"I want answers, people. We were supposed to make nearly $200,000 in gross margin from the new low sodium chip line. From my understanding we sold 20% more chips than expected and only increased the margin by 9% the margin! Since some of our costs are fixed the margin should increase by a higher percentage than sales. Explain to me how this happened!" Eugene Roberts thundered. The Board had appointed Eugene as CEO of Roberts three years ago after Mary stepped down to serve as Chairman of the Board for health reasons. As the oldest of his generation, Eugene had been the natural choice within the family, but he had a fierce temper when things went wrong. Understandable, probably, given the responsibility he felt for maintaining the livelihood of so many members of the Roberts family. "We're still not sure," Percy answered in a reasonable tone, trying to calm his uncle down. "We just barely finished calculating the numbers this morning. We haven't had time to analyze them yet." Eugene's face was starting to turn purple. "Numbers this bad should have been a priority!" he thundered. "Do I have to...?" "Eugene, that's enough," Mary's quiet voice stopped the CEO cold. "You know as well as I do that Percy is good at his job. He'll get the analysis done and back to us as soon as he can, but we have to give him time. Perhaps if you had let him do his work instead of calling him into this emergency meeting, we would have the numbers that we need." "Yes, Aunt Mary," Eugene said immediately, although he almost choked on the words. The others in the room hid smiles. No one argued with Aunt Mary, the Chairman of Roberts' Board of Directors. Eugene took a couple of deep breaths to calm down, and then turned back to the group. "Does anyone have any specific suggestions or ideas that might help Percy's search for the problem?" The room went quiet. "Well," Percy finally said, "Let me give you some good news. I had a few minutes to at least start my search, and it doesn't look like the problem is with our sales. Take a look at these sales and gross margin numbers, and then we can discuss it." "You're right, Percy," Eugene said, his voice much calmer after hearing the good news about sales. "I reviewed the numbers you showed us. The flexible budget sales results are higher than the static budget results, which means we sold more chips than we planned to, right?" As Percy nodded, he continued. "And actual sales results are higher than the flexible budget, which means our selling price was higher than we planned, right?" Again, he waited for Percy's nod before he continued. But this time his face started to turn red. "So exactly what," he continued visibly trying to control his frustration and anger, "happened to expenses?!" Percy shrugged his shoulders. "I don't know yet. I need to dig into the numbers much more before I'll know. If the Board doesn't have any other questions or suggestions, then perha you wouldn't mind letting me get back to my calculations." Eugene looked around the room. "Any additional questions or comments before we excuse Percy and move on to other business?" A young man, sitting nervously in the back, tentatively raised his hand. "Yes, Miles?" Eugene asked. I was hoping to hear from you." "Well," Miles began. "I don't have any specific ideas, but I do know that I've had quite a few discussions with purchasing about the costs of the colorful bags and fancy labels being used for this line of chips and a couple of discussions with HR about the new hires that are being assigned to my division." Miles Roberts, the first of his generation to become manager at Roberts, had only recently graduated with a degree in management and was still working on his MBA. Because of his energy and enthusiasm, not to mention his training, he had recently been assigned as the manager of the low sodium chip division. Lauren Roberts, the HR Director jumped in. "I've heard your complaints, Miles, and I really don't think that we've given you any apprentice chip makers that are worse than those going to other divisions." Miles shook his head. "I disagree. We are having a terrible time with them, and I'm sure that is driving costs up." "No. I know that you are getting the same number of new recruits as everyone else..." Now Lauren's face was the one turning purple. "Enough." As before, Aunt Mary's calm voice cut through the debate before it could turn into an argument. "This isn't helping. Before we can start finding solutions or assigning responsibility, we need to know what happened." She turned to Percy, who was still standing by the white board where she had jotted down her calculations for the sales variances. "Do you have what you need, dear?" she asked. "Yes, ma'am," Percy replied with a nod. "I'll get you some basic numbers on direct materials and the apprentice wages right away, then I'll move on to more detailed analysis." "Good. And if you need anything else, please let us know." Eugene jumped back in, finally picking up his responsibility as CEO. Percy nodded to him and the other members of the leadership team and quietly left the room. Back in his office, he added more information to the original report. Then he sat down to start crunching the numbers that the Board needed. "Uncle Percy?" Miles asked tentatively from his doorway "Ah, Miles," he said briskly to his nephew, motioning him in. "Come in and sit down. Do you have the numbers I asked for?" Miles handed him a sheet of numbers. "I only brought the actual numbers. I assume you have the budgeted numbers since you created the budget for me." Percy frowned. "Well, I can look them up, I guess, but it would have been nice to have them here. It would have saved me a step, especially with the Board and the Executive Team so excited to get the final analysis." Miles frowned. "I guess I didn't think about that." Percy smiled. "Don't worry about it, Miles, but do keep in mind that the more you can do to make life easier for upper management, the faster you will become part of upper management." He turned his attention back to the list of numbers. "Now," he said. "I'd better get to work. Anything in particular you want to point out to me?" "Well, I'm glad that you are looking into the DM costs, Uncle Percy, but I still think you're going to find more answers in the DL." "Maybe, but that's not what my quick analysis showed. I'll get back to you with what I find." Percy set to work with the numbers Miles had brought him and those he already had from the budget (once he found them). He created a spreadsheet that compared the static budget to the actual results and then he inserted a flexible budget in the middle of the two. 1. What are the static budget, sales volume, and flexible budget variances for direct materials? Which of these variances will be the most informative and why? 2. What are the static budget, sales volume, and flexible budget variances for direct labor? 3. Does the problem bigger problem appear to be in materials or labor? Why? 4. Calculate each raw material's price and quantity (efficiency) variances. 5. Calculate the rate (price) and efficiency variances for all three types of Direct Labor. 6. Prepare a statement for the Board, detailing what the root cause of Roberts' problems with the new line may be. Flexible Budget Revenue Direct Materials Direct Labor Applied MOH Gross Profit Static Budget $ 456,250 $ 180,000 $ 30,625 $ 37,000 $ 208,625 Actual Results $ 591,100 $ 274,000 $ 44,300 $ 45,100 $ 227,700 Notes: In this division we had no beginning or ending inventorys of direct materials or finished goods. Manufacturing overhead is a fixed expense. Actual Units Sold: 150,000 Direct Materials Bags Potatoes Sea Salt (dashes) Oil (Gallons) Labels Packaging Boxes Quantity Used 155,000 825,000 900,150 25,000 175,000 7,726 $ $ $ $ $ $ Total Cost 15,000 175,000 18,500 50,000 12,500 3,000 Direct Labor Apprentice Chip Maker Chip Master Hours Worked 1,550 900 $ $ $ Total Cost 18,300 15,000 11,000 555 Budgeted DM and DL Costs (Standards) Cost per DM unit 0.10 0.19 Direct Materials Bags Potatoes Sea Salt (dashes) Oil (Gallons) Labels Packaging Boxes Estimated Qty per Bag 1 4.75 7 1/8 1 1/20 $ $ $ $ $ $ 0.02 1.92 0.04 0.40 Direct Labor Apprentice Chip Maker Chip Master Estimated hours per batch 0.15 0.12 0.08 $ $ $ Rate per hour 10.00 15.00 20.00 The budgeted selling price was $3.65. Bags are made in batches of 20