waltham

Headquarters:Marco Corporation

Subsidiary: Waltham Motors

Product: Electric Motors

Division Controller: Sharon Michaels

Acquired by Marco: In 2003

Problem: Lost customer contract creating variances

between budgeted and annual figures of May.
Performance report, may 2004
FIXED BUDGET
1. PREPARED FOR ONE LEVEL OF SALES VOLUME
2. DOES NOT CHANGE AFTER DEVELOPED.

FLEXIBLE BUDGET
1. PREPARED FOR SEVERAL DIFFERENT VOLUME LEVEL WITHIN A RELEVANT RANGE
2. SEPARATE FIXED AND VARIABLE COST

VARIABLE COST PUT THE FLEX IN THE FLEXIBLE BUDGET

VARIANCE CLASSIFICATION
1. FAVOURABLE ACTUAL AMOUNT INCREASES THE OPERATING INCOME
2. UNFAVOURABLE ACTUAL AMOUNT DECREASE THE OPERATING INCOME
 REQUIRED EXTRA INFORMATION

Inventories Direct Labour Direct Material Variance

No beginning and ending
inventories in WIP or Finished
Goods
Per Unit= 16
2 hours/unit as labour time
Actual Material prices= 5% less
Per Unit= 6 than expected
Actual Labour cost= 8.20/hour
due to increase in medical
benefits
Q1.Using budget data,
Number of units to be sold so that Profit=Loss
how many motors
Budgeted Fixed Cost/Contribution Per Unit
would have to be sold
Contribution per unit=
for Waltham Motors
Budgeted CM/Budgeted Units Sold
Division to break
3,51,200/18000= 19.51/unit
even? Break Even Units=

2,60,000/19.51= 13,326 units

13,326 units
Using budget data, what was the total expected cost per
unit if all manufacturing & shipping overhead (both
variable & fixed) was allocated to planned production?
IF’s Situations
Total expected cost
Manufacturing and shipping overheads
So Total Expected Cost
Total Variable Costs= 5,12,800
per Unit
Total Non Variable/Fixed cost= 2,60,000
7,72,000/18,000=
Total expected cost= 7,72,800

Total budgeted units= 18000 units. 42.93

 Actual Total Expected Cost

What was the Variance cost= 4,32,000

actual per unit Non variable/fixed cost=2,61,200

Total Actual Cost= 6,93,200

cost of Actual Units= 14000

production and Total Cost per Unit= 49.51

shipping?
Per Unit Actual Production Cost=

Total Actual Production Cost/ Total Actual Units

Total Actual Production Cost= (4,04,000+1,49,200)i.e. 5,53,200

Actual Units= 14000

Per Unit Actual Production Cost= 39.51

Per Unit Actual Shipping Cost=

Total Actual Shipping Cost/ Total Actual Units

Total Actual Shipping Cost= 28000

Per Unit Actual Shipping Cost= 2

Comment on the performance report and the plant
accountant’s analysis of results.How,if at all,would you
suggest the performance report be changed before
sending it on to the division manager and Marco
corporation headquarters?
 ON
PERFORMAN ● Material Cost should have been down by 5%,
as per Accountant’s analysis, but is not so
CE REPORT ●
(85400/14000 = $6.1 per unit)
Direct Labour Costs are also more than the

AND PLANT $8.20 per hour as projected after considering

medical benefits (246,000/(14,000*2)=$8.79
per hr)
ACCOUNTAN ● Comparison is being done between 2 different
sets of units, so not a reliable method

T’S ● No information is available on Beginning, WIP

or Ending inventories

ANALYSIS
 ON
CHANGING ●

●
Replace Direct Labor cost and direct
material costs with actual numbers
This allows the company to move from

PERFORM ●
negative operating loss to a positive one, of
$14,800
The Performance report reflects the health

ANCE of the organization, thus its accuracy would

be of utmost importance. Thus the actual
values of costs for Direct Labor and Direct

REPORT ●
Material costs should be used to calculate
total costs
Prepare flexi budget for 3-4 amounts
Prepare your own analysis of the
Waltham Division’s Operations in
May. Explain in as much detail as
possible why income differed from
what you would have expected.
Performance Report as
Expected
 Analysis
∙ Based on this analysis we go from a net loss of $7200 in the month of
May to a positive operating income of $14,800.

∙ This difference was due to accounting error of taking wrong data. Our
new report is the correct reflection.

∙ The accounting department should immediately correct the mistakes

made in the report and the direct materials and direct labour cost need
to be represented accurately.
 Suggestions
∙ Supervision is the department which would need additional attention.
With reduction of 22% in production levels, supervision costs should
ideally come down and that should be reflected in the coming month
data.

∙ If there could be a proportionate reduction in the supervision cost from

$57600 for 18000 units to $44800 for 14000 units then we can gain an
additional revenue of $12800 ($57600-$44800).

