What is the flexible budget for the first quarter? what is the flexible budget variance

what is the price and variance usage for materials, and labor? also which is favourable or unfavourable?

should ellen be help responsible?

also answer questions on pg. 4

DMC Inc.1 I thought the Internet would be an ideal way to distribute our products. We've had a lot of success with our direct sales, but now we can reach a much larger audience. The baskets we make and sell appeal to people everywhere. I thought about opening stores in other towns or maybe even franchising, but the Web offers me a way to expand without losing control. That's why the results for the first quarter of our Web-based unit are so disappointing. We expected a small loss, because of marketing and other start-up expenses, but I was not prepared for the beating we took. Alena Canivel President and CEO DMC Inc. DMC Inc. is a small, family-owned and -managed company that produces and sells wooden baskets. The company was founded in 1977 in California by Barb Canivel as a way of supplementing the family income. The business remained small until 2004, when Alena Canivel took it over from her mother. Until that time, all orders were taken by the senior Ms. Canivel and all baskets were handmade by her. Ten years ago, Alena moved to a model of having \"dealers\" take orders and opened a small workshop where part-time labor produced the baskets. The dealers were also looking to supplement their incomes and, supplied with a small display inventory, displayed the baskets at home or at parties, and took orders. Order fulfillment was handled directly by DMC Inc. personnel, who shipped finished baskets directly to customers. Little production inventory was kept. Last year, Alena Canivel evaluated the costs and benefits of two alternative distribution channels in an attempt to expand the business beyond the West Coast. One alternative was to franchise the business. Alena was concerned that she and the managers of DMC would lose control, especially control over quality, which she felt distinguished DMC baskets. The other alternative was to begin taking orders over the Internet. Alena chose the Internet option. The company added a new managerial position, chief technology officer (CTO), and established a subsidiary, dmc.com, to handle the new business. In an unusual move for the company, Alena went outside the small circle of family and friends and hired as the CTO Ellen Myers, who had experience on both the technical and management side of a local Internet start-up. Ellen was looking for something new where she could be in charge of an entire operation and was excited that she could combine this with her interest in basket weaving. It was agreed that if she could meet or exceed her budget for the first year of operation, she would be given a substantial piece of dmc.com. The executives of DMC Inc. considered the initial foray into the Internet to be an experiment to see if the \"anonymous\" approach would be effective in selling baskets. Until this time, DMC considered its network of dealers to be crucial in the growth it had experienced in the last several years. To this end, a separate workshop (factory) was established in Pennsylvania. One of the reasons for selecting Pennsylvania was the availability of part-time labor at lower costs than in California. Another was to attempt to penetrate the East Coast market by locating a workshop there, taking advantage of more immediate access to local market tastes and trends. It was decided that the Pennsylvania operation would produce exclusively for dmc.com business and the California workshop would continue to handle the orders from dealers. 1 Adapted from a case written by William Lanen. 1 Most of the staff functions for dmc.com were provided and controlled by DMC Inc. Ellen Myers and Donna Shores, the senior vice president of marketing for the parent company, jointly decided the marketing budget. While the budget was decided jointly, media decisions and advertising campaigns were run directly from the parent organization. Personnel and financial services were also centralized. Ellen contracted with a major telecommunications company to provide Web hosting services for the operation. She wanted to go with a telecommunications company rather than a local Internet service provider (ISP) for reasons of reliability. The back office operations (billing, payroll, etc.) would be maintained on personal computers at the dmc.com office. The Initial Plan DMC Inc. (and dmc.com) have a July 1 fiscal year and the launch of dmc.com was designed to coincide with the beginning of fiscal year 1. Alena and Ellen decided that dmc.com would initially offer only one of the company's many baskets for sale. Company managers believed this would simplify production scheduling and help maintain quality control for the workforce. The basket to be offered was the round basket, one of the company's most popular. The standard cost sheet for the basket is shown in Exhibit 1. Exhibit 1. Standard Cost Sheet. Selling price $ 25.00 Materials Reed (pounds per unit) 0.4 pounds @ $5 $ 2.00 Handle 1 @ $4.10 4.10 Direct labor 0.5 hours @ $12 6.00 Variable overhead 0.5 hours @ $1 0.50 Fixed overhead $ 6.10 2.00 Total standard costs $ 14.60 Standard gross profit per unit $ 10.40 The cost accounting system at DMC Inc. and the one adopted for dmc.com is a full absorption, standard cost system. Overhead is assigned to products (at standard cost) and not recognized in income until the product is sold. Variable overhead is allocated on the basis of direct labor-hours and fixed overhead on the number of units. The