Waltham Motors was recently sold to Marco Corporation after being owned by and operated as a family business servicing the home appliance manufacturers. Soon after Marco Corporation acquired Waltham they transferred Sharon Michaels from corporate headquarters to the Waltham Motors Division. She was apprehensive about changing any of the companies accounting practices until she was onsite and able to analyze how the loss of a major contract would affect the company’s business. Question 1 * Using budget data, how many motors would have to be sold for Waltham Motors Division to break even. To determine the breakeven first we must divide the total variable cost by the number of projected units to be manufactured. manufactured. This will allow me to determine determine the VCU. $512,800.00 | TOTAL VARIABLE COST | 18,000 | TOTAL BUDGETED UNITS | $28.49 | VARIABLE COST PER UNIT | Next we determined the selling price per unit by dividing the total sales by the budgeted units. $864,000.00 | TOTAL BUDGETED SALES | 18000 | TOTAL BUDGETED UNITS | $48.00 | SELLING PRICE PER UNIT | || With this information we are now able to determine the unit contribution margin by subtracting variable cost per unit from the selling price per unit. $48.00 | SELLING PRICE PER UNIT | $28.49 | VARIABLE COST PER UNIT | $19.51 | UNIT CONTRIBUTION MARGIN | Finally to determine the breakeven point you divide the Total Fixed cost by the Unit Contribution Margin. $260,000.00 | TOTAL FIXED COST | $19.51 | UNIT CONTRIBUTION MARGIN | 13,326 | UNITS TO BREAKEVEN | CONCLUSION In order for Waltham Motors to breakeven they must manufacture a minimum of 13,326 units to cover all cost. Question 2 * Using budget data, what was the total expected cost per unit if all manufacturing and shipping overhead (both variable and fixed) was allocated to planned production? To determine this number you must add the budgeted variable cost per unit including with the shipping charges to the total budgeted fixed cost and divide by the number of budgeted production units. $484,000.00 | TOTAL BUDGETED VARIABLE MANUFACTURING COST | $28,800.00 | TOTAL BUDGETED VARIABLE SHIPPING COST | $512,800.00 | TOTAL BUDGETED VARIABLE COST | $148,000.00 | TOTAL BUDGETED FIXED COST | $660,800.00 | TOTAL BUDGETED COST -VARIABLE & FIXED | 18,000 | NUMBER OF BUDGETED UNITS | $36.71 | TOTAL BUDGETED COST PER UNIT | The total cost per unit including both variable and fixed cost is $36.71 per unit. * What was the actual per unit cost of production and shipping?
The second part of this question asked what the actual cost per unit is based on the actual number of units produced and the actual variable and fixed cost. $404,000.00 | TOTAL ACTUAL VARIABLE MANUFACTURING COST | $28,000.00 | TOTAL ACTUAL VARIABLE SHIPPING COST | $432,000.00 | TOTAL ACTUAL VARIABLE COST | $149,200.00 | TOTAL ACTUAL FIXED COST | $581,200.00 | TOTAL ACTUAL COST -VARIABLE & FIXED | 14,000 | NUMBER OF ACTUAL UNITS MANUFACTURED | $41.51 | TOTAL ACTUAL COST PER UNIT | Based on this analysis the actual cost of manufacturing was $4.80 per unit over the budgeted amount. CONCLUSION Not only was the actual nu mber of units produced lower than the budgeted amount but the actual production cost of each unit was higher tha n the budgeted manufacturing cost. This will result in a lower operating income at the end of the month. Question 3 * Comment on the performance report and the plant accountant’s analysis of the results. How if at all, would you suggest the performance reports be changed before sending it on to the division manager and Marco Corporation headquarters? The plant accountant failed to recognize that direct material cost were being billed out at 10 cents over the actual budgeted amount of $6.00 per unit and the actual cost were coming in at 5% less than the budgeted amount or $5.70 per unit. Actual variable cost per unit should have reflected direct material cost of $79,800 and not the $85,400 as stated on the performance report. Additionally Direct labor costs were budgeted at $16.00 per unit however it was billed at $16.40 and actual direct labor costs were coming in at $17.57 per unit. This inflates the direct labor cost unit by $16,380 or or $1.17 per unit. This affects the operating income income in the end. My recommendation would be to correct the report by replacing the direct labor cost and direct materials cost with the actual numbers. This will also allow the company to move from a negative operating loss to a positive operating income of $14,800. CONCLUSION As a new entity to Marco Corporation even though the Performance Report still reflects a loss in operating income it truly reflects the actual health of the organization despite the loss of the large contract. If they continue to use a twelve month average to determine budgets they should use the numbers that are a true reflection of the volume that t hey are producing. Question 4 * Prepare your own analysis of Waltham Motor Division operations in May. Explain in as much detail as possible as why income differed from what you expected. The report that should be turned in to Sharon Michaels should reflect the data that is accurate and concise. As a new part of t he Marco Corporation is important to send a tr ue reflection of the financial health of this entity and this can be achieved by recalculating the data in question. The following performance report would be a better reflection of the company. | BUDGET | ACTUAL | VARIANCE | | UNITS | 18000 | 14000 | 4000 | | SALES | $864,000.00 | $686,000.00 | $178,000.00 | U | ||||| VARIABLE MANUFACTURING COST | | | | | DIRECT MATERIAL | $108,000.00 | $79,800.00 | $28,200.00 | F | DIRECT LABOR | $288,000.00 | $229,600.00 | $58,400.00 | F | INDIRECT LABOR | $57,600.00 | $44,400.00 | $13,200.00 | F |
IDLE TIME | $14,400.00 | $14,200.00 | $200.00 | F | CLEANUP TIME | $10,800.00 | $10,000.00 | $800.00 | F | MISCELLANEOUS SUPPLIES | $5,200.00 | $4,000.00 | $1,200.00 | F | TOTAL VARIABLE MANUFACTURING COST | $484,000.00 | $382,000.00 $382,000.00 | $102,000. $102,000.00 00 | F | ||||| VARIABLE SHIPPING COST | | | | | TOTAL VARIABLE SHIIPING COST | $28,800.00 | $28,000.00 | $800.00 | F | | $512,800.00 | $410,000.00 | $102,800.00 | F | ||||| CONTRIBUTION MARGIN | $351,200.00 | $276,000.00 | $75,200.00 | U | ||||| NON VARIABLE MANUFACTURING COST | | | | | SUPERVISION | $57,600.00 | $58,800.00 | -$1,200.00 | U | RENT | $20,000.00 | $20,000.00 | $0.00 | - | DEPRECIATION | $60,000.00 | $60,000.00 | $0.00 | - | OTHER | $10,400.00 | $10,400.00 | $0.00 | - | TOTAL NON-VARIABLE MANU. COST | $148,000.00 | $149,200.00 | -$1,200.00 | U | ||||| SELLING AND ADMINISTRATIVE COST | $112,000.00 | $112,000.00 $112,000.00 | $0.00 | | ||||||||| TOTAL NONVARIABLE AND PROGRAMMED COST | $260,000.00 | $261,200.00 $261,200.00 | -$1,200.00 | U | ||||| OPERATING INCOME (LOSS) | $91,200.00 | $14,800.00 | -$76,400.00 | U | Based on this analysis you go from a net loss of $7200 for the month of May to a positive operating income of $14,800. This is a true reflection of the health of the company. All efforts now should be place on Sales to make up for the lost contract of 4000 units. The accounting department should immediately begin to report data that is a true reflection of true cost of doing business. If it cost the company $41.51 per unit t o manufacture a unit then they need to report that accurately and base their selling price on the cost of manufacturing. The direct materials and direct labor cost need to reflect the actual cost in these two areas at all times. Additionally attention attention needs to be paid to other expenses such as supervision. The production levels are now lower than budgeted amounts this would also mean that labor cost should decrease across the board. It is already reflected in the direct labor cost and the indirect labor cost. Supervision should also reflect reduced labor cost. With production being cut by 22% , Waltham may have to many chiefs and it may pay to take a look at reducing the supervision staff. If they reduced the budget to $44,950 per month this would save them $13,850 per month and potentially generate an additional $83,100 a year in profits. CONCLUSION Marco Corporation purchased Waltham because they represented an opportunity to earn a profit for the company. The GAAP that were utilized may have worked for Waltham when they were family owned. Now that they are a part of a larger corporation there is a need for new generally accepted accounting practices to be adopted. This means reforming their Performance Reports to reflect actual cost each month. The accounting staff must not rush these reports just so they can say that they are finished with them. More time and attention must be paid to actual cost and performance. Marco Corporation has made a sizable investment in Waltham that they expect to see a return return on and it they don’t their ownership of Waltham would not last very long.
