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Standad costing

Problem:
Funtime, Inc., manufactures video game machines. Market saturation and technological innovations caused pricing pressures that resulted in declining profits. To stem the slide in profits until new products can be introduced, top management turned its attention to both manufacturing economics and increased production. To realize these objectives, management developed an incentive program to reward production managers who contribute to an increase in the number of units produced and a decrease in costs.

The production managers responded to the pressure of improving manufacturing in several ways that increased the number of completed units beyond normal production levels. the assembly group puts together video game machines that require parts from both the printed circuit boards(PCB) and the reading heads (RH) groups. To attain increased production levels, the PCB and RH groups began rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used to produce these parts has been postponed; only emergency repair work is being performed to keep production lines moving. The maintenance department is concerned about serious breakdowns and unsafe operating conditions.

The more aggressive assembly group production supervisors pressured maintenance personnel to attend to their machines rather than those of other groups. This resulted in machine downtime in the PCB and RH groups that, when coupled with demands for accelerated parts delivery by the assembly group, led to more frequent rejection of parts and increased friction among departments.

Funtime operates under a standard cost system. The standard costs per video game machine areas follows:

Standard Cost per Unit
Cost Item Quantity Cost Total
Direct materials
Housing unit 1.0 $20 $ 20
Printed circuit boards 2.0 15 30
Reading heads 4.0 10 40
Direct labor
Assembly group 2.0hours 10 20
PCB group 1.0hour 11 11
RH group 1.5hours 12 18
Total standard cost per unit $139

Funtime prepares monthly performance reports based on standard costs. The following is the contribution report for May 2007 when production and sales both reached 2,200 units.

FUNTIME INC.
Contribution Report
For the Month of May 2007

Budget Actual Variance
Units 2,000 2,200 200F
Revenue $400,000 $396,000 $ 4,000U
Variable costs
Direct materials $180,000 $220,400 $40,400U
Direct labor 98,000 112,260 14,260U
Total variable costs 278,000 332,660 54,660U
Contribution margin $122,000 $ 63,340 $58,660U

Funtime's top management was surprised by the unfavorable contribution margin variance in spite of the increased sales in May. Constance Brown, the firm's cost accountant, was asked to identify and report on the reasons for the unfavorable contribution margin as well as the individuals or groups responsible for them. after her review, Constance prepared the following usage report:

FUNTIME INC.
Usage Report
For the Month of May 2007

Cost Item Quantity Actual Cost

Direct materials
Housing units 2,200 units $ 44,000
Printed circuit boards 4,700 units 75,200
Reading heads 9,200 units 101,200
Direct labor
Assembly 3,900 hours 31,200
Printed circuit boards 2,400 hours 31,060
Reading heads 3,500 hours 50,000

total variable cost $332,660

Constance reported that the PCB and Rh groups supported the increased production levels but experienced abnormal machine downtime, causing idle time that required the use of overtime to keep up with the accelerated demand ofr parts.This overtime was charged to direct labor. She also reported that the production managers of these two groups resorted to parts rejections, rather than testing and modifying them, as was done routinely in the past. Constance determined that the assembly group met management's objectives by increasing production while utilizing fewer than standard hours.

Required
1. Set up an Excel spreadsheet to calculate these six variances:
a. Direct material price variance, calculated at point of production
b. Direct material usage variance.
c. Direct labor efficiency variance.
d. Direct labor rate variance.
e. Selling price variance.
f. Sales volume variance, in terms of contribution margin

2. Explain the $58,660 unfavorable variance between budgeted and actual contribution margin during May 2007.
3. Identify and briefly explain the behavioral factors that could promote friction among the production managers and between them and the maintenance manager.
4. Evaluate Constance Brown's analysis of the unfavorable contribution results in terms of the report's completeness and its effect on the behavior of the production groups.

Notes:
I have worked on this one problem for 3 days and I can't seem to get anywhere. If at all possible I need step by step instructions so that I know how to work this problem and how the answers were reached.

Any help would be greatly appreciated.

Solution Summary

Excel spreadsheet contains calculation of fllowing six variances:
a. Direct material price variance, calculated at point of production
b. Direct material usage variance.
c. Direct labor efficiency variance.
d. Direct labor rate variance.
e. Selling price variance.
f. Sales volume variance, in terms of contribution margin
And explains the variances.

$2.19