The Special Widget division manufactures a product called SW for Global Corporation. The plant is a completely autonomous subsidiary that sells SWs to other subsidiaries of Global Corporation, as well as outside companies. At the beginning of the year the controller for Special Widget estimates sales and unit costs based on projections from past quarters’ data. Projected sales for the quarter are 11,000 units and budgeted unit costs are as follows:
Direct costs
Unit Costs Raw materials (10 bls at $3.00/Ibs
$30.00 Direct Labor (.5 hours at $12/hour) |
$6,00 Total direct cost per unit
$36.00
At the end of the quarter the budget and the actual results are compared. Usually the variances between the projected budget and the actual results are negligible. However, this quarter the results are drastically different from the budget. Projections estimated $27,500 ni gross profit, but actual gross profit shows a loss of $23,090. The general manager, who leads the profit center, received a variance report from production, but that didn’t explain the entire difference. Having no confidence in his controller, the general manager brought ni the internal audit team from Global Corporation. As the internal audit team, the first report required should use variances to explain the entire difference in gross profit and interpret those variances to initiate further investigation or corrective action. Detailed information about production and sales is as follows:
Actual Budget
Production Volume (units)
11,000 units 11,000 units Sales Volume (units)
10,000 units 11,000 units| Sales Price per unit|
$45.00 $46.00 Direct labor hours
5,610 hours 5,500 hours Direct labor cost
$66,759 $66,000 Raw Materials purchased (Ibs) 120,000 bls 110,000 bls
Raw Materials purchased (S) Raw Materials used (Ibs) | Overhead Costs (S)
$384.000
$330.000 115,500 lbs 110,000 lbs $84.050 $82,500
The report should include:
- Projected income statement, actual income statement, and flexible budget
• All relevant variances
• Interpretations of those variances
• Hint: Overhead is applied based on direct labor hours and over/underapplied overhead is applied directly to cost of goods sold.