CHAPTER 13 BUDGETING AND STANDARD COST SYSTEMS

Transcription

1 CHAPTER 13 BUDGETING AND STANDARD COST SYSTEMS CLASS DISCUSSION QUESTIONS 1. The three major objectives of budgeting are (1) to establish specific goals for future operations, (2) to direct and coordinate plans to achieve the goals, and (3) to periodically compare actual results with the goals. 2. Managers are given authority and responsibility for responsibility center performance. They are then accountable for the performance of the responsibility center. 3. If goals set by the budgets are viewed as unrealistic or unachievable, management may become discouraged and may not be committed to the achievement of the goals, resulting in the budget becoming less effective as a planning and control tool. 4. Budgeting more resources for travel than requested by department personnel is an example of budgetary slack. 5. A budget that is set too loosely may fail to motivate managers and other employees to perform efficiently. In addition, a loose budget may cause a spend it or lose it mentality, where excess budget resources are spent in order to protect the budget from future reductions. 6. Conflicting goals can cause employees or department managers to act in their own selfinterests to the detriment of the organization s objectives. 7. Zero-based budgeting is used when an organization wishes to take a clean slate view of operations. It is often used when the organization wants to cut costs by reevaluating the need for and usefulness of all operations. 8. A static budget is most appropriate in situations where costs are not variable to an underlying activity level. As a result, it is reasonable to plan spending on the basis of a fixed quantity of resources for the year. This will occur in some administrative functions, such as human resources, accounting, or public relations. 9. Computers not only speed up the budgeting process, but they also reduce the cost of budget preparation when large quantities of data need to be processed. In addition, by using computerized simulation models, management can determine the impact of various operating alternatives on the master budget. 10. The first step in preparing a master budget is preparing the operating budgets, which form the budgeted income statement. The first operating budget to be prepared is the sales budget. 11. The production requirements must be carefully coordinated with the sales budget to ensure that production and sales are kept in balance during the period. Ideally, manufacturing operations should be maintained at 100% of capacity, with no idle time or overtime, and there should be neither excessive inventories nor inventories insufficient to fill sales orders. 12. Purchases of direct materials should be closely coordinated with the production budget so that inventory levels can be maintained within reasonable limits. 13. Direct materials purchases budget, direct labor cost budget, and factory overhead cost budget. 14. a. The cash budget contributes to effective cash planning. This involves advance planning so that a cash shortage does not arise and excess cash is not permitted to remain idle. b. The excess cash can be invested in readily marketable income-producing securities or used to reduce loans. 15. The schedule of collections from sales is used to determine the amount of cash collected from current- and prior-period sales, based on collection history. The schedule is used to help determine the estimated cash receipts portion of the cash budget. 16. The plans for financing the capital expenditures budget may affect the cash budget. 363

2 17. Standard costs assist management in controlling costs and in motivating employees to focus on costs. 18. Management can use standards to assist in achieving control over costs by investigating significant deviations of performance (variances) from standards and taking corrective action. 19. Reporting by the principle of exceptions is the reporting of only variances (or exceptions ) between standard and actual costs to the individual responsible for cost control. 20. There is no set time period for the revision of standards. They should be revised when prices, product design, labor rates, and manufacturing methods change to such an extent that current standards no longer represent a useful measure of performance. 21. Standard costs for direct materials, direct labor, and factory overhead per unit of product are used in budgetary performance evaluation. Product standard costs are multiplied by the planned production volumes. Budget control is achieved by comparing actual results with the standard costs at actual volumes. 22. a. The two variances in direct materials cost are: (1) Price (2) Quantity b. The price variance is the result of a difference between the actual price and the standard price. It may be caused by such factors as a change in market prices or inefficient purchasing procedures. The quantity variance results from using more or less materials than the standard quantity. It can be caused by such factors as excessive spoilage, carelessness in the production processes, and the use of inferior materials. 23. The offsetting variances might have been caused by the purchase of low-priced, inferior materials. The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus generating an unfavorable materials quantity variance. 24. a. The two variances in direct labor costs are: (1) Rate (2) Time b. The direct labor cost variance is usually under the control of the production supervisor. 25. No. Even though the assembly workers are covered by union contracts, direct labor cost variances still might result. For example, direct labor rate variances could be caused by scheduling overtime to meet production demands or by assigning higher-paid workers to jobs normally performed by lower-paid workers. Likewise, direct labor time variances could result during the training of new workers. 26. Standards can be very appropriate in repetitive service operations. Fast-food restaurants can use standards for evaluating the productivity of the counter and food preparation employees. In addition, standards could be used to plan staffing patterns around various times of the day (e.g., increasing staff during the lunch hour). 27. Nonfinancial performance measures provide managers additional measures beyond the dollar impact of decisions. Nonfinancial considerations may help the organization include external customer perspectives about quality and service in performance measurements. 364

3 EXERCISES E13 1 A B C D 1 AGENT BLAZE 2 Flexible Selling and Administrative Expenses Budget 3 For the Month Ending January 31, Total sales $100,000 $125,000 $150,000 5 Variable cost: 6 Sales commissions $ 8,000 $ 10,000 $ 12,000 7 Advertising expense 21,000 26,250 31,500 8 Miscellaneous selling expense 3,000 3,750 4,500 9 Office supplies expense 4,000 5,000 6, Miscellaneous administrative expense 2,000 2,500 3, Total variable cost $ 38,000 $ 47,500 $ 57, Fixed cost: 13 Miscellaneous selling expense $ 2,250 $ 2,250 $ 2, Office salaries expense 15,000 15,000 15, Miscellaneous administrative expense 1,600 1,600 1, Total fixed cost $ 18,850 $ 18,850 $ 18, Total selling and administrative expenses $ 56,850 $ 66,350 $ 75,

