Waltham Motors Division

Question 1:

Using budget data, how many motors would have to be sold for Waltham Motors Division to breakeven? In order to calculate the breakeven point, we use the following equation and budget data: Breakeven Sales*Unit Price-Unit Variable Cost= Fixed Costs Breakeven=Fixed CostsUnitary Price-Unitary Variable Cost Breakeven point=260,000864000/18000-512800/18000=13,226 units

Q2.

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Using budget data, what was the total expected cost per unit if all manufacturing and shipping overhead (both variable and fixed) was allocated to planned production? What was the actual per unit cost of production and shipping?

The results for the total expected cost/unit with budget data is: Expected Cost/Unit= Manufacturing Overhead(variable and not variable)+Shipping Overhead# of Units= =484,000+148,000+28,80018,000=$36. 71/unit The results for the total expected cost/unit with actual data is: 404,000+149,200+28,00014,000=$41,51/unit

Q3.

Comment on the performance report and the plant accountant’s analysis of results. How, if at all, would you suggest the performance report be changed before sending it on to the division manager and Marco Corporation headquarters?

The accountant is making a big mistake by comparing absolute numbers from Budgeted costs and revenues with Actual costs, since the actual number of units sold is less than the Budgeted amount. Therefore, a more detailed analysis must be done, and calculate the costs per unit, as Table 1 shows: Table 1 From this new data on Table 1, we can make the following observations about the accountant’s comments: The only cost that was underestimated (Favourable = F) is the Indirect Labour, so the first comment about being under budget on every single cost except for supervision is wrong. The operating income has decreased, which is expected given the decrease in number of motors sold (4. 000), but based on the report we still cannot tell whether that is the only reason. This also leads to a difference between the actual price ($49) and the budgeted price ($48). The current static budget needs to be changed into a flexible budget so the budgeted data can be recorded taking into account the actual units produced, that is, 14. 000 units.

Prepare your own analysis of the Waltham Division’s operations in May.

Explain in as much detail as possible why income differed from what you would have expected. As suggested in Question3, a new Flexible budget is calculated, so now it is possible to calculate the variances between the Flexible budget and the Actual Results and Static budget we had before. The data is show below in Table 2: Table 2 From this table we can see how the unfavourable Static budget variance = 98400 seen in the accountant’s Performance Report is now divided into the Flexible budget variance = 20. 356$ (2) and the Sales volume variance = 78. 44$ (3): Flexible budget variance: is the difference between the actual result and the corresponding flexible-budget amount. This variance is subdivided into: Sales variance $14. 000 Favourable. This is due to a higher price charged for the motors (49$ instead of the 48$ budgeted), maybe because of changes in prices of the competitors as well. Variable costs variance is Unfavourable by $27. 556, the different components of this variance are: Direct Material variance: Unfavourable by of $1. 00, we need to find out whether this is due to Price and/or Efficiency variance. The accountant indicates that the actual price for direct materials is $5. 7/unit (5% less than budgeted), but the budgeted price was $6/unit. On the other hand, the standard quantity is 14. 000 units while the actual quantity is 85. 400/5. 7=14982. 45 units, therefore: Price variance = $89. 894,75 – $85. 400 = $4494. 76 Favourable. This reflects the company saved money with the decreased prices of raw materials

Efficiency Variance = $84. 00-$89. 894,76 = $5894,76 Unfavourable. Since this amount is larger than the Favourable amount of the Price variance, we can conclude that the overall unfavourable 1. 400$ Direct material balance is due to Efficiency Variance. There are many reasons that might cause this inefficiency coming from the production manager or the purchase manager, such as bad quality of the raw materials bought (which were cheaper after all), or waste of these during the production process. Direct Labour variance: Unfavourable by $22. 000.

Again, we need to find out whether this is Price and/or efficiency driven. We know that according to the accountant information, the actual price is $16,4/unit while the Standard price is $16/unit. On the other hand, the Standard Quantity is 14. 000 units while the actual Quantity is 246. 000/16,4=15. 000 units.

Therefore: Price Variance = 240. 000-246. 000 = $6000 Unfavourable. This reflects the increase in medical benefits noted by the accountant. Efficiency Variance = 224. 000-240. 000 = $16. 000 Unfavourable.

The accountant does not mention anything that can tell for sure the reasons for this lack of efficiency, so we can only guess some reasons such as a change in the labour force to an unskilled one. Idle Time and Cleanup Time: Unfavourable by $3. 000 + $1. 600 respectively, might be due to different reasons such as low efficiency in the cleanup process, or bad shape of the machines used to manufacture the motors that turned into a lot of idle time compared to the one budgeted. The idle time must be monitored since it can lead to further decrease of Labour efficiency. Indirect Labour and Miscellaneous supplies: Favourable by $400 + $40 respectively, might be due to many reasons but the amounts are too small to make up for the unfavourable amounts found in the rest of the variable costs. It might be a coincidence, but there was a favourable Price efficiency for Direct Material, so maybe the Purchasing department is doing a good job.

Fixed costs variance

Supervision unfavourable by $1. 200 might be due to low efficiency of the supervising staff as noted in the accountant comments. Shipping costs variance: Unfavourable by $5. 00 probably because of additional shipping due to bad quality of products that have to be returned and shipped again, or just because of bad efficiency in the shipment process by not using full capacity of transportation. Sales-volume variance: it is the difference between the flexible-budget amounts and the static budget and it arises solely because of the difference between the actual quantity of motors produced and the amount budgeted (expected) to be produced by the company. In this case there is a variance of $78. 044, and we can assume it is because of the key contract that was lost.

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