Please Do Questions 5 and 6 and explain. I'm having a hard time understanding
Introduction Wingo's Widgets is a large privately held company headquartered in Lincoln, Nebraska that provides specialty widgets to companies all over the world. The company was founded in 1960 by Wingo Tillman as a family business employing 5 employees. As of yearend 2020 the company employs over 850 employees. The current CEO of the company is Charles Tillman, Wingo's grandson. Relevant Personnel Tonya Griff was hired by Charles Tillman in 2015 as a consultant. The company had been experiencing a period of growing pains leading to order shortfalls and lost revenues. The company lacked the capacity to keep up with thriving demand. Charles was impressed with Tonya's vision to decentralize production to five strategically placed plants near the company's headquarters. Each of the five locations were in similar working-class localities. This would allow the company to expand operations and enhance distribution channels. All five plants were operational by the end of 2017. Tonya was promoted to AVP of Production and was put in charge of managing the plants. Charles gave Tonya permission to hire additional personnel as needed to support operations. For several months Tonya tried to manage all five plants herself, but quickly realized she was in over her head. It was too difficult managing the day-to-day operation of the five plants when she was physically located at headquarters. In April of 2018 Tonya hired five production managers to oversee each of the five locations. As shown in Figure 1, Gregg, Sarah, Lisa, Armando, and Isiah each report directly to Tonya. Labor Standards and Expectations While Tonya was skilled at growing the business, dealing with human resource and compensation related items were not in her wheelhouse. She confided in a few of her mentors in similar industries for advice on how to manage her new direct reports. It was recommended that she construct standard labor efficiency and standard labor rates to serve as overall guidance for the plant managers. These standards would serve as benchmarks to help guide each of the managers. Tonya recommended that each manager follow the standards developed, however she allowed each of the managers the flexibility to deviate from standards as they deemed appropriate. Hitting the production target was all that Tonya cared about. For 2020, Tonya informed each manager that they were responsible for processing 20,000 widgets per month (240,000 for the year). Based on the standards, the expected labor cost for each plant would be $480,000 for the year. See Table 1 for the standards developed by Tonya and her calculation of total labor expense. Bonus Allocations Wingo's Widgets had a profitable 2020. In January of 2021, Charles met with Tonya and informed her that there was $50,000 available in the bonus pool specifically for the five production managers. Tonya was responsible for allocating the bonuses as she saw fit. Tonya recalled that each manager successfully met the goal of processing the 240,000 units requested, so she deemed it fair to reward each of the managers equally. She also looked at the spending variance report and noted that direct labor was slightly a favorable variance. In her mind, each manager must have been on par with the others, and it wasn't worth digging into given the small variance that existed. Tonya sent an email to Spending Variance report. The next morning, Tonya got a call from Armando, the plant manager of Plant 4. After exchanging pleasantries, Armando shared with Tonya that he had some concerns about his bonus. The conversation went as follows: Armando: Tonya, I was pleasantly surprised that we would be receiving a bonus this year. That said, I was a little surprised that the money was equally split amongst the five of us. I don't want to come across as ungrateful, but would you be able to provide some detail as to how you landed on the equal split? Tonya: You and the other plant managers worked really hard throughout the year. The bonus was earned and I'm grateful to have you all on my team! I don't see your question as being ungrateful. You know that I try to be as transparent as possible with you. Regarding the allocation, I felt that since each of you met the overall output target, and the overall direct labor variance was slightly favorable, all five of you were performing on par with your peers. Armando: Tonya, I can appreciate what you said about hitting output targets, and I'm glad each of us were able to do that! However, I see a big issue with how you interpretated the favorable labor variance. The report that you are using is an aggregate of all five locations. It's extremely likely in this case that a favorable variance by one location is hiding the unfavorable variance by another. Tonya: Hmm... what exactly do you mean? Can you be more specific? Armando: Well, I made changes this year in my plant. Rather than using the standard hourly wage rate of $10, I am only paying my employees $9 per hour. This $1 decrease from the standard had to have a positive impact on my plants total labor cost, and I believe is responsible for the positive variance you are seeing. In fact, the variance should probably be much higher... which means there are probably issues at other plants that you are missing. For this reason, I think my bonus should be higher than my peers. I found a way to save the company money! Tonya: Armando, I didn't realize you are paying your employees less than the $10 per hour standard rate and I can see how that might impact the total labor cost associated with your plant. I think this warrants a deeper dive into the numbers to better understand performance across each of the plants. Thank you for bringing this to my attention. I'm going to reach out to one of the financial analysts to do a deeper dive into the labor variance. Tonya and Armando ended the call. Tonya called Chip Witherspoon, one of the company's leading financial analysts, and explained to him the situation. Tonya provided Chip with a full dataset of all of the payroll and relevant information needed for him to perform his analysis. Figure 1: Org. Chart Table 1: Standards: Standard Labor Rate per Hour $10 Standard Hours Per Widget 0.2 Expectations: 20,000 Widgets processed per month by each location Calculation: Widgets Processed (20K x 12 months) 240,000 Standard Hours Per Widget Total Standard Hours Standard Labor Rate Total Standard Labor Cost per Location 480,000 Locations Total Standard Labor Cost 2,400,0005 Tohle ?. iscussion Questions: 1. Looking at Exhibit 1, which of the overall revenue and spending variances do you believe warrant further investigation by Tim? What criteria did you use to come to that decision? 2. Use the information in the included excel file and the information provided by Tonya to calculate the overall labor spending variance for the company. 3. Additionally, you should also calculate the labor rate and labor efficiency variances. 4. To gain further insight into the activities of each plant, calculate the overall labor spending variance, labor rate, and labor efficiency variances by plant. Provide a visualization that best portrays your findings. 5. What are the positives and negatives of paying all managers the same bonus? 6. What are some advantages and disadvantages of using a spending variance as a mechanism for performance evaluation? 7. Describe the ethical issues present in the case. What ethical issues may come to light if the bonus is paid entirely based on the overall labor spending variance? What about if it's based on the labor rate variance alone? How might management overcome the potential for people to act unethically? 8. Based on your thorough analysis of labor, what recommendations do you have for management surrounding the distribution of the bonuses? Summarize your conclusions in a memorandum addressed to Tim. In the memo, you must clearly communicate your recommendation, while considering the advantages and disadvantages of your recommendation and any ethical implications. 9. As a result of investigating the direct labor rate and efficiency variances for ABC Corp, what has this exercise taught you about the importance of responsibility accounting in budgeting and variance analysis
