Week 6 Assignment - Week 6 PDF

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14-25 Flexible Budgets and the Breakdown of the Total Operating Income Variance Assume that in October 2019 the Schmidt Machinery Company (Exhibit 14.1) manufactured and sold 950 units for $835 each. During this month, the company incurred $475,000 total variable costs and $180,000 total fixed costs. The master (static) budget data for the month are as given in Exhibit 14.1.

Required (Round all your answers to the nearest whole number): 1. Prepare a flexible budget for the production and sale of 950 units. Standard Rate/Unit Units sold and produced Sales Variable Costs

Cost 1000 800000 450000

Cost/uni t

800 450

Flexible Budget @95% Units Sales (95 *800) Variable Cost Contribution Margin Fixed Costs Operating Income

950 760000 427500 332500 150000 182500

2. Compute for October 2019: a. The sales volume variance, in terms of operating income. Indicate whether this variance was favorable (F) or unfavorable (U). a. Sales Volume (Operating Income) = Flexible Budget Operating Income – Master Budget Operating Income 182,500 – 200,000= 17,500 U

b. The sales volume variance, in terms of contribution margin. Indicate whether this variance was favorable (F) or unfavorable (U). Sales Volume (contribution margin) = Flexible Budget Contribution Margin – Master Budget Contribution Margin 332,500 – 350,000 = 17,500 U 3. Compute for October 2019: a. The total flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U). Budget for 950 Units Actual Sales Price/unit

$ 835.00

Actual Budget Units Sales @ 835/Unit Variable Costs Contribution Margin Fixed Costs Operating Income

$ 950.00 $ 793,250.00 $ 475,000.00 $ 318,250.00 $ 180,000.00 $ 138,250.00

Total Flexible Budget Variance= Actual Operating Income-Flexible Budget Operating Income 138,250 – 182,500 = 44,250 U b. The total variable cost flexible-budget variance. Indicate whether this variance was favorable (F) or unfavorable (U). Total Variable Cost Flexible-Budget Variance= Actual Variable Cost-Flexible Budget Variable Cost 475,000 – 427,500 = 47,500 U c. The total fixed cost flexible-budget (FB) variance. Indicate whether this variance was favorable (F) or unfavorable (U). Total Fixed Cost flexible Budget variance = Actual Fixed Costs – Flexible Budget Fixed Costs 180,000 – 150,000 = 30,000 U

d. The selling price variance. Indicate whether this variance was favorable (F) or unfavorable (U).

Selling Price Variance = Actual Sales Revenue – Flexible Budget Sales revenue 793,250 – 760,000 = 33,250 F

14-26 Direct Materials and Direct Labor Variances Assume that Schmidt Machinery Company had the standard costs reflected in Exhibit 14.5. In a given month, the company used 3,450 pounds of aluminum to manufacture 920 units. The company paid $28.50 per pound during the month to purchase aluminum. At the beginning of he month, the company had 50 pounds of aluminum on hand. At the end of the month, the company had only 30 pounds of aluminum in its warehouse. Schmidt used 4,200 direct labor hours during the month, at an average cost of $41.50 per hour.

Required Compute for the month the following variances, all rounded to the nearest whole dollar: 1. The purchase-price variance for aluminum. Indicate whether this variance is favorable (F) or unfavorable (U). Purchase Price variance = (Actual Price – Standard Price) x actual quantity (28.50-25) x 3450 lbs = 12075 U 2. The usage variance for aluminum. Indicate whether this variance is favorable (F) or unfavorable (U). Usage Variance = (Actual Quantity – Standard Quantity) x Standard Price ((920x4) -3450) x 25 = 5750 F 3. The direct labor rate variance. Indicate whether this variance is favorable (F) or unfavorable (U). Direct Labor Rate Variance = (Actual Rate – Standard Rate)X actual hours (41.50-40)x4200 = 6300 F 4. The direct labor efficiency variance. Indicate whether this variance is favorable (F) or unfavorable (U). Direct Labor Efficiency Variance = (Standard Hours – Actual Hours) x Standard Rate ((920 x 5) – (4200) x 40 = 16,000F 14-28 Generating a Flexible Budget; Spreadsheet Application Crane Corporation’s master (static) budget for the year is shown below:

