Minor Case 3

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Thanh Thao Nguyen_43078510

DANSHUI PLANT NO.2


Background: Danshui was a contract manufacturer assembling electronic products in
southern China. There were many manufacturers like Danshui in China assembling parts for
the companies wishing to save labor costs. Apple contracted with Danshui to assemble 2.4
million iPhones in Plant No.2 with the expected high demand of this product in 2010. As a
profit center, Plant No.2 was credited for each iPhone produced and shipped. The process of
assembling was complex and required almost entirely based on handwork for more than 100
components. Danshui was confident of its workers to adapt the new tasks and extra workers
could be hired and trained as needed. The iPhone 4 was the most successful product of
Apple as more than 1.7 million units were sold in the first 3 days they were launched.
However, the plant was operating at a loss because of the underproduction. Consequently,
the controller of this plant considered preparing the new budget showing using a flexible
budget system to identify what went wrong in their operations that contribute to the
performance problems.
Problems and issues: The plant has 2 big problems in terms of budgeting system and labor
force. Firstly, they were in unfavorable performance by using standard budgeting system.
They were unable to meet the Apple contract, which was shortage 10% from the 200,000
targeted units, resulting in the loss of $672,000 rather than the profit of $100,000. Actually, the
plant was using the standard costing system to evaluate their performance, but it was not
appropriate because the comparative quantities were different (180,000 and 200,000 units).
That means the total standard costs would be overstated compared to the total actual costs.
Consequently, the activities under the standard costing system were all overstated efficiency,
leading to the unfavorable net income. Secondly, the lack of qualified labor force also
contributed to this problem. As the assembly of iPhone 4 was extremely complex, this would
be higher chances of errors as the assembly process was handled by different workers with
different skills and working styles. This will indirectly cause a lot wastes in term of cost and
time due to the carelessness and the lack of skill of the workers. The burden of the
supervisors must be increased as they must learn before guiding the workers, who were
almost semiskilled. Although the plant had raised the wages to 30%, they still could not
increase the number of labor force needed, which also contributed to the underproduction. On
the other hand, as the production line was based on handwork, the damage of 1000 flash
memories in installation was unavoidable. Thus, the actual output must be 181,000 units
instead of 180,000 units in their report. The replacement of the wastage had increased the
cost that had led to the unfavorable variance of $389,000. When the reckless jobs had been
done, the workers must use the new tools and supplies, resulting in the increase of the
production costs and cause an unfavorable performance.
Recommendations: For the short term, I recommend Danshui to change from using the
standard costing system to the flexible budget system for performance evaluation purpose. By
using the flexible budget will help them to compare results with adjustable budget and the
variance analysis will be more accurate. This system also proves the unfavorable
performance caused by the variance from variable costs of $1,041,200, which can analyze
and evaluate the weaknesses in controlling the variable cost which is flash memories,
assembly and packaging expenses. For the long term period, they have to overcome the
disadvantages from the labor forces. First of all, the plant should improve their salary policy. I
recommend that they should motivate workers by setting a basic salary and offering bonus if
they complete their jobs well. Secondly, the plant should provide professional training for
labors. Through training, the labors can learn how to handle with care on the parts to avoid
the wastage that will happen. This solution also assists managers to place the correct labor at
the correct assembly parts to reduce the labor hours but still save the materials. Thirdly, the
plant could hire more skilled supervisors who will able to response to the problems arises and
know how to motivate the labor to achieve the goal.
Thanh Thao Nguyen_43078510






APPENDIX



Appendix 1: Flexible Budget Based Variance Analysis for Danshui Plant No.2 for 2010

Appendix 2:
Expected cost per unit = 41,140,000/200,000 = $205.7
Actual cost per unit = 38,148,000 / 180,000 = $211.93

Appendix 3: Presentation of Variance analysis: Flash memories for Danshui plant no.2

Actual Costs
Incurred
(Actual Input
Quantity
Actual Price)

(181,000 $29)
$5,249,000



Actual Input Quantity
Budgeted Price
Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Price)
Direct materials
Flash memories

(181,000 $27)
$4,887,000

(180,000 $27)
$4,860,000

$362,000 U $27,000 U
Price variance Efficiency variance

$389,000 U
Flexible-budget variance

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