Ferguson Foundry Limited (FFL) manufactures two models of wood stoves, Basic and Deluxe. FFL's president, Mark Ferguson, has just reviewed the financial statements of FFL for the fiscal year ended March 31. The results for the year were a shocking disappointment. Despite having sold more stoves than budgeted at higher prices, profits were less than expected in the budget

In the fifth month of the year, the sales and marketing department realized that there was going to be much stronger demand than expected, due to announced increases in energy prices and a forecasted La Nia. Given that factory production is limited to a total of approximately 12,000 units, they decided to raise prices on both models. They decided on a price increase of around 30% for the Basic version and a price increase of around 2% for the Deluxe version. The purpose of this difference in percentage increases was to shift demand away from Basic to the more profitable Deluxe. In order to justify this increase in FFL's new marketing materials, they authorized a change in the quality of materials used in producing the stoves. This resulted in an approximate 10% price increase for materials, but this seemed easily covered by the price increases, given that budgeted materials costs made up less than 33% of budgeted total costs.

Sales and Marketing seemed to make all the right moves, as they generated sales in units that were very close to capacity. They were all over in the sales office patting each other on the back and high-fiving one another's "genius." Every once in a while, one of the sales staff would yell out, "Who did it?" and everyone in the office would scream in unison, "We did it!" One particularly brash sales person even threatened to leave the company if Mark didn't "properly" recognize his department for "all the money we put in the pockets of Mark's family."

However, things were much more somber in the manufacturing plant. They were reeling from the flurry of activity over the past seven months. It had been difficult to handle the increase in production. A major reason was that it was impossible to hire more skilled labor. The production manager had to choose between paying skilled labor overtime or shifting work to the unskilled labor. Since skilled labor received $24.75 for an overtime hour, the equivalent to almost two hours of unskilled labor, he decided to reduce the hours that skilled labor spent on Basic and hire more unskilled labor to get the work done. However, even that had been a difficult order for human resources to fill, and he ended up having to pay unskilled labor overtime to generate enough hours to get the work done. On top of that, the unskilled workers lack of experience resulted in a significant amount of wasted time and materials in making the Basic product. Exasperated, he had told Mark, "And to top it all off, our variable overhead number for Basic is higher than budgeted! How can that be the case when our volume is down? That can't be my fault! Those accountants are always sticking me with some costs that I don't understand."

The following information is available: a statement of standards prepared as part of the budget process (Exhibit A), some actual market and job-cost data (Exhibit B), and a statement of budgeted and actual results (Exhibit C).

Exhibit A

Unit Cost Standards

Cost Standards:

Basic

Deluxe

Materials per Unit

70 kilograms

190 kilograms

Labour per Unit

(unskilled = 37.5%, skilled = 62.5%)

6 hours

16 hours

Variable Overhead is based on Labour Hours

Variable Selling and Administration is based on Sales Volume

Exhibit B

Actual Cost Data

Basic

Deluxe

Materials Used (kilograms)

603,000

997,500

Actual Hours - unskilled

31,825.0

31,500.0

- skilled

20,100.0

52,500.0

Exhibit C

Static Budget and Actual Results

For the Year Ended May 31

Static Budget

Basic

Deluxe

TOTAL

Sales volume (in units)

(10% of total market share)

7,200

4,500

11,700

Sales revenue

$ 2,160,000

$ 3,600,000

$ 5,760,000

Variable costs:

Direct materials

504,000

855,000

1,359,000

Direct labour - unskilled

202,500

337,500

540,000

- skilled

445,500

742,500

1,188,000

Overhead

324,000

540,000

864,000

Selling and administration

108,000

180,000

288,000

Total variable costs

1,584,000

2,655,000

4,239,000

Contribution margin

$576,000

$945,000

$ 1,521,000

Fixed costs:

Manufacturing

750,000

Selling and administration

132,500

Total fixed costs

882,500

Operating income

$638,500

Actual Results

Basic

Deluxe

TOTAL

Sales volume (in units)

6,700

5,250

11,950

Sales revenue

$ 2,345,000

$ 4,252,500

$ 6,597,500

Variable costs:

Direct materials

633,150

1,047,375

1,680,525

Direct labour - unskilled

460,325

393,750

854,075

- skilled

336,600

866,250

1,202,850

Overhead

394,630

638,400

1,033,030

Selling and administration

100,500

210,000

310,500

Total variable costs

1,925,205

3,155,775

5,080,980

Contribution margin

$419,795

$1,096,725

$1,516,520

Fixed costs:

Manufacturing

780,000

Selling and administration

139,500

Total fixed costs

919,500

Operating income

$597,020

My Questions...

1) Given the expected 5,628-hour increase in the flexible budget for unskilled labor, how much did inefficiencies of unskilled labor cost FFL in compensating skilled labor?

2) Given the expected 5,628-hour increase in the flexible budget for unskilled labor, how many additional hours did unskilled labor work?

3) How much did wasted materials cost FFL?

4) How many kilograms of materials were wasted in the production of Basic?