$13-71$ Performance Evaluation

A division of lowa$/$Illinois Corn Company produces seed corn for farmers throughout the Midwest. Jens Jensen became president in $20$X$0.$ He is concerned with the ability of his division manager to control costs. To aid his evaluation, Jensen set up a standard cost system.

Standard costs were based on $20$X$0$ costs in several categories. Each $20$X$0$ cost was divided by $1,520,000$ cwt$-$the volume of $20$X$0$ production$-$to determine a standard for $20$X$1($cwt means hundredweight, or $100$ pounds$)$:

At the end of $20$X$1,$ Jensen compared actual results with the standards he established. Production was $1,360,000$ cwt$,$ and variances were as follows:

Jensen was not surprised by the unfavorable variance in direct materials. After all, corn prices in $20$X$1$ averaged $10\backslash \%$ above those in $20$X$0.$ But he was disturbed by the lack of control of fixed overhead. He called in the production manager and demanded an explanation.

$1.$ Prepare an explanation for the large unfavorable fixed$-$overhead variance.

$2.$ Discuss the appropriateness of using one year's costs as the next year's standards.

NOTE: Please explain using information about the absorption and variable cost systems if possible.