Accounting Principles Solution Chapter (24) PDF

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CHAPTER 24Budgetary Control and Responsibility AccountingASSIGNMENT CLASSIFICATION TABLELearning Objectives Do It! ExercisesA ProblemsB Problems Describe budgetary control and static budget reports. 1, 2, 8,4, 9 3A 3B Prepare flexible budget reports. 1, 2 1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 121A, 2A, 3A...

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CHAPTER 24 Budgetary Control and Responsibility Accounting ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Do It!

Exercises

A Problems

B Problems

1, 2, 8,4, 9

3A

3B

1.

Describe budgetary control and static budget reports.

2.

Prepare flexible budget reports.

1, 2

1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12

1A, 2A, 3A

1B, 2B, 3B

3.

Apply responsibility accounting and to cost and profit centers.

3

10, 11, 13, 14, 15, 16

4A, 6A

4B, 6B

4.

Evaluate performance in investment centers.

4

16, 17, 18, 19

5A

5B

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Simple

20–30

Moderate

30–40

Simple

20–30

1A

Prepare flexible budget and budget report for manufacturing overhead.

2A

Prepare flexible budget, budget report, and graph for manufacturing overhead.

3A

State total budgeted cost formula, and prepare flexible budget reports for two time periods.

4A

Prepare responsibility report for a profit center.

Moderate

20–30

5A

Prepare responsibility report for an investment center, and compute ROI.

Moderate

40–50

6A

Prepare reports for cost centers under responsibility accounting, and comment on performance of managers.

Moderate

40–50

24-2

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Learning Objective

Knowledge Comprehension

Application

1. Describe budgetary control E24-1 and static budget reports.

E24-2 E24-9

2. Prepare flexible budget reports.

DI24-1 DI24-2 E24-3 E24-5

E24-1

E24-7 E24-9 E24-10 E24-11 E24-12

Analysis

Synthesis

Evaluation

P24-3A

E24-8

E24-4 E24-6 P24-1A P24-3A P24-1B

BE24-3 E24-8 P24-2A

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3. Describe responsibility accounting and apply it to cost centres and profit centres.

DI24-3 E24-10 E24-11 E24-13 E24-16

P24-6A E24-14 E24-15 P24-4A

4. Evaluate performance in investment centers.

DI24-4

E24-16 E24-19 E24-17 E24-18

Broadening Your Perspective

BYP24-4

BYP24-3 BYP24-5 BYP24-6

P24-5A

BYP24-1 BYP24-2

BYP24-7 BYP24-8

BLOOM’S TAXONOMY TABLE

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Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

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24-3

SOLUTIONS FOR DO IT! EXERCISES DO IT! 24-1 Difference Favorable F Unfavorable U

Budget

Actual

Variable costs Direct materials ($7) Direct labor ($13) Overhead ($18) Total variable costs

$ 42,000 78,000 108,000 228,000

$ 38,850 76,440 116,640 231,930

$3,150 F 1,560 F 8,640 U 3,930 U

Fixed costs Depreciation* Supervision** Total fixed costs Total costs

8,000 3,800 11,800 $239,800

8,000 4,000 12,000 $243,930

0 200 U 200 U $4,130 U

Units produced

The static budget indicates that actual variable costs exceeded budgeted amounts by $3,930. Fixed costs were unfavorable by $200. The static budget gives the impression that the company did not control its variable costs. However, the static budget does not give consideration to the fact that the company produced 500 more units than planned. As a consequence, the static budget is not a good tool to evaluate variable costs. It is, however, a good tool to evaluate fixed costs, since those should not vary with changes in production volume. DO IT! 24-2 Using the graph data, fixed costs are $90,000, and variable costs are $5.20 per direct labor hour [($350,000 – $90,000) ÷ 50,000]. Thus, at 65,000 direct labor hours, total budgeted costs are $428,000 [$90,000 + (65,000 X $5.20)].

