The Flexible Budgeting - Essay Example

Cost Control Affiliation with more information about affiliation, research grants, conflict of interest and how to contact. CHAPTER 15 Cost Control EX15.2 flexible Budgeting: Rocky mountain Manufacturing produces a single product. The original budget for November was base on expected production of 35,000 units; actual production for November was 33,250 units. The original budget and actual costs incurred for the manufacturing department follow: Original Budget Actual Costing Direct materials …………………….. $551,250 is $541,500 Direct labor ………………………… 427,000 413,500 Variable overhead ………………….. 217,000 195,250 Fixed overhead ……………………... 170,000 172,500 Total ……………………………. $1,365,250 $1,322,750 Required: Prepare an appropriate performance report for the manufacturing dept. E15‑2. Original Budget Flexed Budget Actual Item (35,000 units) (33,250 units) Cost Variance Direct Materials……… 551,250 523687.5 541500 17812.5 Direct Labor ………… 427000 405650 413500 7850 Variable Overhead…… 217000 206150 195250 -10900 Fixed Overhead……… 170000 161500 172500 11000 Total ………………… 1365250 1296987.5 1322750 25762.5 ______________________________________________________________________ The original budget for 35000 units was $ 1365250 while the flexed budget for 33250 units, which was the actual production, was 1296987.5. The actual costing for 33250 units is shown as $ 1322750. Therefore there is a variance of $ 25762.5 from the flexed budget and the actual cost. Thus the actual cost taken for 33250 units was $ 25762.5 greater than the actual cost incurred for manufacturing 33250 units. ______________________________________________________________________ ______________________________________________________________________ EX 15.4 Performances Reporting and Flexible Budgeting: For the stamping dept. of a manufacturing firm, the standard cost for direct labor is $12 per hour, and the production standard calls for 1,000 stamping per hour. During June, 168 hours were required for actual production of 148,000 stampings. Actual direct labor cost for the stamping department for June was $2,184. Required: a. Complete the following performance report for June : Flexed Budget Actual Budget Variance Direct labor b. Analyze the budget variance by calculating the direct labor efficiency and rate variance for June. c. What alternative to the preceding monthly report could improve control over the stamping department’s direct labor? E15‑4. Flexed Budget Actual Variance a. Direct labor………………………………… 2016 2184 168 ______________________________________________________________________ ______________________________________________________________________ b. Direct labor efficiency variance = actual hrs. Worked x standard time – standard hrs. x standard time In 1 hr = 1000 stampings Therefore in 168 hrs = 168000 stampings But production of stamping in June = 148000 stampings Therefore direct labor variance rate = 13.51 Direct labor efficiency rate = 7.69% __________ c. An alternative to the preceding monthly report which could improve control over the stamping department’s direct labor is to increase the production rate in the previous month to in 1 hr = 1200 stampings. _____________________________________________________________________ EX 15.6: Direct labor variances- solving for unknowns Coastal Industries has established direct labor performance standards for its maintenance and repair shop. However, some of the labor records were destroyed during a recent fire. The actual hours worked during March were 4,000, and the total direct labor budget variance was $2,200 unfavorable. The standard labor rate was $18 per hour, but recent registrations allowed the firm to hire lower-paid replacement workers for some jobs, and this produced a favorable rate variance of $3,200 fro March. Required: a. Calculate the actual direct labor rate paid per hour during March. b. Calculate the dollar amount of the direct labor efficiency variance for March. c. Calculate the standard direct labor hours allowed for the actual level of activity during March. (Hint: use the formula for the quantity variance and solve the missing information.) E15‑6. a. Actual direct labor to be paid for the month of march = 4000 * 18 72000 Labor rate $ 2200 unfavorable indicates that the cost of direct labor incurred in march is 72000 + 2200 = 74200 b. In March the actual cost taken is $ 18.55 per hour while the standard cost is $ 18 per hour. Therefore labour efficiency rate = (4000 x 18.55) – (4000 x 18) = $ 2200 unfavourable _________________________________________________________________ ______________________________________________________________________ c. ______favorable rate variance of $ 3200 in march implies $72000 -$ 3200 = $68800 Standard direct labor hours = 68800 / 18 = 3823 hours approx.________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ EX 15.8: Direct material Variances-solving for price and usage variances: Fiber works Company is a manufacturer of fiberglass toy boats. The company has recently implemented a standard cost system and has designed the system to isolate variances as soon as possible. During the month of august, the following results were reported for the production of 50,000 toy boats: Direct materials (fiberglass) purchased………………………………. 100,000 pounds Direct materials issued into production………………………………. 80,000 pounds Standard pounds allowed per boat …………………………………… 1.5 pounds Standard price per pound …………………………………………….. $7.50 Cost of fiberglass purchased …………………………………………. $725,500 ________________________________________________________________________ Required: a. Calculate actual cost per pound of fiberglass purchased during August. b. Calculate the direct materials purchase price variance for August. c. Calculate the direct materials usage variance for August. d. Comment on calculating the material price variance based on pounds purchased rather than pounds issued into production. E15‑8. a. Actual cost per pound = budgeted cost of work performed-cost variance.