Reference no: EM13356312

Analysis of unfavorable income variance.

The Markley Division of Rosette Industries manufactures and sells patio chairs. The chairs are manufactured in two versions: a metal model and a plastic model of a lesser quality. The company uses its own sales force to sell the chairs to retail stores and to catalog outlets. Generally, customers purchase both the metal and plastic versions.

The chairs are manufactured on two different assembly lines located in ad­-joining buildings. The division management and sales department occupy the third building on the property. The division management includes a division controller responsible for the divisional financial activities and the preparation of reports ex­plaining the differences between actual and budgeted performance. The controller structures these reports such that the sales activities are distinguished from cost factors so that each can be analyzed separately.

The operating results for the first three months of the fiscal year as compared to the budget are presented in Table I. The budget for the current year was based upon the assumption that Markley Division would maintain its present market share of the estimated total patio chair market (plastic and metal combined). A status report had been sent to corporate management toward the end of the second month indicating that divisional operating income for the first quarter would probably be about 45 percent below budget; this estimate was just about on target. The division's operating income was below budget even though industry volume for patio chairs increased by 10 percent more than was expected at the lime the budget was devel­oped.

During the quarter, the Markley Division manufactured 55.000 plastic chairs and 22.500 metal chairs. The costs incurred by each assembly line is also presented as Table 2.       

The standard variable manufacturing costs per unit and the budgeted monthly fixed manufacturing costs established for the current year are presented below.

TABLE 1  Markley Division Operating Results for the First Quarter

			Favorable
			(unfavorable)
			relative to the
	Actual	Budget	budget
Sale in units
Plastic model	60,000	50,000	10,000
Metal model	20,000	25,000	(5,000)
Sales revenue
Plastic model	5630,000	$500,000	$130,000
Metal model	300,000	375,000	(75,000)
Total sales	5930,000	$875,000	$ 55,000
Less variable costs
Manufacturing (at standard)
Plastic model	§480,000	$400,000	$(80,000)
Metal model	-200,000	250,000	50,000
Selling
Commissions	46,500	43,750	(2,750)
Bad debt allowance	9,300	8,750	(550)
Total variable costs (except variable
manufacturing variances)	$735,800	5702,500	$(33,300)
Contribution margin (except variable
manufacturing variances)	$194,200	$172,500	$ 21,700
Less other costs
Variable manufacturing costs variances from
standards	$ 49,600	s  _	$(49,600)
Fixed manufacturing costs	49,200	48,000	(1,200)
Fixed selling & admin, costs	38,500	36,000	(2,500)
Corporation offices allocation	18,500	17,500	(1,000)
Total other costs	$155,800	$101,500	$(54,300)
Divisional operational income	$ 38,400	$ 71,000	, $(32,600)

TABLE 2.    Actual Manufacturing Costs

Raw Materials
(stated in
equivalent finished
chairs)	Quantity	Price	Plastic Model	Metal Model
Purchases
Plastic	60,000	$5.65	$339,000
Metal	30,000	$6.00		$180,000
Usage
Plastic	56.000	55.00-	280,000
Metal	23,000	$6.00		138,000
Direct labor
9,300 hours @ $6.00 per hour		55,800
5,600 hours @ $8.00 per hour			44,800
Manufacturing overhead
Variable
Supplies			43,000	18,000
Power			50,000	15,000
Employee benefits		19,000	12,000
Fixed
Supervision			14,000	11,000
Depreciation			12,000	9,000
Property taxes and other items			1,900	1,300

 

	Plastic Model	MetalModel
Raw Material	$5.00	$6.00
Direct labor
1/6  hour @ $6.00 per DLH	1.00
¼  hour @ $8.00 per DLH		2.00
Variable overhead
1/6  hour @ $32.00 per DLH	2.00
¼ hour @ $8.00 per DLH		2.00
Standard variable manufacturing cost per unit	$8.00	$10.00
Budgeted fixed costs per month
Supervision	$4.500	$3.500
Depreciation	4.000	3.000
Property taxes and other items	600	400
Total budgeted fixed costs for month	$9.100	$6.900

Analyze the causes of the $32,600 unfavorable income variance.