PROBLEM 1

Assessment based on Current Cost Control System

1. What is your opinion on the report that was presented by the accountant? What
actions would it promote for the employees responsible for the results?

First off, the report presented by the plants accountant is oversimplified and
thus is not comprehensive and exhaustive enough to make accurate managerial
decisions. It doesnt, for example, state the actual and standard/budgeted price
per unit of input material, which is very crucial to perform the variance analysis.
With the unit input price known, variance analysis is better computed and can
easily be used to breakdown what exactly caused the observed variances in direct
material and labor costs as well as in operating income/loss.

The report shows considerable, unfavorable budget variances. The budget

variances could mean that the accountant wasnt able to accurately estimate
and predicate future expenses and sales. This could be because of either error
in estimation, changing business conditions, or unmet expectations--or all. As
Waltham Motors has been acquired by Marco Corporation, its to be expected
that changing business conditions could very well be one major factor that
resulted in the observed budget variance.

The plant accountant failed to recognize that direct material cost were being
billed out at 10 cents over the actual budgeted amount of $6.00 per unit and
the actual cost were coming in at 5% less than the budgeted amount or $5.70
per unit. Actual variable cost per unit should have reflected direct material cost
of $79,800 and not the $85,400 as stated on the performance report.
Additionally Direct labor costs were budgeted at $16.00 per unit however it was
billed at $16.40and actual direct labor costs were coming in at $17.57 per unit.
This inflates the direct labor cost unit by $16,380 or $1.17 per unit. This
affects the operating income in the end.
 2. What would be the risk of making decisions based on the report by the accountant?

Making decisions, managerial or otherwise, based on the report the accountant

produced could have its own perils for several reasons. One such reason result
from the fact that the unit input price wasnt included in the report. The other
reason is also that the report hasnt accurately depicted true picture of the
divisions actual performance as the sales revenues & costs (actual/budgeted)
are being compared at different output levels. The budgeted level of production
was 18000 units, while the actual ended up being 14000. As such any
comparison between budgeted and actual figures that doesnt take this fact into
account leads to a misleading conclusion.

For example, the plant accountant claimed in the memo that every cost except
supervision is at or under budget. However, this claim of the accountant is totally
misleading and could potentially lead to inaccurate decision making. As per the
unit cost analysis in Exhibit 2, which accurately accounts for the variance in the
units produced, all costs are over-budgeting except indirect labor.

PROBLEM 2
1. List some facts that recently have occurred at Waltham Motors.

In late 2003, Waltham Motors was acquired Marco Corporation. was

originally a family-owned business.
Loss of a major customer contract in April.
No adjustments were made to the budget when the contract was lost in
April.
Instead of budgeted profit of $91,200, the report showed the division had
lost $7,200 in May.
The plant is at or under budget on every single cost except for supervision.

2. Analyze the report that was presented by the accountant. Do you agree with his
conclusions and recommendations?

The actual units produced was lower than the budgeted amount and the actual
unit cost of production was also higher than the budgeted unit cost. Based on
the unit analysis, presented in Exhibit 2, the unit actual manufacturing cost was
$49.51, which is $6.58 more than the budgeted cost of manufacturing cost per
unit of $42.93. This explains why Waltham Motors incurred operating income
loss for the reported month.

The report shows that direct material costs were being billed out at 10 cents
over the actual budgeted amount of $6.00 per unit and the actual costs were
coming in at 5% less than the budgeted amount or $5.70 per unit. Actual
variable cost per unit should have reflected direct material cost of $79,800 and
not the $85,400 as stated on the performance report. Additionally, Direct labor
costs were budgeted at $16.00 per unit however it was billed at $16.40and actual
direct labor costs were coming in at $17.57 per unit. This inflates the direct labor
cost unit by $16,380 or $1.17 per unit. This affects the operating income in the
end.

