Danshui Plant No 2.pptx 3q1p53

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Danshui  Plant  No.  2   Flexible  budget  and  variance  analysis  

Cost Per Unit and Selling Price Per Unit

Budgeteda Variable Costs Materials Labor Shipping Total Variable Costs Fixed Costsb Total Cost per Unit Selling price Gross margin Gross margin (%)

$187.89 13.11 1.06 $202.06 3.65b $205.71 $206.20 0.51 0.2

Actualc

$189.61 17.18 1.06 $207.85 4.09d $211.94 $208.20 $3.74 1.8

aSource:

Case Exhibit1 Budgeted Fixed Cost (Case Exhibit 2) budget Unit (Case Exhibit 3) $729,000/200,000=3.65 cSource Case Exhibit 3 Actual costs 180,000 units dSource: Case Exhibit 4 Actual fixed costs 180,000 units. bTotal

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August 2010 Preliminary Report on the Results of Operations (000 U.S.$.)

Monthly Budget Actual (200000 units) (180000 units)

Exhibit

Variance (20,000 units)

180/200 K

Flexible Budget (180,000 Units)

Actual - Flex Budget Flexible Budget Variance (Revenue and Spending)

Revenue (transfer from Shenzhen) Variable costs Materials Flash memory Application process Chips-phone Gyroscope 8 other chips

$41,240

$37,476

$3764U

0.9

$37,116

$360 F

$5,400 $2,150 $2,810 $520 $14,190 $25,070

$5,249 $1,935 $2,529 $468 $12,643 $22,824

151F 215F 281F 52F 1547F

0.9 0.9 0.9 0.9 0.9

$4,860 $1,935 $2,529 $468 $12,771 $22,563

$389 U $0 $0 $0 ($128) F ($261)

Variable supplies and tools

$12,507

$11,305

1202F

0.9

$11,256

$49 U

Subtotal

$37,577

$34,129

0

0.9

$2,622 $212

$3,092 $191

470U 21F

0.9 0.9

$2,360 $191

$732 U $0

0

0.9

$36,370

Labor Assembly and packaging Shipping Total variable costs

$40,411

$37,412

Contribution

$829

$64

$746

$1,042 U $0 ($682) U

Fixed Costs: Factory rent Machine depreciation Utility fee and taxes Supervision Total fixed costs

$400 $150 $52 $127 $729

$400 $150 $52 $134 $736

$400 $150 $52 $127 $729

$0 $0 $0 $7 U $7 U

Total costs

$41,140

$38,148

0

$37,099

$1,049 U

Net income

$100

(672.00)

$772U

$17

($689) U

7U

•  Flexible  budget  variances  are  calculated  on  the  bases  on  actual   produc@on  and  sales  –  i.e.  180,000/-­‐  units   •  Actual  revenues  are  greater  then  expected  revenues  at  actual  sales   (flexible  budget)  volume  level.   •  Total  cost  variance  is  $1048K  U   •  Of  which  variable  cost  variance  is  $1041K  U.   •  Fixed  cost  variance  ($7K  U)  s  only  for  small  propor@on.     •  What  could  be  reason  for  the  Unfavorable  cost  variance?   –  –  –  – 

Flash  memory  variance  -­‐  $389K  U   Labor  Variance  -­‐  $732K  U   Cost  of  Chips  $120K  F  -­‐  beYer   Variable  supply  and  tools  $48K  U    

•   Need  to  have  closer  look  at  Flash  memory  and  Labor.   •  Are  unfavorable  variance  due  to  price  or  usage?  

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•  Price  Variance      =  [AP  –  SP]  x  AQ  =  $2  x  181  k  =  $362  K  U    Actual  price  –  Std.  Price  X  Actual  QYy.    

•  Usage  Variance  

=  [AQ  –  SQ]  x  SP  =  1K  x  $  27  =  $27K  U    

•  Total  Flexible  Budget  Variances  =  Price  +  Usage   variances   • 

Actual  Price  (AP),  Actual  Quan1ty(AQ),  Standard  Price  (SP),  Standard   Quan1ty(SQ),    

•  Usage  variance  is  negligible   •  Price  variance  is  sizable   –  Did  plant  do  good  nego@a@on   –  However  Samsung  raised  the  price  by  $2  to  install   a  shield   –  Apple  has  raised  revenue  recovery  by  equal   amount   –  Revenue  variance  ($360k  F)  is  almost  offset  by   flash  memory  price  variance  ($362k  U)      

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•  Then  what  about  labor  cost  variance   •  How  to  compute?  Do  we  have  the  data  on   price  and  quan@ty  of  labor?  

•  Note:  Labor  rates  were  increased  by  30%   •  AP*AQ  is  30$  higher  then  SP*SQ   =  SP*AQ  =  AP*AQ/1.3   =$3092K/1.3   =$2,378K  

•  Therefore  the  price  variance  is  es@mated  to  be  $3092k-­‐$2378k  =  $  714k  U   •  Quan@ty  variance  can  be  calculated  by    Total  Labor  Cost  Variance  –  Labor   Price  Variance   =  $732k  U  -­‐  $714k  U  =  $18  k  U  

•  Unfavorable  labor  price  variance  is  due  to  plant’s  overall  unfavorable   performance  (  $688k  U)   •  Who  controls  the  price  variance?   ‘We  can  not  find  people  even  though  we  have  raised  our  factory  wages’    

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  Managerial  Response     –  Recovered  increase  in  price  of  memory     –  Labor  is  the  problem   •  High  labor  rates  are  due  to  a  regional  supply  and  demand  problem  

–  Danshui  is  not  able  assemble  the  target  of  200,000     IPhone4  every  month  with  one  quarter  through   –  Must  take  produc@on  volume  up   –  Labor  is  only  7%  of  total  cost  

–  Apple  has  60%  profit  margin  on  sale  of  these  phones   –  Thus  ing  on  increase  in  labor  cost  to  Apple  is  feasible.   v/s  Wal-­‐Mart  –  thin  profit  margin-­‐  is  cost  conscious   –  But  will  Apple  readily  agree  –  Is  it  good  for  them  to  get  the   planned  volume  or  fall  short  to  meet  sales  demand?   –  Can  Danshui  build  a  plant  at  low  cost  loca@on  as  Foxconn   is  doing?     •  Well  apple  contract  would  get  over  before  plant  is  complete  

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•  Ques@on  4.     •  Es@mate  material  price  and  usage  variances  for  flash   memories,  labor  rate  and  usage(efficiency)  variances.   (Assume  the  standard  labor  rate  is  $0.92  per  hour),  and  the   overhead  spending  variance  for  August.  

Standard  labor  rate  (SP):  $.92       Actual  labor  rate  (AP):  1.3  x  $0.92  =  $  1.196     Std.  Quan@ty  for  180,000  units  (SQ):  S13.11/$0.92  x  180K  –  2,565k  hrs   Actual  quan@ty  for  180,000  units  (AQ):  $3,092k/$1.196  =  2,585k  hrs     Hence,  the  labor  rate  variance  is     [AP-­‐SP]  x  AQ  =  ($1.196  -­‐  $0.92)  x  2,585k  =  $713  U     And  the  labor  efficiency  variance  is     [AQ-­‐SQ]  X  SP  =  (2,585k  –  2,565k)  x  0.$92  =  $18k  U     The  overhead  spending  variance  is  $7,000.  

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