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LAMBETH CUSTOM CABINETS (A)

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Jack Lambeth, a master cabinetmaker, owned and operated a shop where he sold custom-
made cabinets. At the beginning of September, he had no outstanding debts, and the following
amounts were on his books:

1. Raw-materials inventory, $2,150

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2. Supplies inventory, $620
3. Work-in-process inventory, $5,650

Job Materials Labor Overhead (50% of

labor)
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A-3 $ 750 $1,100 $ 550
A-4 900 650 325
A-5 325 700 350
Total $1,975 $2,450 $1,225 $5,650
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4. All other assets as of September 1, $16,890

During the month, Lambeth’s woodworking crew finished jobs A-3, A-4, and A-6, but
did not finish A-5. Job A-7 was started but not finished during September. Overhead costs
(pertaining primarily to equipment and shop depreciation, cleaning supplies, and insurance) were
applied to every job at the end of the month unless the job was finished during the month, in
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which case overhead was applied when the job was finished.

This case was prepared by Professor Francis J. Spreng of McKendree College, with minor revisions by Professor
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Mark Haskins of the Darden Graduate School of Business Administration, University of Virginia. It was written as
a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright  2004 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies ,send an e-mail to sales@dardenpublishing.com. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.

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During September, the following direct-materials and direct-labor costs were incurred:

Job Direct Materials Direct Labor

A-3 $ 280 $ 750
A-4 350 1,300

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A-5 180 550
A-6 375 490
A-7 590 370
$1,175 $3,460

Other important financial factors in September were as follows:

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1. Raw materials costing $1,675 were purchased during the month.
2. Supplies costing $580 were purchased, of which $490 were used and thus transferred to
the manufacturing-overhead account.
3. Total increases to the labor-general-ledger account were $5,460 (apparently, $2,000 of
indirect-labor costs were charged).
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4. General and administrative expenses for the month were $3,420.
5. Collections received from customers on jobs A-3, A-4, and A-6 amounted to $6,125,
$8,600, and $1,750, respectively, for a total of $16,475.
6. At the end of the month, Lambeth Custom Cabinets had no outstanding debts.
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While Lambeth was reviewing the September data, he became concerned about the
manufacturing-overhead variance (MOV). Because he never wanted to lay off an employee, the
MOV was always large in months when business was slow. (Lambeth assigned idle workers to
general cleanup and repair work, and charged their wages to indirect labor.) Of course, Lambeth
realized why the MOV was so large. What he was worried about, however, was Mrs. Carter.
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Mrs. Carter, a neighbor, had stopped by the shop one day in early September to get a
price on some cabinets she wanted built. Lambeth’s son, Jack Jr., spoke with her. Jack Jr. was
working in the shop while on summer vacation between his first and second year of graduate
business school. He studied Mrs. Carter’s plans, and estimated the cost of building her cabinets
to be $1,625. His job-estimation sheet showed the following:

Lumber $590
Finishing materials 75
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Direct-labor cost 640

Overhead __320
$1,625

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When Jack Jr. quoted a price of $1,900 ($1,625 cost plus $275 profit) to Mrs. Carter, she
said that she could get the same thing built by Walworth Custom Kitchens for $1,500.
Furthermore, she informed him, “I would throw the dumb economics books away before I would
pay a penny more than $1,500 for book cabinets to store them.”

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Jack Jr. simply told her that his best price was $1,900. He explained all about labor,
materials, profit, overhead, and competitive capitalism. In addition, he told Mrs. Carter that
Walworth could not make money on a $1,500 price, and if Walworth was really willing to build
the shelves for $1,500, she would be stealing from Mr. Walworth!

Mrs. Carter was very angry when she left. Jack Jr. later told his father the whole story,

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and laughed as he said, “Heck, we can’t build stuff that costs $1,625 and sell it at a price of
$1,600, let alone $1,500, can we?” At the time, Lambeth did not think much about the incident,
but he began to wonder whether Jack Jr. had learned anything at graduate business school.
Lambeth became especially concerned when he saw Bob Walworth, who said, “Mrs. Carter
saved me last month.” Walworth had just delivered Mrs. Carter’s new cabinets, for which she
paid $1,500. Lambeth wondered who was right: Jack Jr. or Walworth?
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Assignment

1. Show, in a series of ledger accounts, the transactions for September (you may use the T-
accounts below).
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2. In the greatest detail possible, prepare balance sheets as of September 1 and September
30 and an income statement for September (do not consider taxes).
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Raw Materials Work-in-Process Finished Goods

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Manufacturing Expense &
Supplies Inventory op Overhead Inc. Summary
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Labor All Other Assets

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617.783.7860