Things Are Not Going Well for the Widget Industry This

Essay

Things are not going well for the widget industry this year. The well-known cyclical nature of widget sales is in a downturn and your plant has been ordered to cut costs by its American parent corporation. The plant manager explains that he has shown the lead by negotiating a $1.50 hourly wage decrease with the production workers, based on a formula that pegs a $1.50 per hour wage increase/decrease to sales volume, and since sales are down this year, so are hourly wage costs. In the quarterly management meeting, the sales manager complained that sales could have been higher, but that somehow costs had increased, at least that's what the reports out of your office in management accounting, indicated. The Purchasing manager assured everyone that she was able to obtain raw materials at the same price as last year, and unfortunately, you as the management accountant, were not in attendance at the meeting. Your assistant, a new employee attended in your place, and promised at the meeting to redo the reports and find the errors. Your assistant has come to you as he cannot find any errors in the reports. Consequently, the plant manager wants you to redo the reports, find the error reports produced by your department for the last quarter and to explain to your boss, the plant manager, why average costs have increased.
Required:
Assuming there are no errors in the cost reports, explain to the plant manager how direct labour costs could be decreased and direct materials costs could be the same as last year, and yet the selling price cannot be lowered without sacrificing net income for the plant.