Ferguson Foundry Limited
------------------------------------------------- Case: Ferguson Foundry Limited (FFL)
EXECUTIVE SUMMARY
Date: March 10 2013
To: Mark Ferguson, President
From: Carl Holitzner
Re: FFL’s Lower-Than-Budgeted Profit for the Fiscal Year Ended May 31 2010
The major issue is determining why Ferguson Foundry Limited’s (FFL) actual profit was $367,600 lower than budgeted, despite selling 2,000 more wood stoves (12,000 instead of 10,000 units). This will be explained using Variance Analysis to demonstrate the underlying reasons why the company failed to meet its president’s expectations. FFL profit for 2010 was below budget due to many factors both production and marketing related.
From a production perspective, there were 3 major areas of concern all of which were unfavorable with respect to Variance Analysis (As shown in Exhibit 3):
1. Direct Labor
2. Variable Overhead
3. Fixed Cost
The $139,200 unfavorable Direct Labor Variance can be attributed to many reasons however it is most likely linked to the management team. Due to the early retirement of the sales manager, the production manager being hospitalized and the accountant quitting, it can be understood that inefficiencies were bound to arise. Without proper management, labor reduced overall productivity of the company, as these workers took 121,200 hours to produce 12,00 stoves rather than the standard 120,000 hours that it should have taken. This reduced Net Income by $18,000 (Labor Yield Variance calculation).
Secondly, the problem arising from Direct Labor also transcends to the Variable Overhead, as it is used as its cost driver. As a result, the $69,600 unfavorable Variable Overhead Variance can also be attributed to the more hours undertaken to produce the 12,000 stoves. With the lack of an inefficient management team, overhead could have accumulated through inefficient use and/or the budget could have not even accurately portrayed current rates for overhead items.
The third
EXECUTIVE SUMMARY
Date: March 10 2013
To: Mark Ferguson, President
From: Carl Holitzner
Re: FFL’s Lower-Than-Budgeted Profit for the Fiscal Year Ended May 31 2010
The major issue is determining why Ferguson Foundry Limited’s (FFL) actual profit was $367,600 lower than budgeted, despite selling 2,000 more wood stoves (12,000 instead of 10,000 units). This will be explained using Variance Analysis to demonstrate the underlying reasons why the company failed to meet its president’s expectations. FFL profit for 2010 was below budget due to many factors both production and marketing related.
From a production perspective, there were 3 major areas of concern all of which were unfavorable with respect to Variance Analysis (As shown in Exhibit 3):
1. Direct Labor
2. Variable Overhead
3. Fixed Cost
The $139,200 unfavorable Direct Labor Variance can be attributed to many reasons however it is most likely linked to the management team. Due to the early retirement of the sales manager, the production manager being hospitalized and the accountant quitting, it can be understood that inefficiencies were bound to arise. Without proper management, labor reduced overall productivity of the company, as these workers took 121,200 hours to produce 12,00 stoves rather than the standard 120,000 hours that it should have taken. This reduced Net Income by $18,000 (Labor Yield Variance calculation).
Secondly, the problem arising from Direct Labor also transcends to the Variable Overhead, as it is used as its cost driver. As a result, the $69,600 unfavorable Variable Overhead Variance can also be attributed to the more hours undertaken to produce the 12,000 stoves. With the lack of an inefficient management team, overhead could have accumulated through inefficient use and/or the budget could have not even accurately portrayed current rates for overhead items.
The third