ATC 8-1 Business Applications Case Static versus flexible budget variances David Catrow is the manufacturing production supervisor for Faraday Motor Works (FMW), a company that manufactures electrical motors for industrial applications. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, “This is the dumbest place I’ve ever worked. Last year the company set up this budget assuming it would sell 150,000 units. Well, it sold only 140,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 150,000 units goal and it sells 160,000. The company’s making all kinds of money. You’d think I’d get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I’d stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I’ve ever worked.” FMW’s master budget and the actual results for the most recent year of operating activity follow: Required a. Did FMW increase unit sales by cutting prices or by using some other strategy? b. Is Mr. Catrow correct in his conclusion that something is wrong with the company’s performance evaluation process? If so, what do you suggest be done to improve the system? c. Prepare a flexible budget and recompute the budget variances. d. Explain what might have caused the fixed costs to be different from the amount budgeted. e. Assume that the company’s materials price variance was favorable and its materials usage variance was unfavorable. Explain why Mr. Catrow may not be responsible for these variances. Now, explain why he may have been responsible for the materials usage variance. f. Assume the labor price variance is unfavorable. Was the labor usage variance favorable or unfavorable? g. Is the fixed cost volume variance favorable or unfavorable? Explain the effect of this variance on the cost of each unit produced.

Critique a Variance Report The Terminator Inc. provides on-site residential pest extermination services. The company bas several mobile teams who are dispatched from a central location in company-owned trucks. The company uses the number of jobs to measure activity. At the beginning of April, the company budgeted for 100 jobs, but the actual number of jobs turned out to be 105. A report comparing the budgeted revenues and costs to the actual revenues and costs appears below: Required: Is the above variance report useful for evaluating how well revenues and costs were controlled during April? Why or Why not?

Refer to Exercise 8.27. At the end of the year, Meliore, Inc., actually produced 310,000 units of the standard model and 115,000 of the deluxe model. The actual overhead costs incurred were: Required: Prepare a performance report for the period. In an attempt to improve budgeting, the controller for Meliore, Inc., has developed a flexible budget for overhead costs. Meliore, Inc., makes two types of products, the standard model and the deluxe model. Meliore expects to produce 300,000 units of the standard model and 120,000 units of the deluxe model during the coming year. The standard model requires 0.05 direct labor hour per unit, and the deluxe model requires 0.08. The controller has developed the following cost formulas for each of the four overhead items: Required: 1. Prepare an overhead budget for the expected activity level for the coming year. 2. Prepare an overhead budget that reflects production that is 10 percent higher than expected (for both products) and a budget for production that is 20 percent lower than expected.

United States Postal Service: Mail sorting time variance One of the operations in the United States Postal Service is a mechanical mail sorting operation. In this operation, handwritten letter mail is sorted at a rate of 1.5 letters per second. An operator sitting at a keyboard mechanically sorts the letter from a three-digit code. The manager of the mechanical sorting operation wishes to determine the number of temporary employees to hire for December. The manager estimates that there will be an additional 24,192,000 pieces of mail in December, due to the upcoming holiday season. Assume that the sorting operators are temporary employees. The union contract requires that temporary employees be hired for one month at a time. Each temporary employee is hired to work 160 hours in the month. A. How many temporary employees should the manager hire for December? B. If each temporary employee earns a standard 17 per hour, what would be the direct labor time variance if the actual number of additional letters sorted in December was 23,895,000?

Calculating factory overhead: two variances Monrovia Manufacturing Inc. normally produces 10,000 units of product A each month. Each unit requires 4 hours of direct labor, and factory overhead is applied on a direct labor hour basis. Fixed costs and variable costs in factory overhead at the normal capacity are 10 and 5 per unit, respectively. Cost and production data for June follow: a. Calculate the flexible-budget variance. b. Calculate the production-volume variance. c. Was the total factory overhead under- or overapplied? By what amount?

Static budget versus flexible budget The production supervisor of the Machining Department for Hagerstown Company agreed to the following monthly static budget for the upcoming year: The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows: The Machining Department supervisor has been very pleased with this performance because actual expenditures for May-July have been significantly less than the monthly static budget of2,358,000. However, the plant manager believes that the budget should not remain fixed for every month but should flex or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows: a. Prepare a flexible budget for the actual units produced for May, June, and July in the MachiningDepartment. Assume depreciation is a fixed cost. b. Compare the flexible budget with the actual expenditures for the first three months.What does this comparison suggest?

