Magic Cakes Co. produces birthday cakes, biscuits, and a variety of quality confectionery. The
company recently installed a flexible manufacturing system for the production of its range of quality
confectionery. The company was experiencing serious problems in the production of confectionery
products that were affecting the quality of the final products and the capacity to deliver on time to
its customer. The problems were due to several major breakdowns in the company’s old production
machinery. The installation of the new production system was not anticipated when the current
year’s budget and cost structure were developed.
The new system was expensive, but management expects it to cut the labour time required by a
substantial amount. Management also expects the new equipment to allow a reduction in direct
material waste. On the negative side, the new flexible manufacturing system requires a more highly
skilled labour force to operate it than it was needed for the company’s old equipment.
The following cost variance report was prepared for October, the first full month after the equipment
was installed: