The Crimson Press Curriculum Center

First Page and the Assignment Questions:
I don’t get it. Production was way below budget in January and way above in February, and yet we had negative variances in both months. I can understand January, but February doesn’t make sense. Either we need a new accountant or a new production manager. Maybe both.

   The speaker was Mike Larson, president of Crimson Chair Company. Mr. Larson had founded the company three years ago, after a new wheelchair that he had designed for his grandmother had turned out to be exceptionally successful. He had resigned his position as a professor of engineering at a private university and start the company. Now he wondered about his decision:

When I was designing it, I at least had some fun. Now, after three years of trying to build a business, I find myself staring at accounting data and not having much fun. This is crazy!

BACKGROUND

   Crimson Chair Company manufactured highly durable wheelchairs that used a special steel that was both strong and lightweight. By a special request from Mr. Larson, the manufacturer produced it in deep crimson, hence the name of the company. Each chair was assembled individually by a skilled worker, and, when all labor was included, was supposed to take two direct labor hours to complete.

   The company had enjoyed remarkable success. Its chairs were in high demand, with prices that reflected the combination of this demand and the limited availability of the special crimson steel. Production was reasonably constant throughout each month, and, given the high demand, virtually no chairs remained in finished goods inventory at the the end of each month.

   Although the supply of crimson steel was limited, Mr. Larson had managed to increase it gradually, and the company had been able to expand its labor force each year to meet the demand. The current labor force consisted of several assemblers, each of whom worked only a few days each week. Most were inventors, and had workshops where they produced their own devices of various sorts. They saw Crimson Chair as a source of income until they made it big.

   As the company grew, Mr. Larson had shifted his activities away from direct production, and had moved into sales, marketing, and purchasing. Because he was away a great deal of the time, he had hired a production manager to oversee the manufacture of the chairs, and, with the growth of the business, also had hired a part-time accountant to prepare monthly financial statements.

Assignment

1.   Do you agree with the calculations in Exhibit 1 for the overhead budget for a typical month and the absorption rate? Why or why not?

2.   Prepare an overhead variance analysis of the sort discussed in the text. Your totals should agree with the accountant’s totals. What is missing from his analysis? How important do you think it is? What do you think are the causes of the variances?

3.   Reconcile Mr. Larson’s computations in the last paragraph of the case with those of the accountant in Exhibit 2. Why do these differences exist? Will they always agree over a two month period? Why or why not?

4.   How would you explain to Mr. Larson the differences between his computations and those of the accountant?

5.   Do you agree with the accountant’s proposed solution to the problem? Why or why not? What else should Mr. Larson do?