Gen Combo Loose Leaf Financial Accounting; Connect Access Card
Gen Combo Loose Leaf Financial Accounting; Connect Access Card
18th Edition
ISBN: 9781264094295
Author: williams
Publisher: MCG
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Chapter 25, Problem 6CP

a.

To determine

Prepare a production budget for the coming year for Plant B of Corporation U.

a.

Expert Solution
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Explanation of Solution

Budget: Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business costs. Management should set the budgeted amount at reasonable and achievable levels.

Production budget: Production budget is the estimation or projection of number of units the company needs to produce to equate the planned sales or budgeted sales and inventory.

Prepare a production budget.

Production Budget
ParticularsUnits
Budgeted unit20,000
Add: Desired ending inventory of finished goods (10%×20,000 units)2,000
Units budgeted to be available for sale22,000
Less: Beginning inventory units0
Planned Production of Finished Goods22,000

Table (1)

Hence, the planned production of finished goods is 22,000 units.

b.

To determine

Prepare a budgeted responsibility income statement for the coming year for Plant B of Corporation U.

b.

Expert Solution
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Explanation of Solution

Budget: Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business costs. Management should set the budgeted amount at reasonable and achievable levels.

Prepare a budgeted income statement.

Plant B
Budgeted Income Statement
For the year ended December 31,
ParticularsAmountAmount
 Sales Revenue (20,000 units×$425 per unit)  $8,500,000
Less: Cost of Goods Sold (20,000 units×$250 per unit)  ($5,000,000)
 Gross Profit    $3,500,000
Less: Operating Expenses:  
Variable Selling and Administrative Expense  (20,000 units×$5 per unit)$100,000 
Fixed Selling and Administrative Expense$1,800,000 
 Total Operating Expenses ($1,900,000)
 Budgeted Operating Income  $1,600,000

Table (2)

Hence, the budgeted operating income for Plant B of Corporation U is $1,600,000.

c.

To determine

Compute the direct labor variances and indicate whether direct labor variances are favorable or unfavorable and explain reason for such considerations.

c.

Expert Solution
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Explanation of Solution

Labor efficiency variance: Labor efficiency is a part of a total labor variance which is caused due to the difference in the standard and actual number of labor hours required to complete a task. The labor rate variance can be calculated by using the formula:

Labor efficiency variance = Standard hourly rate ×(Standard hoursActual Hours)

Compute labor efficiency variance.

Labor efficiency variance} = Standard hourly rate ×[(Actual units produced)×(Standard hours per unit)Actual Hours]=$90 per hour×[(23,000 units×1.5 hours per unit)34,000 hours]=$90 per hour×[34,500 hours34,000 hours]=$45,000 favorable

The labor efficiency variance is favorable because workers of Plant B took 500 less hours [34,500 hours34,000 hours] to produce 23,000 units than the standard hours.

Labor rate variance: Labor rate variance usually indicates the extents to which the hourly wages rate that are contributed to deviations from standard costs. Labor rate variance is a part of a total labor variance which is caused due to the difference in the standard hourly rate and the actual. The labor rate variance can be calculated by using the formula:

Labor rate variance = Actual labour cost (Standard hourly rate×Actual hours worked)

Compute labor rate variance.

Labor rate variance = (Standard hourly rate×Actual hours worked)Actual labour cost=($90 per hour×34,000 hours)$3,094,000=$3,060,000$3,094,000=($34,000) Unfavorable

The labor rate variance is unfavorable because actual wage costs of $3,094,000 for 34,000 hours are higher than the standard wage costs of $3,060,000 for 34,000 hours.

d.

To determine

Determine the direct materials variances (materials price variance and quantity variance).

d.

Expert Solution
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Explanation of Solution

Materials price variance: Materials price variance is a part of a total materials variance which is caused due to the difference in the payment price of materials than the estimated standard cost. The material rate variance can be calculated by using the formula:

Material price variance = Actual direct material costs (Standard price×Actual quantity used)

Compute the materials price variance:

Material price variance = Actual direct material costs (Standard price×Actual quantity used)=$1,000,000($20 per pound×50,000 pounds)=$1,000,000$1,000,000=$0 No variance

There is no variance in the material price because the actual price paid was equivalent to the standard price.

Materials quantity variance: Materials quantity variance is a part of a total material variance which arises due to the more or less material used in the production process than the standard quantity. The material rate variance can be calculated by using the formula:

Materials quantity variance} = (Standard price per unit) ×[(Actual units produced)×(Standard price per unit)(Actual quantity of materials purchased)]

Compute the materials quantity variance:

Materials quantity variance} = (Standard price per unit) ×[(Actual units produced)×(Standard price per unit)(Actual quantity of materials purchased)]=$20 per pound×[(23,000 units×2pounds per unit)50,000 pounds]=$20 per pound×[46,000 pounds50,000 pounds]=($80,000) Unfavorable

The materials quantity variance is unfavorable by ($80,000) because 4,000 pounds were used to produce 23,000 units than the standard units that were expected to use.

e.