The variance can be attributed to various factors. one of these factors and the
obvious one is the fact that Waltham motors unit of production was 14,000
motor units instead of the 18,000 budgeted amount. Another factor could be the
higher actual selling price of $49 than the budgeted selling price of $48. The
actual direct labor cost per unit was also $16.4, lower than the budgeted amount
of $16. The increase in direct material cost could also be one such factor. The
actual direct material cost per unit was $6.1 whereas the budgeted value was
$6.

3. How can the cost control process be improved?

Improving the cost control process of Waltham Motors should start with the
budgeting process and reporting method. The budgeting process should be more
comprehensive and exhaustive. The variable and fixed costs should be presented
in terms of unit price of inputs as well. This way, the manager could get a better
picture of expenses and would be better positioned to make a better decision to
improve profitability.
 4. Prepare a flexible budget and estimate the line by line variances. How does this
result compare with the report presented in question #2.

A flexible budget for Waltham Motors could be prepared by taking into account
the discrepancies in expenditure levels for variable cost based on changes in the
actual sales.

To start off, lets list the assumptions the Waltham Motors accountant used to
produce the report using static budget:

Budgeted Actual

Unit selling price $48 ( i.e. $864,00018,000 ) $48 ( i.e. $686,00014,000 )

Unit direct material $6 $6.1

cost

Unit direct labor $16 $16.4 (i.e. 2*$8.2/hour)

cost

The flexible budget that is presented in exhibit 3 is therefore prepared with

these differences in mind.

5. Prepare a comprehensive variance analysis.

The differences between actual and budgeted costs and sales are presented in
both exhibit 1 based on the Waltham Motors accountant and in exhibits 2 and
3 based on per unit analysis and a flexible budget, respectively.

The accountants budget for sales, for example, was $864,000 based on unit
sales of 18,000 at price $48, which, according to the variance analysis presented
in column 4 of exhibit 1, yields a difference of $178,000. This variance is sales
was primarily caused by lower sales volume despite the higher actual price.

The total variance of Waltham motors for direct materials could be computed by
comparing actual direct material cost, $85,400, to standard direct material cost,
$108,000. This show a favorable variance of $22,600, indicating that actual
direct material cost was lower by this amount than budgeted. According to the
plants accountant memo, actual material prices were 5% lower than expected.
So, the lower price could be one source of the favorable variance in direct
material cost. The favorable overall variance in direct materials cost could also
result from the lower level of actual production of 14,000 units instead of the
budgeted 18,000. All in all, the favorable variance was resulted from the
combination of favorable material price variance, a lower standard price, and
favorable material quantity variance.

The direct labor variance for Waltham Motors could also be calculated in a
similar manner. The total variance for the direct labor hence is the difference
between actual direct labor cost and standard labor cost. The actual labor cost
is $246,000 which is lower by $42,000 compared to the budgeted labor cost of
$288,000. This is a favorable variance. However, unlike the direct material
variance, the price of labor hasnt decreased; it actually increased from $16 per
labor unit to $16.4 per labor unit. This may mean that the favorable direct labor
variance could result from the lower volume of production.

Similarly, the plants variable cost variance is computed by comparing the total
actual variable cost to that of the budgeted variable cost. Waltham Motors
incurred an actual total variable cost of $ 432,000, which is lower than the
budgeted $512, 800, by $80,800. This favorable result is due to lower level of
production, favorable variance in direct material cost and direct labor cost.

6. How do you dispose of the variances for the variable and fixed costs?

The report could be revised and corrected by replacing the direct labor cost and
direct materials cost with the actual numbers. This will reflect the actual
standing and profitability of the plant and will help it move from a negative
operating loss to a positive operating income of $13,156 as presented in exhibit
2.
Having done that, the manager could also employ various cost control systems
to get rid of or reduce the variance for the variable and fixed costs.

7. How is the report from question 5 useful to improve the cost control systems of the
firm?

The report and variance analysis from question number 5 and one presented in
exhibits 2 and 3, is useful to improve the cost control systems of Waltham Motors
by cutting costs to improve the plants performance. The report makes is
relatively easier to identify where the manager should focus in order to reduce
costs and helps to specify cost control opportunities accordingly. The manager
can for example pay closer attention to where there are unfavorable variances.

