Question Details

Accounting 101 PART 6 BUDGETARY CONTROL AND
RESPONSIBILITY ACCOUNTING


Exercises
Ex.  111
Golden Company's master budget reflects budgeted sales information for the month of June, 2002, as follows:
	Budgeted Quantity	Budgeted Unit Sales Price
	Product A	15,000	$7
	Product B	18,000	$9

During June, the company actually sold 13,900 units of Product A at an average unit price of $7.30 and 18,800 units of Product B at an average unit price of $8.90.

Instructions
Prepare a Sales Budget Report for the month of June for Golden Company which shows whether the company achieved its planned objectives.

Ex.  112
Heerey Company developed its annual manufacturing overhead budget for its master budget for 2002 as follows:
	120,000 Direct
Expected annual operating capacity	   Labor Hours	
Variable overhead costs
	Indirect labor	$  480,000
	Indirect materials	90,000
	Factory supplies	      60,000
		Total variable costs	    630,000
Fixed overhead costs
	Depreciation	180,000
	Supervision	144,000
	Property taxes	      96,000
		Total fixed costs	    420,000
Total costs		$1,050,000

The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours.

Instructions
Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours.

Ex.  113
Eaton Company has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department:

EATON COMPANY
Monthly Flexible Manufacturing Overhead Budget
Mixing Department

Activity level
	Direct labor hours	3,000	4,000
Variable costs
	Indirect materials	$  2,100	$  2,800
	Indirect labor	15,000	20,000
	Factory supplies	    6,900	    9,200
		Total variable costs	  24,000	  32,000
Fixed costs
	Depreciation	20,000	20,000
	Supervision	10,000	10,000
	Property taxes	  15,000	  15,000
		Total fixed costs	  45,000	  45,000
Total costs		$69,000	$77,000

Instructions
Prepare a flexible budget at the 5,000 direct labor hours of activity.

Ex.  114
Drennon Company uses a flexible budget for manufacturing overhead based on machine hours.  Variable manufacturing overhead costs per machine hour are as follows:

	Indirect Labor	$8.00
	Indirect Materials	2.50
	Maintenance	.80
	Utilities	.30

Fixed overhead costs per month are:
	Supervision	$600
	Insurance	200
	Property Taxes	300
	Depreciation	900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month.

Instructions
Prepare a flexible manufacturing overhead budget for the expected range of activity, using increments of 1,000 machine hours.

Ex.  115
Drennon Company uses a flexible budget for manufacturing overhead based on machine hours.  Variable manufacturing overhead costs per machine hour as follows:
	Indirect Labor	$8.00
	Indirect Materials	2.50
	Maintenance	.80
	Utilities	.30
Fixed overhead costs per month are:
	Supervision	$600
	Insurance	200
	Property Taxes	300
	Depreciation	900
The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. During the month of August, 2002, the company incurs the following manufacturing overhead costs:
	Indirect Labor	$22,000
	Indirect Materials	8,100
	Maintenance	2,500
	Utilities	950
	Supervision	720
	Insurance	200
	Property Taxes	300
	Depreciation	950
Instructions
Prepare a flexible budget report, assuming that the company used 3,000 machine hours during August.  The company expected to use 3,000 machine hours.

Ex.  116
Jeltz Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are:

	Sales commissions	6%
	Advertising	4%
	Traveling	5%
	Delivery	1%

Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equip-ment $10,000.

Instructions
Prepare a flexible budget for increments of $30,000 of sales within the relevant range.

Ex.  117
Jeltz Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are:

	Sales commissions	6%
	Advertising	4%
	Traveling	5%
	Delivery	1%

Fixed selling expenses consist of Sales Salaries $40,000 and Depreciation on Delivery Equipment $10,000.

Ex.  117  (cont.)
The actual selling expenses incurred in February, 2002, by Jeltz Company are as follows:
	Sales commissions	$20,600
	Advertising	12,000
	Traveling	16,900
	Delivery	2,400
Fixed selling expenses consist of Sales Salaries $41,500 and Depreciation on Delivery Equip-ment $10,000.

Instructions
Prepare a flexible budget performance report, assuming that February sales were $330,000.  Expected and actual sales are the same.

Ex.  118
A flexible budget graph for the Assembly Department shows the following:
1.	At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $60,000.
2.	At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $180,000.

Instructions
Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs.

Ex.  119
Duncan Company uses flexible budgeting to control manufacturing overhead. The budget below was prepared for the month ending June 30, 2003.

								Direct Labor Hours	
	 12,000		 15,000		  18,000	
Indirect materials	$36,000	$45,000	$  54,000
Indirect labor	9,000	11,250	13,500
Utilities	    6,000	    7,500	      9,000
	Total variable costs	  51,600	  63,700	    76,500

Rent	10,000	10,000	10,000
Depreciation	8,000	8,000	8,000
Insurance	    5,500	    5,500	      5,500
	Total fixed costs	  23,500	  23,500	    23,500
Total costs	$74,500	$87,250	$100,000

During the month of June, 16,200 direct labor hours were worked and the following costs were incurred:
Indirect materials	$49,200
Indirect labor	11,980
Utilities	7,800
Rent	10,000
Depreciation	8,200
Insurance	5,620

Instructions
a.	Prepare a flexible budget at the 16,200 direct labor hour level of activity.
b.	Prepare a manufacturing overhead budget at the 16,200 direct labor hour level of activity.	
 
