Standard Costing/Variance Analysis

Funtime Inc. manufactures video game machines. Market saturation and technological innovations have caused pricing pressures which have resulted in declining profits. To stem the slide in profits until new products can be introduced, top management has turned its attention to both manufacturing economies and increased production. To realize these objectives, an incentive program has been developed to reward production managers who contribute to an increase in the number of units produced and effect cost reductions.

The production managers have responded to the pressure of improving manufacturing in several ways which have resulted in increased completed units over normal production levels. The video game machines are put together by the Assembly Group which requires parts from both the Printed Circuit Boards (PCB) and the Reading Heads (RH) groups. To attain increased production levels, the PCB and RH groups commenced rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used in the production of these parts has been postponed with only emergency repair work being performed to keep production line moving. The Maintenance Department is concerned that there will be serious breakdowns and unsafe operating conditions.

The more aggressive Assembly Group production supervisors have pressured maintenance personnel to attend to their machines at the expense of other groups. This has resulted in machine downtime in the PCB and RH groups which, when coupled with demands for accelerated parts delivery by the Assembly Group, has led to more frequent parts rejections and increased friction among departments.

Funtime operates under a standard cost system. The standard costs for video game machines are as follows.

Standard Cost per Unit

Cost Item Quantity Cost Total

Direct material

Housing unit 1 $20 $20

Printed circuit boards 2 15 30

Reading Heads 4 10 40

Direct labor

Assembly group 2 hours 8 16

PCB group 1 hour 9 9

RH group 1.5 hours 10 15

Variable overhead 4.5 hours 2 9

Total standard cost per unit $139

Funtime prepares monthly performance reports based on standard costs. Presented below is the contribution report for May 2014, when production and sales both reached 2,200 units.

Question Continued

Funtime Inc.

Contribution Report

For the month of May 2014

Budget Actual Variance

Units 2,000 2,200 200F

Revenue $400,000 $440,000 $ 40,000F

Variable costs

Direct material 180,000 220,400 40,400U

Direct labor 80,000 93,460 13,460U

Variable overhead 18,000 18,800 800U

Total variable costs 278,000 332,660 54,660U

Contribution margin $122,000 $107,340 $ 14,660U

Funtime's top management was surprised by the unfavorable contribution to overall corporate profits in spite of the increased sales in May. Jack Rath, cost accountant, was assigned to identify and report on the reasons for the unfavorable contribution results as well as the individuals or groups responsible. After review, Rath prepared the Usage Report presented below.

Cost Item Quantity Actual Cost

Direct material

Housing units 2,200 units $ 44,000

Printed circuit boards 4,700 units 75,200

Reading heads 9,200 units 101,200

Direct labor

Assembly 3,900 hours 31,200

Printed circuit boards 2,400 hours 23,760

Reading heads 3,500 hours 38,500

Variable overhead 9,800 hours 18,800

Total variable cost $332,660

Rath reported that the PCB and RH groups supported the increased production levels but experienced abnormal machine downtime, causing idle manpower which required the use of overtime to keep up with the accelerated demand for parts. The idle time was charged to direct labor. Rath also reported that the production managers of these two groups resorted to parts rejections, as opposed to testing and modification procedures formerly applied. Rath determined that the Assembly Group met management's objectives by increasing production while utilizing lower than standard hours.

Question continued

REQUIRED:

A. For May 2014, Funtime Inc.'s labor rate variance was $5,660 unfavorable, and the labor efficiency variance was $200 favorable. By using these two variances and calculating the five variances below, prepare an explanation of the $14,660 unfavorable variance between budgeted and actual contribution margin during May 2014.

1. Material price variance.

2. Material quantity variance.

3. Variable overhead spending variance.

4. Variable overhead efficiency variance.

5. Contribution margin volume variance.

B. 1. Identify and briefly explain the behavioral factors that may promote friction among the production managers and between the production managers and the maintenance manager.

Evaluate Jack Rath's analysis of the unfavorable contribution results in terms

of its completeness and its effect on the behavior of the production groups.