Variance interpretation You have been asked to investigate some cost problems in the Assembly Department of Ruthenium Electronics Co., a consumer electronics company. To begin your investigation, you have obtained the following budget performance report for the department for the last quarter. Ruthenium Electronics Co.Assembly Department Quarterly Budget Performance Report Standard Quantity at Standard Rates Actual Quantity at Standard Rates Quantity Variances Direct labor 157,500 227,500 70,000 U Direct materials 297,500 385,000 87,500 U Total 455,000 612,500 157,500 U You also obtained the following reports: Ruthenium Electronics Co.Purchasing Department Quarterly Budget Performance Report Actual Quantity at Standard Rates Actual Quantity at Actual Rates Price Variance Direct materials 437,500 385,000 (52,500) F Ruthenium Electronics Co.Fabrication Department Quarterly Budget Performance Report Standard Quantity at Standard Rates Actual Quantity at Standard Rates Quantity Variances Direct labor 245,000 203,000 (42,000) F Direct materials 140,000 140,000 0 Total 385,000 343,000 (42,000) F You also interviewed the Assembly Department supervisor. Excerpts from the interview follow: Q: What explains the poor performance in your department? A: Listen, youve got to understand what its been like in this department recently. Lately, it seems no matter how hard we try, we cant seem to make the standards. Im not sure what is going on, but weve been having a lot of problems lately. Q: What kind of problems? A: Well, for instance, all this Quarter weve been requisitioning purchased parts from the material storeroom, and the parts just didnt fit together very well. Im not sure what is going on, but during most of this quarter, weve had to scrap and sort purchased partsjust to get our assemblies put together. Naturally, all this takes time and material. And thats not all. Q: Go on. A: All this Quarter the work we've been receiving from the Fabrication Department has been shoddy. I mean, maybe around 20% of the stuff that comes in from Fabrication just cant be assembled. The fabrication is all wrong. As a result we've had to scrap and rework a lot of the stuff. Naturally, this has just shot our quantity variances. Interpret the variance reports in light of the comments by the Assembly Department supervisor.

Problem #11: Standard Costing & Variances Jake’s cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 0.50 direct labor hours to produce one unit (batch) of product, and the variable overhead rate is $5.00 per hour. Actual results are in for last year, which indicates 45,000 batches of cheese were produced and sold. The company's direct labor workforce worked 27,500 hours, and variable overhead costs totaled $144,000. Required: (1) Calculate the variable overhead spending variance. (2) Calculate the variable overhead efficiency variance. (3) Suggest several possible reasons for the variable overhead spending and efficiency variances.

ces Several years ago, Westmont Corporation developed a comprehensive budgeting system for planning and control purposes. While departmental supervisors have been happy with the system, the factory manager has expressed considerable dissatisfaction with the information being generated by the system. A report for the company's Assembly Department for the month of March follows: Machine-hours Variable costs: Supplies Scrap Indirect materials Fixed costs: Wages and salaries Equipment depreciation Total cost Assembly Department Cost Report For the Month Ended March 31 Actual Results 15,000 $ 11,400 42,000 119,000 85,900 110,000 Planning Budget 20,000 $ 12,000 45,000 142,500 Variances $ 600 F 3,000 F 23,500 F 80,000 110,000 $368,300 $ 389,500 $ 21,200 F 5,900 U 0 After receiving a copy of this cost report, the supervisor of the Assembly Department stated, "These reports are super. It makes me feel really good to see how well things are going in my department. I can't understand why those…

Preparing a Flexible Budget for Performance Reporting Suppose you receive the following performance report from the accounting department for your first month as plant manager for a new company. Your supervisor, the vice president of manufacturing, has concerns that the report does not provide an accurate picture of your performance in the area of cost control. Actual Budgeted Variance Units Costs: 10,000 12,000 2,000 U Direct materials $358,800 Direct labor $414,600 Variable manufacturing overhead $216,000 Fixed manufacturing overhead Total costs $432,000 $73,200 F $518,400 $103,800 F $259,200 $43,200 F $450,000 $432,000 $18,000 U $1,439,400 $1,641,600 $202,200 F REQUIRED Prepare a variance analysis Note: Do not use negative signs with your answers. Static Budget Activity Variance Flexible Budget Flexible Budget Variance Units (in cases) 12,000 10,000 Actual 10,000 ✓ Static (Total) Variance Costs: Direct materials Direct labor Variable overhead $ $ 432,000 $ $ 504,000 x $ 360,000 * F…

Problem 10-19 Activity and Spending Variances [LO10-1, LO10-2, LO10-3] You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company’s costing system and “do what you can to help us get better control of our manufacturing overhead costs.” You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control. After much effort and analysis, you determined the following cost formulas and gathered the following actual cost data for March: Cost Formula Actual Cost in March Utilities $16,800 plus $0.15 per machine-hour $ 21,300 Maintenance $38,500 plus $2.00 per machine-hour $ 68,300 Supplies $0.60 per machine-hour $ 10,600 Indirect labor $94,200 plus $1.30 per machine-hour $ 118,500 Depreciation $68,100 $ 69,800 During March, the company worked 16,000…

U Question 7 The Hernandex Company held a Christmas party. The company expected attendance of 150 people and prepared the following budget: Hotel room rental Entertainment Food Decorations Entertainment Food $800 Frit Format Table 500 Total Costs: $2.300 Two hundred people attended the party. The costs incurred were: Hotel room rental $675 640 700 Decorations 350 Total Costs $2.365 A. What is the variance for total costs and it's favorable or unfavorable? B. What is the primary reason for the variance in total costs? 600 400

#4 Yoder Enterprises' actual production for the period required 2,000 standard direct labor hours. Actual fixed overhead for the period was $14,600. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. a. Compute the FMOH budget variance. 14, 600-14,450 = $150 favorable. b. Compute the FMOH volume variance. #1 Chapter 11

Solution Summary: The author explains that Company F increases its unit sales by any other strategy or by cutting the prices. The problem is in the area of performance evaluation system.

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