∙ Thus, total earning can potentially be $12800 and $14800 totalling to

$27600.
 Conclusion
∙ Marco Corporation purchased Waltham as they saw the opportunity to
earn a profit from the company.
∙ Now that they are part of a large formalised corporation Waltham should
focus on improving their accounting practices to GAAP so as to reduce
chances of errors.
∙ The accounting staff must not rush in generating report, a delay is always
better than having wrong results.
∙ Marco should focus on aiming up for the lost sales and reduction in
proportionate costs to improve earnings as discussed before.
or
Introduction

 Waltham Motors manufactured electric motors of single design that were sold to household appliance manufacturers
 Originally a family-owned business, it was acquired by Macro Corporation in 2003
 Monthly budgets created at Waltham are merely one-twelfth of the annual budget; No adjustments were made to the
recent report based on contract lost last month

Notes from the performance report

 There were no beginning and ending inventories in WIP or finished goods

 Per Unit Standard cost of Direct Material is $6
 Per Unit Standard cost of Direct labour is $16
 Standard time used per unit is 2hrs
 Actual Material Prices have been 5% less than expected
 Actual direct labour costs have been $8.2 per hr due to increase in medical benefits granted last year
Using budget data, how many motors would have to be sold for Waltham Motors Division to breakeven?

Total Fixed costs = $260,000

SP= Total sales/Total sold units=864000/18000= $48
Variable Cost per unit=VCU=Total variable cost/total sold units=512800/18000=$28.49
Breakeven No. of Motors = Total Fixed Cost/ Contribution Margin per motor
Contribution Margin per motor = SP – Variable Cost per unit = $48 - $28.49 = $19.51
Hence the Breakeven motor count = 260000/19.51
= 13,326

Waltham motors division should sell 13,326 motors to achieve break even where total sales is equal to total
cost
Using budget data, what was the total expected cost per unit if all manufacturing & shipping overhead (both variable &
fixed) was allocated to planned production? What was the actual per unit cost of production and shipping?
 Budget Actual Variance
Units 18,000 14,000 4,000
Sales $ 8,64,000 $ 6,86,000 $ 1,78,000 U
Total Budgeted Cost = $5,12,800
Direct Material $ 1,08,000 $ 85,400 $ 22,600 F
Total Budgeted Units = 18,000 Direct Labor $ 2,88,000 $ 2,46,000 $ 42,000 F
Indirect Labour $ 57,600 $ 44,400 $ 13,200 F
Expected Cost per Unit = 772800/18000
Idle Time $ 14,400 $ 14,200 $ 200 F
= $42.93
Cleaup Time $ 10,800 $ 10,000 $ 800 F
Similarly Actual Cost per unit = 686000/14000 Miscellaneous supplies $ 5,200 $ 4,000 $ 1,200 F
Total Variable Manufacturing Cost $ 4,84,000 $ 4,04,000 $ 80,000 F
= $49.51
Variable Shipping Costs $ 28,800 $ 28,000 $ 800 F
Actual Production Cost per unit = Actual Cost Total Variable Costs $ 5,12,800 $ 4,32,000 $ 80,800 F
Per Unit – Per Unit Shipping Cost – Per Unit Contribution Margin $ 3,51,200 $ 2,54,000 $ 97,200 U
Supervision $ 57,600 $ 58,800 $ 1,200 U
Selling & Administration Cost Rent $ 20,000 $ 20,000 $ -

= 49.51-2-8 = 39.51 Depreciation $ 60,000 $ 60,000 $ -

Other $ 10,400 $ 10,400 $ -
Actual Production Cost per unit = $39.51 Total Non variable manufacturing costs $ 1,48,000 $ 1,49,200 $ 1,200 U
Selling & Administrative costs $ 1,12,000 $ 1,12,000 $ -
Per Unit Shipping Cost = $2
Total non variable and programmed costs $ 2,60,000 $ 2,61,200 $ 1,200 U
Operating Income $ 91,200 $ -7,200 $ -98,400 U
Per Unit Cost Table
Budget Actual Per Unit (Budgeted) Per Unit (Actual) Flag
Direct Material $ 1,08,000 $ 85,400 $ 6.00 $ 6.10 U
Direct Labor $ 2,88,000 $ 2,46,000 $ 16.00 $ 17.57 U
Indirect Labour $ 57,600 $ 44,400 $ 3.20 $ 3.17 F
Idle Time $ 14,400 $ 14,200 $ 0.80 $ 1.01 U
Cleaup Time $ 10,800 $ 10,000 $ 0.60 $ 0.71 U
Miscellaneous supplies $ 5,200 $ 4,000 $ 0.29 $ 0.29 -
Total Variable Manf Cost $ 4,84,000 $ 4,04,000 $ 26.89 $ 28.86 U
Variable Shipping Costs $ 28,800 $ 28,000 $ 1.60 $ 2.00 U
Total Variable Costs $ 5,12,800 $ 4,32,000 $ 28.49 $ 30.86 U
Supervision $ 57,600 $ 58,800 $ 3.20 $ 4.20 U
Rent $ 20,000 $ 20,000 $ 1.11 $ 1.43 U
Depreciation $ 60,000 $ 60,000 $ 3.33 $ 4.29 U
Other $ 10,400 $ 10,400 $ 0.58 $ 0.74 U
Total Nonvariable manufacturing costs $ 1,48,000 $ 1,49,200 $ 8.22 $ 10.66 U
Selling & Administrative costs $ 1,12,000 $ 1,12,000 $ 6.22 $ 8.00 U
Total non variable and programmed costs $ 2,60,000 $ 2,61,200 $ 14.44 $ 18.66 U
Total Cost $ 42.93 $ 49.51 U
Comment on the performance report and the plant accountant’s analysis of results. How, if at all, would you suggest the
performance report be changed before sending it on to the division manager and Marco corporation headquarters?
Comments