4 E13 2 a. A B C D 1 NELL COMPANY MACHINING DEPARTMENT 2 Flexible Production Budget 3 For the Three Months Ending March 31, January February March 5 Units of production 110, ,000 90, Wages $495,000 $450,000 $405,000 8 Utilities 33,000 30,000 27,000 9 Depreciation 60,000 60,000 60, Total $588,000 $540,000 $492, Supporting calculations: 13 Units of production 110, ,000 90, Hours per unit Total hours of production 27,500 25,000 22, Wages per hour $18.00 $18.00 $ Total wages $495,000 $450,000 $405, Total hours of production 27,500 25,000 22, Utility cost per hour $1.20 $1.20 $ Total utilities $ 33,000 $ 30,000 $ 27,000 Depreciation is a fixed cost, so it does not flex with changes in production. Since it is the only fixed cost, the variable and fixed costs are not classified in the budget. b. January February March Total flexible budget... $588,000 $540,000 $492,000 Actual cost , , ,000 Excess of actual cost over budget... $ (12,000) $ (30,000) $ (53,000) The excess of actual cost over the flexible budget suggests that the Machining Department has not performed as well as originally thought. Indeed, the department is spending more than would be expected, and it s getting worse, given the level of production for the first three months. 366

5 E13 3 A B C D 1 STEELCASE INC. FABRICATION DEPARTMENT 2 Flexible Production Budget 3 October (assumed data) 5 Units of production 12,000 15,000 18, Variable cost: 8 Direct labor $ 84,000 1 $ 105,000 2 $ 126, Direct materials 783, , ,174, Total variable cost $ 867,000 $1,083,750 $1,300, Fixed cost: 13 Supervisor salaries $ 140,000 $ 140,000 $ 140, Depreciation 22,000 22,000 22, Total fixed cost $ 162,000 $ 162,000 $ 162, Total department cost $1,029,000 $1,245,750 $1,462, ,000 20/60 $ ,000 20/60 $ ,000 20/60 $ , $ , $ , $

6 E13 4 a. A B C D 1 HARMONY AUDIO COMPANY 2 Sales Budget 3 For the Month Ending September 30, Unit Sales Volume Unit Selling Price Product and Area Total Sales 5 Model DL: 6 East Region 3,700 $125 $ 462,500 7 West Region 4, ,250 8 Total 7,950 $ 993,750 9 Model XL: 10 East Region 3,250 $195 $ 633, West Region 3, , Total 6,950 $1,355, Total revenue from sales $2,349,000 b. A B C 1 HARMONY AUDIO COMPANY 2 Production Budget 3 For the Month Ending September 30, Units 5 Model DL Model XL 6 Expected units to be sold 7,950 6,950 7 Plus desired inventory, September 30, Total 8,225 7,002 9 Less estimated inventory, September 1, 2009 (240) (60) 10 Total units to be produced 7,985 6,

7 E13 5 A B C D 1 ROBERTS AND CHOU, CPAs 2 Professional Fees Earned Budget 3 For the Year Ending December 31, Billable Hourly Total Hours Rate Revenue 5 Audit Department: 6 Staff 32,400 $130 $ 4,212,000 7 Partners 4, ,200,000 8 Total 37,200 $ 5,412,000 9 Tax Department: 10 Staff 24,800 $130 $ 3,224, Partners 3, , Total 27,900 $ 3,999, Small Business Accounting Department: 14 Staff 4,500 $130 $ 585, Partners , Total 5,130 $ 742, Total professional fees earned $10,153,500 E13 6 A B C 1 ROBERTS AND CHOU, CPAs 2 Professional Labor Cost Budget 3 For the Year Ending December 31, Staff Partners 5 Audit Department 32,400 4,800 6 Tax Department 24,800 3,100 7 Small Business Accounting Department 4, Total 61,700 8,530 9 Average compensation per hour $30.00 $ Total professional labor cost $1,851,000 $1,066,

8 E13 7 A B C D E 1 MARINO S FROZEN PIZZA INC. 2 Direct Materials Purchases Budget 3 For the Month Ending April 30, Dough Tomato Cheese Total 5 Units required for production: 6 12 pizza 13, , , pizza 34, , ,375 6 Plus desired inventory, 8 April 30, Total 48,250 31,960 40,055 Less estimated inventory, 10 April 1, Total units to be purchased 47,670 31,755 39, Unit price $1.20 $2.60 $3.10 Total direct materials to be 13 purchased $57,204 $82,563 $123,163 $262, , lb , lb , lb , lbs , lb , lbs. 370

9 E13 8 A B C D 1 COCA-COLA ENTERPRISES DALLAS PLANT 2 Direct Materials Purchases Budget 3 For the Month Ending March 31, (assumed data) 5 Concentrate 2-Liter Bottles Carbonated Water 6 Materials required for production: 7 Coke 856* lbs. 214,000 btls. 428,000 ltrs. 8 Sprite 489* 163, ,000 9 Total materials 1,345 lbs. 377,000 btls. 754,000 ltrs. 10 Direct materials unit price $80 $0.08 $0.06 Total direct materials to be 11 purchased $107,600 $ 30,160 $ 45,240 Coke Sprite *Production in liters (bottles 2 liters/bottle) , ,000 Divide by ,280 3,260 Multiply by concentrate pounds per 100 liters Concentrate pounds required for production E13 9 A B C 1 HAMMER RACKET COMPANY 2 Direct Labor Cost Budget 3 For the Month Ending October 31, Forming Assembly Department Department 5 Hours required for production: 6 Junior 1 1,900 3,040 7 Pro Striker 2 7,735 14,365 8 Total 9,635 17,405 9 Hourly rate $16.00 $ Total direct labor cost $154,160 $208, Junior: 0.25 hr. 7,600 = 1,900 hrs hr. 7,600 = 3,040 hrs Pro Striker: 0.35 hr. 22,100 = 7,735 hrs hr. 22,100 = 14,365 hrs. 371

