Overhead variances, ethics. Schmidt Company uses standard costing. The company has two manufacturing plants, one in Colorado and the other in Michigan. For the Colorado plant, Schmidt has budgeted annual output of $4,000,000$ units. Standard labor-hours per unit are 0.25 , and the variable overhead rate for the Colorado plant is $$\$ 3.25$$ per direct labor-hour. Fixed overhead for the Colorado plant is budgeted at $$\$ 2,500,000$$ for the year.
For the Michigan plant, Schmidt has budgeted annual output of 4,200,000 units with standard labor-hours also 0.25 per unit. However, the variable overhead rate for the Michigan plant is $$\$ 3$$ per hour, and the budgeted fixed overhead for the year is only $$\$ 2,310,000$$.
Firm management has always used variance analysis as a performance measure for the two plants, and has compared the results of the two plants.
Jim. Johnson has just been hired as a new controller for Schmict. Jim is good friends with the Michigan plant manager and wants him to get a favorable review. Jim suggests allocating the firm's budgeted common fixed costs of $$\$ 3,150,000$$ to the two plants, but on the basis of one-third to the Michigan plant and two-thirds to the Colorado plant. His explanation for this allocation base is that Colorado is a more expensive state than Michigan.
At the end of the year, the Colorado plant reported the following actual results: output of $3,900,000$ using $1,014,000$ labor-hours in total, at a cost of $$\$ 3,244,800$$ in variable overhead and $$\$ 2,520,000$$ in fixed overhead. Actual results for the Michigan plant are an output of $4,350,000$ units using 1,218,000 labor-hours with a variable cost of $$\$ 3,775,800$$ and fixed overhead cost of $$\$ 2,400,000$$. The actual common fixed costs for the year were $$\$ 3,126,000$$.