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Case 11.45 variances; behavioural issues: Manufacturer
Funtime Ltd manufactures video game machines. Machine saturation and technological innovations have caused pricing pressures that have resulted in declining profits. To stem the slide in profits until new products can be introduced, top management has started to focus on achieving cost savings in manufacturing and increases in sales volume. Sales can be increased only if production volume increases. Therefore, an incentives program has been developed to reward those production managers who contribute to an increase in number of unit produced and achieve cost reductions. In addition, a just-in-time purchasing program has been implemented, and raw materials are purchased on as-needed basis.
The production managers have responded to the pressure to improve manufacturing performance and this has resulted in an increase in the number of completed units over normal production levels. The video game machines are put together by assembly group, which require parts both Printed Circuit Boards and the reading heads groups. To increase production levels, The PCB and RH groups started to reject parts that previously would have been tested and modified to meet manufacturing standards. Preventative maintenance on machines used in the production of these parts has been postponed, with only emergency repair work being performed to keep production lines moving. The maintainenace department is concerned that there will be serious breakdowns and unsafe operating conditions.
The more aggressive assembly group production supervisors have pressured maintenance personnel to attend to their machines at the expense of the other groups. this has resulted in machine downtime in the PCB and RH groups which, when coupled with the demands for accelerated parts delivery by the assembly group, has led to more frequent parts rejections and increased friction between departments. Funtime uses Standard costing system. The standard costs for video games are as follow:
Funtime prepares monthly performance reports based on standard costs. The following table shows the contribution report for May, when production and sales both reached 2200 units. The budgeted and actual unit sales price in May was the same, at $300.
Funtime’s top management was surprised by the unfavourable contribution margin variance in spite of increased sales in May. Jack Rath, cost accountant, was assigned to identify and report on the reasons for unfavourable results as well as the individuals or group responsible. After a thorough review of the data, Rath prepared the following usage report:
Rath reported that PCB and RH groups had supported the increased production levels but had experienced abnormal machine downtime, resulting in idle personnel. This led to use of overtime to keep up with the accelerated demand for parts. the idle time was charged to direct labour. Rath also reported that the production managers of these two groups had resorted to rejecting faulty parts, as opposed to the testing and modification of these parts. Rath determined that the assembly group had met management’s objectives by increasing production while utilising lower than standard hours
1.Calculate the following variance and prepare an explanation of $21 580 unfavourable variance between the budged and actual contribution margin during May. Assume that all the raw material purchased during May was placed into production.
(a.)Direct labour rate variance
(b.)Direct labour efficiency variance
(c.)Direct material price variance
(d.)Direct material quantity variance
(e.)Variable overhead spending variance
(f.)Variable overhead efficiency variance
(g.)Sales volume variance
2.(a.) identify and briefly explain the factors that might have led to friction between the production managers and between maintenance managers.
(b.) evaluate jack Rath’s analysis of the unfavourable contribution results in terms of its completeness and its effects on the behaviour of production groups.
Customer Profitability Case 15.46 25 marks
Case 15.46 Customer profitability analysis; product profitability; customer performance measures.
Waratah Ltd manufactures electronic devices, including PDAs, MP3 and MP4 players, for home and business use. Three years ago, it implemented an activity-based costing system. Both the management accountants and the manufacturing managers are very pleased with the results, as they now have accurate product costing information that they can use for the variety of decisions. However, the ABC system focuses only on product design and manufacturing costs. The activity-based costs of Waratah’s major products are as follow:
In july, Hannah Allen, the assistant accountant, noticed that over the last six months the spending in both the customer support department and the sales department had been steadily increasing. The previous month’s cost had been 20 per cent above budget! The customer support supervisor, Bill Dominico, is able to explain exactly why this is happening. He has had to employ new staff, there is more overtime being worked, and some of the service calls have been outsourced to third party Maintenance Company, but all this was necessary, as he explains:
If a customer has a problem, we have to fix it! And if we have spent more than our budget, then that is just too bad. It is important to keep customer happy. Why, only the other day the managing director was telling us how important our customers are and how customer satisfaction is critical to the company’s success.
Hannah asks Bill if she can have success to have access to the records of his department for the past three months (june quater). She intends to analyse the service calls to see exactly where the extra money is being spent. She also plans to analyse the selling expenses that have occurred during june quater. The analysis reveals the following data:
•The cost of selling and customer support activities, and selling price for each product, are as follow:
• The company’s customers can be analysed into three main groups; educational instructions business and home entertainment. The sales to these groups during the June quarter are detailed below:
1.)Construct two excel spreadsheets to calculate:
-Profitability of each product line
-Profitability of each customer group
2.)What can you conclude from your analysis in requirement 1?
3.)Would you recommend dropping the loss-making products or customers? Explain your answer.
4.)Use your spreadsheet to answer the following questions;
a.)If the selling price of the PDA Basic decreased to $ 1600 and customer support for the PDA+ reduced to $80,000, which product would be most profitable?
b.)If sales of the PDA/Phone to business customer increased to 40 and selling price of the PDA/Phone increased to $3200 which customer group would be the most profitable?
5.)Explain the types of performance measure that could be introduced by Waratah to assist in understanding and managing their customers.
“What’s it gonna cost me!?”, the CEO finally shouts out, totally exasperated.
The accountant replies, “It depends. What do you mean by cost?!”
“What do you mean, what do you mean by cost!?” the CEO replied.
“Well, for starters, do you mean past cost, desired cost or expected cost? Do you mean variable cost of full cost? Do you mean only product cost or more? What decision do you have in mind when you ask me “What’s it gonna cost?”. It all depends.”
Write a 1,000 word essay with a full explanation of the accountant’s “it depends”. You must discuss at least five different issues or choices that must be made when answering the question “What does it cost?”
N.B. You must also provide in this essay some reference back to the three cases prepared in Part A.
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