MA57 Problem: Variances – Ferguson Foundry Ltd.

MA57 Problem: Variances – Ferguson Foundry Ltd.

Mark Ferguson, the president of Ferguson Foundry Limited (FFL), sat in his office early on June 2, 20x5,reviewing the financial statements of FFL for the fiscal year ended May 3 1, 20x5. The results for the year were both a shock and a disappointment.Mr. Ferguson had called Carl Holitzner, CMA, an independent consultant, to meet him in his office.When Carl arrived, Mr. Ferguson described his concerns."I don't know what went wrong last year. Everybody kept telling me that we were selling morewoodstoves than we thought we would and I knew from attending the trade shows that the sales of woodstoves throughout the province were rising. When I saw the statements for last year, I couldn't believe the drop in profits."This company began in 1905. My grandfather used to make farm implements and sled runners; my father  produced mostly trailers. I've dabbled in a few product lines like sewer grates and staircase railings, but,for the last five years, we've concentrated solely on woodstoves. Sales were slow at first and there weremany producers in the market. But we have a good sales force and things have been steadily improvingfor the last two years. In 20x4, we achieved record profits."In addition to profits dropping, we have lost our management team. The sales manager took earlyretirement last month, the production manager is in the hospital for major surgery, and the accountant quitafter we discussed the kind of information I felt he should be providing. He kept telling me thateverything was running smoothly. Boy, was he wrong!"I called you here this morning because I need some help in understanding what went wrong last year. Iwant to be sure that similar mistakes are not made in the future. I'll be hiring some new people, but I needsome answers quickly. Here is the statement of budgeted and actual results (Exhibit 1). I was also able todig up a statement of standard costs (Exhibit 2) that was prepared last year plus some market and job-costdata which the accountant had prepared before he left (Exhibit 3). The standard costs are an accuratereflection of what it should cost to make either of the woodstove models."

 Required:

Assume the role of Carl Holitzner and provide an explanation for FFL's lower than budgeted profit for thefiscal year ended May 31, 20x5. Support your explanation with a detailed variance analysis

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CMA Ontario

P-80

Exhibit 1Ferguson Foundry LimitedStatic Budget and Actual ResultsFor the Year Ended May 31, 20x5

 Static Budget 

BasicDeluxeTotal

Sales volume (in units) 4,500 5,500 10,000Sales revenue $1,350,000 $4,400,000 $5,750,000Variable costsDirect materials 315,000 1,045,000 1,360,000Direct labor 405,000 1,320,000 1,725,000Overhead 202,500660,000862,500Selling and administration 67,500 220,000 287,500990,000 3,245,000 4,235,000Contribution margin $ 360,000 $1,155,000 l,515,000Fixed costs:Manufacturing 750,000Selling and administration 132,500882,500Operating income $ 632,500 

 Actual Results

BasicDeluxe Total

Sales volume (in units) 7,200 4,80012,000Sales revenue $2,340,000$3,360,000$5,700,000Variable costsDirect materials 860,000820,8001,306,800Direct labor 748,8001,190,4001,939,200Overhead 374,400595,200969,600Selling and administration 108,000192,000300,0001,717,2002,798,4004,515,600Contribution margin $622,800$ 561,600 1,184,400Fixed costsManufacturing 780,000Selling and administration 139,500919,500Operating income $264,900 

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CMA Ontario

P-81

Exhibit 2Ferguson Foundry LimitedUnit Cost StandardsFor the Year Ended May 31, 20x5

 Basic Woodstove Deluxe Woodstove

Direct materials:Standard quantity per unit 70 kg 190 kg Standard price per kilogram $1.00 $1.00Direct labor:Standard quantity per unit 6 hrs. 16 hrs.Standard rate per hour $15.00 $15.00Variable overhead:Standard quantity per unit 6 hrs. 16 hrs.Standard rate per hour $7.50 $7.50Variable selling and administrativerate per unit $15.00 $40.00

Exhibit 3Ferguson Foundry LimitedMarket and Job-Cost Datafor the Year Ended May 31, 20x5

Market Data:Expected total market sales of woodstoves 100,000 unitsActual total market sales of woodstoves 133,333 unitsSummary of Job Cost Sheets:

 Basic Deluxe Total 

Units of woodstoves produced 7,200 4,800 12,000Direct materials:Actual quantity used in kilograms 540,000 912,000 1,452,000Actual price per kilogram $0.90Direct labor:Actual direct labor hours worked 46,800 74,400 121,200Actual rate per hour $16.00Actual variable overhead allocated on the basis of direct labor hours $374,400 $595,200 $969,600