Pelican Instruments Inc Case Solution

1. Prepare the report that you feel Amy Shultz should present to Mr. Park.

Fixed overhead spending and volume variances can be calculated by using the following formulas:

Fixed Overhead Spending Variance = Actual Overhead - Budgeted Overhead

Fixed Overhead Volume Variance = ((Budgeted Fixed Overhead) / (Budgeted Units / Production)) * (Actual units - Budgeted Units)

For the computation of company-wise variances, the overall overhead amounts can be used. The following table provides the variance analysis for company-wise overheads:

 All the values of spending variance are favorable except for the fixed administrative expenses which are unfavorable to ($334,000). Similarly, all volume variances are also favorable with the exception of R&D expense. Overall, it seems that the company performed really well in comparison to the budgeted figures. However, the fixed expenses need to be divided among the two product lines so that the variance for individual product lines can also be computed. For this purpose, let's assume that fixed expenses are divided into the ratio of the production capacity. For example, if the budget shows that 30% production comprises of EM units, then 30% of the relevant fixed costs will be allocated to EM for computation of budgeted figures. However, if actual production for EM is 40%, then the same 40% of the relevant fixed costs will be inputted for the computation of actual fixed costs. In this manner, one can divide the budgeted and actual costs among the four departments, manufacturing, marketing, administration and R&D. As per the budget, 65.41% of all the fixed costs are allocated to EM. However, actual numbers raise this allocation to 69.51%. On the contrary, the actual allocation for EI has decreased to 30.49% from 34.59%. The following two tables show the detailed variance analysis for two product lines and all the four departments:

Calculated By using Standard Price * Standard Quantity) - (Actual Price * Actual Quantity)