fixed overhead rate is based on an estimated production level for the quarter. All variances from standard are recognized in the period recorded. Purchasing managers were paid bonuses based on the purchase price variances on materials. Because of the uncertainty surrounding the demand for baskets using this new channel, the first quarter budget was designed to be \"easy\" to meet. In addition, relatively large marketing expenses were budgeted for promoting the new channel at related Web sites and in craft publications. This was especially important in some of the East Coast publications because DMC had a small share in these markets. The first quarter operating budget is shown in Exhibit 2. The marketing and administration budget included the costs incurred by the parent for providing these services, as well as the cost of the small staff assisting Ellen Myers and Alex Meier, the production manager at dmc.com. 2 Exhibit 2. Operating Budget - First Quarter. Budgeted sales and production Revenues 8,400 baskets Variable costs $ Materials 210,000 $ 51,240 Labor 50,400 Variable overhead 4,200 Budgeted contribution margin 105,840 $ Fixed overhead 104,160 16,800 Budgeted gross profit $ Marketing and administration 87,360 90,000 Operating profit (loss) $ (2,640) First Quarter Results At first, things went well for dmc.com. Sales in July were sufficiently strong that managers thought the initial sales forecast might have been too limiting. Beginning in mid-August, however, events turned against the new operation. Workers at the telecommunications company went on strike. At first, there was little impact. On August 9, however, a phone line leading to the server was damaged. Because of the strike, the site went off the air. It was one week before supervisors were able to get the site back up. Although difficult to estimate, Ellen suggested in a message to DMC Inc. that the company lost about 5 percent in unit sales (i.e., about 400 baskets). She based this estimate on the fact that lines were down 7 days of the quarter (about 7.7 percent) but that some of the customers that were not able to connect would return when service was restored. Others would simply click on the next site their search engine identified. In order to try and counteract some of the negative publicity that had occurred, dmc.com offered some concessions to customers. One concession was free shipping on all orders over $100. (Initially, shipping was billed to the customer at cost.) This added $12,000 to the Marketing and Administration expenses for the quarter. Also, at Ellen's request, additional marketing campaigns costing $23,000 were launched in craft magazines and on cable television. These efforts helped make up for some of the lost sales. As sales were falling, the company was also hit by the booming economy in the state when the basket makers were finding better part-time employment in the local industries. As a result, dmc.com had to increase the wage rate simply to maintain production. Not all the news was bad, however. Ellen had immediately identified a modification in the production process at the Pennsylvania workshop that reduced the scrap on each basket by 20 percent. This modification was used on all baskets produced in the quarter. (In the original process, scrap occurred in the initial cutting of the material and, therefore, no labor was lost because of the scrap.) In addition, she maintained the level of quality, so the company received no returns and many comments about future purchases. Still, she was concerned that this poor first quarter showing was going to be difficult to make up. 3 I came here because I wanted to work at a company that, first, I had a significant ownership stake in and, second, would allow me to pursue my interest in the craft of basket weaving full-time. I'm afraid that, because of the strike, I won't meet the first year budget and will lose my bonus shares. I think Alena is a fair person, but she has to answer to the other owners. They might not be so willing to assume that these results are because of events out of my control. Actual sales and production for the quarter were 8,000 baskets sold for $176,000. The actual direct (materials and labor) production inputs are shown in Exhibit 3. Actual total variable overhead for the quarter was $5,760 and actual fixed overhead was $16,000. Marketing and administration costs for the quarter amounted to $135,000. Exhibit 3. Actual Direct Production Quantities and Costs Materials Reed 2,400 pounds $ 11,520 Handle 8,000 handles 31,200 4,800 hours 65,280 Direct labor Next Steps As Alena contemplates the future of the new distribution channel, she is concerned as well about the effect of the first quarter on her agreement with Ellen. I would really like the answer to just one question: Should we rewrite our agreement? From what I have seen, Ellen is really dedicated to the business. On the other hand, an agreement is an agreement. If we revise it now, what kind of problems will we have in the future? Required: 1. Prepare a flexible budget for the first quarter of the fiscal year and compute flexible budget variances. 2. Estimate price and usage (or efficiency) variances for materials such as Reed and Handle, and labor cost. Estimate fixed overhead spending variance and volume variance. Indicate whether each variance is favorable (F) or unfavorable (U). 3. For which of the above variances, if any, should Ellen be held responsible? Should Alena rewrite the agreement with Ellen? 4. Prepare a memo to Alena, explaining the results of the first quarter and making recommendations to improve profitability for future periods. 4