Question

Upon accepting his position at Whitewater Inc., Rusty Whitewater (the Company Founder's Son) was informed that he would be responsible for production operations related to making specialty rafts.

Whitewater was founded on the principle of providing outstanding customer value by producing rafts of outstanding quality while providing excellent customer service and support.

Rusty was told that the materials necessary for the rafts must be purchased from Whitewater's Cincinnati Rubber Division. In addition, corporate headquarters would handle all contract negotiations with labor at the Great Blue River facility. Therefore, Rusty could focus his attention on managing production, controlling inventories and achieving Whitewater's goal of providing the highest quality raft on the market at a low cost, and supporting Whitewater’s goal of excellent customer service by shipping product to customers in a timely and accurate manner.

Finally, Rusty was informed that in addition to his salary, he would be paid a bonus equal to 10 percent of the net favorable (total favorable minus total unfavorable variances) amount on the following variances.

sales price variance

material price variance and material quantity variance

labor rate variance and labor efficiency variance

Standard cost and budgeted sales data for 2019 rubber raft production is as follows:

Direct Materials 5 square yards of rubber sheeting per raft @ $8/sq. yd.

Direct Labor 1 hour per raft @ $15 per hour

Variable Manufacturing Overhead: 1 direct labor hour per raft @ $6 per labor hour

Fixed Manufacturing Overhead: Budgeted at $137,500 per year and applied at a rate of $13.75/raft.

Budgeted 2019 production and sales: 10,000 rafts at $125/raft.

The following actual results were recorded during 2019:

Actual Production: 10,500 rafts

Actual Rafts Sold: 10,500 rafts @ $130 each.

Actual materials purchased and used: 51,450 square yards were purchased @ $7.50/sq. yd. and 51,450 square yards were used in production

Actual labor usage and cost (no overtime was worked): 11,200 labor hours @ $14.50 per hour

Actual variable manufacturing overhead cost: $67,800 Actual fixed manufacturing overhead cost: $132,000

Require

1. Compute the material price and quantity variances.

2. Compute the direct labor rate and efficiency variances.

3. Compute the variable manufacturing overhead flexible budget variance

4. Compute the fixed manufacturing overhead budget variance.

5. Upon receiving a bonus in excess of $8,000, Rusty declared "I always tried to tell Dad I could run this facility!!" Briefly comment on the way in which Rusty's bonus is determined (you do not need to compute his bonus). Specifically, cite any problems with the way his bonus is determined and recommend changes to correct for these problems.

Answer 1