Chapter five measuring yield, mix and quantity effects learning Objectives

Planned
Actual
______________________________________________________________________
Firm-wide fixed expenses ($0000 Fixed manufacturing expenses $3872 Fixed marketing expenses
1856 1440 Fixed administrative expenses
1340 Fixed RD expenses exclusively for EI)
1480 Fiddler Ltd
Adapted from Davidson eta. (This case compares cost—volume--profit based calculations to absorption based costing profit figures. It deals also with standard costing problems. The behavioral issues gain significance in assessing accounting figures validity.
‘I just don’t understand these financial statements at all, exclaimed Mrs Alma Spears. Mrs
Spears, who was approaching retirement, wished to turnover management of Fiddler Ltd, a division of UK Musical Supplies Plc, to her daughter, Linda, the following month. Fiddler Ltd manufactures stringed musical instruments (referred to by the generic term ‘fiddles’).
‘I am really proud of Linda she beamed. She has shown us all the tricks she learned in business school, and, if I say so myself, I firmly believe she is doing rather a good job for us.
For example, she has put together this budget for Fiddler, which makes it really easy to see how much profit we’ll make at any sales volume (Exhibit 303.1). As far as I understand, in
March we expected to have a volume of 8000 units and a profit of £14 500 on our fiddles. But we did much better than that We sold 10 000 fiddles, so we should have made almost £21 on them.’
‘Another one of Linda’s innovations is this standard cost system said Mrs Spears proudly. She sat down with our production people and came up with a standard production cost per unit (see Exhibit 303.2). She says that this will tell us how well our production people are performing. Also, she claims it will cut down on our clerical work Sales at Profit Manufacturing +S&A
S&A expenses Manufacturing costs
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$10,000 0
800 Sales volume Mrs Spears continued, But one thing puzzles me. My calculations show that we should have shown a profit of nearly £21 000 in March. However, our accountants came up with less than £19 000 in the monthly PL (Exhibits 303.3 and 303.4). This bothers me a great deal.
Now I’m not sure whether the accountants are doing their job properly. It appears tome they’re about £2000 short.’
‘As you can probably guess Mrs Spears concluded, we are one big happy family around here.
I just wish I knew what those accountants are up tor coming in with a low profit figure like that. Per fiddle Raw material Frame Stringing materials 20 meters at $0.03 per metre Direct labour Skilled 1/8 hour at $9.60 per hour Unskilled hour at $5.60 per hour Plant overhead Indirect labour Power Supervision Depreciation Other Total standard cost per frame
$6.25 These costs are fixed Base on a estimated volume of 8000 units per month
5. Sales 10000 fiddles at $9 Standard cost of goods sold 10,000 fiddles at $6.25 62,500
Grosss profit after standard costs Variances Material variance (490)
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Labour variance (392) Overhead variance (660) Gross profit Selling and administrative expense Operating profit
$18,758 6. Direct materials purchased and used
Strining materials
175,000 maters at $0.025 per metre Frames
7,100 at $3.15 per frame Labour Skilled ($9.80 per hour 900 hours Unskilled ($5.80 per hour)
840 hours
Overhead Indirect labour Power Depreciation Supervision Other Production 7000 fiddles Question You are required to explain the discrepancy between the profit figures suggested by lina’s profit graph and the account’s profit and loss account, showing all calculations .
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