Ferguson Foundry Limited (FFL) manufactures two models of woodstoves, Basic and Deluxe. FFL’s president, Mark Ferguson, has justreviewed the financial statements of FFL for the fiscal year endedMarch 31. The results for the year were a shocking disappointment.Despite having sold more stoves than budgeted at higher prices,profits were less than expected in the budget.
In the fifth month of the year, the sales and marketingdepartment realized that there was going to be much stronger demandthan expected, due to announced increases in energy prices and aforecasted La Niña. Given that factory production is limited to atotal of approximately 12,000 units, they decided to raise priceson both models. They decided on a price increase of around 30% forthe Basic version and a price increase of around 2% for the Deluxeversion. The purpose of this difference in percentage increases wasto shift demand away from Basic to the more profitable Deluxe. Inorder to justify this increase in FFL’s new marketing materials,they authorized a change in the quality of materials used inproducing the stoves. This resulted in an approximate 10% priceincrease for materials, but this seemed easily covered by the priceincreases, given that budgeted materials costs made up less than33% of budgeted total costs.
Sales and Marketing seemed to make all the right moves, as theygenerated sales in units that were very close to capacity. Theywere all over in the sales office patting each other on the backand high-fiving one another’s “genius.” Every once in a while, oneof the sales staff would yell out, “Who did it?” and everyone inthe office would scream in unison, “We did it!” One particularlybrash sales person even threatened to leave the company if Markdidn’t “properly” recognize his department for “all the money weput in the pockets of Mark’s family.”
However, things were much more somber in the manufacturingplant. They were reeling from the flurry of activity over the pastseven months. It had been difficult to handle the increase inproduction. A major reason was that it was impossible to hire moreskilled labor. The production manager had to choose between payingskilled labor overtime or shifting work to the unskilled labor.Since skilled labor received $24.75 for an overtime hour, theequivalent to almost two hours of unskilled labor, he decided toreduce the hours that skilled labor spent on Basic and hire moreunskilled labor to get the work done. However, even that had been adifficult order for human resources to fill, and he ended up havingto pay unskilled labor overtime to generate enough hours to get thework done. On top of that, the unskilled workers lack of experienceresulted in a significant amount of wasted time and materials inmaking the Basic product. Exasperated, he had told Mark, “And totop it all off, our variable overhead number for Basic is higherthan budgeted! How can that be the case when our volume is down?That can’t be my fault! Those accountants are always sticking mewith some costs that I don’t understand.”
The following information is available: a statement of standardsprepared as part of the budget process (Exhibit A), some actualmarket and job-cost data (Exhibit B), and a statement of budgetedand actual results (Exhibit C).
Exhibit A
Unit Cost Standards
Cost Standards:
| Basic | Deluxe |
Materials per Unit | 70 kilograms | 190 kilograms |
Labour per Unit (unskilled = 37.5%, skilled = 62.5%) | 6 hours | 16 hours |
| | |
Variable Overhead is based on Labour Hours |
Variable Selling and Administration is based on Sales Volume |
Exhibit B
Actual Cost Data
| Basic | Deluxe |
Materials Used (kilograms) | 603,000 | 997,500 |
Actual Hours – unskilled | 31,825.0 | 31,500.0 |
– skilled | 20,100.0 | 52,500.0 |
Exhibit C
Static Budget and Actual Results
For the Year Ended May 31
| Static Budget |
| Basic | Deluxe | TOTAL |
Sales volume (in units) (10% of total market share) | 7,200 | 4,500 | 11,700 |
| | | |
Sales revenue | $ 2,160,000 | $ 3,600,000 | $ 5,760,000 |
Variable costs: | | | |
Direct materials | 504,000 | 855,000 | 1,359,000 |
Direct labour – unskilled | 202,500 | 337,500 | 540,000 |
– skilled | 445,500 | 742,500 | 1,188,000 |
Overhead | 324,000 | 540,000 | 864,000 |
Selling and administration | 108,000 | 180,000 | 288,000 |
Total variable costs | 1,584,000 | 2,655,000 | 4,239,000 |
Contribution margin | $ 576,000 | $ 945,000 | $ 1,521,000 |
Fixed costs: | | | |
Manufacturing | | | 750,000 |
Selling and administration | | | 132,500 |
Total fixed costs | | | 882,500 |
Operating income | | | $ 638,500 |
| | | |
| | | |
| Actual Results |
| Basic | Deluxe | TOTAL |
Sales volume (in units) | 6,700 | 5,250 | 11,950 |
| | | |
Sales revenue | $ 2,345,000 | $ 4,252,500 | $ 6,597,500 |
Variable costs: | | | |
Direct materials | 633,150 | 1,047,375 | 1,680,525 |
Direct labour – unskilled | 460,325 | 393,750 | 854,075 |
– skilled | 336,600 | 866,250 | 1,202,850 |
Overhead | 394,630 | 638,400 | 1,033,030 |
Selling and administration | 100,500 | 210,000 | 310,500 |
Total variable costs | 1,925,205 | 3,155,775 | 5,080,980 |
Contribution margin | $ 419,795 | $ 1,096,725 | $1,516,520 |
Fixed costs: | | | |
Manufacturing | | | 780,000 |
Selling and administration | | | 139,500 |
Total fixed costs | | | 919,500 |
Operating income | | | $ 597,020 |
Given the expected 5,628-hour increase in the flexiblebudget for unskilled labor, how much did inefficiencies ofunskilled labor cost FFL in compensating skilledlabor?
Given the expected 5,628-hour increase in the flexiblebudget for unskilled labor, how many additional hours did unskilledlabor work?
How much did wasted materials cost FFL?
How many kilograms of materials were wasted in theproduction of Basic?
