Game Technology Corporation manufactures video game machines. Market saturation and technological innovations have caused pricing pressures that have resulted in declining profits. To stem the slide in profits until new products can be introduced, top management has turned its attention to both manufacturing economies and increased production. To realize these objectives, an incentive program has been developed to reward production managers who contribute to an increase in the number of units produced and achieve cost reductions. In addition, a just-in-time purchasing program has been implemented, and raw materials are purchased on an as-needed basis.

The production managers have responded to the pressure to improve manufacturing performance in several ways that have resulted in an increased number of completed units over normal production levels. The video game machines put together by the Assembly Group require parts from both the Printed Circuit Boards (PCB) and the Reading Heads (RH) groups. To attain increased production levels, the PCB and RH groups started rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used in the production of these parts has been postponed with only emergency repair work being performed to keep production lines moving. The Maintenance Department is concerned that there will be serious breakdowns and unsafe operating conditions.

The more aggressive Assembly Group production supervisors have pressured maintenance personnel to attend to their machines at the expense of other groups. This has resulted in machine downtime in the PCB and RH groups which, when coupled with demands for accelerated parts delivery by the Assembly Group, has led to more frequent part rejections and increased friction among departments. Game Technology operates under a standard-costing system. The standard costs are as follows:

             

Standard Cost per Unit
	Quantity	Cost	Total
Direct material:
Housing unit	1 unit	$20	$ 20
Printed circuit boards	2 boards	15	30
Reading heads	4 heads	10	40
Direct labor:
Assembly group	2.0 hours	8	16
PCB group	1.0 hour	9	9
RH group	1.5 hours	10	15
Total	4.5 hours
Variable overhead*		2	9
Total standard cost per unit			$139

*Applied on the basis of direct labor: 4.5 direct-labor hours at $2 per hour.

Game Tech prepares monthly performance reports based on standard costs. The following table shows the contribution report for May, when production and sales both reached 2,200 units. The budgeted and actual unit sales price in May were the same at $200.

          

GAME TECHNOLOGY CORPORATION Contribution Report For the Month of May
	Actual	Budgeted	Variance
Units	2,200	2,000	200 F
Revenue	$440,000	$400,000	$40,000 F
Variable costs:
Direct material	$220,400	$180,000	$40,400 U
Direct labor	91,800	80,000	11,800 U
Variable overhead	20,460	18,000	2,460 U
Total variable costs	$332,660	$278,000	$54,660 U
Contribution margin	$107,340	$122,000	$14,660 U

Game Technology’s top management was surprised by the unfavorable contribution-margin variance in spite of the increased sales in May. Jack Rath, director of cost management, was assigned to report on the reasons for the unfavorable contribution results as well as the individuals or groups responsible. After a thorough review of the data, Rath prepared the following usage report.

            

GAME TECHNOLOGY CORPORATION Usage Report For the Month of May
Cost Item	Actual Quantity	Actual Cost
Direct material:
Housing units	2,200 units	$ 44,000
Printed circuit boards	4,700 boards	75,200
Reading heads	9,200 heads	101,200
Direct labor: Assembly	3,900 hours	30,810
Printed circuit boards	2,400 hours	24,240
Reading heads	3,500 hours	36,750
Total	9,800 hours
Variable overhead		20,460
Total variable cost		$332,660

Rath reported that the PCB and RH groups supported the increased production levels but experienced abnormal machine downtime, causing idle personnel. This required the use of overtime to keep up with the accelerated demand for parts. The idle time was charged to direct labor. Rath also reported that the production managers of these two groups resorted to parts rejections as opposed to testing and modifying procedures formerly applied. Rath determined that the Assembly Group met management’s objectives by increasing production while utilizing lower than standard hours.

Required

As a group, prepare a presentation to the class addressing the following requirements.

a. Calculate the following variances, and explain the $14,660 unfavorable variance between the budgeted and actual contribution margin during May. Assume that all raw material purchased during May was placed into production.

(1) Direct-labor rate variance.

(2) Direct-labor efficiency variance.

(3) Direct-material price variance.

(4) Direct-material quantity variance.

(5) Variable-overhead spending variance.

(6) Variable-overhead efficiency variance.

(7) Sales-price variance.

(8) Contribution-margin sales-volume variance.

b. (1) Identify and briefly explain the behavioral factors that could promote friction among the pro duction managers and between the production managers and the maintenance manager.

(2) Evaluate Rath’s analysis of the unfavorable contribution results in terms of its completeness and its effect on the behavior of the production groups.