Mark Ferguson, the president of Ferguson Foundry Limited (FFL), sat in his office early on June 2, 2010, reviewing the financial statements of FFL for the fiscal year ended May 31, 2010. The results for the year were both a shock and a disappointment. 

Ferguson called Carl Holitzner, an independent consultant, to meet him in his office. When Holitzner arrived, Ferguson described his concerns. 

“I don’t know what went wrong last year. Everybody kept telling me that we were selling more woodstoves than we thought we would and I knew from attending the trade shows that the sale of woodstoves throughout the province was rising. When I saw the statements for last year, I couldn’t believe the drop in profits. 

“This company began in 1905. My grandfather used to make farm implements and sled runners; my father produced mostly trailers. I’ve dabbled in a few product lines, like sewer grates and staircase railings, but, for the last five years, we’ve concentrated solely on woodstoves. Sales were slow at first and there were many producers in the market. But we have a good salesforce and things have been steadily improving for the last two years. In 2009, we achieved record profits. 

“In addition to profits dropping, we have lost our management team. The sales manager took early retirement last month, the production manager is in the hospital for major surgery, and the accountant quit after we discussed the kind of information I felt he should be providing. He kept telling me that everything was running smoothly. Boy, was he wrong! 

“I called you here this morning because I need some help in understanding what went wrong last year. I want to be sure that similar mistakes are not made in the future. I’ll be hiring some new people, but I need some answers quickly. Here is the statement of budgeted and actual results. [See Exhibit 12A-5.] I was also able to dig up a statement of standard costs [Exhibit 12A-6] that was prepared last year plus some market and cost data that the accountant had prepared before he left. [See Exhibit 12A-7.] The standard costs are an accurate reflection of what it should cost to make either of the woodstove models.” 

Required 

Assume the role of Carl Holitzner and provide an explanation for FFL’s lower-than-budgeted profit for the fiscal year ended May 31, 2010. Support your explanation with a detailed variance analysis.

 

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Exhibit 12A-5 Ferguson Foundry Limited Static Budget and Actual Results for the Year Ended May 31, 2010 Static Budget Deluxe Total Basic Sales volume (in units) 4,500 5,500 10,000 Sales revenue $1,350,000 $4,400,000 $5,750,000 Variable costs: Direct materials 315,000 1,045,000 1,360,000 Direct labour 405,000 1,320,000 1,725,000 Overhead 202,500 660,000 862,500 Selling and administration 67,500 220,000 287,500 Total variable costs 990,000 3,245,000 4,235,000 $ 360,000 $1,155,000 Contribution margin 1,515,000 Fixed costs: Manufacturing Selling and administration Total fixed costs 750,000 132,500 882,500 $ 632,500 Operating income Actual Results Basic Deluxe Total Sales volume (in units) 7,200 4,800 12,000 Sales revenue $2,340,000 $3,360,000 $5,700,000 Variable costs: Direct materials 486,000 820,800 1,306,800 Direct labour 748,800 1,190,400 1,939,200 Overhead 374,400 595,200 969,600 Selling and administration 108,000 192,000 300,000 Total variable costs 1,717,200 2,798,400 4,515,600 Contribution margin $ 622,800 $ 561,600 1,184,400 Fixed costs: Manufacturing Selling and administration 780,000 139,500 Total fixed costs 919,500 Operating income $ 264,900