Wingo’s Widgets is a large privately held company headquartered
in Lincoln, Nebraska that provides specialty widgets to companies
all over the world. The company was founded in 1960 by Wingo
Tillman as a family business employing 5 employees. As of yearend
2020 the company employs over 850 employees. The current CEO of the
company is Charles Tillman, Wingo’s grandson.
Relevant Personnel
Tonya Griff was hired by Charles Tillman in 2015 as a
consultant. The company had been experiencing a period of growing
pains leading to order shortfalls and lost revenues. The company
lacked the capacity to keep up with thriving demand. Charles was
impressed with Tonya’s vision to decentralize production to five
strategically placed plants near the company’s headquarters. Each
of the five locations were in similar working-class localities.
This would allow the company to expand operations and enhance
distribution channels. All five plants were operational by the end
of 2017. Tonya was promoted to AVP of Production and was put in
charge of managing the plants. Charles gave Tonya permission to
hire additional personnel as needed to support operations.
For several months Tonya tried to manage all five plants
herself, but quickly realized she was in over her head. It was too
difficult managing the day-to-day operation of the five plants when
she was physically located at headquarters. In April of 2018 Tonya
hired five production managers to oversee each of the five
locations. As shown in Figure 1, Gregg, Sarah, Lisa, Armando, and
Isiah each report directly to Tonya. Labor Standards and
Expectations While Tonya was skilled at growing the business,
dealing with human resource and compensation related items were not
in her wheelhouse. She confided in a few of her mentors in similar
industries for advice on how to manage her new direct reports. It
was recommended that she construct standard labor efficiency and
standard labor rates to serve as overall guidance for the plant
managers. These standards would serve as benchmarks to help guide
each of the managers. Tonya recommended that each manager follow
the standards developed, however she allowed each of the managers
the flexibility to deviate from standards as they deemed
appropriate. Hitting the production target was all that Tonya cared
about. For 2020, Tonya informed each manager that they were
responsible for processing 20,000 widgets per month (240,000 for
the year). Based on the standards, the expected labor cost for each
plant would be $480,000 for the year. See Table 1 for the standards
developed by Tonya and her calculation of total labor expense.
Bonus Allocations
Wingo’s Widgets had a profitable 2020. In January of 2021,
Charles met with Tonya and informed her that there was $50,000
available in the bonus pool specifically for the five production
managers. Tonya was responsible for allocating the bonuses as she
saw fit. Tonya recalled that each manager successfully met the goal
of processing the 240,000 units requested, so she deemed it fair to
reward each of the managers equally. She also looked at the
spending variance report and noted that direct labor was slightly a
favorable variance. In her mind, each manager must have been on par
with the others, and it wasn’t worth digging into given the small
variance that existed. Tonya sent an email to the managers to
inform them they would each be getting a check for $10,000. See
Table 2 for the Spending Variance report.
The next morning, Tonya got a call from Armando, the plant
manager of Plant 4. After exchanging pleasantries, Armando shared
with Tonya that he had some concerns about his bonus. The
conversation went as follows:
Armando: Tonya, I was pleasantly surprised that we would be
receiving a bonus this year. That said, I was a little surprised
that the money was equally split amongst the five of us. I don’t
want to come across as ungrateful, but would you be able to provide
some detail as to how you landed on the equal split?
Tonya: You and the other plant managers worked really hard
throughout the year. The bonus was earned and I’m grateful to have
you all on my team! I don’t see your question as being ungrateful.
You know that I try to be as transparent as possible with you.
Regarding the allocation, I felt that since each of you met the
overall output target, and the overall direct labor variance was
slightly favorable, all five of you were performing on par with
your peers.
Armando: Tonya, I can appreciate what you said about hitting
output targets, and I’m glad each of us were able to do that!
However, I see a big issue with how you interpretated the favorable
labor variance. The report that you are using is an aggregate of
all five locations. It’s extremely likely in this case that a
favorable variance by one location is hiding the unfavorable
variance by another.
Tonya: Hmm… what exactly do you mean? Can you be more specific?
Armando: Well, I made changes this year in my plant. Rather than
using the standard hourly wage rate of $10, I am only paying my
employees $9 per hour. This $1 decrease from the standard had to
have a positive impact on my plants total labor cost, and I believe
is responsible for the positive variance you are seeing. In fact,
the variance should probably be much higher… which means there are
probably issues at other plants that you are missing. For this
reason, I think my bonus should be higher than my peers. I found a
way to save the company money!
Tonya: Armando, I didn’t realize you are paying your employees
less than the $10 per hour standard rate and I can see how that
might impact the total labor cost associated with your plant. I
think this warrants a deeper dive into the numbers to better
understand performance across each of the plants. Thank you for
bringing this to my attention. I’m going to reach out to one of the
financial analysts to do a deeper dive into the labor variance.
Tonya and Armando ended the call. Tonya called Chip Witherspoon,
one of the company’s leading financial analysts, and explained to
him the situation. Tonya provided Chip with a full dataset of all
of the payroll and relevant information needed for him to perform
his analysis.
- Introduction Wingo S Widgets Is A Large Privately Held Company Headquartered In Lincoln Nebraska That Provides Specialt 1 (143.18 KiB) Viewed 36 times
and spending variances do you believe warrant further investigation
by Tim? What criteria did you use to come to that
decision?
2. Use the information in the included excel file and
the information provided by Tonya to calculate the overall labor
spending variance for the company.
Labor Spending Variance =
3. Additionally, you should also calculate the labor
rate and labor efficiency variances.
Labor Rate =
Labor Efficiency Variance=
6. What are some advantages and disadvantages of using a
spending variance as a mechanism for performance
evaluation?
7. Describe the ethical issues present in the case. What
ethical issues may come to light if the bonus is paid entirely
based on the overall labor spending variance? What about if it’s
based on the labor rate variance alone? How might management
overcome the potential for people to act
unethically?
8. Based on your thorough analysis of labor, what
recommendations do you have for management surrounding the
distribution of the bonuses? Summarize your conclusions in a
memorandum addressed to Tim. In the memo, you must clearly
communicate your recommendation, while considering the advantages
and disadvantages of your recommendation and any ethical
implications.
9. As a result of investigating the direct labor rate
and efficiency variances for ABC Corp, what has this exercise
taught you about the importance of responsibility accounting in
budgeting and variance analysis?
Figure 1: Org. Chart Gregg G. Production Manager Plant 1 Table 1: Sarah S. Production Manager Plant 2 Tonya Griff AVP Operations Lisa L. Production Manager Plant 3 $10 Standards: Standard Labor Rate per Hour Standard Hours Per Widget 0.2 Expectations: 20,000 Widgets processed per month by each location Calculation: Widgets Processed (20K x 12 months) 240,000 Standard Hours Per Widget 0.2 Total Standard Hours 48,000 Standard Labor Rate 10 Total Standard Labor Cost per Location 480,000 Locations 5 Total Standard Labor Cost 2,400,000 Armando A. Production Manager Plant 4 Isiah I. Production Manager Plant 5
Table 2: Wingo's Widgets Production Department Spending Variances For Year Ended December 31, 2020 (In thousands) Actual Results Flexible Spending Budget Variances* Items Processed: 1,200 1,200 Expenses: Direct Materials 3,489 3,450 (39) U Direct Labor 2,389 2,400 11 F Overhead 1,545 1,600 55 F Electricity 47 55 8 F Rent 350 325 (25) U Insurance 80 78 (2) U Misc 14 17 3 F Total Expenses: 7,914 7,925 11 F *The expense variances are labeled favorable (unfavorable) when the actual expense is less than (greater than) the