24-4

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DO IT! 24-3 ROCKIES DIVISION Responsibility Report For the Year Ended December 31, 2017

Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

Budget $2,000,000 800,000 1,200,000 550,000 $ 650,000

Actual $1,890,000 760,000 1,130,000 550,000 $ 580,000

Difference Favorable F Unfavorable U $110,000 U 40,000 F 70,000 U –0– $ 70,000 U

DO IT! 24-4 (a)

Controllable margin for 2017: Sales...................................................... Variable costs........................................ Contribution margin............................. Controllable fixed costs....................... Controllable margin.............................. Return on investment for 2017:

(b)

$500,000 300,000 200,000 75,000 $125,000 $125,000 $625,000

=

20%

Expected return on investment for alternative 1: $125,000* = 25% $500,000 *Controllable margin remains unchanged from (a)

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DO IT! 24-4 (Continued) Controllable margin for alternative 2: Sales ($500,000 + 100,000)............................. Variable costs ($300,000/$500,000 X $600,000).................. Contribution margin........................................ Controllable fixed costs................................. Controllable margin........................................ Expected return on investment for alternative 2:

24-6

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$165,000 $625,000

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$600,000 360,000 240,000 75,000 $165,000 =

26.4%

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SOLUTIONS TO EXERCISES EXERCISE 24-1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

True. False. Budget reports are prepared as frequently as needed. True. True. False. Budgetary control works best when a company has a formalized reporting system. False. The primary recipients of the sales report are the sales manager and top management. True. True. False. Top management’s reaction to unfavorable differences is often influenced by the materiality of the difference. True.

EXERCISE 24-2 (a)

CREDE COMPANY Selling Expense Report For the Quarter Ending March 31

Month

Budget

By Month Actual Difference

January February March

$30,000 $35,000 $40,000

$31,200 $34,525 $46,000

$1,200 U $ 475 F $6,000 U

Budget $ 30,000 $ 65,000 $105,000

Year-to-Date Actual Difference $ 31,200 $ 65,725 $111,725

$1,200 U $ 725 U $6,725 U

(b)

The purpose of the Selling Expense Report is to help management control selling expenses. The primary recipient is the sales manager.

(c)

Most likely, when management scrutinized the results for January and February, they would determine that the difference was insignificant (4% in January and 1.4% in February), and require no action. When the March results are examined, however, the fact that the difference is 15% of budget would probably cause management to investigate further. As a result of their investigation, management would either

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24-7

take corrective action or modify the amounts of budgeted selling expense for future months to reflect changing conditions. EXERCISE 24-3 MYERS COMPANY Monthly Manufacturing Overhead Flexible Budget For the Year 2017 Activity level Direct labor hours Variable costs Indirect labor ($1) Indirect materials ($.70) Utilities ($.40) Total variable costs ($2.10) Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

7,000

8,000

9,000

10,000

$ 7,000 4,900 2,800 14,700

$ 8,000 5,600 3,200 16,800

$ 9,000 6,300 3,600 18,900

$10,000 7,000 4,000 21,000

4,000 1,200 800 6,000 $20,700

4,000 1,200 800 6,000 $22,800

4,000 1,200 800 6,000 $24,900

4,000 1,200 800 6,000 $27,000

EXERCISE 24-4 (a)

MYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2017

Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Utilities Total variable costs Fixed costs Supervision Depreciation Property taxes

24-8

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Budget at 9,000 DLH

Actual Costs 9,000 DLH

Difference Favorable F Unfavorable U

$ 9,000 6,300 3,600 18,900

$ 8,800 5,800 3,200 17,800

$200 F 500 F 400 F 1,100 F

4,000 1,200 800

4,000 1,200 800

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— — —

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Total fixed costs Total costs

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6,000 $24,900

6,000 $23,800

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— $1,100 F

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24-9

EXERCISE 24-4 (Continued) (b)

MYERS COMPANY Manufacturing Overhead Flexible Budget Report For the Month Ended July 31, 2017

