Requirements

a) Calculate the per-unit fixed and variable costs assigned to manufacturing using the budget data. What was the actual production and delivery cost per unit? Create a flexible budget using the information supplied.

b) Create a report on the flexible budget's performance.

c) Mr. Rahman has received the factory accountant's performance analysis report. Comment on the findings using Table I. Before it is delivered to the FARR ceramics headquarters, suggest areas for improvement that the manager would like to see represented in this analysis. (Hint: investigate material pricing and quantity differences, as well as labor rate and efficiency variances.)

d) What will happen to non-variable production costs if Rosenthal's order decrease continues? Prepare a sensitivity analysis that takes into account the deteriorating order pattern and suggests solutions for FARR Ceramics to improve their present performance.

Case Study

When Mr. Jamilur Rahman, arrived at his office at FARR Ceramics Production Division on June 4, 2019, he was satisfied to see the month-to-month performance report for May resting on his desk. His responsibility as Factory Manager was to investigate the after-effects of tasks of every month and to set up a detailed report on tasks that should have been sent to the corporate office of FARR Ceramics. During May 2019, the scenario at the division had been very tensed due to the declining order and a monthly report would give the chance to discover how things were for a noteworthy clients order.

The Current Scenario

FARR Ceramics manufactures a cup of a special design, called the Brillance Fleurs Sauvages Combi cup that is sold to a household appliance manufacturer Rosenthal GmbH. Rosenthal GmbH is a German retailer of porcelain and other household goods owned since 2009 by the Italian group Sambonet Paderno Industrie. Rosenthal has had a rolling order of fixed quantity, 216,000 units/ year for this cup with FARR Ceramics since 2011. However, from January 2019, FARR was struggling to supply the required quantity each month due to the operational issues entrenched within their production schematic. Moreover, what was even more concerning was that FARR was receiving a lower order quantity than their budgeted amount from Rosenthal.

Budgetary Analysis

Barely any progress had been made in both the organization's working methods and frameworks. This is because FARR wanted to explore how well they were being able to adjust to the improved production techniques implemented at the factory.

The production of 1 cup takes around 0.4 hours. The manufacturing process consists of all standard stages like automatic and semi-automatic forming of products, low-pressure casting, high-pressure casting, biscuit firing in two hours, fully automatic glazing, glost firing, decoration firing at the last stage. Keeping up an ideal quality level is the prime target and exceptional consideration is given to forestall any sort of item defilement. The plant additionally has a well-prepared testing and quality control research center. Well-prepared designers and modelers cooperate to administer during the generation procedure to appear the structure imagined by them. Additionally, incorporated production arranging and stock administration are embraced to guarantee client support.

Experienced staff and sound innovative workgroup give FARR an extra scope of predominance as a noticeable producer in the market. The greater part of the specialized workforce has received training in Italy and Germany. Foreign specialists are serving at the manufacturing plant and adding to the improvement.

Mr. Rahman, a graduate of business administration, was transferred from the head office to the production line in Gazipur during April. Mr. Junaid Khan, also from FARR corporate office, transferred as the new division director for international markets in late April.

The main reason, why Rahman was relocated to the factory, is to oversee and deal with the problem the factory was facing due to operational issues, which caused them to have backlogs in productions and order delivery. The factory operational issue is one of the main reasons why Rosenthal has greatly reduced the number of orders they are placing at FARR.

Besides, the increase in raw material prices and delays from suppliers also added to the backlog of orders posing the second reason for order decline. Due to the decline in order quantity, Rahman had requested that the factory accountant collect the May numbers as fast as he could. However, the prompt response from the accountant beats his expectations. At the corporate office, it takes a few working days to have the monthly. The accountant at the factory had guaranteed Rahman that he would prepare the performance report in one day with some extra time work.

The international division had drafted a budget for 2019 for Rosenthal's order for the cup, in light of the sales unit and cost of production. Since sales are independent of any fluctuations, the month-to-month budget could simply be calculated by considering just one-twelfth of the annual plan. No changes had been made to the May budget when the order quantity was declined in January.