PROBLEM 3
Assessment based on Updated Cost Control System

1. How did the managerial accounting process of standard costing and variance
analysis improve the analysis of the operations of the firm?

Standard costing and variance analyses help to improve the analysis of the firms
operations because it establishes cost standards that are relevant to various
activities in the plant and because, though variance analysis, it highlights areas
that need closer scrutiny. By the analysis of the variance between actual and
budgeted values particularly plays a very important role in understanding the
activities in the firm and ensuring long term profitability.

2. What would be your reaction, as a manager, now that all the new information
has reached your desk?

My reaction would be disappointment at the less-than-satisfactory performance

of the plant. However, considering the facts and changes that have recently
occurred in the plant as it was acquired by Marco Corporation, I could be
optimistic as better performances are possible once Waltham Motors is
integrated well in to its acquiring Marco Corporation.
EXHIBIT 1: Accountants Performance Report, May 2004

COST BUDGET ACTUAL VARIANCE

UNITS 18,000 14,000 4,000 unfavorable

SALES $864,000.00 $686,000.00 178,000.00 unfavorable
Variable Manufacturing Costs:
Direct Material $108,000.00 $85,400.00 $22,600.00 favorable
Direct Labor $288,000.00 $246,000.00 $42,000.00 favorable
Indirect Labor $57,600.00 $44,400.00 $13,200.00 favorable
Idle Time $14,400.00 $14,200.00 $200.00 favorable
Cleaning up Time $10,800.00 $10,000.00 $800.00 favorable
Miscellaneous Supplies $5,200.00 $4,000.00 $1,200.00 favorable
Total Variable
Manufacturing
Cost $484,000.00 $404,000.00 $80,000.00 favorable
Variable Shipping Costs $28,800.00 $28,000.00 $800.00 favorable
Total Variable Costs $512,800.00 $432,000.00 $80,800.00 favorable

Contribution Margin $351,200.00 $254,000.00 $97,200.00 unfavorable

Non-variable Manufacturing
Costs:
Supervision $57,600.00 $58,800.00 -$1,200.00 unfavorable
Rent $20,000.00 $20,000.00 $0.00
Depreciation $60,000.00 $60,000.00 $0.00
Other $10,400.00 $10,400.00 $0.00
Total Non-variable
Manufacturing
Costs $148,000.00 $149,200.00 -$1,200.00 unfavorable

Selling and Administrative Costs $112,000.00 $112,000.00 $112,000.00 unfavorable

Total Non-variable and

Programmed Costs $260,000.00 $261,200.00 $110,800.00 unfavorable

TOTAL COSTS $772,800.00 $693,200.00 $191,600.00 unfavorable

OPERATING - -
INCOME/LOSS $91,200.00 $7,200.00 $98,400.00 unfavorable
EXHIBIT 2: Revised Performance Report with Per Unit Cost Analysis, May 2004
PER PER
UNIT UNIT
BUDGET ACTUAL PER UNIT
COST BUDGET ACTUAL COST COST VARIANCE

