Topics: Manufacturing, Variance, Costs Pages: 12 (1456 words) Published: March 8, 2014
For the exclusive use of Y. ZHAO
Harvard Business School

May 26, 1993

Kaufmann Manufacturing Company (A)
Ms. Mary Kaufmann, president and sole owner of Kaufmann Manufacturing Company (a manufacturer of a single, specialized, industrial product), had just received the financial results of her company for the second six months of 1992. At first, she was pleased by what she observed. However, when she compared these results to those of the first six months of 1992 and the budgets she had originally cast for the two six-month periods (see Exhibits 1, 2 and 3), she became confused. Ms. Kaufmann could not understand why profits had increased so dramatically in the second half of the year, even though actual sales volume had fallen to 188,000 units. She thought that a part of the improved profit could be attributed to the $3 selling price increase which she had authorized effective July 1, 1992; however, she did not believe its effect would be so dramatic. She thought that another part of the profit increase could be attributed to control of production costs, yet when she examined the manufacturing statements (Exhibit 3) she observed that production showed an overall unfavorable variance of $217,000 for the second six months of 1992 as compared to an overall favorable variance of $124,000 for the first six months of 1992. In order to gain an understanding of these confusing results, Ms. Kaufmann decided to meet with her sales manager, Sandy Stevens, and her production manager Carlos Chavez. She would have liked to have had her treasurer-controller, Kenneth Page, at the meeting, but Mr. Page was in New Orleans completing the financing arrangements for Kaufmann's planned expansion into the South. The following excerpts are from the January 15, 1993 meeting between Kaufmann, Stevens, and Chavez.

Mary Kaufmann: Sandy, it looks like your idea to raise our price from $90 to $93 during the second half of the year really came through. We lost volume, just as you predicted, but we sure gave a boost to our income statement, also as you predicted. have you looked into your crystal ball for this year? Do we hold the line at $93 or should we risk another slight price increase? Sandy Stevens: Well, Mary I think our pricing strategy for this year is really going to depend on how well Carlos can control his costs. From the statements you've shown me (referring to Exhibits 1 through 3) it would appear as though we could have done even better in the second half if it had not been for $217,000 in unfavorable variances chalked up by production. Carlos Chavez: (Interrupting) Now hold on Sandy. Your neat little pricing strategy and its resulting decrease in volume raised havoc with our production scheduling. As you recall in our last meeting in July, Mary chewed me out for not meeting our normal production goal and for running down our inventories during the first six months of the year. So I go all out to meet—in fact, exceed— Professor Julie H. Hertenstein of Northeastern University prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is based on an earlier case prepared by Professor Norman J. Bartczak.

Copyright © 1993 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write the Publishing Division, Harvard Business School, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

This document is authorized for use only by YIMING ZHAO in Managerial Accounting taught by Hai Lu from January 2014 to May 2014.

For the exclusive use of Y. ZHAO

Kaufmann Manufacturing Company (A)

normal production in the second half and all I get is grief. These variances...
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