KARENVILLE CORPORATION

A Group Business Case

Presented to the
Accountancy Department
De La Salle University

In partial fulfillment
Of the course requirements
In MODCOS2 Section K32

SUBMITTED TO:
Ms. Joy Lynn Legaspi

SUBMITTED BY:
Gumba, Chelsie Marie D.
Rodriguez, James Vincent E.

August 24, 2019

A. Introduction
For a business to generate a sustainable profit, it must be able to maximize its resources, and
manage its costs properly in various ways in the long run. In order for an entity to optimize its assets, it
is essential to consider several factors internally and externally. Having a budget, and allocating costs is
one of the internal ways to forecast the company's income. While taking into account the relevance of
interest rates, and the correlation of social issues to the nature of the enterprise is one of the external
variables that should be kept in mind.
Nevertheless, no matter how appropriate one's estimation and judgement can be, it may still not
be accurate enough. These certain inexactitudes may be due to the unpredictable changes that even the
market has no control over. Thus, taking advantage of favorable price changes, and boosting the
productivity of an entity will provide an adequate allowance for a significant fall back in the future.
Furthermore, the key towards becoming a competent firm is being able to effectively follow through the
efficient plans of the managers, and practicing the virtue of faithful representation in reporting.
Failure to acknowledge the significance of internal control in the entity, such as separation of
duties, risk assessment, etc., may cause numerous conflicts to arise. The distortion of the final sales
value of products due to unidentifiable reason, biased presentation of reports due to incompetence, and
fraud due to omissions or commissions are some of the consequences that may lead to the company's
downfall. Hence, creating the necessity for entities to foster professionalism.

B. Discussion
Based from the provided standard costs data, the group then calculated the material purchase
price variance, where it is derived by the formula:
DM Price Variance = AQ (AP-SP) (1)
Where the actual number of units or quantity acquired (AQ) is multiplied by the difference
between the actual price (AP) paid to acquire direct materials item and its budgeted or standard price
(SP). By plugging-in all the necessary values in the equation, where actual quantity is 5, 200 pounds of
plastic, actual price is $2.10, and standard price which is $2, will obtain a value of $520 unfavorable
variance.
For the materials quantity variance, the formula follows:
DM Quantity Variance = SP (AQ-SQ) (2)
Where the standard price per unit (SP) is multiplied by the difference between the actual
number of units or quantity acquired (AQ) and the standard number of units or quantity acquired (AQ).
By plugging-in all the necessary values in the equation, where the standard price is $2, actual units or
quantity of 5, 300 pounds of plastic, and standard units or quantity of 5,000 pounds of plastic, will
obtain a value of 600 unfavorable variance.
Moreover, the direct labor (DL) rate variance can be acquired by the formula:
DL Rate Variance = AH (AR - SR) (3)
Wherein the number of actual direct labor hours (AH) is multiplied by the difference between
the actual rate of direct labor hours (AR) and the standard rate of direct labor hours provided by the
company (SR). Given the sufficient data of $4 as the standard rate, $4.10 as the actual rate, and 8,200 as
the actual direct labor hours incurred, results to $820 unfavorable variance.
Meanwhile, the direct labor efficiency variance can be generated by the formula:
DL Efficiency Variance = SR (AH - SH) (4)
By which the standard rate per direct labor hour (SR) is multiplied by the difference between
the number of actual direct labor hours incurred (AH) and the standard direct labor hours required for
the actual units produced (SH). Given the sufficient data of $4 as the standard rate, 8,200 as the actual
direct labor hours incurred, and 1.6 direct labor hours required for each unit of output produced, results
to $800 unfavorable variance.
Lastly, the factory overhead (FOH) controllable variance can be obtained by the formula:
FOH Controllable Variance = Actual FOH - Budgeted FOH (5)
Where the controllable variance within the total factory overhead variance is that portion not
related to changes in volume. In short, it is the actual expenses minus the budgeted amount of expenses
for the standard number of units allowed. Given the sufficient data for factory overhead expenses
results for the following:

*Note that the given budgeted factory overhead expense was divided by the number of months
in a year, since the actual costs to be compared were only incurred for a month
 Hence, the factory overhead controllable variance resulted to $1, 565 unfavorable variance.

