Reference no: EM13330540

Located in Boston, MA, Boston Boats served boaters with a small, lightweight fiberglass sailboat capable of being carried on a car roof. Though the firm could hardly be considered as one of the nation's industrial giants, its burgeoning business had required it to institute a formal system of cost control. James O'Reilly, Boston's president, explained: Our seasonal demand, as opposed to a need for regular, level production, means that we must keep a good line of credit at the bank. Modern cost control and inventory valuation procedures enhance our credibility with the bankers and, more importantly, have enabled us to improve our operations. Our supervisors have realized the value of good cost accounting, and the main office has, in turn, become much more aware of problems in the barn.

Boston's manufacturing and warehouse facilities consisted of three historic barns converted to make a 14-foot "Greased Lightning" sailboat. The company's plans included the addition of 15- and 18-foot sailboats to its present line. Longer-term plans called for adding additional sizes and styles in the hope of becoming a major factor in the regional boat market.

The "Greased Lightning" was an open-cockpit, day sailor sporting a mainsail and small jib on a 18-foot, telescoping aluminum mast. It was ideally suited to the many small lakes and ponds of the region, and after three years it had become quite popular. It was priced at $2,265 complete.

Manufacturing consisted basically of three processes: molding, finishing, and assembly. The molding department mixed all ingredients to make the fiberglass hull, performed the actual molding, and removed the hull from the mold. Finishing included hand addictions to the hull for running and standing rigging, reinforcement of the mast and tiller steps, and general sanding of rough spots. Assembly consisted of the attachment of cleats, turnbuckles, drain plugs, tiller, and so forth, and the inspection of the boat with mast, halyards, and sails in place. The assembly department also prepared the boat for storage or shipment.

Mixing and molding fiberglass hulls, while manually simple, required a great deal of expertise, or "eyeball", as it was known in the trade. Addiction of too much or too little catalyst, use of too much or too little heat, or failure to allow proper time for curing could each cause a hull to be discarded. Conversely, spending too much time on adjustments to mixing or molding equipment or on "personalized" supervision of each hull could cause severe underproduction problems. Once a batch of fiberglass was mixed there was no time to waste being overcautious or it was likely to "freeze" in its kettle.

With such a situation, and the company's announced intent of expanding its product line, it became obvious that a standard cost system would be necessary to help control costs and to provide some reference for supervisors' performance.

Jonas Fitzpatrick, the molding department supervisor, and June McDonald, Boston's accountant, agreed after lengthy discussion to the following standard costs based on the production of 450 boats:

Materials	----	Glass cloth--	120 sq. ft	@$2.00	=	$240.00
	----	Glass min--	40 lbs	@$3.75	=	$150.00
Direct labor	----	Mixing--	0.5 hr.	@$20.25	=	$10.12
	----	Molding--	1.0 hr.	@$20.25	=	$20.25
Variable overhead	----	Apply at $10.00 per hull			=	$  10.00
Fixed overhead	----	Apply at $14.30 per hull			=	$  14.30
Total cost to mold hull					=	$444.67

ANALYSIS OF OPERATIONS

After several additional months of operations, June McDonald expressed her disappointment about the apparent lack of attention being paid to the standard costs. The molders tended to have a cautious outlook toward mixing too little or "cooking" too long. No one wanted to end up throwing away a partial hull because there was too little glass mix.

In reviewing the most recent month's production results, McDonald noted the following actual costs for production of 430 hulls:

Materials:

Purchased     60,000 sq.ft. glass cloth @ $1.80

20,000 lbs. glass mix @ $4.09

Used        54,000 sq. ft. glass cloth

19,000 lbs. glass mix

Direct labor       Mixing 210 hrs. @ $21.37

Molding 480 hrs. @ $20.25

Variable Overhead Incurred $4,500

Fixed Overhead     Incurred $6.640

Before proceeding with further analysis, McDonald called Fitzpatrick to arrange a discussion of the variances. She also told O'Reilly, "Maybe we should look into an automated molding operation. Although I haven't finished my analysis, it looks like there will be unfavorable variances again. Fitzpatrick insists that the standards are reasonable, then never meets them!"

O'Reilly seemed disturbed and answered, "Well, some variances are inevitable. Why don't you analyze them in some meaningful manner and discuss your ideas with Fitzpatrick, who is an expert in molding whose opinion I respect. Then the two of you meet with me to discuss the whole matter."

QUESTIONS

1. Determine the molding department's direct cost variances and overhead variances. Why do you think they occurred?

2. Do you think Boston's standards are meaningful? How would you improve them?

3. Assume that the month's actual and standard production costs for items other than molding hulls amounted to $914.33 per boat, and that 430 boats were sold. Prepare a statement of budgeted and actual gross margin for the month, assuming planned sales of 450 boats.