Danshui Plant No. 2 Case Solution
The flexible budget for 180,000 iPhone 4 results in budgeted sales revenue of $ 37,026, with total budgeted variable cost of $ 33,820, the total labor cost of $ 2,551 and total fixed cost of $ 729, the accumulated total cost of $ 37,100 that resulted in net income with the lossof $ 74.
When budget figures are compared with actual figures, the differences is called the variance. It helps to identify the changes in sales, material costs, labor costs and fixed costs. The Variance results in favorable if the sales increases or costs decreases and unfavorable for higher costs and lower revenues.
Based on the calculated flexible budget, the favorable variance of revenue shows the increase in actual sales by $ 45,000), variable supplies unfavorable variance with the difference amount of $ 4800 and in labor cost assembling and packaging costs are unfavorable with the difference amount of $ 73200.the only favorable cost is of other chips used in production that was properly controlled and led to saving of $ 12800, the manager has to check the unit cost and the quantity used for the unfavorable costs.
The Variance is unfavorable because of the company had used more supplies and tools or spend more money on the purchase of raw materials. It results in total market variance (price variance – Usage variance) of $ 220,000.
The labor rate variance:: The standard labor rate is 11.8 per hour, and actual labor rate is 1.36 per hour. Standard hours are 199,983 and actual hours are 201,302, it results in direct labor rate variance of 716,635 with unfavorable variance. The direct labor efficiency is actual hour minus standard hour multiplied by standard rate and it resulted in 15,565 with unfavorable variance. The labor is unfavorable because of increase in wages and working hours have been increased and also the salaries of supervisors also increased. The total labor variance results in the 701,071.
The fixed overhead spending variance is calculated as actual fixed overhead minus standard fixed overhead. As calculated in the flexible budget, the actual overhead is 736000 and standard or budgeted overhead is 729,000, it results in the unfavorable variance of about $ 7,000.
4. What are some strategies or decisions that Wentao Chen should consider in trying to solve the problems with the Apple iPhone 4 contract in the next nine months?
The manager of Danshui should learn the variance strategy, which is one of the effective procedures to make analysis and adjustments with the varied cost of production. It will help the company to understand the main causes of variance and distribute in categories based on favorable and unfavorable factors. Along with this, the variance analysis shows the effective costing strategy that helps to adjust or absorb the costs and help in eliminating the cost related issues and develop the understanding of reconciliation of actual and budgeted income to normalize the actual cost per unit.
These changes lead to increase in the cost of production and profitability as well of the Danshui plant 2. As the company increases its operations, it should increase its personnel for the purpose of increasing the production output per day or to buy additional machinery for automated production………………….
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