10 E13 10 a. A B C 1 LEVI STRAUSS & CO. 2 Production Budget 3 January (assumed data) 5 Dockers 501 Jeans 6 Expected units to be sold 24,700 53,600 7 Plus January 31 desired inventory 410 _1,890 8 Total units 25,110 55,490 9 Less January 1 estimated inventory _1,110 _1, Total units to be produced 24,000 54,000 b. A B C D E F 1 LEVI STRAUSS & CO. 2 Direct Labor Cost Budget 3 January (assumed data) 5 Inseam Outerseam Pockets Zipper Total 6 Dockers 1 43,200 52,800 16,800 24, Jeans 2 64,800 81,000 48,600 32,400 8 Total minutes 108, ,800 65,400 56,400 Total direct labor hours 9 (/60 minutes) 1,800 2,230 1, Direct labor rate $12.50 $12.50 $16.00 $ Total direct labor cost $ 22,500 $ 27,875 $17,440 $15,040 $82, (24,000/10 pairs) 18 min. = 43,200 min. 14 (24,000/10 pairs) 22 min. = 52,800 min. 15 (24,000/10 pairs) 7 min. = 16,800 min. 16 (24,000/10 pairs) 10 min. = 24,000 min (54,000/10 pairs) 12 min. = 64,800 min. 18 (54,000/10 pairs) 15 min. = 81,000 min. 19 (54,000/10 pairs) 9 min. = 48,600 min. 20 (54,000/10 pairs) 6 min. = 32,400 min. 372

11 E13 11 A B C 1 VENUS CANDY COMPANY 2 Factory Overhead Cost Budget 3 For the Month Ending September 30, Variable factory overhead costs: 5 Manufacturing supplies $ 15,000 6 Power and light 44,000 7 Production supervisor wages 132,000 8 Production control salaries 35,000 9 Materials management salaries 38, Total variable factory overhead costs $264, Fixed factory overhead costs: 12 Factory insurance $ 26, Factory depreciation 21, Total fixed factory overhead costs 47, Total factory overhead costs $311,000 Note: Advertising expenses, sales commissions, and executive officer salaries are selling and administrative expenses. 373

12 E13 12 A B C D 1 SWISS CERAMICS INC. 2 Cost of Goods Sold Budget 3 For the Month Ending June 30, Finished goods inventory, June 1, 2010 $ 9,500 5 Work in process inventory, June 1, 2010 $ 2,800 6 Direct materials: 7 Direct materials inventory, June 1, 2010 $ 8,280 8 Direct materials purchases 158,160 9 Cost of direct materials available for use $166, Less direct materials inventory, June 30, , Cost of direct materials placed in production $155, Direct labor 184, Factory overhead 86, Total manufacturing costs 426, Total work in process during the period $428,890 Less work in process inventory, 16 June 30, , Cost of goods manufactured 427, Cost of finished goods available for sale $436,510 Less finished goods inventory, 19 June 30, , Cost of goods sold $425,

13 E13 13 A B C D 1 PET JOY WHOLESALE INC. 2 Schedule of Collections from Sales 3 For the Three Months Ending July 31, May June July 5 Receipts from cash sales: 6 Cash sales (10% current month s sales) $ 36,000 $ 45,000 $ 60,000 7 May sales on account: 8 Collected in May ($324, %) 162,000 9 Collected in June ($324,000 35%) 113, Collected in July ($324,000 15%) 48, June sales on account: 12 Collected in June ($405, %) 202, Collected in July ($405,000 35%) 141, July sales on account: 15 Collected in July ($540, %) 270, Total cash collected $198,000 $360,900 $520, $360,000 90% = $324, $450,000 90% = $405, $600,000 90% = $540,

14 E13 14 A B C D 1 OFFICE MATE SUPPLIES INC. 2 Schedule of Collections from Sales 3 For the Three Months Ending October 31, August September October 5 Receipts from cash sales: 6 Cash sales (25% current month s sales) $ 62,500 $ 72,500 $ 67,500 7 July sales on account: 8 Collected in August (Accounts Receivable balance) 200,000 9 August sales on account: 10 Collected in August ($187, %) 37, Collected in September ($187,500 80%) 150, September sales on account: 13 Collected in September ($217, %) 43, Collected in October ($217,500 80%) 174, October sales on account: 16 Collected in October ($202, %) 40, $300,000 $266,000 $282, $250,000 75% = $187, $290,000 75% = $217, $270,000 75% = $202,

15 E13 15 A B C D 1 EXCEL LEARNING SYSTEMS INC. 2 Schedule of Cash Payments for Selling and Administrative Expenses 3 For the Three Months Ending August 31, June July August 5 June expenses: 6 Paid in June ($92, %) $55,440 7 Paid in July ($92,400 40%) $36,960 8 July expenses: 9 Paid in July ($85, %) 51, Paid in August ($85,500 40%) $34, August expenses: 12 Paid in August ($75, %) 45, Total cash payments $55,440 $88,260 $79, $117,400 $25, $110,500 $25, $100,400 $25,000 Note: Insurance, property taxes, and depreciation are expenses that do not result in cash payments in June, July, or August. 377

16 E13 16 A B C D 1 REJUVENATION PHYSICAL THERAPY INC. 2 Schedule of Cash Payments for Operations 3 For the Three Months Ending September 30, July August September 5 Payments of prior month s expense 1 $24,000 $ 30,270 $ 33,210 6 Payment of current month s expense 2 70,630 77,490 90,090 7 Total payment $94,630 $107,760 $123, $24,000, given as Accrued Expenses Payable, July 1 10 $30,270 = ($112,000 $11,100) 30% 11 $33,210 = ($121,800 $11,100) 30% 12 2 $70,630 = ($112,000 $11,100) 70% 13 $77,490 = ($121,800 $11,100) 70% 14 $90,090 = ($139,800 $11,100) 70% Note: Insurance and depreciation are expenses that do not result in cash payments in July, August, and September. E13 17 A B C D E 1 GARDENEER TOOLS INC. 2 Capital Expenditures Budget 3 For the Four Years Ending December 31, Building $ 7,000,000 $ 6,000,000 $ 5,200, Equipment 1,700,000 $ 200,000 1,000,000 7 Information systems 900, Total $ 7,000,000 $7,700,000 $ 1,100,000 $ 6,200, $13,000,000 40% = $5,200, $1,600, = $900,000 E13 18 Direct labor... $ hrs. $ Direct materials... $ bd. ft Variable factory overhead... $ hrs Fixed factory overhead... $ hrs Total cost per unit... $

