New Look Jackets

In early 2010, the president of the New Look Jacket Co. Inc. (NLJ) was reviewing the 2009 operating results
and variance report (see Exhibits 1 and 2). He was pleased to see that sales and net income were higher
than the budget, but was not sure how to interpret the variance report that was prepared by the newly hired
controller, a Certified Management Accountant.

NLJ produces and sells two lines of jackets, nylon and leather. The market for nylon jackets is large and
competitive, but the leather jacket market has traditionally been small, with only a few competing
manufacturers. During 2009, fashion trend-setters highlighted leather jackets, creating a ten-time increase
in the market's demand for leather jackets. Unfortunately, NLJ did not foresee this trend and had planned
sales of only 5,000 leather jackets in the 2009 budget (see Exhibit 1).

While the increased demand for leather jackets created a windfall gain in sales for NLJ, it created great
turmoil in the production plant. Supply of direct materials had been contracted at the beginning of the year
based on the budgeted requirements. NLJ's buyers had to purchase the increased requirements for leather
from various new sources, some of which proved to be unreliable. Workers skilled in cutting and sewing
leather were scarce and the production manager had to hire and train inexperienced workers. Also, three
new special sewing machines had to be purchased.

In late December 2009, the production manager reported to the president that, despite the many necessary
adjustments that were made during the year, he managed to fill all orders for both lines of jackets. He was
proud of his department's performance and requested that sizeable bonuses be awarded to all production
workers and staff.

Hearing about the production manager's request, the marketing manager asked to speak with the president.

Marketing Manager: "I hear that the production manager has been boasting about his department's
performance this year. Sure, he filled all of the orders, but deliveries were usually two to four weeks late
and eight percent of the leather jackets were sent back for replacement because of flaws, sizing errors and
inferior quality of leather. We've built our reputation on good service and quality products. We've never
been late on deliveries before and returns have always been less than 1%. I'm afraid we're going to lose
some of our long standing customers if we don't get our service and quality back to our usual standards."

President: "The production manager admitted to having quality control problems because the experienced
leather workers did not have the time to adequately train and supervise the new inexperienced workers that
were hired. However, he assured me that the new workers need only another month or two to perfect their
skills and get up to speed."

Marketing Manager: "Well, I hope so. The fashion trend for leather jackets is expected to surpass last
year's and, if we can deliver good quality jackets on time, I think we can sell up to 30,000 leather jackets in
2010."

After his meeting with the marketing manager, the president met with the new controller. The president
described his conversations with both the production and marketing managers and then requested the
following information from the controller:

1. A written explanation of the significance of the variances in the 2009 detailed variance report.

2. A supported opinion on the performance of the marketing and production departments and whether
either department should be awarded bonuses.

3. A draft operating budget for 2010.

The controller immediately collected data from the marketing and production managers on which to base
the 2010 budget (see Exhibit 3).

Required

As the controller for NLJ, prepare the information requested by the president.
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 EXHIBIT 2
New Look Jacket Co.Inc.
2009 Detailed Variance Report

Nylon Leather
Jackets Jackets Total
Sales Volume
Mix 376,750
Quantity
Mkt size 179,000
Mkt share (39,375) 139,625 517,375

Flexible Budget
Sales price - - -
VC Flex Budget
Direct Materials
Price - (44,550) (44,550)
Usage - (66,000) (66,000)
- (110,550) (110,550)
Direct Labor
Rate - 99,000 99,000
Efficiency - (165,000) (165,000)
- (66,000) (66,000)
Variable OH - (16,500) (16,500)
Variable S & A 14,025 (16,500) (2,475) (195,525)

FFOH Spending (100,000)

Fixed S&A Spending (50,000) (345,525)

Static Budget Variance 171,850

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