Introduction
The case of the Berkshire Toy Company illustrates the "behind the scenes" causes of a net loss despite record sales. We approached this problem from each departmental perspective and, where appropriate, attempted to reconcile the cause-and-effect relationship between the Marketing, Purchasing and Production areas.
Production
Berkshire Toy Company faced a number of labor and manufacturing setbacks during FY98 that led to poor overall production. Of particular interest are the direct labor variances for the fiscal period. Berkshire had a net labor rate variance (LRV) of $76,329 (see Table 3) which can be attributed to the "last minute" hiring of several replacement employees at a rate higher than the budgeted average of $8.00 per hour. In fact, the overall average labor rate was $8.17 per hour. The net labor efficiency variance (LEV) was even more startling at $903,976 (see Table 4A). This difference in quantity of labor hours contributed heavily to Berkshire's 36% overage in budgeted (static) direct labor. This gross difference in direct labor hours was reflected by increased production time on all four parts of unit production, increasing overall production time (on average) by nearly 15%. This difference was most likely the result of hiring less skilled replacement workers but also due (in part) to the necessity of in-house accessory production to meet increased sales demand. It is important to note that an increase in direct labor hours was unavoidable given the increased order volume generated by the Marketing department.
Labor and workforce issues were not the only problems faced by the Production department. For FY98, Berkshire's net material usage variance (MUV) was $288,066 (see Table 2A). Unforeseeable circumstances such as a ...