EMBA-2012 WAC

Managerial Accounting & Control systems

Roll # 2012-04-0029

Written Analysis Case Submitted By: Subject: Managerial Accounting & Control systems Case: Waltham Motors Division Assignment Questions Question #1:

Roll No. 2012-04-0029

Instructor: Ayesha Bhatti

Using budget data, how many motors would have to be sold for Waltham Motors Division to breakeven? Answer: As per budget data provided in case exhibit performance report, Total Fixed costs = FC =$260000 Selling price per unit= SP= Total sales/Total sold units=864000/18000= $48 Variable Cost per unit=VCU=Total variable cost/total sold units=512800/18000=$28.49 Now by using formula, Breakeven No. of motors=Total Fixed Cost/Contribution margin per motor Here, Contribution margin per unit= SP - VCU= 48 - 28.49= $19.51 So, Breakeven No. of motors= 260000/19.51=13326 Waltham motors division should sell 13326 motors to achieve breakeven point where total sales revenue matches total cost. Question # 2 Using budget data,what was the total expected cost per unit if all manufacturing & shipping overhead (both variable & fixed) was allocated to planned production?What was the actual per unit cost of production and shipping? Answer: As per budget data provided in Exhibit#1 shown below,
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EMBA-2012 WAC

Managerial Accounting & Control systems

Roll # 2012-04-0029

Total budgeted Cost (variable & fixed)=$512800+$260000=$772800 Total budgeted units=18000 So, Total Expected cost per unit=772800/18000=$42.93 Similarly, Total actual cost per unit=$49.51 Per unit actual production cost= $39.51 Exhibit #1: Per Unit Cost Analysis Budgeted cost for 18000 units 108000 288000 57600 14400 10800 5200 484000 28800 512800 57600 20000 60000 10400 148000 112000 260000 772800 Actual Under Per Per cost or Unit unit for Over budget actual 14000 Budget Cost cost units 85400 246000 44400 14200 10000 4000 404000 28000 432000 58800 20000 60000 10400 149200 112000 261200 693200 6.00 16.00 3.20 0.80 0.60 0.29 26.89 1.60 28.49 3.20 1.11 3.33 0.58 8.22 6.22 14.44 42.93 6.10 17.57 3.17 1.01 0.71 0.29 28.86 2.00 30.86 4.20 1.43 4.29 0.74 10.66 8.00 18.66 49.51 Over Over Over Over Over Over Over Over Over Over Over Over Under Over Over and Per unit actual shipping cost= $2

Cost Type

Variable manufacturing costs: Direct material Direct labor Indirect labor Idle time Cleanup time Misc supplies Total Variable manufacturing costs: Variable shipping costs Total Variable costs: Nonvariable manufacturing costs: Supervision Rent Depreciation Other Total nonvariable manufact costs: Selling & admn costs Total nonvariable costs: Total costs ($) :

Question # 3: Comment on the performance report and the plant accountants analysis of results.How,if at all,would you suggest the performance report be changed before sending it on to the division manager and Marco corporation headquarters?
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EMBA-2012 WAC

Managerial Accounting & Control systems

Roll # 2012-04-0029

Ans: Comment #1: The performance report prepared by the plant accountant is not depicting true picture as the sales revenues & costs (actual/budgeted) are being compared at different output level i.e 18000 for budget & 14000 for actual. The plant accountants claim that every cost except supervision is either at or under budget, is totally wrong & cannot be accepted. As per unit cost analysis in Exhibit # 1, all costs are over-budgeting except indirect labor. Comment # 2: Plant accountant is deliberately attempting to report over-simplification in inventory costs (WIP & finished goods),which is not a realistic scenario. Comment # 3: As per plant accountant note nos.2,3,4 & 5, actual material price is 5% less than expected i.e actual material price should be $5.7(.95*6),but as per exhibit#1, actual material price comes out to be $6.1.Moreover,actual direct labor cost per unit should be $16.4 but as per exhibit #1, its value comes out to be $17.57. Suggestion to change performance report: As per comments narrated above, I suggest that budgeted as well as actual costs in the performance report, need two types of adjustments/changes before sending it to management: The static budget needs to be changed into flexible budget sothat budgeted figures are recorded according to the actual output (number of motors produced) i.e 14000. The actual direct material & direct labor costs need to be updated as per plant accountants note nos.2,3,4&5. Question # 4: Prepare your own analysis of the Waltham Divisions operations in May.Explain in as much detail as possible why income differed from what you would have expected? Ans: As per Exhibit # 2,static budget variance (level1) for operating income is 98400 U which is further sub-divided into (level2) sales volume variance (78044U) & flexible budget variance (20356U).Sales volume variance may occur due to low overall motors demand, wrong budgeted sales targets or quality issue. Flexible budget variance for operating income (20356U) is further divided into selling price variance for sales (14000F), direct material variance (1400U), Direct labor variance(22000U), Variable/fixed overhead variance etc.Variance occurred as Waltham actually used greater quantities of inputs such as direct
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EMBA-2012 WAC