______________________________________________________________ 50,000 _ 80,000 = -30,000. _______________________________________________________________ _____________________________________________________________________ b. Direct Material Price Variance is= “(Actual quantity purchased × Actual price) − (Actual quantity purchased × Standard price)]” (Direct Materials Price Variance, 2011). _______________________________________________________________ (100,000 * 80,000 ) – (100,000 *7.50 ) ______________________________________________________________________ =8000000000 – 750000 = 7999250000. ______________________________________________________________________ c. Direct Material Usage Variance is = Std price * [Std Quantity - Actual Quantity Used]. _________________________________________________________________ =7.50* [1.5 - 50,000] ______________________________________________________________________ = -374988.75. ______________________________________________________________________ d. In this calculation the actual cost per pound is -30,000, Direct Material Price Variance ______________________________________________________________ is 7999250000 and the Direct Material Usage Variance is 374988.75. ___________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ EX 15.10 Segmented income statement: Vogel Co. produces three models of heating and air conditioning thermostat components. The following table summarizes data about each model: BV19 HV41 MV12 Selling price per unit ………………………. $ 36 $ 60 $ 30 Contribution margin per unit ………………. 12 18 6 Units sold per month ………………………. 4,000 2,000 6,000 Total contribution margin ………………… $ 48,000 $ 36,000 $36,000 Direct fixed expenses ……………………. 21,600 17,100 24,300 Segment Margin …………………………. $26,400 $18,900 $11,700 Allocated company fixed …………………. 10,000 5,000 15,000 Operating income (loss) …………………… $16,400 $13,900 $(3,300) Required: a. Criticize the preceding presentation. On what basis does the $30,000 of company fixed expenses appear to be allocated? b. Calculate the effect on total company net income if the MV12 model were discontinued. c. Calculate the contribution margin ratio for each model. d. If an advertising campaign focusing on a single model were to result in an increase of 5,000 units in the quality of units sold, which model should be advertised? Explain your answer. e. If an advertising campaign focusing on a single model were to result in an increase of 15,000 in revenues, which model should be advertised? Explain your answer. E15‑10. a. This income statement provide Vogel Co. produces three forms of heating and air ______________________________________________________________________ Conditioning thermostat components. The $30,000 of company fixed expenses included ______________________________________________________________________ BV19- 10000, HV41 – 5000 and MV12 – 15000. ____________________________________________________________ b. The effect on total company net income of MV12 model =$36,000 __________________________________________________________________ ______________________________________________________________________ Contribution Margin Ratio = (Contribution Margin / Sales) × 100. BV19 = (12/36) * 100 = 33.33 , HV41 = 18/60 * 100 = 30 c. ______________________________________________________________________ MV12 = 6/30 *100 = 20. ____________________________________________________________________ d. An advertising campaign concentrating on a single model were to outcome in an raise __________________________________________________________________ of 5,000 units in the value of units sold . The high contribution margin per unit HV41. So this model should be advertised. ______________________________________________________________________ e. The Allocated company fixed expenses of MV12 is 15,000. So MV12 should be ____________________________________________________________________ Advertised. __________________________________________________________________ EX15.12: Investment center analysis; ROI and residual income: Milano Corporation has three operating divisions and requires a 12% return on all investments. Selected information is presented here: Division A Division B Division C Revenue …………………… $ 500,000 ? ? Operating income ………….. $ 60,000 ? $ 80,000 Operating …………………... $ 250,000 $ 600,000 ? Margin ……………………… ? 12% ? Turnover ……………………. ? 1 turn 2 turns ROI ………………………… ? ? ? Residual income ……………. ? ? $20,000 Required: a. Calculate the missing amounts for each division. b. Comment on the relative performance of each division. c. Provide an example to show how residual income improves decision making at the divisional level. E15.12. a. DuPont Performance Analysis: Division A Division B Division C Revenues…………………………………... $ 500,000 Operating Income………………………….. $ 60,000 $ 80,000 Operating Assets…………………………… $ 250,000 $ 600,000 Margin _____________________________ 12% Turnover ___________________________ 1 turn 2 turns ROI _______________________________ Residual Income Analysis: Operating Income.……….………………… $ 60,000 $ 80,000 Required ROI (Operating assets x 12%)….. 30,000 72,000 Residual Income.…………………………... $ 20,000 b. Revenue of Division B is 600,000 * 12% = $72,000 and Division C is $60,000 (80,000 ____________________________________________________________________ – 20,000). Operating Income of Division B is 600,000 - 72,000 = 528000. Operating ____________________________________________________________________ Assets of Division C is calculated as $60,000/2 = $30,000. ROI is calculated as gain _____________________________________________________________________ From investment – cost of investment / cost of investment.) ____________________________________________________________________ c. For example, imagine that operating assets are $100,000, net operating income is $15,000, and the minimum return on assets is 12%. Residual income is $15,000 - (12% ___________________________________________________________________ __ X $100,000) = $15,000 - $12,000 = $3,000. RI is now and then chosen over ROI as a performance determine because it encourages managers to recognize investment __________________________________________________________________ Opportunities that have rates of return more than the charge for invested capital. So the residual income enhances decision making at the divisional level. ______________________________________________________________________ Reference List Direct Materials Price Variance, (2011). Accounting for Management. 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