Ferguson Foundry Limited (FFL) manufactures two models of wood stoves, Basic and Deluxe. FFLs 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 FFLs 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 anothers 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 didnt properly recognize his department for all the money we put in the pockets of Marks 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 cant be my fault! Those accountants are always sticking me with some costs that I dont 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

Mark Ferguson wants you, as FFLs newly-hired controller, to answer the following questions. Once he has the answers, he believes he will better understand why the company did not exceed its profit level goals for the year.

1. Including in the flexible budget the expected 5,628-hour reduction for skilled labor, how much did inefficiencies of skilled labor cost FFL in compensating skilled labor? (These inefficiencies were likely the result of having to answer questions posed by and deal with issues caused by unskilled labor.)

2. Assuming that the entire skilled labor pay rate variance is the result of skilled labor working overtime, how much did skilled labor cost FFL in overtime?