Requirement #1 Prepare the following:

a.) Flexible Budget using the information on Exhibit 1. You will need to get a budgeted rate per unit for the variable expenses like we did in class to make that happen. Level 1 and Level 2.

b.) Calculate the breakeven in units based on the per unit costs you found in part a.

c.) Calculate the Level 2 variances and indicate if the variance is favorable or unfavorable. (This should be done on each individual account and for the total.)

d.) Calculate the level 3 variances (price and efficiency) for direct material, direct labor, and shipping costs, and indicate if the variance is favorable or unfavorable. (Assume that the direct material per completed unit is 1 unit of direct material for each unit completed.)

e.) Calculate the level 3 variances for overhead, both variable and fixed, and indicate if the variance is favorable or unfavorable. Assume that the company allocates their overhead based on direct labor hours. You may lump all individual line items of variable overhead together. You may do the same for fixed overhead.

Requirement #2 Compare the breakeven calculation to actual results. Was your prediction correct? If not, why?

Requirement #3 Comment on the performance report and the plant accountant's analysis of results how, if at all, would you suggest the performance report be changed before sending it on to the division manager and Marco Corporation headquarters? Here you should be talking about the importance of the flexible budget, the information it provides and how it ties to this individual case

Requirement #4 Prepare your own analysis of the Waltham Division's operations in May. Ex plain in as much detail as possible why income differed from that you would have expected? You should be explaining every level 3 variance in detail and should also briefly talk about the level 2 variances. You should be using details provided in the case reading to support your analysis.

Case:

Waltham Motors Division

When Sharon Michaels arrived at her office at Waltham Motors Division on June 4, 1991, she was pleased to find the monthly performance re port for May on her desk. Her job as division controller was to analyze results of operations each month and to prepare a narrative report on operations which was to be forwarded to corporate headquarters of Marco Corporation. Waltham Motors was a wholly owned subsidiary of Marco. The atmosphere at the division had been one of apprehensiveness throughout the month of May, and today would provide a chance to find out how well division management had compensated for the recent loss of a major customer contract. Waltham Motors manufactured electric motors of a single design which were sold to household appliance manufacturers. Originally a family-owned business, the division had been acquired in late 1990 by the Marco Corporation. Few changes had been made in either the company's operating procedures or systems, as Marco's management had chosen to delay changing procedures and systems until it was able to observe how well those in use at Waltham functioned. In April, Sharon Michaels, who had earned a master's degree in business administration in 1989, was transferred from the corporate headquarters controller's office to Waltham Motors. She was joined in late Ma\ by David Marshall, also from Marco, who was to be the new division manager. Because of the lost contract, Michaels had asked the plant accountant to assemble the May figures as quickly as possible, but she was amazed that the\ were ready so soon. At headquarters, monthly results had rarely been avail Waltham Motors Division able until several days after the end of each month. Even though the plant accountant had promised Sharon that he would be able to prepare the report in a single day with some overtime work, she was surprised that he had been able to do so. The division had prepared a budget for 1991 based on estimated sales and production costs. Because sales were not subject to seasonal fluctuations, the monthly budget was merely one twelvth of the annual budget. No adjustments had been made to the May budget when the contract was lost in April.

A glance at the performance report confirmed Ms. Michael's worst fears. Instead of a budgeted profit of $91,200, the report showed the division had lost $7,200 in May. Even allowing for the lost volume, she had expected a better showing than indicated by the performance report. The plant accountant had attached the following memo to the report:

1. There were no beginning and ending inventories in work in progress or finished goods.

2. Per unit standard costs used in budgeting this year was: Direct material $ 6 direct labor 16

3. We are still using two hours per unit as standard labor time.

4. Actual material prices have been 5% less than expected.

5. Actual direct labor costs have been $8.20 per hour due to the increase in medical benefits granted last January.

EXHIBIT 1

Performance Report, May 1991

Budget Actual Variance

Units 18,000 14,000 4,000

Sales $864,000 $686,000 $178,000 U

Variable manufacturing costs:

Direct material $108,000 $85,400 $22,600 F

Direct labor 288,000 246,000 42,000 F

Indirect labor 57,600 44,400 13,200 F

Idle time 14,400 14,200 200 F

Clean-up time 10,800 10,000 800 F

Miscellaneous supplies 5,200 4,000 1,200 F

Total variable manufacturing cost $484,000 $404,000 $80,000 F

Variable shopping costs $28,800 $28,000 $800 F

Total variable costs $512,800 $432,000 $80,800 F

Contribution margin $351,200 $254,000 $97,200 U

Nonvariable manufacturing costs:

Supervision $57,600 $58,800 $1,200 U

Rent 20,000 20,000 ----

Depreciation 60,000 60,000 ----

Other 10,000 10,400 ----

Total nonvariable manufacturing costs $148,000 $149,200 $1,200 U

Selling and administrative costs 112,000 112,000 ----

Total nonvariable and programmed costs $260,000 $261,200 $1,200 U

Operating income (loss) 91,200 (7,200) (98,400) U