A manufacturing company such as Karenville Corporation that manufactures and sells products

is expected to have responsible and compliant department managers, which in this case are Mr. McGee

and Ms. Gibson. Based from the report provided by Karenville Corporation, Mr. McGee, purchasing

department manager, took the advantage of developing, leading and executing purchasing strategies by

obtaining several quotations from suppliers. He also tracked and reported key functional metrics to

reduce expenses and improve the effectiveness of the items he purchased through purchasing in lots and

taking advantage of cash discounts, and selecting the most economical means of delivery, thereby

crafting negotiation strategies and closing deals with optimal terms, and more importantly meeting the

demands of the production department.

In the case of Ms. Gibson, the commendable job that Mr. McGee did for the company will

surely have a ripple effect on her department because the computations for direct materials price and

quantity variances conclude that albeit the direct materials price variance resulted to unfavorable
variance, the direct materials quantity variance also resulted to an unfavorable variance. It is common

knowledge that the company like Karenville Corporation has a least control over the direct materials

price variance. Yet with the best effort of Mr. McGee in purchasing 5, 200 pounds of plastic at its best

price of $2.10, this gave way for Ms. Gibson in obtaining an unfavorable variance over its direct

materials quantity variance and solving the conflict between prices and quantity variances.
 KARENVILLE CORPORATION
Factory Overhead Cost Variance Report- Manufacturing Department
For the month ended November 30, 2018
 In Karenville Corporation’s case, wherein the company has various problems involving the

classification of labor hours, it can be alleviated by first identifying the significant cost drivers in their

business operation. The labor hours worked seemed to be major cost driver that the company utilizes to

assign overhead costs to the number of units produced than machine hours worked. The task that Mr.

Lancaster must do is to reclassify and restate the labor hours involved in the hands-on production of

goods and services that are considered to be direct labor and all other labor is, by default, classified as

indirect labor. This is done by making a daily department list of labor hours that are classified as direct

and indirect and update its records from time to time.

In addition, the company must deliberately identify and label the labor hours according to the

cost driver in the cost of an activity. Color coding, to distinguish between direct labor hours and indirect

labor hours, is one of the suggestions that Mr. Lancaster may implement in the timekeeping function of

the company. In this regard, misclassification of labor hours will now be diminished. The key for the

consistency of this practice is to transparently disclose the necessary information upon the occurrence

of such overhead costs and account such costs in the designated classification (direct and indirect)

accordingly.

Another solution in classification of labor hours is to allocate an official day for indirect labor

hours every week. The timekeeping function manager has the duty and responsibility to assess the cost

accumulation of factory overhead, correct any misstatement of cost incurrence, and adjust any

erroneous journalization of entries in the records of the company. Moreover, the company can improve

their cost accounting system through restructuring their accounting practice and practicing significant

accounting ethics relevance and faithful representation of financial information.

C. Conclusion

Overall, Karenville Corporation is a manufacturing and retail business that practices standard

cost system to be utilized as an aid in planning and controlling their operations. The company has two

major departments, namely purchasing and production, that plays a vital role in determining the price at

which materials and supplies are purchased and quantities at which materials are used to make products.

However, the need to perform the timekeeping function created a debacle in the course of business of

the company. Ms. Gibson, who is assigned as manager of the production department, also does the

timekeeping function. Accordingly, she deliberately misclassified labor hours to guarantee that only one

of the two labor variances is unfavorable. This created the illusion that the company is operating at an

income without knowing that, in the long-run, it would create a major upheaval in its business

condition; and eventually leading to the downfall of the company.

D. Recommendation

The group then recommends that Karenville Corporation must hire a manager or supervisor in

the timekeeping function in order to address the need for a lack of manpower of that department. This

would entail an additional cost on the part of the company because of salaries and wages that it would

be obliged to provide to its personnel and workers, but it would lessen the workload of Ms. Gibson and

concentrate more on her department needs. More importantly, it would provide substantial accounting

information on the variance of labor hours should the company hire a timekeeping expert.