Concept explainers
Novo, Inc., wants to develop an activity flexible budget for the activity of moving materials. Novo uses eight forklifts to move materials from receiving to stores. The forklifts are also used to move materials from stores to the production area. The forklifts are obtained through an operating lease that costs $18,000 per year per forklift. Novo employs 25 forklift operators who receive an average salary of $50,000 per year, including benefits. Each move requires the use of a crate. The crates are used to store the parts and are emptied only when used in production. Crates are disposed of after one cycle (two moves), where a cycle is defined as a move from receiving to stores to production. Each crate costs $1.80. Fuel for a forklift costs $3.60 per gallon. A gallon of gas is used every 20 moves. Forklifts can make three moves per hour and are available for 280 days per year, 24 hours per day (the remaining time is downtime for various reasons). Each operator works 40 hours per week and 50 weeks per year.
Required:
- 1. Prepare a flexible budget for the activity of moving materials, using the number of cycles as the activity driver.
- 2. Calculate the activity capacity for moving materials. Suppose Novo works at 80 percent of activity capacity and incurs the following costs:
Prepare the budget for the 80 percent level and then prepare a performance report for the moving materials activity.
- 3. Calculate and interpret the volume variance for moving materials.
- 4. Suppose that a redesign of the plant layout reduces the demand for moving materials to one-third of the original capacity. What would be the budget formula for this new activity level? What is the budgeted cost for this new activity level? Has activity performance improved? How does this activity performance evaluation differ from that described in Requirement 2? Explain.
1.
Construct a flexible budget for N Company for the activity of moving materials using number of cycles as the activity driver.
Explanation of Solution
Flexible budget: A flexible budget is a statement of estimate regarding revenues and expenses for a future period that can be modified depending on the level of output.
Resource |
Fixed ($) | Variable |
Salaries | 1,250,000 (1) | - |
Lease | 144,000 (2) | - |
Crates | - | $1.80 |
Fuel | - | (3) $0.36 |
Total | 1,394,000 | $2.16 |
Table (1)
Working notes:
(1) Calculate the total salary expenses.
(2) Calculate the total lease payable.
(3) Calculate the fuel consumption per machine per cycle.
2.
Compute the activity capacity of N Company for moving materials assuming that N Company works at 80 percentage activity capacity. Construct a budget for 80 percent capacity level and also prepare a performance report for the moving materials activity if N Company incurred the following cost.
Salaries - $1,290,000
Lease - $144,000
Crates - $118,000
Fuel - $24,000
Explanation of Solution
Prepare a flexible budget for N Company at 80 percentage activity capacity.
Resource |
Fixed ($) |
Variable ($) |
Activity output 60,000 cycles (6) ($) |
Salaries | 1,250,000 (1) | - | 1,250,000 |
Lease | 144,000 (2) | - | 144,000 |
Crates | - | $1.80 | 108,000 (4) |
Fuel | - | $0.36 (3) | 21,600 (5) |
Total | 1,394,000 | $2.16 | 1,523,600 |
Table (2)
Working notes:
(4) Calculate the total activity output with respect to crates.
(5) Calculate the total activity output with respect to fuel.
(6) Compute the 80 percent activity capacity of N Company.
(7) Compute the operator capacity of N Company.
Compute the forklift capacity of N Company.
Capacity is determined by the minimum f forklift capacity and operator capacity. Therefore, 75,000 cycles is the output capacity.
Prepare a performance report for moving materials of N Company.
N Company
Performance report
Resource |
Actual costs ($) |
Budgeted cost ($) |
Budget variance ($) |
(a) | (b) | ||
Salaries | 1,290,000 | 1,250,000 | 40,000 |
Lease | 144,000 | 144,000 | 0 |
Crates | 118,000 | 108,000 | 10,000 |
Fuel | 24,000 | 21,600 | 2,400 |
Total | 1,576,000 | 1,523,600 | 52,400 |
Table (3)
3.
Compute the volume variance of N Company and interpret the results.
Explanation of Solution
Since standard quantity equals zero, the volume variance is the capacity acquisition cost.
The volume variance is $1,394,000.
4.
Compute the budget formula and new activity level if a redesign of the plant layout reduces the demand for moving materials to one-third of the original capacity. Provide information and evaluate the calculated result with proper explanation.
