Danshui Plant

DANSHUI PLANT NO.2

Background: Danshui was a contract manufacturer assembling electronic products in southern China. There were many manufacturers like Danshui in China assembling parts for the companies wishing to save labor costs. Apple contracted with Danshui to assemble 2.4 million iPhones in Plant No.2 with the expected high demand of this product in 2010. As a profit center, Plant No.2 was credited for each iPhone produced and shipped. The process of assembling was complex and required almost entirely based on handwork for more than 100 components. Danshui was confident of its workers to adapt the new tasks and extra workers could be hired and trained as needed. The iPhone 4 was the most successful product of Apple as more than 1.7 million units were sold in the first 3 days they were launched. However, the plant was operating at a loss because of the underproduction. Consequently, the controller of this plant considered preparing the new budget showing using a flexible budget system to identify what went wrong in their operations that contribute to the performance problems.

Problems and issues: The plant has 2 big problems in terms of budgeting system and labor force. Firstly, they were in unfavorable performance by using standard budgeting system. They were unable to meet the Apple contract, which was shortage 10% from the 200,000 targeted units, resulting in the loss of $672,000 rather than the profit of $100,000. Actually, the plant was using the standard costing system to evaluate their performance, but it was not appropriate because the comparative quantities were different (180,000 and 200,000 units). That means the total standard costs would be overstated compared to the total actual costs. Consequently, the activities under the standard costing system were all overstated efficiency, leading to the unfavorable net income. Secondly, the lack of qualified labor force also contributed to this problem. As the assembly of iPhone 4 was extremely complex,...