 The performance report prepared by the plant accountant is not depicting true picture as the sales revenues & costs
(actual/budgeted) are being compared at different output level i.e. 18000 for budget & 14000 for actual. The plant
accountant’s claim that every cost except supervision is either at or under budget, is totally wrong & cannot be
accepted. As per unit cost analysis in Per Unit Cost Table, all costs are over -budgeting except indirect labour
 Plant accountant is deliberately attempting to report over - simplification in inventory costs (WIP & finished
goods), which is not a realistic scenario
 As per plant accountant notes, actual material price is 5% less than expected i.e. actual material price should be
$5.7(.95*6),but as per unit cost table, actual material price comes out to be $6.1. Moreover, actual direct labour
cost per unit should be $16.4 but as per unit cost table, its value comes out to be $17.57

Suggestions

 The static budget needs to be changed into flexible budget so that budgeted figures are recorded according to the
actual output (number of motors produced) i.e. 14000
 The actual direct material & direct labour costs need to be updated as per plant accountant’s note
Prepare your own analysis of the Waltham Division’s operations in May .Explain in as much detail as possible why income
differed from what you would have expected?
Flexible Budget Table
Static Budget Static Budget Flexible Budget Flexible Budget
Budget Actual Variance Variance Flag Flexible Budget Variance Variance Flag

Units 18,000 14,000 4,000 14,000 -

Sales $ 8,64,000 $ 6,86,000 $ 1,78,000 U $ 6,72,000 $ 14,000 F
Direct Material $ 1,08,000 $ 85,400 $ 22,600 F $ 84,000 $ 1,400 U
Direct Labor $ 2,88,000 $ 2,46,000 $ 42,000 F $ 2,24,000 $ 22,000 U

Indirect Labour $ 57,600 $ 44,400 $ 13,200 F $ 44,800 $ 400 F

Idle Time $ 14,400 $ 14,200 $ 200 F $ 11,200 $ 3,000 U
Cleaup Time $ 10,800 $ 10,000 $ 800 F $ 8,400 $ 1,600 U
Miscellaneous supplies $ 5,200 $ 4,000 $ 1,200 F $ 4,044 $ 44 F
Total Variable Manf Cost $ 4,84,000 $ 4,04,000 $ 80,000 F $ 3,76,444 $ 27,556 U
Variable Shipping Costs $ 28,800 $ 28,000 $ 800 F $ 22,400 $ 5,600 U
Total Variable Costs $ 5,12,800 $ 4,32,000 $ 80,800 F $ 3,98,844 $ 33,156 U
Contribution Margin $ 3,51,200 $ 2,54,000 $ 97,200 U $ 2,73,156 $ 19,156 U
Supervision $ 57,600 $ 58,800 $ 1,200 U $ 57,600 $ 1,200 U
Rent $ 20,000 $ 20,000 $ - $ 20,000 $ -
Depreciation $ 60,000 $ 60,000 $ - $ 60,000 $ -
Other $ 10,400 $ 10,400 $ - $ 10,400 $ -
Total Nonvariable manufacturing costs $ 1,48,000 $ 1,49,200 $ 1,200 U $ 1,48,000 $ 1,200 U
Selling & Administrative costs $ 1,12,000 $ 1,12,000 $ - $ 1,12,000 $ -
Total nonvariable and programmed costs $ 2,60,000 $ 2,61,200 $ 1,200 U $ 2,60,000 $ 1,200 U
Operating Income $ 91,200 $ -7,200 $ -98,400 U $ 13,156 $ 20,356 U
Why is the actual income differing from expected income?
 Expected income was recorded against output of 18000 motor units whereas actual income calculated against
14000 motor units
 Actual selling price per unit was $49 whereas budgeted selling price per unit was $48
 Actual direct material cost per unit was $6.1 whereas its budgeted value was $6
 Actual direct labour cost per unit was $16.4 whereas its budgeted value was $16

W.r.t accountant’s notes, actual direct material cost should be $79800 (0.95*84000) instead of $85400.Actual
direct labour cost should be $229600 (2*8.2*14000) instead of $246000.Variable shipping cost against output of
14000 should be $22400 (1.6*14000) instead of $28000.With these three changes incorporated, we obtain actual
operating income of $20400 instead of loss of $7200.