Nanotech Inc. manufactures and distributes standardizedprocess control switches for manufacturing firms. The company uses standard costing for its manufacturing costs. Below are the budget and actual figures for the year just ended (December 31, 2019).

Your team of staff accountants has recently joined the company after a number of positions became vacant in the controllers office. The chief financial officer,Leslie Schnurr, has complained that she never feels like she has a good sense of why the company did not meet its operating income targets whenever she reviews the variances on companys performance report income statement.

The controller, Martin Levy, has asked your team (called the Accounting Analysis Group) to review the matter and explore whether there is a better way to present the report that would make it more insightful. He wants you to include a discussion of any deficiencies with the present format and an indicate how any proposed format would improve the situation. Also, he wants you to explain what specific additional information the company might obtain from a changed format in terms of a more detailed explanation as to why Nanotech did not meet its budget targets.

In addition, he wants you to prepare the usual detailed analysis of all the manufacturing variances (Direct Materials, Direct Labour, Variable Overhead and Fixed Overhead) and indicate how these manufacturing variances tie into any revised format for the Operating Income Performance Report you might come up with.

Mr. Levy has asked you to include these three things in a report addressed to him along with supporting schedules.

In summary, your report should include the following:

1. A brief discussion of what you understand to be the problem with the current Operating Income Performance Report format and how your proposal for an alternate format would correct this problem by providing more specific information. Prepare a Contribution Margin statement including a Variance column ( 5 Marks)

2. Using your proposed format, provide a reconciliation between Static budget operating income and Actual Op. Income including specific explanations why the actual operating income was different from the budgeted operating income (to demonstrate that your proposed format does in fact allow you to provide more detailed explanations)..( 10 Marks)

3. Prepare variance diagrams for all manufacturing cost variances and show a total for all variable manufacturing variances and as well as the fixed manufacturing variances.( 10 Marks)

4. Prepare a Comprehensive Performance report see Exhibit 9-6 on page 352 from the ( 10 Marks)

5. A brief discussion on your variance analysis and the reasons you feel the variances have occurred (5 Marks)

6. Prepare a 5-10 minute power point presentation, discussing the results of your analysis and a discussion on why variance analysis is important.(5 Marks)

NanotechInc.

Operating Income Performance Report (Current Format)

20192019

BudgetActual Variance

Sales-units 220,000210,00010,000 U

Dollars (in 000s)

Sales-Dollars... $5,500 $5,333$ 167U

Cost of Sales:

Materials 880 860* 20 F

Labour 1,7601,782** 22 U

Variable Factory Overhead 440442*** 2 U

Fixed Factory overhead.. 660650 10 F

3,740 3,734 6 U

Gross Profit 1,7601,599161U

Selling Expenses:

Variable 440418 22 F

Fixed 200 204 4 U

Administration-Fixed. 3002973 F

940 91921F

Operating income . $ 820 $ 680 $140U

Sales are assumed to equal production so there is no change in inventory levels

*purchased and used 80,000 kg at a purchase cost of $ 860,000.

** based on 108,000 direct labour hours actually worked

*** manufacturing overhead is applied on the basis of direct labour hours

Standard Costs on which the Budget is Based

Selling Price $25

Direct Material (0.4 kg at $10/kg)* $4

Direct Labor (0.5 hour at $16 per hour).. $ 8

Variable Overhead (0.5 hour at $4 per hour). $ 2

Denominator output is 220,000 units