Teva Sport Sandals was founded in the 1980s by a seasoned river guide. Mark Thatcher who was tired of loosing his flip flop sandals every time he took a raft ride down the Colorado River. Thatcher knew firsthand how 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. It was 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 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 website at teva.com. Sandal styles are updated by designers at Deckers annually for each new selling season. Those new sandal specifications are converted into sandal proto types by the in house Fabrication Department.

Upon arrival of the prototype designs detailed sandal 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 with China to help reduce the costs and prices of finished goods. Other direct materials 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. Overhead is allocated based on machine hours.

1-Output of units (pairs of sandals)

Actual results 150,000

Flexible Budget Amount 150,000

2-Machine hours

Actual results 67,500

Flexible Budget Amount 60,000

3-Machine hours per output unit

Actual results 45 cents

Flexible Budget Amount 40 cents

4-Variable manufacturing overhead costs

1,950,000

Flexible Budget Amount 1,800,000

5-Variable manufacturing overhead cost per machine hour

Actual results $28.89

Flexible Budget Amount $30.00

6-Variable manufacturing overhead cost per output unit

Actual results $13.00

Flexible Budget Amount $12.00

The plant manager's performance bonus is tied in part to his or her control of manufacturing overhead costs. There is an unfavorable variable overhead flexible budget variance of $150,075 for this month's production of 150,000 pairs of sandals. The manager is interested in finding out what happened and why.

Part 1

What do the spending and efficiency variances mean? What are possible causes?

Part 2

What explanation or explanations should the plant manager give for the unfavorable variable overhead flexible budget variance this month?

Answer rating: 100% (QA)

Part 1 Overhead are allocated on the basis of machine hours Variable Spending variance Actual machin... View the full answer