Explanation of Solution
Resource |
Fixed ($) |
Variable ($) |
Activity output 25,000 cycles ($) |
Salaries | 450,000 | - | 450,000 (8) |
Lease | 54,000 | - | 54,000 (9) |
Crates | - | 1.80 | 45,000 (12) |
Fuel | - | 0.36 | 9,000 (13) |
Total | 504,000 | $2.16 | 558,000 |
Table (4)
Working notes:
(8) Compute the required operators for N Company for the need capacity.
(9) Compute the actual forklifts that will be required by N Company.
(10)Compute the cycle capacity for N Company for the need capacity.
(11) Compute the forklift capacity of N Company.
(12) Compute the activity output for crate of N Company.
(13) Compute the activity output for fuel consumption of N Company.
Want to see more full solutions like this?
Chapter 12 Solutions
Cornerstones of Cost Management
- Krouse Company produces two products, forged putter heads and laminated putter heads, which are sold through specialty golf shops. The company is in the process of developing itsoperating budget for the coming year. Selected data regarding the companys two products areas follows: Manufacturing overhead is applied to units using direct labor hours. Variable manufacturing overhead Ls projected to be 25,000, and fixed manufacturing overhead is expected to be15,000. The estimated cost to produce one unit of the laminated putter head is: a. 42. b. 46. c. 52. d. 62.arrow_forwardFoy Company has a welding activity and wants to develop a flexible budget formula for the activity. The following resources are used by the activity: Four welding units, with a lease cost of 12,000 per year per unit Six welding employees each paid a salary of 50,000 per year (A total of 9,000 welding hours are supplied by the six workers.) Welding supplies: 300 per job Welding hours: Three hours used per job During the year, the activity operated at 90 percent of capacity and incurred the actual activity and resource costs, shown on page 676. Lease cost: 48,000 Salaries: 315,000 Parts and supplies: 805,000 Required: 1. Prepare a flexible budget formula for the welding activity using welding hours as the driver. 2. Prepare a performance report for the welding activity. 3. What if welders were hired through outsourcing and paid 30 per hour (the welding equipment is provided by Foy)? Repeat Requirement 1 for the outsourcing case.arrow_forwardElliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of 25,750 and is capable of processing as many as 6,500 purchase orders per year. Each clerk uses a PC and laser printer in processing orders. Time available on each PC system is sufficient to process 6,500 orders per year. The cost of each PC system is 1,100 per year. In addition to the salaries, Elliott spends 27,560 for forms, postage, and other supplies (assuming 26,000 purchase orders are processed). During the year, 25,350 orders were processed. Required: 1. Classify the resources associated with purchasing as (1) flexible or (2) committed. 2. Compute the total activity availability, and break this into activity usage and unused activity. 3. Calculate the total cost of resources supplied (activity cost), and break this into the cost of activity used and the cost of unused activity. 4. (a) Suppose that a large special order will cause an additional 500 purchase orders. What purchasing costs are relevant? By how much will purchasing costs increase if the order is accepted? (b) Suppose that the special order causes 700 additional purchase orders. How will your answer to (a) change?arrow_forward
- Biotechtron, Inc., has two research laboratories in the Southwest, one in Yuma, Arizona, and the other in Bernalillo, New Mexico. The owner of Biotechtron centralized the legal services function in the Yuma office and had both laboratories send any legal questions or issues to the Yuma office. The legal services support center has budgeted fixed costs of 160,000 per year and a budgeted variable rate of 65 per hour of professional time. The normal usage of the legal services center is 2,600 hours per year for the Yuma office and 1,400 hours per year for the Bernalillo office. This corresponds to the expected usage for the coming year. Required: 1. Determine the amount of legal services support center costs that should be assigned to each office. 2. Since the offices produce services, not tangible products, what purpose is served by allocating the budgeted costs? 3. Now, assume that during the year, the legal services center incurred actual fixed costs of 163,000 and actual variable costs of 272,400. It delivered 4,180 hours of professional time2,580 hours to Yuma and 1,600 hours to Bernalillo. Determine the amount of the legal services centers costs that should be allocated to each office. Explain the purposes of this allocation. 