Required Output

55000 $ 1,705,000.00

Sales revenue @31/unit Cost of Goods Sold: Direct material @ 2.80 Direct Labor @ 7.50 Variable Overhead (40% direct labor)

$ 154,000.00 $ 412,500.00 $ 165,000.00

Gross Profit Selling Expenses

Rent Insurance General Expenses: Salaries Rent Depreciation Operating Income

$ 182,000.00 $ 487,500.00 $ 195,000.00 $ 731,500.00 $ 973,500.00

Total COGS

Commission @ 9%

65000 $ 2,015,000.00

$ 864,500.00 $ 1,150,500.00

$ 153,450.00 $ 40,000.00 $ 30,000.00

$ 181,350.00 $ 40,000.00 $ 30,000.00

$ 92,000.00 $ 77,000.00 $ 50,000.00

$ 92,000.00 $ 77,000.00 $ 50,000.00 $

$

531,050.00

680,150.00

1. During the year, the company manufactured and sold 55,000 units of product. Prepare an Excel spreadsheet that contains a flexible budget for this level of output. Round all budget figures to nearest whole dollar. See above 2. Now suppose that the actual level of output was 65,000 units. Rerun your spreadsheet to generate a flexible budget for this output level. Round all budget figures to the nearest whole dollar. See above 3. Of what relevance is the notion of the “relevant range” when preparing pro forma budgets or a flexible budget for control purposes? Relevant ranges are important because costs and revenues are never predicted @ 100%. A relevant range allows management to make decisions based on different output targets.

15-24 Flexible Overhead Budgets for Control Johnny Lee Inc. produces a line of small gasolinepowered engines that can be used in a variety of residential machines, ranging from different types of lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basic product line consists of three different models, each meant to fill the needs of a different market. Assume you are the cost accountant for this company and that you have been asked by the owner of the company to construct a flexible budget for factory overhead costs, which seem to be growing faster than revenues. Currently, the company uses machine hours (MHs) as the basis for assigning both variable and fixed factory overhead costs to products. Within the relevant range of output, you determine that the following fixed factory overhead costs per month should occur: engineering support, $15,000; insurance on the manufacturing facility, $5,000; property taxes on the manufacturing facility, $12,000; depreciation on manufacturing equipment, $13,800; and indirect labor costs of supervisory salaries, $14,800, setup labor, $2,400, and materials handling, $2,500. Variable factory overhead costs are budgeted at $21.00 per machine hour, as follows: electricity, $8.00; indirect materials for Material A of $1.00 and for Material B of $4.00; indirect labor—maintenance, $6.00; and production-related supplies, $2.00. Required 1. Prepare a flexible budget for Johnny Lee for each of the following monthly levels of machine hours: (a) 4,000, (b) 5,000, and (c) 6,000. (Hint: Provide in your response a separate line for each of the factory overhead costs for the company.) Flexible budget variance: Machine Hours Standard overhead application rates: Budgeted fixed ovehead Engineering support Insurance Property taxes Depreciation

4000

15000 5000 12000 13800

5000

6000

Supervisory salaries Setup labor Materials handling Total Fixed Overhead

14800 2400 2500 65500

Variable overhead Electricity Material A Material B Indirect Labor-Maintenance Supplies-Production Total Variable Overhead Total Manufacturing Overhead