2019Performance Analysis Report

Table I: Budgeted and Actual costs along with performance analysis.

Performance Report, May 2019 (F=Favorable,

U=Unfavorable)

Budget Actual Variance Units 18,000 14,000 4,000 Sales Tk864,000 Tk686,000 Tk178,000U

Variable manufacturing costs: Direct material

TK108,000

TK 85,400 TK 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 Cleanup time 10,800 10,000 800 F

Miscellaneous supplies 5,200 4,000 1,200 F Total variable manufacturing

TK404,000

cost TK484,000 TK 80,000 F Variable shipping costs TK 28,800

TK 28,000 TK 800 F Total variable costs TK512,800 TK432,000 TK 80,800 F

Contribution margin TK351,200 TK254,000 TK 97,200 U Nonvariable manufacturin

g costs: TK 57,600 TK 58,800 TK1,200 U

Supervision

Rent 20,000 20,000 -- Depreciation 60,000 60,000 -- Other 10,400

10,400 -- Total non-variable manufacturing costs TK148,000 TK149,200 TK1,200 U Selling and

administrative costs 112,000 112,000 -- Total non-variable and

programmed costs TK260,000 TK261,200 TK1,200 U Operating income (loss) 91,200 (7,200) (98,400) U

Farr Ceramics Production Division: A Budgetary Analysis

A look at the performance report affirmed Rahman's most exceedingly awful feelings. Rather than a planned profit of Tk 91,200, the report demonstrated the division made a loss of Tk7,200 in May. Taking into consideration the declining order, he considered an improved trend than demonstrated by the performance report. The factory accountant had connected the accompanying notice to the report:

June 6, 12:00 noon

Dear Sir

Please find attached the performance report for May. The profit figure is not what we estimated it to be. It is to be noted that other than supervision costs most of the costs are under budget or at par almost. The unfavorable variance of costs associated with factory supervision was achieved by controlling other costs. Work in Progress and finished goods inventory at the beginning and end of the month are zero.

Per unit standard costs used in budgeting this year were: Direct material Tk 6 Direct labor Tk 16.

It requires 130 grams (0.13 kg) of euro fine porcelain and 0.40 labor hour to produce one cup. Euro porcelain is a specialized material used in ceramic products. Farr's estimated cost per kg of euro porcelain Taka 46. During the month, Farr purchased 1,820 kg of raw materials at the rate of Taka 46.92 per kg to produce 14,000 cups. All of the materials purchased were used for production. There were no ending raw materials.

During the month the company recorded 5,467 direct labor hours at an hourly rate of Taka 45 to produce 14,000 units of products. The budgeted cost of labor per hour was Taka 40 (direct labor cost per Unit 16/0.40 hour required to produce one unit).

The falling order quantities from the foreign buyers were a cause for concern for FARR Ceramics and steps were needed to be taken to renegotiate larger, more profitable contracts with the buyer. As the executive pondered this unwanted reduction in demand from the foreign buyer and its long-term implications on segment profitability, he was unable to shake off the looming concerns of inefficiencies which have caused a budget control failure and resulted in a net operating loss.

At the back of his mind, he was perfectly aware that a bid to cut down on costs to make the segment profitable once more can easily backfire by compromising quality and inability to export consignments on time. This delicate problem left him deep in thought as he gazed out from the window of his office contemplating the optimum solution to this complex dilemma.

2019CONCLUSION

Holistically, this case provides an opportunity to understand multifaceted issues in costing and delivering products and develop the skill set to prepare budgets taking a wide array of operational factors and product-related information into consideration.

This case familiarizes students with in-depth investigations of multidimensional constraints and challenges real-life organizations face when preparing, executing, and controlling deviations from the budgeted quantities and values. This understanding is of cardinal importance in focusing on developing analytical skills through tackling real-life obstacles derived from case-based contexts.