Variance Analysis

VARIANCE ANALYSIS

Case: SunAir Boat Builders, Inc.*

Questions

Determine the molding department’s direct cost variances and overhead
variances. Why do you think they occurred?

Do you think SunAir’s standards are meaningful? How would you improve
them?

Assume that the month’s actual and standard production costs for items
other than molding hulls amounted to $914.33 per boat, and that 430
boats were sold. Prepare a statement of budgeted and actual gross margin
for the month, assuming planned sales of 450 boats.

Located in New Hampshire, SunAir Boat Builders served boaters with a
small, lightweight fiberglass sailboat capable of being carried on a car
roof. Though the firm could hardly be considered as one of the
nation’s industrial giants, its burgeoning business had required it to
institute a formal system of cost control. Jan Larson, SunAir’s
president, explained:

Our seasonal demand, as opposed to a need for regular, level production,
means that we must keep a good line of credit at the bank. Modern cost
control and inventory valuation procedures enhance our credibility with
the bankers and, more importantly, have enabled us to improve our
operations. Our supervisors have realized the value of good cost
accounting, and the main office has, in turn, become much more aware of
problems in the barn.

SunAir’s manufacturing and warehouse facilities consisted of three
historic barns converted to make 11-foot "silver Streak" sailboats. The
company’s plans included the addition of 15- and 18-foot sailboats to
its present line. Longer-term plans called for adding additional sizes
and styles in the hope of becoming a major factor in the regional boat
market.

The "Silver Streak" was an open-cockpit, day sailer sporting a mainsail
and small jib on a 17-foot, telescoping aluminum mast. It was ideally
suited to the many small lakes and ponds of the region, and after three
years it had become quite popular. It was priced at $2,265 complete.

Manufacturing consisted basically of three processes: molding,
finishing, and assembly. The molding department mixed all ingredients to
make the fiberglass hull, performed the actual molding, and removed the
hull from the mold. Finishing included hand additions to the hull for
running and standing rigging, reinforcement of the mast and tiller
steps, and general sanding of rough spots. Assembly consisted of the
attachment of cleats, turnbuckles, drain plugs, tiller, and so forth,
and the inspection of the boat with mast, halyards, and sails in place.
The assembly department also prepared the boat for storage or shipment.

Mixing and molding fiberglass hulls, while manually simple, required a
great deal of expertise, or "eyeball," as it was know in the trade.
Addition of too much or too little catalyst, use of too much or too
little heat, or failure to allow proper time for curing could each cause
a hull to be discarded. Conversely, spending too much time on
adjustments to mixing or molding equipment or on "personalized"
supervision of each hull could cause severe underproduction problems.
Once a batch of fiberglass was mixed there was no time to waste being
overcautious or it was likely to "freeze" in its kettle.

With such a situation, and the company’s announced intent of expanding
its product line, it became obvious that a standard cost system would be
necessary to help control costs and to provide some reference for
supervisors’ performance.

Randy Kern, the molding department supervisor, and Bill Schmidt,
SunAir’s accountant, agreed after lengthy discussion to the following
standard costs:

Materials — Glass cloth — 120 sq. ft

      - Glass miz — 40lbs.

Direct labor — Mixing — 0.5 hr.

      - Molding — 1.0 hr.

Indirect costs — Absorb at $24.30 per hull *

Total cost to mold hull @ $2.00

@ $3.75

@ $20.25

@ $20.25 =

=

=

=

=

= $240.00

150.00

10/12

20/25

24.30

$444.67

Analysis of Operations

After several additional months of operations, Bill Schmidt expressed
his disappointment about the apparent lack of attention being paid to
the standard costs. The molders tended to have a cautious outlook toward
mixing too little or "cooking" too long. No one wanted to end up
throwing away a partial hull because there was too little glass mix.

In reviewing the most recent month’s production results, Schmidt noted
the following actual costs for production of 430 hulls:

Materials

    Purchased  

60,000 sq. ft glass cloth @$1.80

20,000 lbs. glass mix @ $4.09

    Used 54,000 sq. ft. glass cloth

19,000 lbs. glass mix

Direct Labor: Mixing 210 hrs. @ $21.37

Molding 480 hrs. @ $20.25

Overhead: Incurred $11,140

Before proceeding with further analysis, Schmidt called Kern to arrange
a discussion of variances. He also told Jan Larson, "Maybe we should
look into an automated molding operation. Although I haven’t finished
my analysis, it looks like there will be unfavorable variances again.
Kern insists that the standards are reasonable, then never meets them!"

Larson seemed disturbed and answered, "Well, some variances are
inevitable. Why don’t you analyze them in some meaningful manner and
discuss your ideas with Kern, who is an expert in molding whose opinion
I respect. Then the two of you meet with me to discuss the whole
matter."