Solved: Funtime Inc manufactures video game machines

Market saturati

Funtime, Inc., manufactures video game machines. Market saturation and technological
innovations caused pricing pressures that resulted in declining profits. To stem the slide in
profits until new products can be introduced, top management turned its attention to both
manufacturing economics and increased production. To realize these objectives, management
developed an incentive program to reward production managers who contribute to an increase
in the number of units produced and a decrease in costs. The production managers responded
to the pressure of improving manufacturing in several ways that increased the number of
completed units beyond normal production levels. The assembly group puts together video
game machines that require parts from both the printed circuit boards (PCB) and the reading
heads (RH) groups. To attain increased production levels, the PCB and RH groups began
rejecting parts that previously would have been tested and modified to meet manufacturing
standards. Preventive maintenance on machines used to produce these parts has been
postponed; only emergency repair work is being performed to keep production lines moving.
The maintenance department is concerned about serious breakdowns and unsafe operating
conditions. The more aggressive assembly group production supervisors pressured
maintenance personnel to attend to their machines rather than those of other groups. This
resulted in machine downtime in the PCB and RH groups that, when coupled with demands for
accelerated parts delivery by the assembly group, led to more frequent rejection of parts and
increased friction among departments.
Funtime operates under a standard cost system. The standard costs per video game machine
are as follows:

Funtime prepares monthly performance reports based on standard costs. The following is the
contribution report for May 2010 when production and sales both reached 2,200 units.

Funtime’s top management was surprised by the unfavorable contribution margin variance in
spite of the increased sales in May. Constance Brown, the firm’s cost accountant, was asked to
identify and report on the reasons for the unfavorable contribution margin as well as the
individuals or groups responsible for them. After her review, Constance prepared the following
usage report:

Constance reported that the PCB and RH groups supported the increased production levels but
experienced abnormal machine downtime, causing idle time that required the use of overtime to
keep up with the accelerated demand for parts. This overtime was charged to direct labor. She
also reported that the production managers of these two groups resorted to parts rejections,
rather than testing and modifying them, as was done routinely in the past. Constance
determined that the assembly group met management’s objectives by increasing production
while utilizing fewer-than-standard hours.

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 Required
1. Set up an Excel spreadsheet to calculate the following variances:
a. Direct material price variance, calculated at point of production.
b. Direct material usage variance.
c. Direct labor efficiency variance.
d. Direct labor rate variance.
e. Selling price variance.
f. Sales volume variance, in terms of contribution margin.
2. Determine the components of the $58,660 unfavorable variance between budgeted and
actual contribution margin during May 2010.
3. Identify and briefly explain the behavioral factors that could promote friction among the
production managers and between them and the maintenance manager.
4. Evaluate Constance Brown’s analysis of the unfavorable contribution results in terms of the
report’s completeness and its effect on the behavior of the production groups.
(CMAAdapted)

ANSWER
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