4. Did the costs allocated differ from the costs incurred by the legal services center? If so, why?arrow_forwardAmbassador Suites Inc. operates a downtown hotel property that has 300 rooms. On average, 80% of Ambassador Suites' rooms are occupied on weekdays, and 40% are occupied during the weekend. The manager has asked you to develop a budget for the housekeeping and restaurant staff for weekdays and weekends. You have determined that the housekeeping staff requires 30 minutes to clean each occupied room. The housekeeping staff is paid $15 per hour. The housekeeping labor cost is fully variable to the number of occupied rooms. The restaurant has six full-time staff on duty to staff the restaurant for breakfast and lunch (eight hours), regardless of occupancy. However, for every 60 occupied rooms, an additional person is brought in to work in the restaurant for breakfast and lunch (eight hours). The restaurant staff is paid $13 per hour. Prepare two columns, labeled as weekday and weekend day. a. Determine the number of rooms occupied for an average weekday and weekend day. b. Determine…arrow_forward2. Johnny Co. operates under the lean philosophy. As a result, it has a production cell for its power drills. The conversion costs for 4,000 hours of production is budgeted for the year at $2,400,000. During January, 2,000 units were started and completed. Each drill requires 12 minutes of cell production time. (a) Determine the budgeted cell conversion costs per hour (b) Determine the conversion manufacturing costs per unitarrow_forward
- Flounder Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $10 from an outside vendor. Division A needs 9,000 lamps for the coming year. Division B has the capacity to manufacture 45,000 lamps annually. Sales to outside customers are estimated at 36,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $7 per lamp and include $2 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $72,000. Consider the following independent situations.arrow_forwardBlue Spruce Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $10 from an outside vendor. Division A needs 8,200 lamps for the coming year. Division B has the capacity to manufacture 41,000 lamps annually. Sales to outside customers are estimated at 32,800 lamps for the next year. Reading lamps are sold at $12 each. Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $65,600. Consider the following independent situations. (a) What should be the minimum transfer price accepted by Division B for the 8,200 lamps and the maximum transfer price paid by Division A? Minimum transfer price accepted by Division B Maximum transfer price paid by Division A $ $ per unit per unitarrow_forwardLucky Lager has just purchased the Austin Brewery. The brewery is two years old and uses absorption costing. It will “sell” its products to Lucky Lager at $45 per barrel. Paul Brandon, Lucky Lager’s controller, obtains the following information about Austin Brewery’s capacity and budgeted fixed manufacturing costs for 2012: Budgeted Fixed MOH per period Days of Production per period Hours of production per day Barrels per hour Theoretical capacity $28,000,000 360 24 540 Practical capacity $28,000,000 350 20 500 Normal capacity utilization $28,000,000 350 20 400 Master-Budget capacity for each half year: a) January – June 2012 b) July – December 2012 $14,000,000 $14,000,000 175 175 20 20 320 480 In 2012, the Austin Brewery reported these production results: Beginning inventory in barrels, 1 January 2012: 0 Production in barrels: 2,600,000…arrow_forward
- Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps. Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $10.10 from an outside vendor. Division A needs 11,100 lamps for the coming year. Division B has the capacity to manufacture 49,600 lamps annually. Sales to outside customers are estimated at 38,500 lamps for the next year. Reading lamps are sold at $12.09 each. Variable costs are $6.87 per lamp and include $1.41 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $75,900. Consider the following independent situations. What should be the minimum transfer price accepted by Division B for the 11,100 lamps and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 15.25.) Per unit Minimum transfer price accepted by Division B $_ Maximum transfer…arrow_forwardAmbassador Suites Inc. operates a downtown hotel property that has 300 rooms. On average, 80% of Ambassador Suites’ rooms are occupied on weekdays and 40% are occupied during the weekend. The manager has asked you to develop a direct labor budget for the housekeeping and restaurant staff for weekdays and weekends. You have determined that the housekeeping staff requires 30 minutes to clean each occupied room. The housekeeping staff is paid $14 per hour. The housekeeping labor cost is fully variable to the number of occupied rooms. The restaurant has six full-time staff (eight-hour day) on duty, regardless of occupancy. However, for every 60 occupied rooms, an additional person is brought in to work in the restaurant for the eight-hour day. The restaurant staff is paid $12 per hour. Determine the estimated housekeeping, restaurant, and total direct labor cost for an average weekday and average weekend day. Format the budget in two columns, labeled as weekday and weekend day. Enter…arrow_forwardSchneider Logistics Company has built a new warehouse in Columbus, Ohio, to facilitate the consoli-dation of freight shipments to customers in the region. George Schneider must determine how manyteams of dock workers he should hire to handle the cross-docking operations and the other warehouseactivities. Each team costs $5,000 a week in wages and overhead. Extra capacity can be subcontracted ata cost of $8,000 a team per week. Each team, whether in-house or subcontracted, can satisfy 200 laborhours of work a week. The labor hour requirements for the new facility are uncertain. Management hasestimated the following probabilities for the requirements: How many teams should Schneider hire?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,