Kaufmann Manufacturing Company
During the second half of the year, the company increased the price of the goods. As a result the company suffered a decrease in sales but its total revenue increased due to the increasing prices. This could be explained by the fact that the company did not maximize its profit during the first half of the year, the price and sales of the company is not at equilibrium and products are being sold at a price lower than equilibrium. At the second of the year, due to an increase in price the sales volume shifts to the right; (see the graph below) it may not be at the equilibrium but it’s getting closer to the equilibrium. (Period 2 production lies between period 1 and equilibrium production level)
In the second half of the year, the labor variance looks worse than the first term. This is the result of an increase in production during second term. In the first half of the year, the company did not meet its production quota (therefore less materials and labor were used for production). So Carlo tried to improve the production in the second term. As a result, the production for second term not only meets the goal but also exceeds the required production amount. This increase in material consumption for the production of second term leads to the unfavorable variance we see in Exhibit 3. Another reason why the second term seems to do better than the first term is that production increased while sales decreased in second term, therefore some of the fixed costs are deferred to the inventory and the unsold products are being recorded as an asset, making the company seemingly to do better than it actually does. Comparing the difference between the production volume variance of the first and second half of the year, we noticed that during the second term, it is more favorable than the first term. Since production volume variance indicates whether the materials and production management staff is able to produce goods in accordance with long-range planned expectations, we
In the second half of the year, the labor variance looks worse than the first term. This is the result of an increase in production during second term. In the first half of the year, the company did not meet its production quota (therefore less materials and labor were used for production). So Carlo tried to improve the production in the second term. As a result, the production for second term not only meets the goal but also exceeds the required production amount. This increase in material consumption for the production of second term leads to the unfavorable variance we see in Exhibit 3. Another reason why the second term seems to do better than the first term is that production increased while sales decreased in second term, therefore some of the fixed costs are deferred to the inventory and the unsold products are being recorded as an asset, making the company seemingly to do better than it actually does. Comparing the difference between the production volume variance of the first and second half of the year, we noticed that during the second term, it is more favorable than the first term. Since production volume variance indicates whether the materials and production management staff is able to produce goods in accordance with long-range planned expectations, we