Futura Electronics, a fast-growing electronic price device producer, uses a standard costing system with standards set at the beginning of each year. In the second quarter of 2021, Futura faced two challenges: it had to negotiate and sign a new short-term labour agreement with the workers' union, and it also had to pay a higher rate to its suppliers for direct materials. The new labour contract raised the cost of direct manufacturing labour relative to the company's 2021 standards. Similarly, the new rate for direct materials exceeded the company's 2021 standards. However, the materials were of better quality than expected, so Futura's management was confident that there would be less waste and less rework in the manufacturing process. They also speculated that the per-unit direct manufacturing labour cost might decline as a result of the materials' improved quality. At the end of the second quarter, Futura's CFO, Terence Shaw, reviewed the following results: Per unit variable costs Standard First quarter 2021 actual results Second quarter 2021 results Direct materials 2.2 lbs at $5.70\/lb $12.54 2.3 lbs at $5.80\/lb $13.34 2 lbs at $6.00\/lb $12.00 Direct manufacturing labour 0.5 hrs at $12.00\/hr $6.00 0.52 hrs at $12.00\/hr $6.24 0.45 hrs at $14.00\/hr $6.30 Other variable costs $10.00 $10.00 $9.85 Total $28.54 $29.58 $28.15 Static budget for each quarter based on 2021 First quarter 2021 results Second quarter 2021 results Units 4,000 4,400 4,800 Selling price $70.00 $72 $71.50 Sales $280,000 $316,800 $343,200 Variable costs: Direct materials $50,160 $58,696 $57,600 Direct manufacturing labour $24,000 $27,456 $30,240<\/p>
Other variable costs $40,000 $44,000 $47,280 Total variable costs $114,160 $130,152 $135,120 Contribution margin $165,840 $186,648 $208,080 Fixed costs $68,000 $66,000 $68,400 Operating income $97,840 $120,648 $139,680 Shaw was relieved to see that the anticipated savings in material waste and rework seemed to have materialised. However, he was concerned that the union would press hard for higher wages given that actual unit costs came in below standard unit costs and operating income continued to climb. REQUIRED:<\/strong> 1. Prepare a detailed variance analysis of the second-quarter results relative to the static budget. Show how much of the improvement in operating income arose due to changes in sales volume and how much arose for the reasons. Calculate variances that isolate the effects of price and usage changes in direct materials and direct manufacturing labour. (14 marks)<\/p> 2. Use the results of requirement 1 to prepare a rebuttal to the union's anticipated demands in light of the second quarter results. (4 marks)<\/p> 3. Terence Shaw thinks that the company can negotiate better if it changes the standards. Without performing any calculations, discuss the pros and cons of immediately changing the standards. (2 marks)<\/p>",
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