- Pete Potter was known for the high quality & distinctive custom features of its ceramic bathroom fixtures.
- His company had grown from a two-man operation to the present group of 20 master potters located in 2 large warehouses.
- By 1980, Pete felt the need for a systematic COST-CONTROL as his business had expanded substantially. With increase in business, Peterson realized the need for better cost control and control over production scheduling, thereby adopting a STANDARD COST system.
- Pete, with his Cost Accountant, calculated Standard cost of a toilet at $55.00 with Budgeted Volume of 1200 ceramic toilets per month.
STANDARD COST PER UNIT OF A TOILET
| Material Cost | Input | unit | cost/lb | Cost/Unit |
| Raw Clay | 25 | lb | 0.95 | 23.75 |
| Glazing Mix | 5 | lb | 0.75 | 3.75 |
| Direct Labour Cost | Input | Unit | cost/hr | |
| Molding | 1 | hr | 15 | 15.00 |
| Glazing | 0.5 | hr | 15 | 7.50 |
| Manufacturing OH | ||||
| Variable | 1 | 1.94 | 1.94 | |
| Fixed | 1 | 3.06 | 3.06 | |
| COST / UNIT | 55.00 |
ANALYSIS OF OPERATIONS
- After 6 months of operations with new Cost system, Pete felt Standards were not met.
- He observed that the potters were too set in their ways to adopt & follow new system properly & there was resistance to change.
- Production for June was only 1145 toilets i.e. a shortage of 55 units from the Budgeted Volume.
ACTUAL COSTS FOR 1145 UNITS
|
| Actual Vol. | Actual Vol. | Actual | Actual Material |
| Materials | Purchased | Used | Cost/lb | Cost of units used |
| Raw Clay | 30000 lb | 28900 lb | $ 0.92 | 26588 |
| Glazing Mix | 6000 lb | 5900 lb | $ 0.78 | 4602 |
| Direct Labour Cost |
| Actual Hours | Cost/hr | Total Labour Cost |
| Molding |
| 1200 hrs | 15.25 | 18300 |
| Glazing |
| 600 hrs | 15.00 | 9000 |
| Manufacturing OH |
| Units |
| Total OH Cost |
| Variable |
| 1145 | 2300 | |
| Fixed |
| 1145 |
| 3800 |
- Pete met with his Master Potter, Jason, to discuss the variances and accused him of not meeting the standards.
- The Master Potter, who was never impressed with the new system, advised Pete to ask the Cost Accountant for an explanation on Variances.
- We will try to study the Price and Efficiency Variances in this case.
SUMMARY OF COSTS
| MATERIAL COST | ||||||
| Raw Clay | Output | Input | Total lb | Price | Total Cost | |
| Budget | 1200 | 25 | 30000 | 0.95 | 28500 | |
| Actual | 1145 | 25.24 | 28900 | 0.92 | 26588 | |
| Flexible | 1145 | 25 | 28625 | 0.95 | 27194 | |
| Glazing Mix | Output | Input | Total lb | Price | Total Cost | |
| Budget | 1200 | 5 | 6000 | 0.75 | 4500 | |
| Actual | 1145 | 5.15 | 5900 | 0.78 | 4602 | |
| Flexible | 1145 | 5 | 5725 | 0.75 | 4294 | |
| DIRECT LABOR COST | ||||||
| Molding | Output | Input | Total Hrs | Price | Total Cost | |
| Budget | 1200 | 1 | 1200 | 15 | 18000 | |
| Actual | 1145 | 1.05 | 1200 | 15.25 | 18300 | |
| Flexible | 1145 | 1 | 1145 | 15 | 17175 | |
| Glazing | Output | Input | Total Hrs | Price | Total Cost | |
| Budget | 1200 | 0.5 | 600 | 15 | 9000 | |
| Actual | 1145 | 0.52 | 600 | 15 | 9000 | |
| Flexible | 1145 | 0.5 | 573 | 15 | 8588 | |
VARIABLE OVERHEADS
| VOH | Output | Rate | Total |
| Budget | 1200 | 1.94 | 2328 |
| Actual | 1145 | 2.01 | 2300 |
| Flexible | 1145 | 1.94 | 2221 |
| FIXED OVERHEADS | |||
| FOH | Output |
| Total |
| Budget | 1200 |
| 3672 |
| Actual | 1145 |
| 3800 |
VARIANCE ANALYSIS
| BUDGET | ACTUAL | FLEXIBLE | Vol. Var. | Price Var. | Eff. Var. / | |
| (Budget-Flexible) | Usage Var. | |||||
| Material Cost | (1) | (2) | (3) | (1) – (3) | ||
| Raw Clay | 28500 | 26588 | 27194 | 1306 (F) | 867 (F) | 261 (U) |
| Glazing Mix | 4500 | 4602 | 4294 | 206 (F) | 177 (U) | 131 (U) |
| Direct Labour Cost | ||||||
| Molding | 18000 | 18300 | 17175 | 825 (F) | 300 (U) | 825 (U) |
| Glazing | 9000 | 9000 | 8588 | 412 (F) | 0 | 412 (U) |
| Manufacturing Overheads | ||||||
| Variable | 2328 | 2300 | 2221 | 107 (F) | 80 (U) | 0 |
| Fixed | 3672 | 3800 | 3672 | 0 | 128 (U) | 0 |
F – FAVOURABLE
U – UNFAVOURABLE / ADVERSE
PRICE VARIANCE
| Costs | Budgeted | Actual | Cost | Actual | Price |
|
| cost | Cost | Diff. | units | Variance |
| Raw Clay | 0.95 | 0.92 | 0.03 | 28900 | 867 F |
| Glazing Mix | 0.75 | 0.78 | -0.03 | 5900 | 177 U |
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| Molding | 15 | 15.25 | -0.25 | 1200 | 300 U |
| Glazing | 15 | 15 | 0 | 600 | 0 |
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| Manufacturing VOH | 1.94 | 2.00873 | .06793 | 1145 | 79 U |
EFFICIENCY VARIANCE
| Costs | Flexible | Actual | Vol | Budgeted | Efficiency |
|
| input Vol | input Vol | difference | unit price | Variance |
| Raw Clay | 28625 | 28900 | -275 | 0.95 | 261 U |
| Glazing Mix | 5725 | 5900 | -175 | 0.75 | 131 U |
| Molding | 1145 | 1200 | -55 | 15 | 825 U |
| Glazing | 572.5 | 600 | -28 | 15 | 413 U |
FIXED OVERHEAD VARIANCE
| COST | Budgeted Cost | Actual Cost | Fixed OH Variance |
| FIXED OH | 3672 | 3800 | 79 U |
CONCLUSIONS
- In his quest for reducing costs and increasing profits, Pete had used a cheaper brand of raw material which resulted in lower output.
- Though there was Favorable Price Variance of $ 867 in Raw Clay Material cost, it lead to the following Unfavourable Efficiency Variances:
Raw Clay Material - $ 261 U
Glazing Mix Material - $ 131 U
D. Labor (Molding) - $ 825 U
D. Labor (Glazing) - $ 413 U
SUGGESTIONS
- Pete should have taken his master potter into confidence about his intentions of procuring cheaper raw material.
- Pete needs clear focus on objectives – whether to maintain his quality or to increase sales at the cost of quality.
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