Question 1 (22 marks) Do-it Factor Limited was founded in 1980 to manufacture gaming console targeted mainly children. To deal with the slide in profits, top management developed an incentive program to reward production managers who contribute to an increase in the number of units produced and a decrease in costs. The production managers responded to the pressure of improving manufacturing in several ways that increased the number of completed unites beyond normal production levels. The Assembly Division (AD) puts together gaming console that require parts from both the Electrical Division (ED) and Monitor Division (MD). To attain increased production levels, both the divisions (ED and MD) began rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used to produce these parts has been postponed; only emergency repair work is being performed to keep production lines moving. The maintenance department is concerned about serious breakdowns and unsafe operating conditions. The more aggressive assembly division production supervisors pressured maintenance personnel to attend to their machines rather than those of other divisions. This resulted in machine downtime in the EM and MD that, when coupled with demands for accelerated parts delivery by the assembly division, led to more frequent rejection of parts and increased friction among the three divisions. Do-it Factor operates under standard cost system. The standard cost per unit and the performance report for March 2018 are as follows and there is no inventory of direct material: Quantity Rate Direct materials: Console housing 1 $20 per unit $20.00 Electrical boards 2 $15 per unit $30.00 Monitor panel 4 $10 per unit $40.00 Direct labour: Assembly division (AD) 2 hours $10 per hour $20.00 Electrical division (ED) 1 hour $11 per hour $11.00 Monitor division (MD) 1.5 hours $12 per hour $18.00 Standard cost per unit $139,00 Do-it Factor Limited Contribution Report for March 2018 Budget Actual Sales $400,000 $396,000 Variable costs: Direct materials 180,000 220,400 Direct labour 98,000 112.260 278,000 332,660 Contribution Margin 122.000 63.340 The president of Do-it Factor was surprised by the unfavourable contribution margin variance of $58,660 in spite of the sales in March 2018 was 200 units above the targeted sales of 2,000 units. Adrian Yuen, the firm's cost accountant, was asked to identify and report on the reasons for the unfavourable contribution margin as well as the individuals or divisions responsible for them and prepared the following report: Actual Cost $44,000 75,200 101,200 Do-it Factor Limited Usage report for March 2018 Quantity Direct materials: Console housing 2,200 units Electrical boards 4,700 units Monitor panel 9,200 units Direct labour : Assembly division (AD) 3,900 hours Electrical division (ED) 2,400 hours Monitor division (MD) 3,500 hours Total variable cost 31,200 31,060 50,000 $332,660 Adrian reported that ED and MD supported the increased production levels but experienced abnormal machine downtime, causing idle time that required the use of overtime to keep up with the accelerated demand for parts. He also reported that the production managers of these two divisions resorted to parts rejections, rather than testing and modifying them, as we done routinely in the past. Required: a. For the month of March 2018, compute the following variances for Do-it Factor Limited, indicating whether each is favourable (F) or unfavourable (U): i. Direct materials price and usage variances for each input material (7 marks) ii. Direct labour rate and efficiency variance (7 marks) b. Briefly explain one possible behavioural factor that could promote friction among the production managers of AD, ED and MD and/or between production managers and the maintenance manager. (4 marks) c. Briefly explain possible reasons why a favorable price variance on material and/or labor may not always be desirable. Give at least one reason for each cost input. (4 marks) Question 1 (22 marks) Do-it Factor Limited was founded in 1980 to manufacture gaming console targeted mainly children. To deal with the slide in profits, top management developed an incentive program to reward production managers who contribute to an increase in the number of units produced and a decrease in costs. The production managers responded to the pressure of improving manufacturing in several ways that increased the number of completed unites beyond normal production levels. The Assembly Division (AD) puts together gaming console that require parts from both the Electrical Division (ED) and Monitor Division (MD). To attain increased production levels, both the divisions (ED and MD) began rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used to produce these parts has been postponed; only emergency repair work is being performed to keep production lines moving. The maintenance department is concerned about serious breakdowns and unsafe operating conditions. The more aggressive assembly division production supervisors pressured maintenance personnel to attend to their machines rather than those of other divisions. This resulted in machine downtime in the EM and MD that, when coupled with demands for accelerated parts delivery by the assembly division, led to more frequent rejection of parts and increased friction among the three divisions. Do-it Factor operates under standard cost system. The standard cost per unit and the performance report for March 2018 are as follows and there is no inventory of direct material: Quantity Rate Direct materials: Console housing 1 $20 per unit $20.00 Electrical boards 2 $15 per unit $30.00 Monitor panel 4 $10 per unit $40.00 Direct labour: Assembly division (AD) 2 hours $10 per hour $20.00 Electrical division (ED) 1 hour $11 per hour $11.00 Monitor division (MD) 1.5 hours $12 per hour $18.00 Standard cost per unit $139,00 Do-it Factor Limited Contribution Report for March 2018 Budget Actual Sales $400,000 $396,000 Variable costs: Direct materials 180,000 220,400 Direct labour 98,000 112.260 278,000 332,660 Contribution Margin 122.000 63.340 The president of Do-it Factor was surprised by the unfavourable contribution margin variance of $58,660 in spite of the sales in March 2018 was 200 units above the targeted sales of 2,000 units. Adrian Yuen, the firm's cost accountant, was asked to identify and report on the reasons for the unfavourable contribution margin as well as the individuals or divisions responsible for them and prepared the following report: Actual Cost $44,000 75,200 101,200 Do-it Factor Limited Usage report for March 2018 Quantity Direct materials: Console housing 2,200 units Electrical boards 4,700 units Monitor panel 9,200 units Direct labour : Assembly division (AD) 3,900 hours Electrical division (ED) 2,400 hours Monitor division (MD) 3,500 hours Total variable cost 31,200 31,060 50,000 $332,660 Adrian reported that ED and MD supported the increased production levels but experienced abnormal machine downtime, causing idle time that required the use of overtime to keep up with the accelerated demand for parts. He also reported that the production managers of these two divisions resorted to parts rejections, rather than testing and modifying them, as we done routinely in the past. Required: a. For the month of March 2018, compute the following variances for Do-it Factor Limited, indicating whether each is favourable (F) or unfavourable (U): i. Direct materials price and usage variances for each input material (7 marks) ii. Direct labour rate and efficiency variance (7 marks) b. Briefly explain one possible behavioural factor that could promote friction among the production managers of AD, ED and MD and/or between production managers and the maintenance manager. (4 marks) c. Briefly explain possible reasons why a favorable price variance on material and/or labor may not always be desirable. Give at least one reason for each cost input. (4 marks)