Managerial Accounting

Case study: Volkswagen Group - Model 293X Engine Control Unit

Short overview: This case represents problem of production company koda Auto Plant No.2 with their new contract

production of Model 293X Engine Control Unit for their client Volkswagen Group. The contract is made for the period of one year from 1 June 2010 to 31 May 2011. Production plan was 2,4 million Models 293X Engine Control Unit or 200,000 ECUs per month In August, top management of company put their brain together because it turns out that figures are not like they expected.

1. Using budget data, how many Model 293X ECU would have to be completed for koda Auto Plant No. 2 to break even

The break-even level represents the sales amount in revenue terms that is required to cover total costs (both fixed and variable) or we can say that profit at break-even is zero. In the case of koda Auto Plant No.2, the table below shows how many ECU must be made in order to get zero profit of mentioned project. For these analyses, we used figures from actual budget in August. In that month, plant produced 180,000 units which are used to calculate revenue and total variable cost per unit. The formula is very simple: Quantity x 208.20 Quantity x 207.84 - FIXED COST = 0 The table below shows the result:
Actual Budget (180,000) Revenue Total variable costs Total Fixed costs Net income 37,476.000 37,412.000 736.000 (672.000) Quantity of Actual Contribution Quantity of units at break figures units at even per margin per unit break even month 208.20 0.36 2044444.444 227160.4938 207.84 736.000

2. Using budget data, what was the total expected cost per unit if all manufacturing and shipping overhead (both variable and fixed) were allocated to planned production? What was the actual cost per unit of production and shipping? Total expected cost per unit for all manufacturing, shipping and labor cost was 202.06 euro (187.89+13.11+1.06). Total expected fixed cost was 729,000 euro. Total actual cost per unit for all manufacturing, shipping and labor cost was 207.84 euro (189.61+17.17+1.06). Total expected fixed cost was 736,000 euro.

Revenue Variable Costs Materials Microcontroller chip Printed circuit board Turbocharger chip Software 8 other chips Variable supplies and tools Subtotal Labor Assembly and packaging Shipping Total variable costs Fixed Costs Factory Rent Machine Depreciation Utility fee and taxes Supervision Total Fixed costs

Monthly Budget Actual Budget Monthly Budget (200,000) (180,000) per unit 41,240.000 37,476.000 206.200 5,400.000 5,249.000 27.000 2,150.000 1,935.000 10.750 2,810.000 2,529.000 14.050 520.000 468.000 2.600 14,190.000 12,643.000 70.950 12,507.000 11,305.000 62.535 37,577.000 34,129.000 187.885 2,622.000 3,092.000 13.110 212.000 191.000 1.060 40,411.000 37,412.000 202.055 400.000 150.000 52.000 127.000 729.000 400.000 150.000 52.000 134.000 736.000 400.000 150.000 52.000 127.000 729.000

Actual Budget per unit 208.200 29.161 10.750 14.050 2.600 70.239 62.806 189.606 17.178 1.061 207.844 400.000 150.000 52.000 134.000 736.000

3. Prepare a flexible budget for 180,000 Model 293X ECU and calculate flexible budget variance using actual costs for August. Comment on your calculations, and show how you would reconcile the planned budget with the actual

The table with flexible budget shows all figures made with actual costs but with achieved sales volume (in our case 180,000 units).

Revenue Variable Costs Materials Microcontroller chip Printed circuit board Turbocharger chip Software 8 other chips Variable supplies and tools Subtotal Labor Assembly and packaging Shipping Total variable costs Fixed Costs Factory Rent Machine Depreciation Utility fee and taxes Supervision Total Fixed costs Total Costs Net Income

Monthly Budget (200,000) 41,240.000

Flexed Budget Actual Budget (180,000) (180,000) 37,116.000 37,476.000

Variance 360.000F

5,400.000 2,150.000 2,810.000 520.000 14,190.000 12,507.000 37,577.000

4,860.000 1,935.000 2,529.000 468.000 12,771.000 11,256.300 33,819.300

5,249.000 1,935.000 2,529.000 468.000 12,643.000 11,305.000 34,129.000

389.000U

128.000F 48.700U 309.700U

2,622.000 212.000 40,411.000

2,359.800 190.800 36,369.900

3,092.000 732.200U 191.000 200U 37,412.000 1,042.100U

400.000 150.000 52.000 127.000 729.000 41,440.000 100.000

400.000 150.000 52.000 127.000 729.000 37,296.000 (180.000)

400.000 150.000 52.000 134.000 736.000 38,148.000

7000U 7000U 852.000U

(672.000) 492.000U

Comparing flexed budget and actual budget, we noticed that there is a favorable variance of 360.000euro between budget revenues and flexed revenues. This is only possible due to higher price of ECU per unit because sales volume remains the same. Actually, prices went up to 2 euro per ECU.

Direct Materials variance is unfavorable, mainly because the cost of microcontroller chip is arose in amount of 2 dollar per unit by company Infineon. Further analysis show that total direct labor variance is unfavorable in amount of 1,041.100 euro because koda has increased wages of their employees in the factory by almost 30% since July. Cost for assembly and packaging went up from 13.11 euro per unit to 17.17 per unit (ECU). Regarding fixed cost, koda estimates poorly cost of Supervision and because of that fixed overhead variance is unfavorable.

Reconciling original budgeted profit with actual profit shows connections between those budgets. Budget profit + All favorable variances All unfavorable variances=Actual profit In case of koda Plant No 2, figures are: Budget profit Microcontroller chip Printed circuit board Turbocharger chip Software 8 other chips Variable supplies and tools Shipping 21.000 151.000 215.000 281.000 52.000 1,547.000 1,202.000 3,469.000 Revenue Assembly and packaging Total Fixed costs 3,764.000 470.000 7.000 4,241.000 Actual profit (672.000) 100.000

4. What are some strategies or decision that Novak should consider in trying to solve the problems with the Model 293X ECU contract in the next nine months? How would these change the costs and profitability of koda Auto Plant No. 2 and the Model 293X ECU contract?

koda Auto Plant No. 2 should pay all his attention to lowering costs of production in terms of materials and efficiency of labor. Novak may consider finding another supplier of Microcontroller chip, of course with the same quality but with better prices then Infineon. Estimated cost of Microcontroller chip should be achieved and that must be Novaks goal. Another thing should be reorganization of people in the factory in terms of their better efficiency. For the following nine months, employees should be organized in teams of 29 people instead of 33 for one unit (ECU). Total variable cost of labor per unit was 18.23 euro in August (33 employees work 5 days for one unit). If team of 29 employees could assembly one unit in 5 days, total variable cost of labor would be 16.11 euro per unit. Budgeted costs can be achieved if Novak push people to work harder in follow ing period. That is not easy to do because Novak does not have any more the bonus at salary as strategy of motivation but he can divide total profit at the end of project (for stat he can offer 10-15% of total profit). The changes will get koda Auto Plant No. 2 at budgeted level for variable costs which will lead to less total costs and eventually to profit. Let do some calculations 180,000 units with prices of 208.20 euro lead to revenue of 37,476,000 euro. Subtotal variable costs are 33,740,000 euro because all cost remains the same instead of cost of Microcontroller chip. The cost of chips is now at budgeted level in amount of 4,860,000 euro. With our changes in organization, total variable labor cost per unit is 16.11 euro. Total variable labor cost is 2,899,800 euro. Fixed cost remains the same and total profit is 100,200 euro.