Campar Industries Case Study

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Gross margin variances

Budgeted unit margin, A = $300 - ($72 + $62.50 + $75) = $90.50

Budgeted unit margin, B = $185 - ($54 + $37.50 + $45) = $48.50

Actual unit margin, A = ($533750/1750) - $209.50 = $95.50

Actual unit margin, B = ($601250/3250) - $136.50 = $48.50

Unit margin variance

For A: ($95.50 - $90.50)*1750 = $8750

For B: ($48.50 - $48.50)*3250 = $0

Total unit margin variance = $8750

Mix variance

For A: (1750- 1900)*$90.50 = -$13575

For B: (3250-3100)*$48.50 = $7275

Total mix variance = -$6300

Net margin variance = -$6300 + $8750 = $2450.

Material variances

Standard materials per unit, A: $72 at $1.80 per lb = 40 lbs.

Standard materials per unit, B: $54 at $1.80 per lb = 30 lbs.

Price variance: ($1.80 – ($330480/180000))*180000 = ($1.80 - $1.836)*180000

= (-$0.036)*180000 = -$6480.

Usage variance: ((1800*40) + (3300*30) – 180000)*$1.80

= (72000 + 99000 - 180000)*1.80 = -9000*$1.80 = -$16200.

Net material variance = -$6480 + (-$16200) = -$22680

Labor variances

A: Standard labor per unit: $62.50/$25/hr = 2.5 hrs.

B: Standard labor per unit: $37.50/$25/hr = 1.5 hrs.

Labor efficiency variance: ((1800*2.5) + (3300*1.5) – 9450)*$25 = (4500 + 4950 - 9450)*$25 = 0*$25 = $0.

Rate variance = ($25 – ($233880/9450))*9450 = ($25 - $24.75)*9450 = $2362.50

Net labor variance = Rate variance + Labor efficiency variance = $2362.50 + $0 = $2362.50

Overhead variances

Spending variance = $94000 + ($0.80*233880) - $320000 = -$38896

Volume variance = ($1.20*233880) – ($32000 - $38896) = $280656 - $281104 = -$448

Net overhead variance = -$38896 - $448 = -$39344.

Profit variance

= Net margin variance + Net material variance + Net labor variance + Net overhead variance = $2450 + (-$22680) + 2362.50 + (-$39344) = -57211.50

Summary of gross margin for Delta division

Budgeted margin

Revenue, Budgeted: (1900*$300) + (3100*$185) = $570000 + $573500 = $1143500

Cost of goods sold at standard = $821200

Gross margin, standard = $1143500 - $821200 = $322300

Production cost variances = Nil

Gross margin, Actual = $322300.

Actual margin

Revenue, Actual: $533750 + $601250 = $1135000

Cost of goods sold at standard = $810250

Gross margin, standard = $1135000 - $810250 = $324750

Production cost variances

Materials usage = -$16200

Materials price = -$6480

Labor rate = $2362.50

Overhead spending = -$38896

Overhead volume = -$448

Gross margin, Actual = $265088.50

Discussion

In delta division, due to the higher margin of Product A, the standard gross margin has increased by $8750. But there is an offset of this figure due to a shift in product mix of the lower margin Product B. Standard overhead cost per unit has been underestimated due to a sale volume presumption at 23500 DL$ but the actual volume is a bit less at 233880 DL$. Except the labor rate variance all other production variances are unfavorable.

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Conclusion

Except the Alpha division all the other 3 divisions have issues and not profitable according to the variance analysis. It is highly recommended to correct the potential issues causing the overall unfavorable variances and turn the divisions to the path of profits.

References:

Anthony. (05/2010). Accounting: Texts and Cases, 13th Edition. [VitalSource Bookshelf Online]. Retrieved from https://bookshelf.vitalsource.com/#/books/1259302172/

Accounting-Simplified.com Retrieved from http://accounting-simplified.com/management/variance-analysis/material/mix.html

Joe Ben Hoyle & C.J. Skender (2016), Financial accounting, U of M Libraries Publishing. Retrieved from https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=4