When Sharon Michaels arrived at her office at Waltham Motors Division on June 4, 2004, she was pleased to find the monthly performance report for May on her desk. Her job as division controller was to analyze results of operations each month and have a narrative report on operations that was to be forwarded to the 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 that were sold to household appliance manufacturers. Originally a family-owned business, the division had been acquired in late 2003 by the Marco Corporation. Few changes had been made in either the company's operating procedures or systems because Marco's management had chosen to delay changing procedures and systems until it was able to observe how well those already in use at Waltham functioned. In April, Sharon Michaels, who had earned a master's degree in business administration in 2002, was transferred from the corporate headquarters controller's office to Waltham Motors. She was joined in late May 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 they were ready so soon. At headquarters, monthly results had rarely been available 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 2004 based on estimated sales and production costs. Because sales were not subject to seasonal fluctuations, the monthly budget was merely one-twelfth 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 Michaels'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.

"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.

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 were: 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."

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

Cleanup 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 shipping 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 10,400/ 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. Calculate the budgeted unit cost and the actual unit cost.

2. Produce a revised performance report where you calculate:

a. Calculate the Flexible budget and the flexible budget variance.

b. Calculate direct materials and direct labor price and efficiency variance.

c. Calculate Volume Variance.