Lance Prating is the controller of the Colorado Springs manufacturing facility of Prudhom Enterprises, Inc. The annual cost control report is one of the many reports that must be filed with corporate headquarters and is due at corporate headquarters shortly after the beginning of the New Year. Prating does not like putting work off to the last minute, so just before Christmas he prepared a preliminary draft of the cost control report. Some adjustments would later be required for transactions that occur between Christmas and New Year’s Day. A copy of the preliminary draft report, which Prating completed on December 21, follows:

Tab Kapp, the general manager at the Colorado Springs facility, asked to see a copy of the preliminary draft report. Prating carried a copy of the report to Kapp’s office where the following discussion took place:
Kapp: Wow! Almost all of the variances on the report are unfavorable. The only favorable variances are for supervisory salaries and industrial engineering. How did we have an unfavorable variance for depreciation?
Prating: Do you remember that milling machine that broke down because the wrong lubricant was used by the machine operator?
Kapp: Yes.
Prating: We couldn’t fix it. We had to scrap the machine and buy a new one.
Kapp: This report doesn’t look good. I was raked over the coals last year when we had just a few unfavorable variances.
Prating: I’m afraid the final report is going to look even worse.
Kapp: Oh?
Prating: The line item for industrial engineering on the report is for work we hired Sanchez Engineering to do for us. The original contract was for $160,000, but we asked them to do some additional work that was not in the contract. We have to reimburse Sanchez Engineering for the costs of that additional work. The $154,000 in actual costs that appears on the preliminary draft report reflects only their billings up through December 21. The last bill they had sent us was on November 28, and they completed the project just last week. Yesterday I got a call from Mary Jurney over at Sanchez and she said they would be sending us a final bill for the project before the end of the year. The total bill, including the reimbursements for the additional work, is going to be. 
Kapp: I am not sure I want to hear this.
Prating: $176,000
Kapp: Ouch!
Prating: The additional work added $16,000 to the cost of the project.
Kapp: I can’t turn in a report with an overall unfavorable variance! They’ll kill me at corporate headquarters. Call up Mary at Sanchez and ask her not to send the bill until after the first of the year. We have to have that $6,000 favorable variance for industrial engineering on the report.

What should Lance Prating do?Explain.

  • CreatedSeptember 27, 2013
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