8 1 4 6 2 21

65500

65500

65500

32000 4000 16000 24000 8000 84000 149500

40000 5000 20000 30000 10000 105000 170500

48000 6000 24000 36000 12000 126000 191500

2. Generate an equation to represent, within the relevant range, the factory overhead costs per month for Johnny Lee (state the variable overhead cost rate to 2 decimal places). Use this equation to estimate monthly total overhead cost for machine hours of 3,000 to 6,000, in increments of 500. Total= (Variable Overhead per machine hour x machine hours) + fixed manufacturing overhead Variable Overhead Total Fixed Overhead Machine Hours 3000 3500 4000 4500 5000 5500 6000

$ 21.00 $ 65,500.00 Variable Overhead $ 63,000.00 $ 73,500.00 $ 84,000.00 $ 94,500.00 $ 105,000.00 $ 115,500.00 $ 126,000.00

Total Costs $ 128,500.00 $ 139,000.00 $ 149,500.00 $ 160,000.00 $ 170,500.00 $ 181,000.00 $ 191,500.00

3. Use the Chart function in Excel to generate a graphical representation of the monthly factory overhead cost function for Johnny Lee over the range of 3,000-6,000 machine hours per month.

Total Costs $250,000.00

$200,000.00

$150,000.00

$100,000.00

$50,000.00

$-

3000

3500

4000

4500

5000

5500

6000

15-51 Standard Cost Variance Analysis and Interpretations Glavine & Co. produces a single product, each unit of which requires three direct labor hours (DLHs). Practical capacity (for setting the factory overhead application rate) is 30,000 DLHs, on an annual basis. The information below pertains to the most recent year:

Required 1. What was the actual number of direct labor hours (DLHs) worked during the year? (Round answer to nearest whole number.) [Hint: Recall from Chapter 14 that the DL Efficiency Variance = SP × (SQ − AQ), where SP = standard labor rate per hour, SQ = standard #of DLHs for output produced, and AQ = actual number of DLHs worked.] Direct Labor Efficiency Variance = 10000U (SH-AH) * SR = -10000 9500*3 – AH * 20 = -10000 AH = 29,000 hours 2. What was the standard variable overhead rate per DLH during the year? (Round answer to 2 decimal places, e.g., $13.231 = $13.23.) [Hint: Recall that the Variable Overhead Efficiency Variance = SP × (SQ − AQ), where [assuming variable overhead is applied on the basis of DLHs] SP = standard variable overhead cost per DLH, SQ = standard #of DLHs for output produced, and AQ = actual #of DLHs worked during the period.] Variable overhead Efficiency Variance = 5000U (SH-AH)*SR = -5000 (28500-29000)*SR = -5000 Variable overhead rate = $10 per dh

3. What was the total overhead application rate per direct labor hour (DLH) during the year? (Round answer to 2 decimal places, e.g., $15.679 = $15.68.) Fixed Overhead Application = Fixed Manufacturing Overhead/DLH $600,000/30,000 = $ 20/DLH Total Overhead = $20(Fixed) + $10(Variable) = $30 / DLH 4. What was the total actual overhead cost incurred during the year, rounded to the nearest whole dollar? Fixed Overhead = SH*SR = (9500*3)*20 = 570,000 Fixed overhead variance = Fixed Overhead applied-budget fixed overhead = 570000-60000 = $30,000 U Total overhead spending variance = 50,000 F – 30,000 U = 80,000F Budgeted total overhead = (9500*3*10) + 600,000 -80,000 = $805,000 5. What was the Production Volume Variance (to the nearest whole dollar) for the year? Was this variance favorable (F) or unfavorable (U)? Fixed overhead Applied = SH*SR = (9500*3)*20 = 570,000 Production volume variance = fixed overhead – budgeted fixed overhead = 570,000-600,000 = 30,000 U 6. What was the total Overhead Spending Variance (to the nearest whole dollar) for the year? Was this variance favorable (F) or unfavorable (U)? Total overhead spending variance = Total overhead cost variance – fixed overhead volume variance = 50,000F-30,000U = 80,000F 16-39 Sales Volume, Sales Quantity, and Sales Mix Variances The Greensboro Performing Arts Center (GPAC) has a total capacity of 7,500 seats: 2,000 center seats, 2,500 side seats, and 3,000 balcony seats. The budgeted and actual tickets sold for a Broadway musical show are as follows:

The actual ticket prices were the same as those budgeted. Once a show has been booked, the total cost does not vary with the total attendance. Required Compute the following for the show (calculate sales mix percentage and unit contribution margin to 4 decimal places and round the variances to the nearest whole dollar): 1. The budgeted and actual sales mix percentages for different types of seats. Seats

Availabl e

Budgeted %

Occupanc y

Price

Budgeted Amount

Actual %

Actual Occupancy

Actual Amount

Center

2000

90

1800

70

126000

95

1900

133000

Side Balcon y

2500

80

2000

60

120000

85

2125

127500

3000

85

2550

50

127500

75

2250

112500

635 0

373500

6275

373000

2. The budgeted average contribution margin per seat. Assume the ticket price is also the contribution margin. Total Budget Contribution = 373,500 Total Budget occupancy = 6350 Budgeted contribution Margin / Seat = 373,500/6350 = $58.8189/seat

3. The total sales quantity variance and the total sales mix variance. Total sales mix variance = Total sales volume variance + total sales occupancy variance 500 U + 75 U = 575 U Total Sales Quantity Variance Center – 1900-1800 = 100F Side-2125-2000=125F Balcony = 2250-2550 = 300U Total Sales Variance = 75U

4. The total sales volume variance. Center- 133000-126000 = 7000F Side- 127500-120000 = 7500F Balcony 112500-127500 = 15000U Total Sales volume Variance = 500U 16-40 Sales Variances; Quarter to Quarter Hathaway Products Inc. produces an innovative lighting system used in restaurants and high-end retail stores to provide a pleasing, warm atmosphere. Hathaway produces two versions of the product, called Starlight and Moonlight. Sales management at Hathaway wants to complete a sales performance analysis and has collected the following information for the first quarter (Qtr. 1) and the second quarter (Qtr. 2) of the current fiscal year:

Required 1. Prepare a flexible-budget contribution income statement for Qtr. 2, showing the Qtr. 2 results, the Qtr. 1 results, and the flexible budget. Use Exhibit 16.15 as a guide.

Quarter 2

Sales Price Variance

Flexible Budget

Sales Volume Variance

Quarter 1

Gross Sales Starlight

$

84,000.00

$

$ 84,000.00

$

(3,500.00)

$

87,500.00

Moonlight

$

816,000.00

$

(48,000.00)

-

$ 864,000.00

$

189,000.00

$

675,000.00

Total Sales

$

900,000.00

$

(48,000.00)

$ 948,000.00

$

185,500.00

$

762,500.00

Starlight

$

31,200.00

$

$ 31,200.00

$

(1,300.00)

$

32,500.00

Moonlight

$

355,200.00

$

(48,000.00)

$ 403,200.00

$

88,200.00

$

315,000.00

Total Contribution

$

386,400.00

$

(48,000.00)

$ 434,400.00

$

86,900.00

$

347,500.00

Less: Fixed Costs

$

150,000.00

$

150,000.00

Operating income

$

236,400.00

$

197,500.00

Contribution by product: -

2. Calculate the sales volume variance for each product based both on sales dollars and contribution margin. See table above 3. Determine the sales mix variance, and the sales quantity variance for each product, based on contribution margin. Sales Mix Variance = (Actual Sales-Budget Sales) x Actual Quantity x Budgeted Contribution Starlight: (0.2-0.25) x 12000 x (35-22) = $7,800 U Moonlight: (0.8-0.75) x 12000 x (90-48) = $25,200F

Sales Quantity Variance = (Actual Quantity – Budgeted Quantity) x Budget Sales Mix x Budgeted Contribution

Starlight: (12000-10000) x 0.25x (35-22) = $6,500F Moonlight: (12000-10000)x 0.75x (90-48) = $63,000 F...