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compare and evaluate the profit and manufacturing of the Kauffman Manufacturing company for the first and second six months of 1992

Exhibit 1 Comparative Income Statements (thousands of dollars) Original Budget for First Six Months of 1992 First Six Months Actual Original Budget for Second Six Months of 1992 Second Six Months Actual Sales $18,000.00 $19,080.00 $18,000.00 Cost of goods solda 14,940.00 16.608.80 14,940.00 Gross margin 3,060.00 2,471.20 3,060.00 Selling and administrative expenses 2.500.00 2.500.00 2,500.00 Operating incomeb $ 560.00 $ (28.80) $ 560.00 aAll manufacturing variances are closed out to cost of goods sold on a semi-annual basis. bTaxes need not be considered. $17,484.00 13,364.20 4,119.80 2,500.00 $ 1,619.80 Cutie Exhibit 2 Sales, Production, and Inventory Statistics First Six Months, 1992 Second Six Months, 199 Sales forecast Actual sales 200,000 units 212,000 units 200,000 units 188,000 units 200,000 units 188,000 units 200,000 units 212,000 units Normal production Actual production Raw materials, inventory, beginning of period Finished goods inventory, beginning of period 0 0 100,000 units at $74.70 standard cost per unit 76,000 units at $74.70 standard cost per unit 590,000 lbs. 600,000 lbs. Raw materials purchased and used in production Direct labor hours used in production 400,000 hours 425,000 hours Exhibit 3 Comparative Manufacturing Statements (thousands of dollars) Original Budget for First Six Months of 1992 First Six Months Actual Original Budget for Second SIX Months of 1992 Second SIX Months Actual Variance Variance $119F $ 2,400 4,400 $ 2,281 4,400 $2,400 4,400 $ 2,432 4,813 $ 320 413U Raw materials Direct labor Factory overhead: Indirect labor Supplies Power Maintenance Supervision Depreciation Insurance 1,080 70 1,200 2,050 1,930 1,460 350 1,080 70 1,200 2,172 1,800 1,460 353 1,080 70 1,200 2,050 1,930 1,460 350 1220 130F 63U 6U 740 374F 1,143 76 1,274 1,676 1,930 1,460 353 3U 3U $14,940 $14,816 124F $14,940 $15,157 217U Note: F = favorable; U = unfavorable. Exhibit 4 Standard Cost Sheet (based on normal production volume of 200,000 units every six months) Cost Per Unit $12.00 Raw material (3 lbs. of material to complete one unit; @ $4.00 per lb.) Direct labor (2 hours to complete one unit; @ $11.00 per hour) Factory overhead: (all allocated on the basis of units of production) 22.00 Variable costs: Indirect labor Supplies Power 5.40 35 6.00 Fixed costs: Maintenance Supervision Depreciation Insurance 10.25 9.65 7.30 175 Total standard production cost per unit $74.70 aufmann Manufacturing Company (A) ry Kaufmann, president and sole owner of Kaufmann Manufacturing Company fa single, specialized, industrial product), had just received the financial results of he he second six months of 1992. At first, she was pleased by what she observed a she compared these results to those of the first six months of 1992 and the budget ully cast for the two six-month periods (see Exhibits 1, 2 and 3), she became confused could not understand why profits had increased so dramatically in the second half o though actual sales volume had fallen to 188,000 units. She thought that a part of th it could be attributed to the $3 selling price increase which she had authorized effectiv owever, she did not believe its effect would be so dramatic. She thought that anothe fit increase could be attributed to control of production costs, yet when she examined In order to gain an understanding of these confusing results, Ms. Kaufmann decic ner sales manager, Sandy Stevens, and her production manager Carlos Chavez. She v to have had her treasurer-controller, Kenneth Page, at the meeting, but Mr. Page w ns completing the financing arrangements for Kaufmann's planned expansion into ollowing excerpts are from the January 15, 1993 meeting between Kaufmann, St - Kaufmann: Sandy, it looks like your idea to raise our price from $90 to $93 during of the year really came through. We lost volume, just as you predicted, but we sure ga ir income statement, also as you predicted. have you looked into your rystal ball for ve hold the line at $93 or should we risk another slight price increase? dy Stevens: Well, Mary I think our pricing strategy for this year is really going to d well Carlos can control his costs. From the statements you've shown me (referring to ugh 3) it would appear as though we could have done even better in the second half if for $217,000 in unfavorable variances chalked up by production. Kaufmann Manuta action in the second half and all I get is grief. These variances (referrin are not my fault! They are simply due to your generating only 188,000 line; in fact, I've improved my performance over the first six months. ann: I sure can't tell it from these figures, Carlos. Exactly what did ance? Jez. Let me give you some general examples. Here's a copy for eac t sheet (Exhibit 4) which Ken Page worked up at the beginning of 1992 for quite some time establishing the standards, and at our budget re 91 we all agreed that they seemed reasonable. I remember that we ha tanding how the fixed costs were to be allocated to our production fo that something called "full absorption costing' on the basis of a normal ce that we cover all of our costs. Anyway, I've tried to adhere to these star but Ken said we could expect some variances simply because volume normal. He also said that it was likely that these variances would "wash ou mann: (Interrupting) This standard cost sheet is very interesting Ca pproving it, but I don't see how it shows that you've improved your perfor vez: Sorry, Mary, I was getting to that. As I mentioned, Ken said that by nces would wash out, and as you can see from the manufacturing stater variance for the year is only $93.000 over budget. Why that's less than 1% o, as you can see from the manufacturing statement, I've beefed up ouj sup al level, and I hope to see improvement in the next six months. In fact, my su t they had done a good job in the second half of the year. mann: The figures (pointing at Exhibit 3) sure don't show it! It looks as agent has been slack, your laborers inefficient and your supervisors have istakes by cutting maintenance! savez: Give me a little time to develop some reports to explain the differe nd actual profitability in the first six month and the second six months of 1992