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 Vl2 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:

June 3, 11:00 p.m.

Sharon:

As promised, here is the performance report for May. (I told you smaller is better; well show headquarters how efficient our plant accounting department is!) I am sure you'll find the bottom line as disappointing as I did, but plant performance really looks good, and the crews there may deserve our compliments. Note how they are at or under budget on every single cost except for supervision. I suspect that the unfavorable variance in supervision was caused directly by the work involved in controlling other costs.

Because I worked late, I am taking a day off tomorrow. The other data you re¬ quested are as follows:

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.

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            $80,800F

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

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

1. List some facts that recently have occurred at Waltham Motors. 

2. Analyze the report that was presented by the accountant. Do you agree with his conclusions and recommendations? 

3. How can the cost control process be improved? 

4. Prepare a flexible budget and estimate the line by line variances. How does this result compare with the report presented in question #2. 

5. Prepare a comprehensive variance analysis, i.e. computing the price variances and quantity variances. 

6. How do you dispose of the variances for the variable and fixed costs on the books of the company? 

7. How is the report from question 5 useful to improve the cost control systems of the firm.