6 - ’13-40 Materials Variances—Working Backwards SMP...

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Unformatted text preview: ’13-40 Materials Variances—Working Backwards SMP Company has the following data from its opera: tions for the month just completed: Direct materials purchased 40,000 pounds Direct materials used 38,000 pounds Total cost of direct materials purchased $120,000 Standard price of direct materials/lb. $3.50 per pound Direct materials usage variance—unfavorable $6,500 Required Compute for SMP Company the following: 1. Purchase price per pound for direct materials. 2. Direct materials purchase price variance. 3. Total standard quantity of direct materials for units produced during the period. ‘13-54 Labor Rate and Efficiency Variances Keck Company’s direct labor costs to manufacture its only product in October follow: Standard direct labor-hours per unit of product 1.5 Number of finished units produced 10,000 Standard wage rate per direct labor-hour $16 Total payroll for direct labor $207,000 Wage paid per direct labor-hour $18 Dificrcnccs in hourly wage rates reflect skill levels of workers. * [lax-i: dlzsc fix October. I- Din lira It m. 7. Dina lira efliicncy variance. 3. hull-film maga‘s paformance in managing direct labor costs. 13-73 Summary Problem: All Variances Funtime, Inc., manufactures video game machines. Market satu- ration and technological innovations caused pricing pressures that resulted in declining profits. To stem the slide in profits until new products can be introduced, top management turned its attention to both manufacturing economies and increased production. To realize these objectives, management developed an incentive program to reward production managers who contribute to an increase in the number of units produced and a decrease in costs. The production managers responded to the pressure of improving manufacturing in several ways that increased the number of completed units beyond normal production levels. The as— sembly group puts together video game machines that require parts from both the printed circuit boards (PCB) and the reading heads (RH) groups. To attain increased production levels, the PCB and RH groups began rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used to produce these parts has been postponed; only emergency repair work is being performed to keep production lines mov- ing. The maintenance department is concerned about serious breakdowns and unsafe operating conditions. The more aggressive assembly group production supervisors pressured maintenance person- nel to attend to their machines rather than those of other groups. This resulted in machine down- time in the PCB and RH groups that, when coupled with demands for accelerated parts delivery by the assembly group, led to more frequent rejection of parts and increased friction among departments. Funtime operates under a standard cost system. The standard costs per video game machine are as follows: Standard Cost per Unit Cost Item Quantity Cost Total Direct materials Housing unit 1.0 $20 $ 20 Printed circuit boards 2.0 15 30 Reading heads 4.0 10 40 Direct labor Assembly group 2.0 hours 10 20 PCB group 1.0 hour 11 11 RH group 1.5 hours 12 J Total standard cost per unit w Funtimc prepares monthly performance reports based on standard costs. The following is the contribution report for May 2007 when production and sales both reached 2,200 units. FUNTlME INC. Contribution Report For the Month of May 2007 Budget Actual Variance U nits 2,000 2,200 200F Revenue $400,000 $396,000 $ 4,000U Variable costs Direct materials $180,000 $220,400 $40,400U D ire ct Ia bor 98,000 112,260 14,260U Total variable costs 278,000 332,660 54,560U Contribution margin $122,000 $ 63,340 $58,560U Funtime’s top management was surprised by the unfavorable contribution margin variance in spite of the increased sales in May. Constance Brown, the firm ’5 cost accountant, was asked to identify and report on the reasons for the unfavorable contribution margin as well as the individuals or groups responsible for them. After her review, Constance prepared the following usage report: FUNTIME INC. Usage Report For the Month at May 2007 Cost Item Quantity Actual Cost Direct materials Housing units 2,200 units $ 44,000 Printed circuit boards 4,700 units 75,200 Reading heads 9,200 units 101,200 Direct labor Assembly 3,900 hours 31,200 Printed circuit boards 2,400 hours 31,060 Reading heads 3,500 hours 50,000 Total variable cost $332,660 Constance reported that the PCB and RH groups supported the increased production levels but experienced abnormal machine downtime, causing idle time that required the use of overtime to keep up with the accelerated demand for parts. This overtime was charged to direct labor. She also reported that the production managers of these two groups resorted to parts rejections, rather than testing and modifying them, as was done routinely in the past. Constance determined that the as- sembly group met management’s objectives by increasing production while utilizing fewer than standard hours. Required 1. Set up an Excel spreadsheet to calculate these six variances: a. Direct material price variance, calculated at point of production Direct material usage variance. Direct labor efficiency variance. Direct labor rate variance. Selling price variance. runes? Sales volume variance, in terms of contribution margin 2. Explain the $58,660 unfavorable variance between budgeted and actual contribution margin during May 2007. 3. Identify and briefly explain the behavioral factors that could promote friction among the production managers and between them and the maintenance manager. 4. Evaluate Constance Brown’s analysis of the unfavorable contribution results in terms of the report’s completeness and its effect on the behavior of the production groups. (CMA Adapted) ...
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