Ex.  120
Data concerning manufacturing overhead for Friendly Company are presented below. The Mixing Department is a cost center.

An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level.

The flexible budget formula and the cost and activity for the months of July and August are as follows:
Ex.  120 (cont.)
	Flexible Budget Per     
	Direct Labor Hour	  Actual Costs and Activity	
					    July		  August	
Direct labor hours		6,000	7,000
Overhead costs
	Variable
		Indirect materials	$3.00	$  17,600	$  21,500
		Indirect labor	6.00	39,500	40,700
		Factory supplies	  1.00	8,600	8,500
	Fixed
		Depreciation	$20,000	15,000	15,000
		Supervision	24,000	21,600	25,000
		Property taxes	    5,000	    12,000	    12,000
Total costs			$114,300	$122,700

Instructions
(a)	Prepare the responsibility reports for the Mixing Department for each month.
(b)	Comment on the manager's performance in controlling costs during the two month period.
Ex.  121
Dreer Company's manufacturing overhead budget for the first quarter of 2002 contained the following data:

Variable Costs
	Indirect Materials	$25,000
	Indirect Labor	12,000
	Utilities	14,000
	Maintenance	6,000
Ex.  121  (cont.)
Fixed Costs
	Supervisor's Salary	$40,000
	Depreciation	8,000
	Property taxes	4,000

Actual variable costs for the first quarter were:
	Indirect Materials	$23,300
	Indirect Labor	13,200
	Utilities	14,600
	Maintenance	5,300

Actual fixed costs were as expected except for property taxes which were $4,800. All costs are considered controllable by the department manager except for the supervisor's salary.

Instructions
Prepare a manufacturing overhead responsibility performance report for the first quarter.


Ex.  122
The Ace Division, a profit center of Crowe Engineering Company, reported the following data for the first quarter of 2002:
	Sales	$6,000,000
	Variable costs	4,500,000
	Controllable direct fixed costs	600,000
	Noncontrollable direct fixed costs	400,000
	Indirect fixed costs	150,000

Instructions
(a)	Prepare a performance report for the manager of the Ace Division.
(b)	What is the best measure of the manager's performance?  Why?
(c)	How would the responsibility report differ if the division was an investment center?

Ex.  123
Reese Company has two investment centers and has developed the following information:
	Department A	Department B
Departmental controllable margin	$150,000	?
Average operating assets	?	$500,000
Sales	800,000	250,000
ROI	10%	12%

Instructions
Answer the following questions about Department A and Department B.

1.	What was the amount of Department A's average operating assets?  $____________.

2.	What was the amount of Department B's controllable margin?  $____________.

3.	If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________.

4.	If Department A is able to increase its controllable margin by $30,000 as a result of reducing variable costs, Department A's new ROI would be _________________.

Ex.  124
The Appliance Division of Malone Manufacturing Company reported the following results for 2002:

	Sales	$4,000,000
	Variable costs	3,200,000
	Controllable fixed costs	200,000
	Average operating assets	3,000,000

Management is considering the following independent alternative courses of action in 2003 in order to maximize the return on investment for the division.

1.	Reduce controllable fixed costs by 15% with no change in sales or variable costs.
2.	Reduce average operating assets by 20% with no change in controllable margin.
3.	Increase sales $600,000 with no change in the contribution margin percentage.

Instructions
(a)	Compute the return on investment for 2002.
(b)	Compute the expected return on investment for each of the alternative courses of action.

Ex.  125
Data for the following subsidiaries of Timmons Company which are operated as investment centers are as follows:
	Black Company	Greer Company
Sales	$3,000,000	$2,000,000
Controllable Margin	(1)	(3)
Average Operating Assets	(2)	6,000,000
Contribution Margin	900,000	900,000
Controllable Fixed Costs	400,000	150,000
Return on Investment	10%	(4)

Instructions
Compute the missing amounts using the ROI formula.

Ex.  126
The data for an investment center is given below.
	    1/1/02		  12/31/02	
Current Assets	$   400,000	$   600,000
Plant Assets	3,000,000	4,000,000
Idle Plant Assets	250,000	330,000
Land held for future use	1,200,000	1,200,000

The controllable margin is $960,000.  What is the return on investment for the center for 2002?

Ex.  127
The owner of Bronx Bagels has recently expanded his business in order to add additional product lines. In addition to bagels, Bronx Bagels now sells muffins and sandwiches. The company has a minimum rate of return of 16%.
		   Bagels		 Muffins		Sandwiches
Sales	$1,000,000	$75,000	$  900,000
Controllable margin	350,000	15,750	270,000
Average operating costs	1,750,000	105,000	1,500,000

Instructions
a.	Compute the return on investment (ROI) for each investment center.
b.	Compute the residual income for each investment center.