To determine

Determine the total over- or under applied (both fixed and variable) overheads and indicate whether the cost of goods sold be a larger or smaller expense item after the adjustments made for for over- or under applied overhead.

e.

Expert Solution
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Explanation of Solution

Determine the total over- or under applied (both fixed and variable) overheads.

ParticularsAmount
Overhead applied: 
 Fixed (23,000 units×$45 per unit)$1,035,000
 Variable (23,000 units×$30 per unit)$690,000
 Total overhead applied (A)$1,725,000
  
Actual overhead costs: 
 Fixed$1,080,000
 Variable$620,000
 Total actual overhead (B)$1,700,000
  
Over application of overhead (A)(B)$25,000

Table (3)

Thus, the over-applied of fixed and variable overhead is $25,000. After the adjustment for the over-application of overhead, the Cost of goods sold would be a smaller expense item.

f.

To determine

Determine the actual plant operating profit for the year.

f.

Expert Solution
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Explanation of Solution

Operating profit: Income statement reports revenues and expenses from business operations, and the result of those operations before taxes, other revenues and expenses, is referred as operating profit.

Determine the actual plant operating profit for the year.

Plant B
Actual plant operating profit for the year
ParticularsAmount
 Sales Revenue (21,500 units×$420 per unit) $9,030,000
Less: Cost of Goods Sold (Refer Table (5))($5,419,000)
 Gross Profit  $3,611,000
Less: Selling and Administrative Expense($2,000,000)
 Operating profit $1,611,000

Table (4)

Therefore, the actual plant operating profit for the year is $1,611,000.

Working Note:

Determine the cost of goods sold.

Plant B
Computation of cost of goods sold
ParticularsAmount
 Standard cost of units sold (21,500 units×$250 per unit) $5,375,000
Adjustment for variances:
Less:  Direct labor efficiency variance  ($45,000)
Less:  Over application of overhead($25,000)
Add:  Direct labor rate variance$34,000
Add:  Direct  material quantity variance$80,000
Add:  Direct  material price variance$0
 Total cost of goods sold $5,419,000

Table (5)

g.

To determine

Explain the difference between the budgeted operating profit and the actual operating profit for the Plant B for its first year of operations using flexible budget and identify the part of the variance that would be the plant manager’s responsibility.

g.

Expert Solution
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Explanation of Solution

Budget: Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business costs. Management should set the budgeted amount at reasonable and achievable levels.

Determine the difference amount between the budgeted operating profit and the actual operating profit.

ParticularsAmount
Flexible budget operating profit [{($425255)×21,500 units}$1,800,000] $1,855,000
Less: Actual operating profit (Refer Table (4))($1,611,000)
 Flexible budget variance  $244,000
  
Budgeted operating profit (Refer Table (2))$1,600,000
Less: Actual operating profit (Refer Table (4))($1,611,000)
Master budget($11,000)

Table (6)

As per Table (6), the flexible budget operating profits were $244,000 which is higher than actual profits primarily because actual selling and general administrative costs were $200,000,000 over the budgeted selling and general administrative cost and the net operating variances were $44,000($80,000+$34,000$45,000$25,000). Moreover, the actual operating profit was $11,000 more than the budgeted operating profit. This difference was driven by higher sales than budgeted. The plant manager should bear the responsibility of the flexible budget variance. Since, the unit is a profit center, the plant manager should be held responsible for the inefficient management of selling and general administrative cost.

h.

To determine

Determine the return on investment for the first year of operations and compute the return on sale (ROS) and capital turnover (CT) for the plant using the DuPont method of evaluation.

h.

Expert Solution
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Explanation of Solution

Return on sales ratio evaluates the operating income that can be expected from one dollar of sales. This ratio is calculated using the formula:

Return on sales =Operating earningsNet sales

Determine the return on sales.

Return on sales =Operating earningsNet sales=$1,611,000$9,030,000=17.84%

Capital turnover is a ratio that measures the amount of sales generated from each dollar of capital investment. Thus, it shows the relationship between the net sales and the average capital invested. This ratio is calculated using the formula

Capital turnover =Net salesAverage total assets

Determine the capital turnover.

