Sales Volume and Flexible-Budget (FB) Variances/JIT Manufacturing
Solid Box Fabrications manufactures boxes for workstations. The firm's standard cost sheet prior to October and actual results for October 2010 are as follows:
Budget Information
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Standard Price and Variable Costs per Unit
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Fixed Costs
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Actual Results October 2010
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Units
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9,500
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Sales
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$50.00
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$551,000
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Variable costs: Direct materials 5 pounds at $2.40 per pound =
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$12.00
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48,000 lbs.* x $3 = $144,000
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Direct labor 0.5 hour at $14 per hour =
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7.00
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4,800 hours x $16 = 76,800
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Manufacturing overhead
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2.00
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19,000
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Selling and administrative
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5.00
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55,100
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Total variable cost
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$26.00
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$294,900
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Contribution margin
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$24.00
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$256,100
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Fixed costs: Manufacturing (factory) overhead
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$50,000
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$ 55,000
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Selling and administrative
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20,000
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24,000
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Total fixed costs
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$70,000
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$ 79,000
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Operating income
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$177,100
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* Assume that #lbs. purchased = #lbs. issued to production (i.e., a JIT inventory policy).
In preparing the master budget for October 2010, the firm recognized that several items on the standard cost sheet would change. For example, the selling price of the product would increase by 8 percent. Suppli- ers have notified the firm that starting October 1, materials prices would be 5 percent higher. The labor con- tract prescribes a 10 percent increase, starting October 1, on wages and benefits. Fixed manufacturing costs will increase $5,000 for insurance, property taxes, and salaries. Fixed selling and administrative expenses will increase as follows: $2,000 in managers' salaries, and $2,000 for advertising during October 2010. The unit sales for October 2010 are expected to be 10,000 units. Solid Box Fabrications uses JIT systems in all of its operations including materials acquisitions and product manufacturing.
Required
1. Prepare the master (static) budget and pro forma budgets for 9,500 units and 11,000 units for October 2010.
2. Calculate and label as favorable or unfavorable the static (master) budget variance (total operating- income variance) for October 2010. Break this variance down into the sales volume variance and the total flexible-budget variance for the period.
3. Compute and label as favorable or unfavorable each of the following variances for October 2010: selling price variance; total variable cost flexible-budget (FB) variance; and total fixed cost variance.
4. Break down the total direct materials flexible-budget variance and the total direct labor flexible-budget variance into their price (rate) and quantity (efficiency) components. Label each component variance as favorable or unfavorable.
5. Define what is meant by a just-in-time (JIT) manufacturing process. What are the primary benefits, both financial and nonfinancial, of a JIT system compared to a conventional manufacturing process?