Water Play, Inc.

Variance Analysis and Revised Budgets-Part 3

The company adopted the constant demand sales pattern budgets developed in part 2. In
quarter one, the company actually sold 11,000 units and in quarter two, 16,000 vehicles. The
company experienced some difficulty getting the advertising message out to the target market.
Funding for the national campaign was reduced but Water Play shifted those funds to do local
advertising through cooperative advertising contracts with local dealers. This two-pronged
advertising campaign has seemed to work better based on the second quarter results. Orders for
quarters three and four from dealers are strong and it appears the sales mark of 18,000 units will
be met in each of the two remaining quarters.

The accountants have revised the following budget schedules having put in the actual
units sold and produced and actual costs for quarters one and two: sales, production, direct
materials, direct labor, manufacturing overhead, selling and general administrative expenses and
finished goods schedules have been revised and are provided in appendices D-3 through D-9;
these appendices will be used to prepare a revised cash budget, income statement and balance
sheet which are provided in appendices D-10 through D12. The background data is provided in
appendices D-1 and D-2 which will be used to calculate the cost variances for quarters one and
two. The variance tables are found in appendices D-13 through D-18.

As the new cost analyst for Water Play, Inc., you have been asked to calculate cost
variances and prepare a variance report explaining the potential causes of these variances.
Explain potential causes of the variances in light of the fact that this is a startup company that has
no experience manufacturing the Shark Scout vehicle. For example, it is typical that material
components will be redesigned early in the year as manufacturing experience is gained and
feedback from customers and dealers about the vehicles functionality/safety are obtained. Water
Play’s engineers work in conjunction with suppliers to redesign (develop new parts’
specifications) components. These suppliers would then need to renegotiate the component’s
prices for those parts based on the design change. This could lead to either higher or lower
material prices for specific components than what was originally forecasted. The material
quantity standards have been set as ideal while the labor quantity standard has been set as
practical. There are also many issues surrounding new laborers unfamiliar with the
manufacturing process which can lead to several different variances being unfavorable. In
quarter one, the damage to material components during installation led to higher rework costs to
repair the damaged parts and vehicles. The reduced volume of production in quarter one of
10,800 units instead of the original 18,000 budgeted, led to Water Play delaying the hiring of
factory managers reducing the amount spent on supervisors’ salaries and benefits; by quarter
two, the increased production to 16,200 required adding another work shift and necessitating
hiring of the full complement of supervisors that were originally budgeted. Also, since many
unfavorable variances resulted from inexperienced workers in quarter one, the company decided
to increase budgeted spending on training costs in quarter two in order to reduce unfavorable
variances generated in quarter one.

Information concerning the actual quantities and prices for the three most costly material
components, direct labor, variable overhead and fixed overhead are provided in appendices D-1
and D-2. The standard prices have also been included. However, you will need to calculate the
standard quantity allowed for materials used and the direct labor hours so the variances can be
calculated.

Required:

1. Compute the direct material price and quantity variances for the three most costly
components—seat assembly, engine block, and diving bell suit in appendices D-13 through
D-15. Compute the direct labor rate and efficiency variances in appendix D-16, variable
overhead rate/spending and efficiency variances in appendix D-17 and the fixed overhead
budget and volume variances in appendix D-18. In addition to showing the variances in
dollars and labeled as favorable or unfavorable, you must calculate the percentage of
variance from standard. These percentages should also be disclosed in a table in the body of
the report to support the written interpretation and identification of the variances’ causes. In
addition to identifying the cause(s) of the variances, did the variances improve or worsen
from quarter one to quarter two? In answering this last question, the team will want to
examine the percentage of variance from the standard cost.

2. Using the revised “year one” budget schedules provided in appendices D-3 through D-9,
prepare a cash budget, an absorption format income statement, and a balance sheet for the
year assuming a FIFO cost flow assumption for determining ending finished goods inventory
and cost of goods sold (income statement and balance sheet) provided in appendix D-9.
Appendices D-10 through D-12 provide the formats for the cash budget, income statement
and balance sheet. Compare and comment on the differences between the original budgeted
information and the revised budgeted cash budget, income statement and balance sheet.
Refer to part two—constant demand budget for comparative purposes found in appendices B-
9 through B-11. Calculate percentage of change in items on the income statement and
balance sheet (horizontal rate of change) comparing the original constant demand budget to
the revised income statement and balance sheet and discuss the major changes and causes.