Managerial Accounting & Control systems

Roll # 2012-04-0029

material, direct labor , Idle time, shipping costs compared to the budgeted ones as well as used higher prices per unit of these inputs. Direct material variance (1400U) is due to only DM Price variance (1400U) as efficiency variance is zero. Direct labor variance (22000U) is further decomposed into DL-price variance (6000U) & DL-efficiency variance (16000U). Production manager should control efficiency variance. W.r.t accountants notes, actual direct material cost should be $79800 (0.95*84000) instead of $85400.Actual direct labor cost should be $229600 (2*8.2*14000) instead of $246000.Variable shipping cost against output of 14000 should be $22400 (1.6*14000) instead of $28000.With these three changes incorporated, we obtain actual operating income of $20400 instead of loss of $7200. To conclude, the actual income differed from expected income due to following reasons: Expected income was recorded against output of 18000 motor units whereas actual income calculated against 14000 motor units. Actual selling price per unit was $49 whereas budgeted selling price per unit was $48. Actual direct material cost per unit was $6.1 whereas its budgeted value was $6. Actual direct labor cost per unit was $16.4 whereas its budgeted value was $16.

EMBA-2012 WAC

Managerial Accounting & Control systems

Roll # 2012-04-0029

Exhibit # 2: Flexible Budget & variances calculations Flexib le Budge t 18000 14000 4000 U 14000 86400 68600 17800 67200 0 0 0 U 0 Static Budg et Actua l Static Budget variances 10800 0 85400 22600 F 28800 24600 0 0 42000 F 57600 14400 10800 5200 48400 0 28800 51280 0 35120 0 44400 14200 10000 4000 40400 0 28000 43200 0 25400 0 13200 200 800 1200 80000 800 80800 97200 F F F F 84000 22400 0 44800 Flexible Budget Variance 0 1400 0 F SalesVolume Variance 4000 U 19200 0 U

Parameters Units Sales Variable manufacturing costs: Direct material Direct labor Indirect labor Idle time Cleanup time Misc supplies Total Variable manufacturing costs: Variable shipping costs Total Variable costs: Contribution Margin Nonvariable manufacturing costs: Supervision Rent Depreciation Other Total nonvariable manufact costs: Selling & admn costs Total nonvariable costs:

11200 8400 4044 37644 F 4 F 22400 39884 F 4 27315 U 6

1400 2200 0 (400 ) 3000 1600 (44) 2755 6 5600 3315 6 1915 6

U 24000 F U 64000 F F 12800 F U 3200 F U 2400 F F 1156 F 10755 U 6 F U 6400 F 11395 U 6 F U 78044 U

57600 20000 60000 10400 14800 0 11200 0 26000 0

58800 20000 60000 10400 14920 0 11200 0 26120 0

1200 U 57600 20000 0 0 60000 10400 0 14800 1200 U 0 11200 0 0 26000 1200 U 0 13156

1200 U 0 0 0 1200 U 0 1200 U

0 0 0 0 0 0 0 0

Operating Income(loss):

91200

-7200 98400 U

2035 6 U 78044 U

Reference: Cost Accounting 13th Ed By Horngren , Datar, Foster,Rajan & Ittner Introduction to Managerial Accounting By Folk, Garrison & Noreen
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