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Danshui was a contract producer putting together electronic items in southern China. There were numerous makers like Danshui in China assembling parts for the business wishing to conserve labor expenses. Apple contracted with Danshui to put together 2.4 million iPhones in Plant No. 2 with the expected high need of this item in 2010. As a profit center, Plant No. 2 was credited for each iPhone produced and shipped. The procedure of putting together was complex and required almost totally based on handwork for more than 100 elements.
Danshui was positive of its employees to adapt the new tasks and extra workers might be worked with and trained as required. The iPhone 4 was the most successful item of Apple as more than 1.7 million units were sold in the very first 3 days they were launched. Nevertheless, the plant was operating at a loss since of the underproduction.
As a result, the controller of this plant considered preparing the new budget plan revealing using a versatile spending plan system to determine what went incorrect in their operations that contribute to the efficiency problems.
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Problems and concerns: The plant has 2 big issues in regards to budgeting system and labor force. First of all, they remained in undesirable performance by utilizing basic budgeting system. They were unable to satisfy the Apple contract, which was lack 10% from the 200,000 targeted units, resulting in the loss of $672,000 rather than the earnings of $100,000. Actually, the plant was using the basic costing system to evaluate their performance, but it was not suitable because the relative quantities were various (180,000 and 200,000 systems).
That indicates the total standard expenses would be overemphasized compared to the total real expenses. Subsequently, the activities under the standard costing system were all overstated performance, causing the undesirable net earnings.
Secondly, the lack of qualified labor force also contributed to this problem. As the assembly of iPhone 4 was extremely complex, this would be higher chances of errors as the assembly process was handled by different workers with different skills and working styles. This will indirectly cause a lot wastes in term of cost and time due to the carelessness and the lack of skill of the workers. The burden of the supervisors must be increased as they must learn before guiding the workers, who were almost semiskilled. Although the plant had raised the wages to 30%, they still could not increase the number of labor force needed, which also contributed to the underproduction. On the other hand, as the production line was based on handwork, the damage of 1000 flash memories in installation was unavoidable. Thus, the actual output must be 181,000 units instead of 180,000 units in their report.
The replacement of the wastage had increased the cost that had led to the unfavorable variance of $389,000. When the reckless jobs had been done, the workers must use the new tools and supplies, resulting in the increase of the production costs and cause an unfavorable performance. Recommendations: For the short term, I recommend Danshui to change from using the standard costing system to the flexible budget system for performance evaluation purpose. By using the flexible budget will help them to compare results with adjustable budget and the variance analysis will be more accurate. This system also proves the unfavorable performance caused by the variance from variable costs of $1,041,200, which can analyze and evaluate the weaknesses in controlling the variable cost which is flash memories, assembly and packaging expenses. For the long term period, they have to overcome the disadvantages from the labor forces. First of all, the plant should improve their salary policy.
I recommend that they should motivate workers by setting a basic salary and offering bonus if they complete their jobs well. Secondly, the plant should provide professional training for labors. Through training, the labors can learn how to handle with care on the parts to avoid the wastage that will happen. This solution also assists managers to place the correct labor at the correct assembly parts to reduce the labor hours but still save the materials. Thirdly, the plant could hire more skilled supervisors who will able to response to the problems arises and know how to motivate the labor to achieve the goal.
Danshui Plant No.2 China. (2016, Mar 16). Retrieved from https://studymoose.com/danshui-plant-no-2-china-essay
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