case study in production cost control

Case 1-7

VARIANCE CONTROVERSY AT

CALIFORNIA CAR COMPANY

Case Objectives:

1. Introduce the concepts of performance (flexible) budgets and cost variances.

2. Introduce the use of managerial accounting information in performance evaluation.

Decision (Performance Evaluation): 1. How have CCC and its departments performed in April?

The Controversy:

It is now the middle of May 2016. After reviewing the April Job Sheets for cost of goods manufactured, Sally

Swanson, vice president of production, and Jena Butler, vice president of finance, meet to discuss cost

control. Jena says: "After comparing the actual April manufacturing costs with the April planning budget for

manufacturing costs (as shown in Exhibit 1-7.1), I am concerned that our manufacturing costs are much

higher than planned. If CCC is to earn an acceptable profit this year, it is critical that we meet our 2016 cost

estimates."

Sally responds: "I am surprised the cost of goods manufactured schedule indicates that our cost control in

April is weak. The plant ran smoothly in April and I know of no reason why our costs should be too high.

Both of my production department managers and a couple of my overhead department managers are fuming.

They all feel accused of not controlling costs when they are all convinced they have done a good job

controlling costs in their respective areas. We better get to the bottom of all this before I have an outright

revolt on my hands." Sally and Jena have asked you to evaluate the cost control performance of the

production area in April as quickly as possible.

The accountants have given you Exhibit 1-7.1, which contains CCC's planned April production level of 619

cars (481 sedans and 138 compacts) and planned cost of manufacturing 619 cars. Exhibit 1-7.1 also contains

the actual April manufacturing costs, as reflected in the April cost of goods manufactured schedule provided.

You can trace the actual direct material and direct labor costs back to the job cost sheets for April. It also

indicates that total April actual manufacturing overhead cost is $5,147,285, as opposed to the April applied

planning overhead of $6,024,168. The actual value is the same as the April Job Sheet amount. CCC

considers the Inspection, Setup, and the Material Handling Departments to be variable cost centers. Costs in

the Maintenance and General Factory Departments are considered fixed.

Note that the first column of Exhibit 1-7.1 is information from Case 1-4. The material cost per sedan and per

compact for each department is given at the top of Exhibit 1-4.2. The direct labor cost per car in each

department is calculated by multiplying the hours shown in Exhibit 1-4.2 by $38 per hour. The 2016

predetermined variable overhead rate used in Case 1-4 is $37.79 per DLH. In Exhibit 1-7.1 the sum of the

costs per DLH for the Inspection, Material Handling, and Setup departments is $40. The actual Total Fixed

Overhead in Exhibit 1-7.1, which consists of Maintenance and General Factory departments, totals

$5,147,285 for April as compared to the planning amount of $6,024,168.

From the April Job sheets we see that CCC produced the equivalent of 481 sedans during April. They started

and completed all 475 sedans in Job 157, plus they did all final assembly work on the 17 sedans in Job 156

and completed all chassis assembly work on 17 sedans in Job 158. The combination of work done on Job 156

and Job 158 is exactly equal to the amount of work required to produce 17 completed sedans. CCC produced

148 compacts in Job 253, all started and completed in April. These numbers are in the actual column of

Exhibit 1-7.1.

Other numbers in the actual column also come from the April Job sheets. The total April cost of direct

material cost for both the Chassis Assembly and Final Assembly Departments totals $2,062,448 (summed for

you at the bottom of Exhibit 1-7.1), the same number from the April Job Sheets. Likewise, the total April

direct labor cost of $2,320,660 (61,070 DLHs).

The estimated (budgeted) 2016 information from Case 1-4 follows:

Material costs per car, Chassis:

Sedan $1,282

Compact $790

Material costs per car, Final Assembly:

Sedan $1,848

Compact $2,742

Direct labor costs per car:

Sedan $3,990 (105 hours)

Compact $2,394 (63 hours)

Planned and actual direct labor rate per hour: $38

Predetermined overhead rates:

Variable $39.79 per direct labor hour

Fixed $44.15 per direct labor hour

Total $83.94

Requirements: In answering the questions you may have to refer back to your solution to Case 1-4. The last column of

Exhibit 1-7.1 has either a U or an F in the column. A “U” is an unfavorable variance while a “F” is a

favorable variance. All work can be done and submitted on the Excel sheet. Please send me the Excel file as

your solution.

1. Look at the Exhibit 1-7.1 and discuss whether you believe that the manufacturing cost analysis is appropriate. Can you see any reason why some department managers complaining?

2. Set up a spreadsheet in the format of Exhibit 1-7.1 (included in your Excel download section on Moodle). In this sheet insert a performance budget column between the actual and the planned

budget. Compute new variances so you have a complete cost performance report. In this column you

will use the actual number of Sedans and Compacts instead of the planned values. Follow the same

cell reference format found in the planned Budget column. For example in the performance budget

column you would have 492 sedans. Under the Sedan direct hours you would have 492*105 for a

total of 51,660 hours. Continue this through the entire column. Since the Maintenance Department

and General Factory are fixed amounts use the same values from the planned budget columns for

these amounts. Make sure you chance the variance performance column calculations to reflect the

performance variance between your new performance budget column and the actual. Also, make sure

you change the last column to so that you are checking the need data for either favorable or

unfavorable.

3. Prepare an brief analysis discussing: a. The overall cost control performance of the entire plant.

b. The cost control performance of each manufacturing department:

 Chassis Assembly

 Final Assembly

 Inspection and Rework

 Material Handling

 Setup

 Maintenance

 General Factory

4. If CCC actually produced 500 sedans and 150 compacts in April instead of the 492 sedans and 144 compacts shown in Exhibit 1-7.1 and all actual costs remain the same, by how much would the

variances for each of the following departments change? Hint: If you use the cell references for the

calculations it should just be a matter of changing the Sedan and Compact amounts produced.

 Chassis Assembly

 Final Assembly

 Inspection and Rework

 Maintenance

5. On several different occasions in April, the production of compacts was halted because of stock outs of small solar panels. In each case the chassis and final assembly lines had to be changed over to

Sedan production temporarily until parts arrived from the outside vendor, at which time the lines were

changed back to the production of compacts. As a result, more setups were required in April than

expected. In the requirement 5 section of your Excel spread sheet, indicate the impact of the extra

setups on the April variances by placing a U for an unfavorable impact, an F for a favorable impact,

and an N for no impact. Keep in mind, what if any effect these stock outs would have on these areas.