As per calculations, actual cost per unit is $4.8 higher than the budgeted one. The same is also obvious from the given data as per exhibit 1. Analysis: Although, the actual production, in terms of number of products, registered a 22.22% decline from the budgeted production, the total cost (both variable and non variable costs) registered only a 12.05% decline. Conversely, it can be said that the plant operating at 87.95% of its total budgeted cost, produced only 77.78% of its budgeted capacity in terms of number of products, resulting in the rise of actual cost per unit by an amount of S4.8.
3. 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 performance report prepared by the accountant is not useful in analyzing the variances as it is not an Apple to Apple comparison, but more like an Apple to Orange comparison. It is because the budgeted costs are for 18,000 units where as the actual costs are for 14,000 units. To make the former (Apple to Apple) comparison, we need to prepare a Flexible budget which is based on actual output at budgeted quantity and budgeted cost. Revised performance report as per Exhibit 1 is to be submitted to the division manager and Marco corporation headquarters.
4. 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. Unfortunately, due to unavailability of enough data, we can’t calculate the price and efficiency variances (which we call Level 3 variances) and hence unable to have a deeper insight into company’s performance between actual and expected performance. Based on the given data, analysis for variable and non variable costs as well as contribution margin is as under.
The total variable cost and the direct labor cost in particular, is the biggest culprit in company’s negative performance as compared to what was expected. The flexible budget variance for total variable cost is Unfavorable (US$ 33,156 as per Exhibit 1 below) for the actual output of 14,000 units. It is unfavorable because of one or both of the following. 1. Company used greater quantities of input (such as direct manufacturing labor hours) compared to the budgeted quantities of inputs. 2. Company incurred higher prices per unit for the inputs compared to the budgeted prices per unit of the inputs.
The flexible budget variance for the contribution margin is $19,156 Unfavorable (table 1), It helps reduce the impact of variance under the variable costs The main reason being the stronger than expected market demand resulting in a 2.08% price hike.
Non Variable Costs:
Company’s performance is much better in this section as the variance is limited to $1200 only. Further insight suggests that the said variance is limited to higher supervision costs only whereas costs under all other heads remain as expected.