Direct labor hours (DLH) Variable costs Indirect labor ($1.00) Indirect materials ($0.70) Utilities ($0.40) Total variable costs ($2.10) Fixed costs Supervision Depreciation Property taxes Total fixed costs Total costs

Budget at 8,500 DLH

Actual Costs 8,500 DLH

Difference Favorable F Unfavorable U

$ 8,500 5,950 3,400

$ 8,800 5,800 3,200

$300 U 150 F 200 F

17,850

17,800

50 F

4,000 1,200 800 6,000 $23,850

4,000 1,200 800 6,000 $23,800

— — — — $50 F

(c) In case (a) the performance for the month was satisfactory. In case (b) management may need to determine the causes of the differences for indirect labor and utilities, or since the differences are small, 3.5% of budgeted cost for indirect labor and 5.9% for utilities, they might be considered immaterial.

24-10

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EXERCISE 24-5 FALLON COMPANY Monthly Selling Expense Flexible Budget For the Year 2017 Activity level Sales Variable expenses Sales commissions (6%) Advertising (4%) Traveling (3%) Delivery (2%) Total variable expenses (15%) Fixed expenses Sales salaries Depreciation Insurance Total fixed expenses Total expenses

$170,000

$180,000

$190,000

$200,000

$ 10,200 6,800 5,100 3,400

$ 10,800 7,200 5,400 3,600

$ 11,400 7,600 5,700 3,800

$ 12,000 8,000 6,000 4,000

25,500

27,000

28,500

30,000

35,000 7,000 1,000 43,000 $ 68,500

35,000 7,000 1,000 43,000 $ 70,000

35,000 7,000 1,000 43,000 $ 71,500

35,000 7,000 1,000 43,000 $ 73,000

EXERCISE 24-6 (a)

FALLON COMPANY Selling Expense Flexible Budget Report For the Month Ended March 31, 2017

Sales Variable expenses Sales commissions Advertising Travel Delivery Total variable expenses Fixed expenses Sales salaries Depreciation Insurance Total fixed expenses Total expenses

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Budget $170,000

Actual $170,000

Difference Favorable F Unfavorable U

$ 10,200 6,800 5,100 3,400 25,500

$ 11,000 6,900 5,100 3,450 26,450

$800 U 100 U 0U 50 U 950 U

35,000 7,000 1,000 43,000 $ 68,500

35,000 7,000 1,000 43,000 $ 69,450

0U 0U 0U 0U $950 U

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EXERCISE 24-6 (Continued) (b)

FALLON COMPANY Selling Expense Flexible Budget Report For the Month Ended March 31, 2017

Sales Variable expenses Sales commissions Advertising Travel Delivery Total variable expenses Fixed costs Sales salaries Depreciation Insurance Total fixed expenses Total expenses

Budget $180,000

Actual $180,000

Difference Favorable F Unfavorable U

$ 10,800 7,200 5,400 3,600

$ 11,000 6,900 5,100 3,450

$200 U 300 F 300 F 150 F

27,000

26,450

550 F

35,000 7,000 1,000 43,000 $ 70,000

35,000 7,000 1,000 43,000 $ 69,450

0U 0U 0U 0U $550 F

(c) Flexible budgets are essential in evaluating a manager’s performance in controlling variable expenses because the budget allowance varies directly with changes in the activity index. At $170,000 of sales, the manager was over budget (unfavorable) by $950 but at $180,000 of sales, the manager was under budget (favorable) by $550.

