Question

In 1995, RD. Kelton, established Kelton's Gingerbread Dollhouses Inc. The company assembles dollhouses which are sold in the United States. After her father-in-law's retirement in 2017, Maia Kelton assumed control of the company. In 2018, Maia expected the company's operating income to increase because the company no longer had to pay RD.'s salary of $125,000. Instead, the company's operating income decreased As Maia's accountant, you prepared operating income reconciliation from 2017 to 2018. As you are getting ready for a meeting with her, you need to explain the reasons why operating income decreased. Based on what you have learned (and still learning) this semester, evaluate the variances below. Gingerbread Dollhouses Inc. Operating Income Reconciliation 2017 - 2018 $ Difference 1,857,600 (591,600) S(256,000) (22,000) Operating Income 2017 Total Sales Mix Variance Manufacturing Variances: Direct Materials Variance Price Efficiency Direct Labor Variance Rate Efficiency Variable Overhead Variance Spending Total Manufacturing Variances Selling & General Administration Operating Income 2018 (37,850) (2,775) (30,600) S(349,225) 125,000 $1.041.775

Answer 1

Page 1:
Let us look at the data in the following given format and note down analysis points:
	2017		2018
	Deluxe Victorian	Simpe Victorian	Deluxe Victorian	Simpe Victorian
Sales Price	900	350	900	350
Sales Mix	80%	20%	50%	50%
Qty Sold	5440	1360	3400	3400
Sales (Qty Sold * Sales Price)	4896000	476000	3060000	1190000
(-) Assembly cost	-2176000	-272000	-1712500	-605500
(-) Labour Cost	-408000	-20400	-277425	-69200
(Labour Hours * Rate per Hour)
(-) Variable Cost	-190400	-47600	-129200	-139400
	2121600	136000	940875	375900
Total	2257600		1316775
Salaries	-400000		-275000
Opeationg Profit	1857600		1041775
Difference in Operating Profit	815825
Points to be noted:
1) We can see that a change in Sales Mix has caused a big drop in the total amount of Sales by $ 11,22,000 even though the sales price of both the products remaining the same
2) There are savings in Assembly cost, Labour Cosrs and Director Salaries, however still it is not enough to justify the decrease in Operating profit due to the change in Sales Mix
Page 2:Let us summarise data in the following given format and the make analysis points on the same
Particulars	Standard Cost		Acual Cost
	Deluxe Victorian	Simple Victorian	Deluxe Victorian	Simple Victorian
Assembly Kit per dollhouse	$                   400	$                  200	$                   500	$                  175
Direct Labour hours per dollhouse	3	1	3	1
Direct Labour rate per hour	$                      25	$                    15	$                      27	$                    20
Variable overhead rate per dollhouse	$                      35	$                    35	$                      35	$                    41
1)Analysis of Assembly Kit Cost
i) Deluxe Victorian
There is an Adverse Variance from standard cost of $100 per doll house ($400-$500)
ii) Simple Victorian
There is a Favourable Variance from Standard cost of $25 per doll house ($200-$175)
2) Analysis of Labour rate per hour
i) Deluxe Victorian
There is an Adverse Variance from standard cost of $2 per hour ($25-$27)
ii) Simple Victorian
There is an Adverse Variance from standard cost of $5 per hour ($15-$20)
3) Analysis of Variable rate per dollhouse
i) Deluxe Victorian
No Variance
ii) Simple Victorian
There is an Adverse Variance from standard cost of $5 per doll house ($35-$41)

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