Assume the labor price variance is unfavorable. Was the labor usage variance favorable or…

Business Applications Case Static versus flexible budget variances

Justin Radeka is the manufacturing production supervisor for Clear-View Optics Company. Trying to explain why he did not get the year-end bonus he had expected, he told his wife, This is the dumbest place I ever worked. Last year the company set up this budget assuming it would sell 230,000 lenses. Well, it sold only 220,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 230,000 goal and it sells 250,000. The company’s making all kinds of money. You’d think I’d get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They say the company would have made a lot more money if I’d stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I ever worked.” Clear-View Company’s master budget and the actual results for the most recent year of operating activity follow.

Master Budget

Actual Results

Variances

F or U

Number of units

230,000

250,000

20,000

Sales revenue

$4,600,000

$5,037,500

$437,500

F

Variable manufacturing costs Materials

(759,000)

(835,000)

76,000

U

Labor

(391,000)

(420,000)

29,000

U

Overhead

(414,000)

(442,500)

28,500

U

Variable general, selling, and admin. costs

(552,000)

(612,500)

60,500

U

Contribution margin

2,484,000

2,727,500

243,500

F

Fixed costs Manufacturing overhead

(1,570,000)

(1,585,700)

15,700

U

General, selling, and

admin. costs

(575,000)

(563,500)

11,500

F

Net income

$ 339,000

$ 578,300

$239,300

F

Required

a. Did Clear-View increase unit sales by cutting prices or by using some other strategy?

b. Is Mr. Radeka correct in his conclusion that something is wrong with the company’s performance evaluation process? If so, what do you suggest be done to improve the system?

c. Prepare a flexible budget and recompute the budget variances.

d. Explain what might have caused the fixed costs to be different from the amount budgeted.

e. Assume that the company’s material price variance was favorable and its material usage variance was unfavorable. Explain why Mr. Radeka may not be responsible for these variances. Now, explain why he may have been responsible for the material usage variance.

f. Assume the labor price variance is unfavorable. Was the labor usage variance favorable or unfavorable?