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06/12/14

Danshui Plant No. 2


Flexible budget and variance analysis

Cost Per Unit and Selling Price Per Unit

Budgeteda
Variable Costs
Materials
Labor
Shipping
Total Variable Costs
Fixed Costsb
Total Cost per Unit
Selling price
Gross margin
Gross margin (%)

$187.89
13.11
1.06
$202.06
3.65b
$205.71
$206.20
0.51
0.2

Actualc

$189.61
17.18
1.06
$207.85
4.09d
$211.94
$208.20
$3.74
1.8

aSource:

Case Exhibit1
Budgeted Fixed Cost (Case Exhibit 2) budget Unit (Case Exhibit 3) $729,000/200,000=3.65
cSource Case Exhibit 3 Actual costs 180,000 units
dSource: Case Exhibit 4 Actual fixed costs 180,000 units.
bTotal

06/12/14

August 2010 Preliminary Report on the Results of Operations (000 U.S.$.)

Monthly Budget
Actual
(200000 units) (180000 units)

Exhibit

Variance
(20,000 units)

180/200 K

Flexible Budget
(180,000 Units)

Actual - Flex Budget


Flexible Budget
Variance
(Revenue and
Spending)

Revenue (transfer from Shenzhen)


Variable costs
Materials
Flash memory
Application process
Chips-phone
Gyroscope
8 other chips

$41,240

$37,476

$3764U

0.9

$37,116

$360 F

$5,400
$2,150
$2,810
$520
$14,190
$25,070

$5,249
$1,935
$2,529
$468
$12,643
$22,824

151F
215F
281F
52F
1547F

0.9
0.9
0.9
0.9
0.9

$4,860
$1,935
$2,529
$468
$12,771
$22,563

$389 U
$0
$0
$0
($128) F
($261)

Variable supplies and tools

$12,507

$11,305

1202F

0.9

$11,256

$49 U

Subtotal

$37,577

$34,129

0.9

$2,622
$212

$3,092
$191

470U
21F

0.9
0.9

$2,360
$191

$732 U
$0

0.9

$36,370

Labor
Assembly and packaging
Shipping
Total variable costs

$40,411

$37,412

Contribution

$829

$64

$746

$1,042 U
$0
($682) U

Fixed Costs:
Factory rent
Machine depreciation
Utility fee and taxes
Supervision
Total fixed costs

$400
$150
$52
$127
$729

$400
$150
$52
$134
$736

$400
$150
$52
$127
$729

$0
$0
$0
$7 U
$7 U

Total costs

$41,140

$38,148

$37,099

$1,049 U

Net income

$100

(672.00)

$772U

$17

($689) U

7U

Flexible budget variances are calculated on the bases on actual


produc@on and sales i.e. 180,000/- units
Actual revenues are greater then expected revenues at actual sales
(exible budget) volume level.
Total cost variance is $1048K U
Of which variable cost variance is $1041K U.
Fixed cost variance ($7K U) accounts only for small propor@on.
What could be reason for the Unfavorable cost variance?

Flash memory variance - $389K U


Labor Variance - $732K U
Cost of Chips $120K F - beYer
Variable supply and tools $48K U

Need to have closer look at Flash memory and Labor.


Are unfavorable variance due to price or usage?

06/12/14

Price Variance
= [AP SP] x AQ = $2 x 181 k = $362 K U
Actual price Std. Price X Actual QYy.

Usage Variance

= [AQ SQ] x SP = 1K x $ 27 = $27K U


Total Flexible Budget Variances = Price + Usage


variances

Actual Price (AP), Actual Quan1ty(AQ), Standard Price (SP), Standard


Quan1ty(SQ),

Usage variance is negligible


Price variance is sizable
Did plant do good nego@a@on
However Samsung raised the price by $2 to install
a shield
Apple has raised revenue recovery by equal
amount
Revenue variance ($360k F) is almost oset by
ash memory price variance ($362k U)

06/12/14

Then what about labor cost variance


How to compute? Do we have the data on
price and quan@ty of labor?

Note: Labor rates were increased by 30%


AP*AQ is 30$ higher then SP*SQ
= SP*AQ = AP*AQ/1.3
=$3092K/1.3
=$2,378K

Therefore the price variance is es@mated to be $3092k-$2378k = $ 714k U


Quan@ty variance can be calculated by Total Labor Cost Variance Labor
Price Variance
= $732k U - $714k U = $18 k U

Unfavorable labor price variance is due to plants overall unfavorable


performance ( $688k U)
Who controls the price variance?
We can not nd people even though we have raised our factory wages

06/12/14


Managerial Response

Recovered increase in price of memory
Labor is the problem
High labor rates are due to a regional supply and demand problem

Danshui is not able assemble the target of 200,000


IPhone4 every month with one quarter through
Must take produc@on volume up
Labor is only 7% of total cost

Apple has 60% prot margin on sale of these phones


Thus passing on increase in labor cost to Apple is feasible.
v/s Wal-Mart thin prot margin- is cost conscious
But will Apple readily agree Is it good for them to get the
planned volume or fall short to meet sales demand?
Can Danshui build a plant at low cost loca@on as Foxconn
is doing?
Well apple contract would get over before plant is complete

06/12/14

Ques@on 4.
Es@mate material price and usage variances for ash
memories, labor rate and usage(eciency) variances.
(Assume the standard labor rate is $0.92 per hour), and the
overhead spending variance for August.

Standard labor rate (SP): $.92


Actual labor rate (AP): 1.3 x $0.92 = $ 1.196

Std. Quan@ty for 180,000 units (SQ): S13.11/$0.92 x 180K 2,565k hrs
Actual quan@ty for 180,000 units (AQ): $3,092k/$1.196 = 2,585k hrs

Hence, the labor rate variance is
[AP-SP] x AQ = ($1.196 - $0.92) x 2,585k = $713 U

And the labor eciency variance is
[AQ-SQ] X SP = (2,585k 2,565k) x 0.$92 = $18k U

The overhead spending variance is $7,000.