17 E13 19 a. A B 1 WARWICK BOTTLE COMPANY 2 Manufacturing Cost Budget 3 For the Month Ended July 31, Standard Cost at Planned Volume (650,000 Bottles) 5 Manufacturing costs: 6 Direct labor $ 8,580 7 Direct materials 34,710 8 Factory overhead 2,210 9 Total $45, $1.32 (650,000/100) = $8, $5.34 (650,000/100) = $34, $0.34 (650,000/100) = $2, Note: The cost standards are expressed as per 100 bottles. b. A B C D 1 WARWICK BOTTLE COMPANY 2 Manufacturing Costs Budget Performance Report 3 For the Month Ended July 31, Actual Costs Standard Cost at Actual Volume (700,000 bottles) Cost Variance (Favorable) Unfavorable 5 Manufacturing costs: 6 Direct labor $ 9,400 $ 9,240 $ Direct materials 36,500 37,380 (880) 8 Factory overhead 2,400 2, Total manufacturing cost $48,300 $49,000 $(700) 10 $1.32 (700,000/100) = $9, $5.34 (700,000/100) = $37, $0.34 (700,000/100) = $2,380 c. WBC s actual costs were $700 less than budgeted. A favorable direct materials cost variance more than offset a smaller unfavorable direct labor cost variance and factory overhead cost variance. The unfavorable variances should be investigated further to discover the cause. Note: The budget prepared in part (a) at the beginning of the month should not be used in the budget performance report because actual volumes were greater than planned (700,000 vs. 650,000). 379

18 E13 20 a. Price variance: Direct Materials Price Variance = (Actual Price Standard Price) Actual Quantity Direct Materials Price Variance = ($1.80 per lb. $1.85 per lb.) 54,600 lbs. Direct Materials Price Variance = $2,730 Favorable Variance Quantity variance: Direct Materials Quantity Variance = (Actual Quantity Standard Quantity) Standard Price Direct Materials Quantity Variance = (54,600 lbs. 53,400 lbs.) $1.85 per lb. Direct Materials Quantity Variance = $2,220 Unfavorable Variance Total direct materials cost variance: Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance Direct Materials Cost Variance = $2,730 + $2,220 Direct Materials Cost Variance = $510 Favorable Variance b. The direct materials price variance should normally be reported to the Purchasing Department, which may or may not be able to control this variance. If materials of the same quality were purchased from another supplier at a price lower than the standard price, the variance was controllable. However, if the variance resulted from a market-wide price decrease, the variance was not subject to control. The direct materials quantity variance should be reported to the proper level of operating management for possible corrective action. For example, if excessive amounts of direct materials had been used because of the malfunction of equipment that had not been properly maintained or operated, the variance would be reported to the production supervisor. However, if the excess usage of materials had been caused by the use of inferior raw materials, the Purchasing Department should be held responsible. The total materials cost variance should be reported to senior plant management, such as the plant manager or materials manager. 380

19 E13 21 Product finished... 1,200 units Standard finished product for direct materials used (5,000 lbs./4 lbs.)... 1,250 Deficiency of finished product for materials used... (50) units Standard cost for direct materials: Quantity variance divided by deficiency of product for materials used ($500/50 units)... $10 Alternate solution: Materials used... 5,000 lbs. Price variance... $500 Price variance per lb. ($500/5,000 lbs.)... $0.10 Unit price of direct materials... $ 2.40 Plus price variance (favorable) per lb Standard price per lb.... $ 2.50 Pounds per unit of product... 4 Standard direct materials cost per unit of product... $10.00 E13 22 a. Standard Standard Standard Cost Quantity Price = per Batch Whole tomatoes... 2,500 $ 0.45 $ 1, Vinegar Corn syrup Salt $ 1, Pounds per batch 1,500 lbs. $ 1.18 per lb. b. Actual Standard Materials Quantity for Quantity per Quantity Standard Quantity Batch K103 Batch Difference Price = Variance 2,600 2, $ 0.45 $ U (5) F U (1) F $ U 381

20 E13 23 a. Rate variance: Direct Labor Rate Variance = (Actual Rate per Hour Standard Rate per Hour) Actual Hours Direct Labor Rate Variance = ($15.20 $15.00) 3,650 hrs. Direct Labor Rate Variance = $730 Unfavorable Variance Time variance: Direct Labor Time Variance = (Actual Direct Labor Hours Standard Direct Labor Hours) Standard Rate per Hour Direct Labor Time Variance = (3,650 hrs. 3,710 hrs.) $15 per hour Direct Labor Time Variance = $900 Favorable Variance Total direct labor cost variance: Direct Labor Cost Variance = Direct Labor Time Variance + Direct Labor Rate Variance Direct Labor Cost Variance = $900 + $730 Direct Labor Cost Variance = $170 Favorable Variance b. The employees may have been more experienced or better trained, thereby requiring a higher labor rate than planned. The higher level of experience or training may have resulted in more efficient performance. Thus, the actual time required was less than standard. Fortunately, the gained efficiency offset the higher labor rate. 382

21 E13 24 Rate variance: Direct Labor Rate Variance = (Actual Rate per Hour Standard Rate per Hour) Actual Hours Direct Labor Rate Variance = ($12.50 $12.75) 600 hrs. Direct Labor Rate Variance = $150 Favorable Variance Time variance: Direct Labor Time Variance = (Actual Direct Labor Hours Standard Direct Labor Hours) Standard Rate per Hour Direct Labor Time Variance = (600 hrs. 560 hrs.*) $12.75 per hour Direct Labor Time Variance = $510 Unfavorable Variance *2 hrs. 280 units Total direct labor cost variance: Direct Labor Cost Variance = Direct Labor Time Variance + Direct Labor Rate Variance Direct Labor Cost Variance = $150 + $510 Direct Labor Cost Variance = $360 Unfavorable Variance 383

