Sun Air Boat Builders, Inc
Sun Air Boat Builders served boaters with a small, lightweightfiberglass sailboat capable of being carried on a car roof. Thoughthe firm could hardly be considered as one of the nationâsindustrial giants, its burgeoning business had required it toinstitute a formal system of cost control. Jan Larson, Sun AirâsPresident, explained:
Our seasonal demand, as opposed to a need for regular, levelproduction, means that we must keep a good line of credit at thebank. Modern cost control and inventory valuation proceduresenhance our credibility with the bankers and, more importantly,have enabled them to improve our operations. Our supervisors haverealized the value of good cost accounting, and the main officehas, In turn, become much more aware of problems in the barn.
Sun Airâs manufacturing andwarehouse facilities consisted of three historic barns converted tomake 11 -foot âsilver Streakâ sailboats. The companyâs plansincluded the addition of 15-and 18-foot sailboats to its presentline. Longer-term plans called for adding additional sizes andstyles in the hope of becoming a major factor in the regional boatmarket.
The âSilver Streak â was anopen--cockpit,day sailer sporting a mainsail and small jib on a17-foot,telescoping aluminum mast.It was ideally suited to the manysmall lakes and ponds of the region,and after three years it hadbecome quite popular. It was priced at $2,265 complete.
Manufacturing consisted basicallyof three processes: molding, finishing, and assembly. The moldingdepartment mixed all ingredients to make the fiberglass hull,performed the actual molding, and removed the hull from the mold.Finishing included hand additions to the hull for running andstanding rigging, reinforcement of the mast and tiller steps, andgeneral sanding of rough spots. Assembly consisted of theattachment of cleats, turnbuckles, drain plugs, tiller, and soforth, and the inspection of the boat with mast, halyards, andsails in place. The assembly department also prepared the boat forstorage or shipment.
Mixing and molding fiberglasshulls, while manually simple, required a great deal of expertise,or âeyeball,â as it was known in the trade.. Addition of too muchor too little catalyst, use of too much or too little heat, orfailure to allow proper time for curing could each cause a hull tobe discarded. Conversely, spending too much time on adjustments tomixing or molding equipment o on âpersonalizedâ supervision of eachhull could cause severe underproduction problems. Once a batch offiberglass was mixed there was no time to waste being overcautiousor it was likely to âfreeze âin its kettle..
With such a situation, and thecompanyâs announced intent of expanding its product line, it becameobvious that a standard cost system would be necessary to helpcontrol costs and to provide some reference for supervisorsâperformance.
Randy Kern, the moldingdepartment supervisor, and Bill Schmidt, Sun Air âs accountant,agreed after lengthy discussion to the following standardcosts:
Materials -Glass cloth 120 sq.ft @$2.00 = $240.00
-Glass mix 40lbs. .@$3.75 = 150.00
Directlabor -Mixing 0.5 hr..@$20.25 = 10.12
-Molding 1.0 hr..@$20.25 = 20.25
Indirect costs -Absorb at $24.30 per hull *= 24.30
Total cost to mold hull $444.67
* The normal volume of operationsfor overhead derivation purposes was assumed to be 450 hulls permonth.
The estimated monthly indirectcost equation was: Budget = $9.72 * hulls + $6,561
Analysis of Operations
After several additional months of operations, Bill Schmidtexpressed his disappointment about the apparent lack of attentionbeing paid to the standard costs. The molders tended to have acautious outlook toward mixing too little or âcookingâ too long. Noone wanted to end up throwing away a partial hull because there wastoo little glass mix.
In reviewing the most recentmonth âs production results, Schmidt noted the following actualcosts for production of 430 hulls:
Materials:
Purchased 60,000 sq. ft glass cloth @$1.80
20,000 lbs. glass mix @$4.09
Used 54,000 sq. ft. glass cloth
19,000 lbs. glass mix
Direct Labor: Mixing 210 hrs. @$21.37
Molding 480 hrs @$20.25
Overhead :Incurred $11,140
Before proceeding with furtheranalysis, Schmidt called Kern to arrange a discussion of variances.He also told Jan Larson, âMaybe we should look into an automatedmolding operation. Although I havenât finished my analysis, itlooks like there will be unfavorable variances again. Kern insiststhat the standards are reasonable, then never meetsthem!â
Larson seemed disturbed and answered, âWell, some variances areinevitable. Why donât you analyze them in some meaningful mannerand discuss your ideas with Kern, who is an expert in molding whoseopinion I respect. Then the two of you meet with me to discuss thewhole matter.â
Questions
1. Determine the molding departmentâsdirect cost variances and overhead variances. Why do you think theyoccurred?
2. Do you think Sun Airâs standards aremeaningful? How would you improve them?
3. Assume that the monthâs actual andstandard production costs for items other than molding hullsamounted to $914.33 per boat, and that 430 boats were sold. Preparea statement of budgeted and actual gross margin for the month,assuming planned sales of 450 boats.