UNITS 18,000 14,000 -4,000 unfavorable

-
SALES $864,000.00 $686,000.00 $178,000.00 unfavorable
Variable Manufacturing Costs:
Direct Material $108,000.00 $85,400.00 $6.00 $6.10 -$0.10 unfavorable
Direct Labor $288,000.00 $246,000.00 $16.00 $17.57 -$1.57 unfavorable
Indirect Labor $57,600.00 $44,400.00 $3.20 $3.17 $0.03 favorable
Idle Time $14,400.00 $14,200.00 $0.80 $1.01 -$0.21 unfavorable
Cleaning up Time $10,800.00 $10,000.00 $0.60 $0.71 -$0.11 unfavorable
Miscellaneous Supplies $5,200.00 $4,000.00 $0.29 $0.29
Total Variable
Manufacturing
Cost $484,000.00 $404,000.00 $26.89 $28.86 -$1.97 unfavorable
$0.00
Variable Shipping Costs $28,800.00 $28,000.00 $1.60 $2.00 -$0.40 unfavorable
Total Variable Costs $512,800.00 $432,000.00 $28.49 $30.86 -$2.37 unfavorable
$0.00
Contribution Margin $351,200.00 $254,000.00 $19.51 $18.14 $1.37 unfavorable
Non-variable Manufacturing Costs:
Supervision $57,600.00 $58,800.00 $3.20 $4.20 -$1.00 unfavorable
Rent $20,000.00 $20,000.00 $1.11 $1.43 -$0.32 unfavorable
Depreciation $60,000.00 $60,000.00 $3.33 $4.29 -$0.95 unfavorable
Other $10,400.00 $10,400.00 $0.58 $0.74 -$0.17 unfavorable
Total Non-varable
Manufacturing
Costs $148,000.00 $149,200.00 $8.22 $10.66 -$2.43 unfavorable

Selling and Administrative Costs $112,000.00 $112,000.00 $6.22 $8.00 -$1.78 unfavorable
Total Non-variable and
Programmed Costs $260,000.00 $261,200.00 $14.44 $18.66 -$4.21 unfavorable

TOTAL COSTS $772,800.00 $693,200.00 $42.93 $49.51 -$6.58 unfavorable

-
OPERATING INCOME/LOSS $91,200.00 $7,200.00 $5.07 -$0.51 -$5.58 unfavorable
EXHIBIT 3: Revised Performance Report with Flexible Budget, May 2004

FLEXIBLE
FLEXIBLE BUDGET
COST BUDGET ACTUAL BUDGET VARIANCE

UNITS 18,000 14,000 14,000 -4,000 unfavorable

SALES $864,000.00 $686,000.00 $672,000.00 -$178,000.00 unfavorable
Variable Manufacturing Costs:
Direct Material $108,000.00 $85,400.00 $84,000.00 -$1,400.00 unfavorable
Direct Labor $288,000.00 $246,000.00 $224,000.00 -$22,000.00 unfavorable
Indirect Labor $57,600.00 $44,400.00 $44,800.00 $400.00 favorable
Idle Time $14,400.00 $14,200.00 $11,200.00 -$3,000.00 unfavorable
Cleaning up Time $10,800.00 $10,000.00 $8,400.00 -$1,600.00 unfavorable
Miscellaneous Supplies $5,200.00 $4,000.00 $4,044.00 $44.00 favorable
Total Variable
Manufacturing
Cost $484,000.00 $404,000.00 $376,444.00 -$27,556.00 unfavorable

Variable Shipping Costs $28,800.00 $28,000.00 $22,400.00 -$5,600 unfavorable

Total Variable Costs $512,800.00 $432,000.00 $398,844.00 -$33,156.00 unfavorable

Contribution Margin $351,200.00 $254,000.00 $273,156.00 $19,156.00 unfavorable

Non-variable Manufacturing Costs:
Supervision $57,600.00 $58,800.00 $57,600.00 -$1,200.00 unfavorable
Rent $20,000.00 $20,000.00 $20,000.00 $0.00
Depreciation $60,000.00 $60,000.00 $60,000.00 $0.00
Other $10,400.00 $10,400.00 $10,400.00 $0.00
Total Non-variable
Manufacturing
Costs $148,000.00 $149,200.00 $148,000.00 -$1,200.00 unfavorable

Selling and Administrative Costs $112,000.00 $112,000.00 $112,000.00 $0.00

Total Non-variable and

Programmed Costs $260,000.00 $261,200.00 $260,000.00 -$1,200.00 unfavorable

TOTAL COSTS $772,800.00 $693,200.00 $658,844.00 -$34,356.00 unfavorable

OPERATING - -
INCOME/LOSS $91,200.00 $7,200.00 $13,156.00 $20,356.00 unfavorable