22 E13 25 Step 1: Determine the standard direct materials and direct labor per unit. Standard direct materials quantity per unit: Direct materials lbs. budgeted for October: $24,000 $0.60 per lb. = 40,000 lbs. Standard pounds per unit: 40,000 lbs. 16,000 units = 2.5 standard lbs. per unit Standard direct labor time per unit: Direct labor hrs. budgeted for October: $8,000 $10.00 per hr. = 800 direct labor hrs. Standard direct labor hrs. per unit: 800 hrs. 16,000 units = 0.05 standard direct labor hr. per unit Step 2: Using the standard quantity and time rates in step 1, determine the standard costs for the actual October production. Standard direct materials at actual volume: 14,000 units 2.5 lbs. per unit $ $ 21,000 Standard direct labor at actual volume: 14,000 units 0.05 direct labor hr. per unit $ ,000 Total... $ 28,000 Step 3: Determine the direct materials quantity and direct labor time variances, assuming no direct materials price or direct labor rate variances. Actual direct materials used in production... $ 21,600 Standard direct materials (step 2)... 21,000 Direct materials quantity variance unfavorable... $ 600* *(36,000 lbs. 35,000 lbs.) $0.60 = $600 U $21,600/$0.60 = 36,000 lbs. $21,000/$0.60 = 35,000 lbs. Actual direct labor... $ 7,200 Standard direct labor (step 2)... 7,000 Direct labor time variance unfavorable... $ 200** **14,000 units 0.05 hr. = 700 standard hrs. $7,200/$10.00 = 720 actual hrs. (720 hrs. 700 hrs.) $10.00 = $200 U 384

23 E13 26 a. Actual weekly expenditure: 2 people $18.00 per hr. 40 hrs. per week = $1,440 b. Standard time used for the volume of admissions: Unscheduled Scheduled Total Number of admissions Standard time min. 10 min. Total... 2,640 min. 2,400 min. 5,040 min. or 84 hrs. c. Actual productive minutes available (2 employees 40 hrs. 60 min.)... 4,800 Less standard minutes used at actual volume... 5,040 Time difference from standard Standard rate per minute... $ Direct labor time (efficiency) variance favorable... $ 72 or [(2 40 hours) 84 hours] $18 per hour = $72 or $1,440 (a) $1,512 2 = $72 1 Standard direct labor rate: $18/60 min. = $0.30 per min. 2 Standard labor cost at actual volume: Productive time (5,040/60) $18 = $1,512 The Admissions Department was more efficient than standard by 240 minutes, or four hours. 385

24 E13 27 a. Possible Input Measures Registration staffing per student Technology investment per period for registration process Training hours per registration personnel Amount of faculty staffing Amount of technology capacity (size of computer, number of input lines) for registration process Maintenance dollars spent on the registration system Employee satisfaction score Number of hours per day registration is available Possible Output Measures Cycle time for a student to register for classes Number of times a course is unavailable Number of separate registration events or steps (log-ons or line waits) per student Number of times a replacement course was used by a student Number of registration errors Student satisfaction score with the registration process Number of student complaints about registration process Number of registration rework steps per student Cost of registration per student Number of personnel overtime hours during registration Labor time variance for registration process (standard hours less actual hours at standard labor rate) b. Tri-County College is interested in not only the efficiency of the process but also the quality of the process. This means that the process must meet multiple objectives. The college wants this process to meet the needs of students, which means it should not pose a burden to students. Students should be able to register for classes quickly, get the courses they want, and avoid registration errors, hassles, and problems. Thus, the nonfinancial measures are used to balance the need for a cost-efficient process with one that will meet the needs of the student. 386

25 E13 28 a. and b. Average computer response time to customer clicks Dollar amount of returned goods Elapsed time between customer order and product delivery Maintenance dollars divided by hardware investment Number of customer complaints divided by the number of orders Number of misfilled orders divided by the number of orders Number of orders per warehouse employee Number of page faults or errors due to software programming errors Number of software fixes per week Server (computer) downtime Training dollars per programmer Input Measure X X X X X Output Measure X X X X X X Explanation A measure of the speed of the ordering process. If the speed is too slow, we may lose customers. An important measure of customer satisfaction with the final product that was ordered. An important overall measure of process responsiveness. If the company is too slow in providing product, we may lose customers. A driver of the ordering system s reliability and downtime. The maintenance dollars should be scaled to the amount of hardware in order to facilitate comparison across time. An extreme measure of customer dissatisfaction with the ordering process. Incorrectly filled orders reduce the customer s satisfaction with the order process. A measure of output quality of the process. This measure is related to the capacity of the warehouse relative to the demands placed upon it. This relationship will impact the delivery cycle time. The page errors will negatively impact the customer s ordering experience. It s a measure of process output quality. Software bugs reduce the effectiveness of the order fullfillment system; thus, fixes are an input that will improve the performance of the order fulfillment system. A measure of computer system reliability. Trained programmers should enhance the software s responsiveness and reliability. 387

26 Appendix: E13 29 Variable factory overhead controllable variance: Actual variable factory overhead cost incurred... $125,000 Budgeted variable factory overhead for 5,000 hrs. [5,000 ($30.00 $4.25)] ,750 Variance favorable... $ 3,750 Fixed factory overhead volume variance: Productive capacity at 100%... 8,000 hrs. Standard for amount produced... 5,000 hrs. Productive capacity not used... 3,000 hrs. Standard fixed factory overhead rate... $4.25 Variance unfavorable... 12,750 Total factory overhead cost variance unfavorable... $ 9,000* *Proof: ($125,000 + $34,000) $150,000 Alternative Computation of Overhead Variances Factory Overhead Actual costs $159,000 Applied costs 150,000 Balance, underapplied factory overhead $ 9,000 Actual Factory Budgeted Factory Applied Factory Overhead Overhead for Amount Overhead Produced $159,000 Variable cost [5,000 ($30.00 $4.25)] $128,750 $150,000 Fixed cost 34,000 Total $162,750 $3,750 F $12,750 U Controllable Volume Variance Variance $9,000 U Total Factory Overhead Cost Variance 388

27 Appendix: E13 30 a. Controllable variance: Actual variable factory overhead ($128,500 $52,000)... $ 76,500 Standard variable factory overhead at actual production: Standard hours at actual production... 31,000 Variable factory overhead rate 1... $2.50 Standard variable factory overhead 77,500 Controllable variance favorable... $ 1,000 b. Volume variance: Volume at 100% of normal capacity... 40,000 Less standard hours... 31,000 Idle capacity... 9,000 Fixed overhead rate 2... $1.30 Volume variance unfavorable... 11,700 Total factory overhead cost variance unfavorable... $10, Variable factory overhead rate: $75,000 30,000 hrs. = $2.50 per hr. 2 Fixed factory overhead rate: $52,000 40,000 hrs. = $1.30 per hr. 3 Proof: $128,500 [($ $1.30) 31,000 hrs.] = $10,

