Part 2 variance analysis

Luc is the plant manager of FEMI inc., a car manufacturer. He wants you to analyse the plants performance, that he asses as poor. Last year, when preparing the budgets for the current year, the plant was expecting to benefit from the manufacturing of a new SUV (sport utility vehicule), made from an aluminium alloy instead of the usual steel. This new design was extensively tested before production started and allows the vehicule to show better breaking and acceleration performances, as well as a reduced gasoline consumption. This is greatly appreciated by the customers, and the business has seen the numbers of orders increase accordingly. Luc is however concerned by the disappointing financial results of the new model and would like to understand the situation better. You are presented with the following information:

FEMI inc.

Budgeted and actual results

Year ended March 31, 2022

Thousands of $

	budgeted	actual
Sales volumes (units)	400,000	210,000
Sales (note 1)	18,000,000	10,500,000
Direct materials (note 2)	13,234,000	7,971,600
Direct labor (note 3)	250,000	138,600
Variable MOH (note 4)	600,000	294,000
Variable selling expenses (commissions) (note 5)	1,200,000	630,000
Total contribution margin	2,716,000	1,465,800
Fixed MOH (note 6)	500	490
Fixed S&A (note 5)	200	230
Total operating income ($)	2,715,300	1,465,080

Fiscal year 2022 did not go as planned depsite the reduction of sanitary measures:the shortage in the supply of semiconductours that affects many manufacturers in various industries has continued. the budget has been perpared based on a normal supply level, but the economic recovery has been significatly slower than expected. This has impacted the companys ability to close sales: despite numerous orders, many sales were not realized because of the inability to deliver the product to the customer. The production level was half of what was expected, because it was imporssible to have access to a sufficient supply of semiconductors to manufacture the vehicules.

Manufacturing process for a single vehicule

	budgeted unit quantity	Actual unit quantity	budgeted cost	Actual cost
DM - aluminum (per KG) (note 2)	190	195	$1.50/KG	$3/KG
DM semiconductors	1,400	1,350	$2/unit	$2,5/unit
DM - other (per unit) (note 2)	1	1	$30,000/unit	$34,000/unit
DL (hours) (note 3)	25	22	$25/H	$30/H
Variable MOH (per DL hour) (note 4)	1	1	$3,000	$3,000

note 1

FEMI manufactured 190,000 fewer vehicules because of the shortage of semiconductors. This shortage had an impact on the number of available vehicules and on the delivery times. In order to alleciate the effets of these elements and to compensate for the increased manufcaturing costs, the selling price was increased by $5,000; from 45,000$ to 50,000$.

Note 2

DM is comprised of three main components: semiconductors, aluminium and other DM.

Semiconductors:

When preparing the buudgets, management had anticipated the semiconductor market would revert to its original equilibrium. Experts now expect this to happen at the end of 2022, possibly even in 2023, The supply chain of semiconductors was negatively affected bu lockdowns and teleworking that generated an increased demand for electronic products, along with the increased demande for semiconductors. The companies that manufacture semiconductors are unable to fulfil the added demand, which had increased the cost of DM by up to 20%.

By working with designers, luc was able to remove certain non-essential functionalities to reduce the number of semiconductors needed in a vehicule, to increase the number of vehicules that could be manufactured,

Aluminium

In recent months, the aluminium market was unstable, since Russia the second largest producer in the world because of its cheaper electricity cost as well as the low value of the rouble on the international markets. Because of this uncertainty, the price of aluminium has more than doubled in the last year: the budgeted price was 1.50$/Kg where the actual price was 3$/Kg

Other DM

Because of the inflation rate that has reached a long-term high, the unit cost of other DM increased by 4,000$ per hevicule. The budgeted amount was 30,000$ per vehicule.

Note 3

In the context where labor is hard to find, FEMI decided to award a salary increase of 5$/hour to all its manufacturing employeees, which brings their salary to 30$/hour.

For each vehicule manufactured, it was expected that 25 hours of DL would be required. However, because of the reduction of several sanitary measures caused by the pandemic, 3 hours were saved by the reduction in the time to disinfect each employees workstation, that used to be required many times per day.

Note 4

The varibale MOH include the masks supplied to the employees, oil, lubricants, various hardware as well as various suppliers used in the manufacturing process. Since the requirement to wear masks was removed if employees remain more than 2m from one another, FEMI was able to genereate savings in that aspect.

Note 5

S&A expenses include the 3000$ commission given to the dealershipd for each vehicule sold, as well as the salaries of the administration personnel, which is compromised of an accountant, an assistant and a financial manager. To ensure employee retention, a salary increase of 30,000$ was shared between these 3 positions.

Note 6

the manufacturing cost includes annual fixed MOH costs of 500,000$ that are allocated based on the number of units, since despite an automated manufcaturing process, FEMI manufactures onle one model of SUVs. FEMI was able to generate savings because of the reduction in sanitary measures, which avoided the need to install panels in the breakroom that was recently reopened.

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