Concept explainers
1.
Prepare a performance report for incorporation M for the year 2015.
1.
Explanation of Solution
Prepare a performance report for incorporation M manufacturing:
Incorporation M | |||
Performance Report | |||
For the year 2015 | |||
Particulars | Actual costs | Budgeted costs | |
Direct materials | $ 440,000 | $ 480,000(1) | $40,000 F |
Direct labour | 355,000 | 320,000(2) | 35,000 U |
Depreciation | 100,000 | 100,000 | 0 |
Maintaining equipment | 425,000 | 435,000(3) | 10,000 F |
Machining | 142,000 | 137,000(4) | 5,000 U |
Moving materials | 232,500 | 240,000(5) | 7,500 F |
Inspecting products | 160,000 | 145,000(6) | 15,000 U |
Total | $ 1,854,500 | $ 1,857,000 | $2,500 F |
Table (1)
Therefore, the budget variance of incorporation M for the year 2015 is $2,500 favourable.
Note: Budgeted formulas for following items in the above table (1) are ascertained by using the high-low method that is using the appropriate cost driver for each method.
Working notes:
(1)
(2)
(3)
The fixed and variable costs portions of maintaining equipment is computed using high-low method as follows:
Therefore,
(4)
The fixed and variable costs portion of machining is determined using high-low method as follows:
Therefore,
(5)
The fixed and variable costs portion of moving materials is calculated using high-low method as follows:
Therefore,
(6)
The fixed and variable costs portion of inspecting products is determined using high-low method as follows:
Therefore,
2.
Determine the budgeted unit
2.
Explanation of Solution
Compute the pool rates:
Note: The pool (a) incorporates both material and labor costs. The total for each pool represents the appropriate costs related with the given driver in the flexible budget. The totals represent the second activity level of the budget.
Determine the unit cost:
Pool | Calculation | Amount ($) |
a | $ 110,000 | |
b | $ 33,600 | |
c | $ 3,625 | |
d | $ 5,625 | |
Total | $ 152,850 | |
Divide: Units | 10,000 units | |
Unit cost | | $ 15.29 (rounded off) |
Table (2)
Therefore, the unit cost for the incorporation M is $15.29.
3.
Describe how activity-based budgeting may provide useful data for non-value-added activities.
3.
Explanation of Solution
To provide more insight into controlling the activity and its associated cost, it is necessary to have significant knowledge about how the resource costs change with activity drivers and the consumption of resources by each activity.
Example: - The moving material is deemed to be a non-value-added activity, and efforts should be made to diminish the demands for this activity. If the number of moves can able to decrease to 20,000 from the expected 40,000, then the costs can be reduced by not only eliminating the need for the four operators but also by decreasing the demand to lease from four to two forklifts. Whereas, while considering in the short run, if the demand for their service is reduced the cost of leasing forklifts may insist.
Particulars | 20,000 moves | 40,000 moves |
Materials handling: | ||
Forklifts | $ 40,000 | $ 40,000 |
Operators | $ 120,000 | $ 240,000 |
Fuel | $ 5,000 | $ 10,000 |
Total | $ 165,000 | $ 290,000 |
Table (3)
The information unveils that in the short run the forklift leases must remain but the number of operators should be cut down and it is assumed that each operator can do 5,000 moves per year. An extra benefit of $20,000 can be achieved by subleasing the two forklifts. Therefore, the budget points out that by reducing the requirement for materials handling to 20,000 moves can able to save between $125,000 and $145,000 relative to the 40,000-move level. If the activity requirement is reduced to nil, an additional amount can able to save (up to $165,000).
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Chapter 12 Solutions
Cornerstones of Cost Management (Cornerstones Series)
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