28 Appendix: E13 30, Concluded Alternative Computation of Overhead Variances Factory Overhead Actual costs $128,500 Applied costs ($ ,000) 117,800 Balance, underapplied factory overhead $ 10,700 Actual Factory Budgeted Factory Applied Factory Overhead Overhead for Amount Overhead Produced $128,500 Variable cost (31,000 $2.50) $ 77,500 $117,800* Fixed cost 52,000 Total $129,500 $1,000 F $11,700 U Controllable Volume Variance Variance $10,700 U Total Factory Overhead Cost Variance *[($ $1.30) 31,000] 390

29 Appendix: E13 31 In determining the volume variance, the productive capacity overemployed (1,000 hours) should be multiplied by the standard fixed factory overhead rate of $2.40 ($6.00 $3.60) to yield a favorable variance of $2,400. The variance analysis provided by the chief cost accountant incorrectly multiplied the 1,000 hours by the total factory overhead rate of $6.00 per hour and reported it as unfavorable. A correct determination of the factory overhead cost variances is as follows: Variable factory overhead controllable variance: Actual variable factory overhead cost incurred... $269,000 Budgeted variable factory overhead for 76,000 hours (76,000 $3.60) ,600 Variance favorable... $ 4,600 Fixed factory overhead volume variance: Productive capacity at 100%... 75,000 hrs. Standard for amount produced... 76,000 hrs. Productive capacity overemployed... (1,000) hrs. Standard fixed factory overhead rate... $2.40 Variance favorable... 2,400 Total factory overhead cost variance favorable... $7,000 Alternative Computation of Overhead Variances Factory Overhead Actual costs $449,000 Applied costs 456,000 Balance, overapplied factory overhead $7,000 Actual Factory Budgeted Factory Applied Factory Overhead Overhead for Amount Overhead Produced $449,000 Variable cost (76,000 $3.60) $273,600 $456,000* Fixed cost 180,000 Total $453,600 $4,600 F $2,400 F Controllable Volume Variance Variance *[($ $2.40) 76,000] $7,000 F Total Factory Overhead Cost Variance 391

30 Appendix: E13 32 A B C D E 1 SCIENTIFIC MOLDED PRODUCTS INC. 2 Factory Overhead Cost Variance Report Trim Department 3 For the Month Ended August 31, Productive capacity for the month 15,000 hrs. 5 Actual productive capacity used for the month 11,000 hrs. 6 7 Budget 8 (at actual Variances 9 production) Actual Favorable Unfavorable 10 Variable factory overhead costs: 1 11 Indirect factory labor $ 26,400 $ 27,000 $ Power and light 4,400 4,000 $ Indirect materials 13,200 13, Total variable factory overhead cost $ 44,000 $ 44, Fixed factory overhead costs: 16 Supervisory salaries $ 30,000 $ 30, Depreciation of plant and equipment 23,400 23, Insurance and property taxes 21,600 21, Total fixed factory overhead cost 75,000 75, Total factory overhead cost $119,000 $119, Total controllable variances $400 $ Net controllable variance unfavorable $ Volume variance unfavorable: 25 Idle hours at the standard rate for fixed factory overhead (15,000 hrs. 11,000 hrs.) $ , Total factory overhead cost variance unfavorable $20,500 1 The budgeted variable factory overhead costs are determined by multiplying 11,000 hours by the variable factory overhead cost rate for each variable cost category. These rates are determined by dividing each budgeted amount (estimated at the beginning of the month) by the planned (budgeted) volume of 10,000 hours. Thus, for example: $26,400 = ($24,000/10,000 hrs.) 11,000 hrs. $4,400 = ($4,000/10,000 hrs.) 11,000 hrs. $13,200 = ($12,000/10,000 hrs.) 11,000 hrs. 2 Fixed factory overhead rate: $75,000 = $5.00 per hr. 15,000 hrs. 392

31 Appendix: E13 32, Concluded Alternative Computation of Overhead Variances Factory Overhead Actual costs $119,500 Applied costs [11,000 ($4.00* + $5.00)] 99,000 Balance, overapplied factory overhead $ 20,500 Actual Factory Budgeted Factory Applied Factory Overhead Overhead for Amount Overhead Produced $119,500 Variable cost (11,000 $4.00) $ 44,000 $99,000 Fixed cost 75,000 Total $119,000 $500 U $20,000 U Controllable Volume Variance Variance $20,500 U Total Factory Overhead Cost Variance *$40,000/10,000 hours budgeted at the beginning of the month 393

32 PROBLEMS P A B C D 1 REGAL FURNITURE COMPANY 2 Sales Budget 3 For the Month Ending August 31, 2010 Unit Sales Unit Selling 4 Product and Area Volume Price Total Sales 5 King: 6 Northern Domestic 5,500 $750 $ 4,125,000 7 Southern Domestic 3, ,208,000 8 International 1, ,131,000 9 Total 10,150 $ 7,464, Prince: 11 Northern Domestic 6,900 $520 $ 3,588, Southern Domestic 4, ,320, International , Total 11,800 $ 6,448, Total revenue from sales $13,912, A B C 1 REGAL FURNITURE COMPANY 2 Production Budget 3 For the Month Ending August 31, Units 5 King Prince 6 Expected units to be sold 10,150 11,800 7 Plus desired inventory, August 31, Total 10,950 12,200 9 Less estimated inventory, August 1, Total units to be produced 10,000 11,

