The Waltham Motors case includes 4 questions but you should instead answer the following set of budgeting and variance questions that we will address in class:
Questions:
1. Exhibit 1 in the case shows budgeted and actual amounts for May 2004. Note that the budgeted revenues, costs, and profit for May 2004 in Exhibit 1 correspond to the original planned level of production (18,000 units) not the revised, actual level of production (14,000 units). This is key to understanding what is shown in Exhibit 1 versus what you will learn from the budget you prepare in question 2.
a) The favorable variances shown in Exhibit 1 for variable costs indicate that actual costs are lower than the budgeted amounts for 18,000 motors. However, do these favorable variances indicate that actual variable costs are lower than they should have been to produce 14,000 motors?
b) Does the unfavorable variance shown in the exhibit for fixed supervision costs indicate that actual fixed supervision costs are higher than they should have been to produce 14,000 motors?

2. Prepare a budget showing what revenues and costs should have been for the actual production of 14,000 units, assuming that selling price of motors, the variable costs per unit, and the total fixed costs remained the same as assumed in the budget shown in Exhibit 1. Use the new 14,000 unit budget to analyze how much of the difference between the planned level of profit shown at the bottom of the Budget column in Exhibit 1 and the actual level of profit shown at the bottom of the Actual column is explained by each of the following components:
a) operating at a different actual level of activity (14,000 units) than the originally planned level of activity (18,000 units)?
b) selling motors at a different average selling price than originally planned?
c) incurring actual costs higher or lower than "what costs should have been to produce 14,000 motors"?
Hint #1: For this component, be sure to focus on the amounts shown in the budget you prepared for 14,000 units?)
Hint #2: See Datar and Rajan Chapter 13 for terminology that describes the 18,000 unit budget as a static budget and the 14,000 unit budget as a flexible budget = see especially pp. 539-542. The chapter also explains an analytical framework where static-budget variances can be decomposed into flexible-budget variances and sales-volume (or sales-activity) variances, and flexible-budget variances can be further decomposed into price and quantity variances - see especially pp. 542-547. (This last decomposition is used in question 3 below.) Also, make sure you understand the relationships among revenue, cost, and profit variances. Once you understand these relationships, you can summarize the effect of operating at a different level of activity by a sales-volume profit variance, the effect of selling motors at a different average price than originally planned by a flexible-budget revenue variance, and control of costs by a series of flexible-budget cost variances.

3. The case provides information that allows us to examine two of the flexible-budget cost variances in more detail, namely the Direct Labor and Direct Material flexible-budget variances. For each of these two variable costs, compute price and quantity variances. In each of the two cases, how do the price and quantity variances relate to the flexible budget variance?
Hint #1: See Chapter 13 pp. 542-547 for detailed discussion of price and efficiency (or quantity) variances.
Hint #2: You will find some of the information you need to compute price and quantity variances for these two items stated explicitly in the case. However, other information will need to be inferred. For example, when total cost = price x quantity, then you can infer quantity if you know total cost and price or you can infer price if you know total cost and quantity. As a specific example, you can determine the actual quantity of labor hours used, by dividing the actual labor cost of $246,000 by the actual labor cost per hour of $8.20.
Hint #3: Students often confuse the roles of output quantities (for example 18,000 motors of output or 14,000 motors of output) versus input quantities (for example, the amount of material it takes to produce 18,000 motors or the amount of material to produce 14,000 motors). To see the distinction between the roles of output quantities versus input quantities more clearly, you may find the following helpful.
First, note that you can use the numbers in the case to determine the budgeted and actual hours of direct labor time. For example, the $288,000 budget for direct labor to produce 18,000 motors represents 2 hours per motor x $8.00 per hour x 18,000 motors. You will prepare a similar direct labor budget to produce 14,000 motors.
Second, you may find it helpful to make a more concrete assumption about the materials used to produce motors. For example, assume that the materials required to produce each motor consist of 6 pounds of materials at an expected price of $1.00 per pound (consistent with the standard $6.00 of material per motor described in the case). Then assume that the actual cost of materials is 5% less than expected (consistent with the statement in the case) or $.95 per pound.

The Waltham Motors case includes 4 questions but you should instead...