ATC 8-1 Business Applications Case Stafie versus Jebe budget rariance David Catrow is the manufacturing production supervisor for Faraday Motor Works (MW), co pany that manufactures electrical motors for industrial applicabots. Trying to explains he did get the year-end bonus that he had expected. he told his wife, "This is the dumbest place CE worked. Last year the company set up this budget assuming it would sell 150.000 units. Well, sold only 140.000. The company lost money and gave me a bus for not using as much material and bor as was called for in the budget. This year, the company has the same 150,000 units goal and it sells 160,000. The company's making all kinds of money. You'd think I'd get this big fat bonus. Instead management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I'd stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked." FMW's master budget and the actual results for the most recent year of operating activity kollow Foru Master Budget 150.000 $33,000,000 Actual Results 160.000 $35,520,000 Variances 10.000 $2,520,000 Number of units Sales revenue Variable manufacturing costs Materials Labor Overhead Variable selling, general, and admin. costs Contribution margin Pued costs Manufacturing overhead Selling general, and admin. costs (4.800,000 (4,200,000 (2,100,000) (5,300,000 (4,400,000 (2,290,000) 500.000 200,000 190,000 5.250.000 16,650.000 15.450,000 18.000.000 200.000 1,430,000 U F 0.830,000) 16.980.000 $ 1.840.000 07.751,000 12.015.000 $ 3.314.000 79.000 35.000 $1.474.000 F U W US Punas 15.250.000 16.650.000 5.450.000 18.080.000 200 000 1.430.000 admin costs to margin costs anufacturing overhead elling.general, and admin costs come (7.830.000) 16.980.000 $ 1.840.000 (7.751.000) 7.015.000) $ 3.314.000 79.000 _35.000 $1.474.000 Chapter 8 Required a. Did FMW increase unit les by cutting prices or by using the strategy b. Is Mr. Catrow correct in his conclusion that something is wrong with the company's performance evaluation process? If so, what do you suggest be done to improve the system? e. Prepare a flexible budget and recompute the budget variances. d. Explain what might have caused the fixed costs to be different from the amount budgeted. e. Assume that the company's materials price variance was favorable and its materials usage vari- ance was unfavorable. Explain why Mr. Catrow may not be responsible for these variances. Now, explain why he may have been responsible for the materials uge variance Assume the labor price variance is unfavorable. Was the labor usage variance favorable on unfavorable? Is the fixed cost volume variance favorable or unfavorable? Explain the effect of this variance on the cost of each unit produced
