Evaluating Cost Center Performance
P 6. Plastic Products, LLC, manufactures plastic beverage bottles. The division that manufactures water bottles for the North American market has two plants that operate 24 hours a day, 365 days a year. The plants are evaluated as cost centers. Small tools and supplies are considered variable overhead. Depreciation and rent are considered fixed overhead. The master budget for a plant and the operating results of the two North American plants, North and South, are as follows:
| Center costs | Master Budget | North Actual | South Actual |
| Plastic pellets ($0.009) | $4,500,000 | $3,880,000 | $5,500,000 |
| Caps ($0.004) | 2,000,000 | 1,990,000 | 2,000,000 |
| Direct labor ($0.002) | 1,000,000 | 865,000 | 1,240,000 |
| Small tools and | |||
| supplies ($0.0005) | 250,000 | 198,000 | 280,000 |
| Depreciation and rent | 450,000 | 440,000 | 480,000 |
| Total cost | $8,200,000 | $7,373,000 | $9,500,000 |
| Performance measures | |||
| Bottles processed per hour | 69,450 | 62,000 | 70,250 |
| Average daily pounds of scrap | 5 | 6 | 7 |
| Bottles processed (in millions) | 500 | 450 | 520 |
Required
1. Prepare a performance report for the North plant. Include a flexible budget and variance analysis.
2. Prepare a performance report for the South plant. Include a flexible budget and variance analysis.
3. Compare the two plants, and comment on their performance.
4. Explain why a flexible budget should be prepared.
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