33 P13 1, Continued 3. A B C D E F 1 REGAL FURNITURE COMPANY 2 Direct Materials Purchases Budget 3 For the Month Ending August 31, Direct Materials 5 Fabric (sq. yds.) Wood (lineal ft.) Filler (cu. ft.) Springs (units) Total Required units for 6 production: 7 King 50, , , , Prince 41, , , ,200 8 Plus desired inventory, 9 August 31, ,300 6,200 3,100 7, Total 96, ,200 79, ,700 Less estimated inventory, 11 August 1, ,500 6,000 2,800 6,700 Total units to be 12 purchased 91, ,200 76, , Unit price $12.00 $8.00 $3.50 $4.50 Total direct materials to be 14 purchased $1,098,240 $5,185,600 $267,554 $1,170,000 $7,721, ,000 5 yds. = 50,000 sq. yds , lineal ft. = 350,000 lineal ft , cu. ft. = 38,000 cu. ft , units = 140,000 units , sq. yds. = 41,720 sq. yds , lineal ft. = 298,000 lineal ft , cu. ft. = 38,144 cu. ft , units = 119,200 units 395

34 P13 1, Concluded 4. A B C D E 1 REGAL FURNITURE COMPANY 2 Direct Labor Cost Budget 3 For the Month Ending August 31, Framing Department Cutting Department Upholstery Department Total 5 Hours required for production: 6 King 1 25,000 15,000 24,000 7 Prince 2 21,456 5,960 23,840 8 Total 46,456 20,960 47,840 9 Hourly rate $12.00 $11.00 $ Total direct labor cost $557,472 $230,560 $669,760 $1,457, This line is calculated as 10,000 King chairs from the production budget multiplied by 13 the hours per unit in each department estimated for the King chairs. 25,000 = 10, ; 15,000 = 10, ; 24,000 = 10, This line is calculated as 11,920 Prince chairs from the production budget multiplied by 16 the hours per unit in each department estimated for the Prince chairs. 21,456 = 11, ; 5,960 = 11, ; 23,840 = 11,

35 P A B C D 1 HEADS UP ATHLETIC CO. 2 Sales Budget 3 For the Month Ending January 31, Unit Sales Unit Selling Volume Price Total Sales 5 Batting helmet 3,700 $ 70 $ 259,000 6 Football helmet 7, ,022,400 7 Total revenue from sales $1,281, A B C 1 HEADS UP ATHLETIC CO. 2 Production Budget 3 For the Month Ending January 31, Units 5 Batting Football Helmet Helmet 6 Expected units to be sold 3,700 7,200 7 Plus desired inventory, January 31, Total 3,990 7,720 9 Less estimated inventory, January 1, Total units to be produced 3,680 7,

36 P13 2, Continued 3. A B C D 1 HEADS UP ATHLETIC CO. 2 Direct Materials Purchases Budget 3 For the Month Ending January 31, Plastic Foam Lining Total 5 Units required for production: 6 Batting helmet 4, , Football helmet 20, ,220 4 Plus desired units of inventory, 8 January 31, , Total 26,096 12,510 Less estimated units of inventory, 10 January 1, Total units to be purchased 25,296 11, Unit price $7.50 $5.00 Total direct materials to be 13 purchased $189,720 $59,950 $249, , lbs , lb , lbs , lbs. 398

37 P13 2, Continued 4. A B C D 1 HEADS UP ATHLETIC CO. 2 Direct Labor Cost Budget 3 For the Month Ending January 31, Molding Department Assembly Department Total 5 Hours required for production: 6 Batting helmet , Football helmet 2, , Total 2,926 6,585 9 Hourly rate $15 $13 10 Total direct labor cost $43,890 $85,605 $129, , hr , hr , hr , hr. 5. A B C 1 HEADS UP ATHLETIC CO. 2 Factory Overhead Cost Budget 3 For the Month Ending January 31, Indirect factory wages $115,000 5 Depreciation of plant and equipment 32,000 6 Power and light 18,000 7 Insurance and property tax 8,700 8 Total $173,

38 P13 2, Continued 6. A B C D 1 HEADS UP ATHLETIC CO. 2 Cost of Goods Sold Budget 3 For the Month Ending January 31, 2010 Finished goods inventory, 4 January 1, 2010 $ 34, Work in process, January 1, 2010 $ 12,500 6 Direct materials: 7 Direct materials inventory, January 1, 2010 $ 8, Direct materials purchases 249,670 9 Cost of direct materials available for use $258, Less direct materials inventory, January 31, , Cost of direct materials placed in production $246, Direct labor 129, Factory overhead 173, Total manufacturing costs 549, Total work in process during period $562, Less work in process, January 31, , Cost of goods manufactured 548, Cost of finished goods available for sale $583,085 Less finished goods inventory, 19 January 31 40, Cost of goods sold $543, Batting helmet (310 $33.00) $ 10, Football helmet (420 $57.00) 23, Finished goods inventory, January 1, 2010 $ 34, Plastic (800 $7.50) $ 6, Foam lining (520 $5.00) 2, Direct materials inventory, January 1, 2010 $ 8, Plastic (1,240 $7.50) $ 9, Foam lining (450 $5.00) 2, Direct materials inventory, January 31, 2010 $ 11, Batting helmet (290 $34.00) $ 9, Football helmet (520 $58.00) 30, Finished goods inventory, January 31, 2010 $ 40,

39 P13 2, Concluded 7. A B C 1 HEADS UP ATHLETIC CO. 2 Selling and Administrative Expenses Budget 3 For the Month Ending January 31, Selling expenses: 5 Sales salaries expense $275,300 6 Advertising expense 139,500 7 Telephone expense selling 3,200 8 Travel expense selling 46,200 9 Total selling expenses $464, Administrative expenses: 11 Office salaries expense $ 83, Depreciation expense office equipment 5, Telephone expense administrative Office supplies expense 4, Miscellaneous administrative expense 5, Total administrative expenses 99, Total operating expenses $564, A B C 1 HEADS UP ATHLETIC CO. 2 Budgeted Income Statement 3 For the Month Ending January 31, Revenue from sales $1,281,400 5 Cost of goods sold 543,065 6 Gross profit $ 738,335 7 Operating expenses: 8 Selling expenses $464,200 9 Administrative expenses 99, Total operating expenses 564, Income from operations $ 174, Other income: 13 Interest revenue $ 14, Other expenses: 15 Interest expense 17,400 (2,900) 16 Income before income tax $ 171, Income tax expense 51, Net income $ 119,

