Kemp Tables, Inc. (KTI) makes picnic tables of 2 × 4 planks of treated pine. It sells the tables to large retail discount stores such as Walmart. After reviewing the following data generated by KTI's chief accountant, the company president, Arianne Darwin, expressed concern that the total manufacturing cost was more than $0.5 million above budget ($7,084,800 − $6,520,000 = $564,800).
Actual Results Master Budget
Cost of planks per table.................................. $ 44.10........................... $ 40.00
Cost of labor per table...................................... 26.10............................. 25.50
Total variable manufacturing cost per table (a)....... $ 70.20.......................... $ 65.50
Total number of tables produced (b).................... 82,000........................... 80,000
Total variable manufacturing cost (a × b)......... $5,756,400...................... $5,240,000
Total fixed manufacturing cost...................... 1,328,400........................ 1,280,000
Total manufacturing cost............................ $7,084,800..................... $6,520,000
Ms. Darwin asked Conrad Pearson, KTI's chief accountant, to explain what caused the Increase in cost. Mr. Pearson responded that things were not as bad as they seemed. He noted that part of the cost variance resulted from making and selling more tables than had been expected. Making more tables naturally causes the cost of materials and labor to be higher. He explained that the flexible budget cost variance was less than $0.5 million. Specifically, he provided the following comparison.
Actual Results Flexible Budget
Cost of planks per table...................................... $ 44.10............................. $ 40.00
Cost of labor per table..........................................26.10............................... 25.50
Total variable manufacturing cost per table (a)...........$ 70.20............................. $ 65.50
Total number of tables produced (b)....................... 82,000.............................. 82,000
Total variable manufacturing cost (a × b)............ $5,756,400......................... $5,371,000
Total fixed manufacturing cost.......................... 1,328,400........................... 1,280,000
Total manufacturing cost............................... $7,084,800......................... $6,651,000
Based on this information, he argued that the relevant variance for performance evaluation was only $433,800 ($7,084,800 − $6,651,000). Ms. Darwin responded, "Only $433,800! I consider that a very significant number. By the end of the day, I want a full explanation as to what is causing our costs to increase."
Required
a. Divide the class into groups of four or five students and divide the groups into three sections.
Assign Task 1 to the first section, Task 2 to the second section, and Task 3 to the third section.
Group Tasks
(1) Based on the following information, determine the total materials cost variance and the price and usage variances. Assuming that the variances are an appropriate indicator of cause, explain what could have caused the variances. Identify the management position responsible.
Actual Data Standard Data
Number of planks per table........................ 21................................... 20
Price per plank................................. × $2.10............................. × $2.00
Material cost per table........................ $44.10.............................. $40.00
(2) Based on the following information, determine the total labor cost variance and the price and usage variances. Assuming that the variances are an appropriate indicator of cause, explain what could have caused each variance. Identify the management position responsible.
Actual Data Standard Data
Number of hours per table................................ 2.9.................................... 3.0
Price per hour......................................... × $9.00................................ × $8.50
Labor cost per table................................... $26.10................................. $25.50
(3) Determine the amount of the fixed cost spending and volume variances. Explain what could have caused these variances. Based on the volume variance, indicate whether the actual fixed cost per unit would be higher or lower than the budgeted fixed cost per unit.
b. Select a spokesperson from each section to report the amount of the variances computed by the group. Reconcile any differences in the variances reported by the sections. Reconcile the individual variances with the total variance. Specifically, show that the total of the materials, labor, and overhead variances equals the total flexible budget variance ($433,800).
c. Discuss how Ms. Darwin should react to the variance information.