Capital turnover =Net salesAverage total assets=$9,030,000$8,050,000=112.17%

DuPont model: It is a model which allows the analyst to analyse a company’s performance using ratios. This model uses the ratios that indicate the company performance. DuPont model equation is as follows:

Return on Investment (ROI)}=Capital turnover×Return on salesOperating incomeAverage total assets=Net salesAverage total assets×Operating earningsNet sales

Determine the return on investment.

Return on Investment (ROI)}=Capital turnover×Return on sales=112.17%×17.84%=20.00%

i.

To determine

Identify and explain whether the manager would undertake the project or not, and identify other evaluation tools that could be used by Corporation U to make the performance of the plant better.

i.

Expert Solution
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Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies. The formula for ROI is as follows:

Return on investment(ROI)  = Operating income Average total investment

Determine the ROI of the new equipment.

Return on investment(ROI)= Operating incomeAverage total investment=$108,000$600,000= 18%      

The ROI of the new equipment is 18% and the existing ROI is 20% which reflects that the manager of the plant would not undertake this investment because the existing ROI (20%) is higher than the ROI (18%) of new equipment.

The manager of Corporation U could use residual income or economic value addition measures of plant performance to encourage investment above the required rate of return.

j.

To determine

Explain whether the annual bonus of Plant B’ manger should depend upon the ROI of the plant after deducting the corporate wide administrative fee or not.

j.

Expert Solution
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Explanation of Solution

The bonus of the plant manager should be based on the ROI that would be earned after subtracting the corporate-wide administrative expenses. Assessment of the plant as an investment center implies that the unit is being considered as a stand-alone business. Generally, the stand alone businesses would incur similar administrative expenses.

Therefore, the manager of Plant B should be charged for corporate-wide administrative expenses and the manger should be rewarded based upon the ROI including such expenses.

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Chapter 25 Solutions

Gen Combo Loose Leaf Financial Accounting; Connect Access Card

Ch. 25 - Prob. 6DQCh. 25 - Prob. 7DQCh. 25 - Prob. 8DQCh. 25 - Prob. 9DQCh. 25 - Prob. 10DQCh. 25 - Prob. 11DQCh. 25 - Prob. 12DQCh. 25 - Prob. 13DQCh. 25 - Prob. 14DQCh. 25 - Prob. 15DQCh. 25 - Prob. 1BECh. 25 - Prob. 2BECh. 25 - Prob. 3BECh. 25 - LO25-5 BRIEF EXERCISE 25.4 Balanced...Ch. 25 - LO25-2, LO25-3 BRIEF EXERCISE 25.5 Computations...Ch. 25 - LO25-3 BRIEF EXERCISE 25.6 Criticisms of...Ch. 25 - LO25-2, LO25-4 BRIEF EXERCISE 25.7 Calculate...Ch. 25 - LO25-4 BRIEF EXERCISE 25.8 Calculate EVA The...Ch. 25 - LO25-6 BRIEF EXERCISE 25.9 Variable versus Fixed...Ch. 25 - LO25-2 BRIEF EXERCISE 25.10 Components of...Ch. 25 - LO25-2, LO25-3, LO25-4, LO25-5, LO25-6 EXERCISE...Ch. 25 - Prob. 2ECh. 25 - LO25-1 EXERCISE 25.3 Employee Motivation Assume...Ch. 25 - LO25-2, LO25-3, LO25-4 EXERCISE 25.4 ROI versus...Ch. 25 - Prob. 5ECh. 25 - Prob. 6ECh. 25 - Prob. 7ECh. 25 - Prob. 8ECh. 25 - Prob. 9ECh. 25 - Prob. 10ECh. 25 - Prob. 11ECh. 25 - Prob. 12ECh. 25 - Prob. 13ECh. 25 - Prob. 14ECh. 25 - Prob. 15ECh. 25 - Prob. 1APCh. 25 - Prob. 2APCh. 25 - Prob. 3APCh. 25 - Prob. 4APCh. 25 - Prob. 5APCh. 25 - LO25-5, LO25-6 PROBLEM 25.6A Balanced Scorecard...Ch. 25 - Prob. 7APCh. 25 - Prob. 8APCh. 25 - Prob. 9APCh. 25 - Prob. 1BPCh. 25 - Prob. 2BPCh. 25 - LO25-1, LO25-2, LO25-3, LO25-4 PROBLEM...Ch. 25 - Prob. 4BPCh. 25 - Prob. 5BPCh. 25 - LO25-5, LO25-6 PROBLEM 25.6B Balanced Scorecard in...Ch. 25 - Prob. 7BPCh. 25 - Prob. 8BPCh. 25 - Prob. 9BPCh. 25 - Prob. 1CTCCh. 25 - Prob. 2CTCCh. 25 - Prob. 6CP
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