Sunair Boat Case

AnthonyHawkinsMerchant: Accounting: Text and Cases, Tenth Edition

II. Management Accounting

20. Production Cost Variance Analyses

653 The McGrawHill Companies, 2001

Actual labor costs for April........................................ $45,000Standard labor cost of output

(63,000 ! $6.00/10) .............................................. 37,800Unfavorable labor variance........................................ $ 7,200

This variance is significantly higher than normal and management wouldlike an explanation. Prepare a detailed analysis of the unfavorable laborvariance for the molding department that shows the variance resulting from(1) labor rates; (2) labor substitution; (3) material substitution; (4) operat-ing efficiency; and (5) idle time.

b. The molding department supervisor is concerned with the large variancescharged to the department. The supervisor feels that the variances due to la-bor substitution and change in raw materials should not be charged to thedepartment. Does the supervisor have a valid argument? Briefly justify yourposition.(CMA adapted)

CasesCASE 201 SunAir Boat Builders, Inc.*

653

Located in New Hampshire, SunAir Boat Buildersserved boaters with a small, lightweight fiberglass sail-boat capable of being carried on a car roof. Thoughthe firm could hardly be considered as one of the na-tions industrial giants, its burgeoning business had re-quired it to institute a formal system of cost control.Jan Larson, SunAirs president, explained:

Our seasonal demand, as opposed to a need for regular,level production, means that we must keep a good line ofcredit at the bank. Modern cost control and inventory val-uation procedures enhance our credibility with thebankers and, more importantly, have enabled us to im-prove our operations. Our supervisors have realized thevalue of good cost accounting, and the main office has, inturn, become much more aware of problems in the barn.

SunAirs manufacturing and warehouse facilitiesconsisted of three historic barns converted to make11-foot Silver Streak sailboats. The companysplans included the addition of 15- and 18-foot sail-boats to its present line. Longer-term plans called for

adding additional sizes and styles in the hope of be-coming a major factor in the regional boat market.

The Silver Streak was an open-cockpit, daysailer sporting a mainsail and small jib on a 17-foot,telescoping aluminum mast. It was ideally suited tothe many small lakes and ponds of the region, and af-ter three years it had become quite popular. It waspriced at $2,265 complete.

Manufacturing consisted basically of threeprocesses: molding, finishing, and assembly. Themolding department mixed all ingredients to makethe fiberglass hull, performed the actual molding, andremoved the hull from the mold. Finishing includedhand additions to the hull for running and standingrigging, reinforcement of the mast and tiller steps,and general sanding of rough spots. Assembly con-sisted of the attachment of cleats, turnbuckles, drainplugs, tiller, and so forth, and the inspection of theboat with mast, halyards, and sails in place. The as-sembly department also prepared the boat for storageor shipment.

Mixing and molding fiberglass hulls, while man-ually simple, required a great deal of expertise, oreyeball, as it was known in the trade. Addition of

*Copyright by the President and Fellows of Harvard College.Harvard Business School case 172-052.

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AnthonyHawkinsMerchant: Accounting: Text and Cases, Tenth Edition

II. Management Accounting

20. Production Cost Variance Analyses

654 The McGrawHill Companies, 2001

too much or too little catalyst, use of too much or toolittle heat, or failure to allow proper time for curingcould each cause a hull to be discarded. Conversely,spending too much time on adjustments to mixing ormolding equipment or on personalized supervisionof each hull could cause severe underproductionproblems. Once a batch of fiberglass was mixed therewas no time to waste being overcautious or it waslikely to freeze in its kettle.

With such a situation, and the companys an-nounced intent of expanding its product line, it be-came obvious that a standard cost system would benecessary to help control costs and to provide somereference for supervisors performance.

Randy Kern, the molding department supervisor,and Bill Schmidt, SunAirs accountant, agreed afterlengthy discussion to the following standard costs:

Materials Glass cloth120 sq. ft. @ $2.00 ! $240.00Glass mix40 lbs. @ $3.75 ! 150.00

Direct labor Mixing0.5 hr. @ $20.25 ! 10.12Molding1.0 hr. @ $20.25 ! 20.25

Indirect costsAbsorb at $24.30 per hull* ! 24.30Total cost to mold hull ! $444.67

*The normal volume of operations for overhead derivation purposes was assumed to be 450 hulls per month. The esti-mated monthly indirect cost equation was: Budget ! $9.72 * hulls " $6,561.

Analysis of OperationsAfter several additional months of operations,

Bill Schmidt expressed his disappointment about theapparent lack of attention being paid to the standardcosts. The molders tended to have a cautious outlooktoward mixing too little or cooking too long. Noone wanted to end up throwing away a partial hullbecause there was too little glass mix.

In reviewing the most recent months produc-tion results, Schmidt noted the following actual costsfor 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 cloth19,000 lbs. glass mix

Direct labor: Mixing 210 hrs. @ $21.37Molding 480 hrs. @ $20.25

Overhead: Incurred $11,140

Before proceeding with further analysis,Schmidt called Kern to arrange a discussion of vari-

ances. He also told Jan Larson, Maybe we shouldlook into an automated molding operation. Al-though I havent finished my analysis, it looks likethere will be unfavorable variances again. Kern in-sists that the standards are reasonable, then nevermeets them!

Larson seemed disturbed and answered, Well,some variances are inevitable. Why dont you analyzethem in some meaningful manner and discuss yourideas with Kern, who is an expert in molding whoseopinion I respect. Then the two of you meet with meto discuss the whole matter.

Questions1. Determine the molding departments direct costvariances and overhead variances. Why do you think theyoccurred?2. Do you think SunAirs standards are meaningful? Howwould you improve them?3. Assume that the months actual and standard productioncosts for items other than molding hulls amounted to $914.33per boat, and that 430 boats were sold. Prepare a statementof budgeted and actual gross margin for the month, assumingplanned sales of 450 boats.

654

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