40 P A B C D 1 DASH SHOES INC. 2 Cash Budget 3 For the Three Months Ending June 30, June July August 5 Estimated cash receipts from: 6 Cash sales $ 12,000 $ 15,000 $ 20,000 7 Collection of accounts receivable a 101, , ,200 8 Dividends 3,500 9 Total cash receipts $116,900 $121,800 $144, Estimated cash payments for: 11 Manufacturing costs b $ 41,600 $ 54,000 $ 62, Selling and administrative expenses 35,000 40,000 45, Capital expenditures 48, Other purposes: 15 Note payable (including interest) 61, Income tax 18, Dividends 8, Total cash payments $ 76,600 $112,000 $225, Cash increase or (decrease) $ 40,300 $ 9,800 $ (81,200) 20 Cash balance at beginning of month 45,000 85,300 95, Cash balance at end of month $ 85,300 $ 95,100 $ 13, Minimum cash balance 35,000 35,000 35, Excess or (deficiency) $ 50,300 $ 60,100 $ (21,100) (Continued) 402

41 P13 3, Concluded 24 Computations: 25 a Collections of accounts receivable: June July August 26 April sales $ 38, May sales 63,000 2 $ 42, June sales 64,800 4 $ 43, July sales 81, Total $101,400 $106,800 $124, $96,000 40% = $38, $105,000 60% = $63, $105,000 40% = $42, $120,000 90% 60% = $64, $120,000 90% 40% = $43, $150,000 90% 60% = $81, b Payments for manufacturing costs: June July August 38 Payment of accounts payable, beginning of month balance c $ 8,000 $ 8,400 $ 11, Payment of current month s cost d 33,600 45,600 51, Total $ 41,600 $ 54,000 $ 62, c Accounts payable, June 1 balance = $8, ($50,000 $8,000) 20% = $8, ($65,000 $8,000) 20% = $11, d ($50,000 $8,000) 80% = $33, ($65,000 $8,000) 80% = $45, ($72,000 $8,000) 80% = $51, The budget indicates that the minimum cash balance will not be maintained in August. This is due to the capital expenditures and note repayment requiring significant cash outflows during this month. This situation can be corrected by borrowing and/or by the sale of the marketable securities, if they are held for such purposes. At the end of June and July, the cash balance will exceed the minimum desired balance, and the excess could be considered for temporary investment. 403

42 P13 4 a. Standard Materials and Labor Cost per Faucet Direct materials ($ lbs.)... $18.40 Direct labor [$14.60 (15 min./60 min.)] $22.05 b. Direct Materials Cost Variance Price variance: Direct Materials Price Variance = (Actual Price Standard Price) Actual Quantity Direct Materials Price Variance = ($11.75 per lb. $11.50 per lb.) 12,400 lbs. Direct Materials Price Variance = $3,100 Unfavorable Variance Quantity variance: Direct Materials Quantity Variance = (Actual Quantity Standard Quantity) Standard Price Direct Materials Quantity Variance = (12,400 lbs. 12,000 lbs.*) $11.50 per lb. Direct Materials Quantity Variance = $4,600 Unfavorable Variance *7,500 units 1.6 lbs. Total direct materials cost variance: Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance Direct Materials Cost Variance = $3, ,600 Direct Materials Cost Variance = $7,700 Unfavorable Variance 404

43 P13 4, Concluded c. Direct Labor Cost Variance Rate variance: Direct Labor Rate Variance = (Actual Rate per Hour Standard Rate per Hour) Actual Hours Direct Labor Rate Variance = ($15.00 $14.60) 1,800 hrs.* Direct Labor Rate Variance = $720 Unfavorable Variance *50 employees 36 hrs. Time variance: Direct Labor Time Variance = (Actual Direct Labor Hours Standard Direct Labor Hours) Standard Rate per Hour Direct Labor Time Variance = (1,800 hrs.* 1,875 hrs.**) $14.60 per hr. Direct Labor Time Variance = $1,095 Favorable Variance *50 employees 36 hrs. **7,500 units 0.25 hr. Total direct labor cost variance: Direct Labor Cost Variance = Direct Labor Rate Variance + Direct Labor Time Variance Direct Labor Cost Variance = $720 $1,095 Direct Labor Cost Variance = $375 Favorable Variance 405

44 P13 5 a. Direct Materials Cost Variance Price variance: Direct Materials Price Variance = (Actual Price Standard Price) Actual Quantity Direct Materials Price Variance = ($5.00 per lb. $5.10 per lb.) 70,600 lbs. Direct Materials Price Variance = $7,060 Favorable Variance Quantity variance: Direct Materials Quantity Variance = (Actual Quantity Standard Quantity) Standard Price Direct Materials Quantity Variance = (70,600 lbs. 71,000 lbs.) $5.10 per lb. Direct Materials Quantity Variance = $2,040 Favorable Variance Total direct materials cost variance: Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance Direct Materials Cost Variance = $7,060 $2,040 Direct Materials Cost Variance = $9,100 Favorable Variance b. Direct Labor Cost Variance Rate variance: Direct Labor Rate Variance = (Actual Rate per Hour Standard Rate per Hour) Actual Hours Direct Labor Rate Variance = ($17.80 $17.50) 1,330 hrs. Direct Labor Rate Variance = $399 Unfavorable Variance Time variance: Direct Labor Time Variance = (Actual Direct Labor Hours Standard Direct Labor Hours) Standard Rate per Hour Direct Labor Time Variance = (1,330 hrs. 1,300 hrs.) $17.50 per hour Direct Labor Time Variance = $525 Unfavorable Variance 406

45 P13 5, Continued Total direct labor cost variance: Direct Labor Cost Variance = Direct Labor Rate Variance + Direct Labor Time Variance Direct Labor Cost Variance = $399 + $525 Direct Labor Cost Variance = $924 Unfavorable Variance c. Appendix: Factory Overhead Cost Variance Variable factory overhead controllable variance: Actual variable factory overhead cost incurred... $ 4,000 Budgeted variable factory overhead for 1,300 hrs. 4,030 Variance favorable... $ 30 Fixed factory overhead volume variance: Normal capacity at 100%... 1,350 hrs. Standard for amount produced... 1,300 Productive capacity not used hrs. Standard fixed factory overhead cost rate... $4.90 Variance unfavorable Total factory overhead cost variance unfavorable... $