Part I case TEVA SPORT SANDALS: Variable Overhead Variences Teva Sport Sandals w

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Part I case TEVA SPORT SANDALS: Variable Overhead Variences Teva Sport Sandals wax founded in the 1980s by a seasoned river guide. Mark Thatcher, who was tired of losing his flip-flop sandals every time he took a raft ride down the Colorado River. Thatcher knew firsthand bow thong-style rubber sandals abandoned his feet when he was slogging through mud and water. He figured a thong-style sandal with a heel strap on the back would be the answer to keeping sandals on. His new sandal creation was called the "Teva" (which means "nature" in Hebrew). 55 an immediate hit with water sports enthusiasts on the river and with others nowhere near a river. Today Teva sandals are manufactured under license by as Deckers outdoor Corporation of Goleta, California. More than 60 styles for men, women, and children are available through retail sports stores, catalogs, and department stores around the world. The entire line of sandals also is sold direct to consumers through Teva's web site at www.teva.com. Sandal styles are updated by designers at Deckers annually for each new selling season. Those new sandal specifications are converted into vandal prototypes by the in-house Fabrication Department. Upon approval of the prototype designs, detailed vandal specifications are given to Pat Devaney, Deckers vice president of production, development, and sourcing. Pat has responsibility for negotiating the best possible prices for finished sandals with the plant in China that manufactures the sandals. The specifications are critical to the negotiations. Some of the direct materials are sourced within China to help reduce the costs and prices of finished goods. Other direct materials must be imported. Either way, Deckers and the manufacturing plant in China work together to arrive at the best price. Once the specification and price negotiations are finished, the plant begins production according to the schedule set during negotiations. The managers at the manufacturing plant in China have responsibility for controlling production costs. For illustration purposes, let's assume the following data apply to a recent month of sandal manufacturing for the plant (all accounts in US dollars). Overhead is allocated based on machine-hours. The plant manager's performance bonus is tied, in part, to his or her control of manufacturing overhead costs. There is an unfavorable overhead flexible-budget variance of $150.000 for this month's production of 150.000 pairs of sandals. The manager is interested in finding exit what happened and why. Compute the spending variance and the efficiency variance for variable manufacturing overhead. What do the spending and efficiency variances mean? What are possible causes? What explanation(s) should the plant manager give for the unfavorable variable overhead flexible-budget variance this month?

Explanation / Answer

1) Spending variance=actual machine hours*(actual overhead cost per machine hr-budgeted overhead cost per machine hr)

=67500*(28.89-30)

=$74,925(favorable)

efficency variance=(actual overhead- allowed overhead)*budgeted rate

=(67500-60000)*30

=$225,000(un favourable)

2)favourable spending variance means we have used ledd than required overhead cost per machine hr. This may be due some cost like labour cost,electricity cost may come down that waht we have budgeted.

Unfavorable efficenecy variance means more machine hours are used than budgeted machine hours for manufacturing 150,000 units. This may be due to the workers who are operatign the machine are not skillful enough , machine are not working efficently may be due to wear and tear issue .

3)Total unfavourbale variance is -74,925+225,000=150,075 . It may be due to issues like unskilful labour hired and nor properly trained the use of machine,machine is not maintained properly for its peak performance, inaccuracy in budgeted numbers

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