24-12

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EXERCISE 24-7 (a)

APPLIANCE POSSIBLE INC. Flexible Production Cost Budget Activity level Production levels Variable costs: Manufacturing ($6) Administrative ($4) Selling ($3) Total variable costs ($13) Fixed costs: Manufacturing Administrative Total fixed costs Total costs

90,000

100,000

110,000

$ 540,000 360,000 270,000 1,170,000

$ 600,000 400,000 300,000 1,300,000

$ 660,000 440,000 330,000 1,430,000

160,000 80,000 240,000 $1,410,000

160,000 80,000 240,000 $1,540,000

160,000 80,000 240,000 $1,670,000

(b) Let (X) represent number of units Sales price(X) = Variable costs(X) + Fixed costs + Profit Sales price(X) = Variable costs(X) + $240,000 + $60,000 (Sales price – Variable costs)(X) = $300,000 ($16 – $13)(X) = $300,000 $3(X) = $300,000 X = 100,000 units to be sold

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24-13

EXERCISE 24-8 (a)

RENSING GROOMERS Flexible Budget Activity level Direct labor hours Variable costs: Grooming supplies ($5) Direct labor ($14) Overhead ($1) Total variable costs ($20) Fixed costs: Overhead Total fixed costs Total costs

550

600

700

$ 2,750 7,700 550 11,000

$ 3,000 8,400 600 12,000

$ 3,500 9,800 700 14,000

10,000 10,000 $21,000

10,000 10,000 $22,000

10,000 10,000 $24,000

(b) A flexible budget presents expected costs at various levels of production volume, not just one, so that comparisons can be made between actual costs and budgeted costs at the same volume. This allows the person to determine whether a difference between the actual results and budget is due to better or worse cost control than expected or due to achieving a different volume than that upon which the fixed budget was predicated. (c) $21,000 ÷ 550 = $38.18 $22,000 ÷ 600 = $36.67 $24,000 ÷ 700 = $34.29 (d) Cost formula is $10,000 + $20(X), where (X) = direct labor hours Total cost = $10,000 + ($20 X 650) = $23,000. Number of clients = 650 hrs ÷ 1.30 hrs/client = 500 Cost per client = $23,000 ÷ 500 = $46.00 Charge per client = $46.00 X 1.40 = $64.40

24-14

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EXERCISE 24-9 (a)

SORIA COMPANY Selling Expense Flexible Budget Report Clothing Department For the Month Ended October 31, 2017

Sales in units Variable expenses Sales commissions ($.30) Advertising expense ($.09) Travel expense ($.45) Free samples ($.20) Total variable expenses ($1.04) Fixed expenses Rent Sales salaries Office salaries Depreciation—sale staff autos Total fixed expenses Total expenses

Budget 10,000

Actual 10,000

Difference Favorable F Unfavorable U

$ 3,000 900 4,500 2,000

$ 2,600 850 4,100 1,400

$ 400 F 50 F 400 F 600 F

10,400

8,950

1,450 F

1,500 1,200 800 500 4,000 $14,400

1,500 1,200 800 500 4,000 $12,950

0U 0U 0U 0 0U $1,450 F

(b) No, Joe should not have been reprimanded. As shown in the flexible budget report, variable costs were $1,450 below budget.

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EXERCISE 24-10 (a)

CHUBBS INC. Manufacturing Overhead Flexible Budget Report For the Quarter Ended March 31, 2017 Difference

Variable costs Indirect materials Indirect labor Utilities Maintenance Total variable costs Fixed costs Supervisory salaries Depreciation Property taxes and insurance Maintenance Total fixed costs Total costs

(b)

Actual

Favorable F Unfavorable U

$12,000 10,000 8,000 6,000 36,000

$13,500 9,500 8,700 5,000 36,700

$1,500 U 500 F 700 U 1,000 F 700 U

36,000 7,000

36,000 7,000

0U 0U

8,000 5,000 56,000 $92,000

8,300 5,000 56,300 $93,000

300 U 0U 300 U $1,000 U

CHUBBS INC. Manufacturing Overhead Responsibility Report For the Quarter Ended March 31, 2017

Controllable Costs Indirect materials Indirect labor Utilities Maintenance* Supervisory salaries

24-16

Budget

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Budget $12,000 10,000 8,000 11,000 36,000 $77,000

Actual $13,500 9,500 8,700 10,000 36,000 $77,700

Difference Favorable F Unfavorable U $1,500 U 500 F 700 U 1,000 F 0U $ 700 U

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*Includes variable and fixed costs

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