Webb, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows:
Indirect labor $5.00
Indirect materials 2.50
Fixed overhead costs per month are:
Property taxes 600
The company believes it will normally operate in a range of 4,000 to 8,000 machine hours per month. During the month of August, 2013, the company incurs the following manufacturing overhead costs:
Indirect labor $28,000
Indirect materials 16,200
Property taxes 600
Ex. 186 (Cont.)
Prepare a flexible budget report, assuming that the company used 6,000 machine hours during August.
Lapp Manufacturing uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $480,000. Variable costs and their percentage relationships to sales are:
Sales commissions 6%
Fixed selling expenses consist of sales salaries $80,000 and depreciation on delivery equipment $20,000.
Prepare a flexible budget for increments of $40,000 of sales within the relevant range.
Cadiz Co. 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 5%
Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000.
The actual selling expenses incurred in February, 2013, by Cadiz are as follows:
Sales commissions $17,200
Fixed selling expenses consist of sales salaries $41,500 and depreciation on delivery equipment $10,000.
Prepare a flexible budget performance report, assuming that February sales were $330,000.
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 $120,000.
2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000.
Develop the budgeted cost formula for the Assembly Department and identify the fixed and variable costs.
Ace Production Co. has two production departments, Fabricating and Assembling. At a department managers’ meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following.
1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $100,000 in the Fabricating Department, and $80,000 in the Assembling Department.
Ex. 190 (Cont.)
2. At normal capacity of 100,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000 in the Fabricating Department, and $290,000 in the Assembling Department.
(a) State the total budgeted cost formula for each department.
(b) Compute the total budgeted cost for each department, assuming actual direct labor hours worked were 106,000 and 94,000, in the Fabricating and Assembling Departments, respectively.
Hubbard, Inc.’s static budget at 3,000 units of production includes $12,000 for direct labor, $3,000 for utilities (variable), and total fixed costs of $24,000. Actual production and sales for the year was 9,000 units, with an actual cost of $70,800.
Determine if Hubbard is over or under budget.
Campbell Clothing produces men’s ties. The following budgeted and actual amounts are for 2013:
Cost Budget at 5,000 Units Actual Amounts at 5,800 Units
Direct materials $60,000 $71,000
Direct labor 75,000 86,500
Equipment depreciation 5,000 5,000
Indirect labor 7,500 8,600
Indirect materials 9,000 9,600
Rent and insurance 12,000 13,000
Prepare a performance budget report for Campbell Clothing for the year.
Data concerning manufacturing overhead for Wilson Industries 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.
Ex. 193 (Cont.)
The flexible budget formula and the cost and activity for the months of July and August are as follows:
Flexible Budget Per
Direct Labor Hour Actual Costs and Activity
Direct labor hours 6,000 7,000
Indirect materials $3.50 $ 20,500 $ 25,100
Indirect labor 6.00 39,500 40,700
Factory supplies 1.00 7,600 8,200
Depreciation $20,000 15,000 15,000
Supervision 25,000 23,000 26,000
Property taxes 10,000 12,000 12,000
Total costs $117,600 $127,000
(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.
Strickland Corp.’s manufacturing overhead budget for the first quarter of 2013 contained the following data:
Indirect materials $40,000
Indirect labor 24,000
Ex. 194 (Cont.)
Supervisor’s salary $80,000
Property taxes 8,000
Actual variable costs for the first quarter were:
Indirect materials $37,200
Indirect labor 26,400
Actual fixed costs were as expected except for property taxes which were $9,000. All costs are considered controllable by the department manager except for the supervisor’s salary.
Prepare a manufacturing overhead responsibility performance report for the first quarter.
The Deluxe Division, a profit center of Riley Manufacturing Company, reported the following data for the first quarter of 2013:
Variable costs 6,300,000
Controllable direct fixed costs 1,200,000
Noncontrollable direct fixed costs 530,000
Indirect fixed costs 300,000
(a) Prepare a performance report for the manager of the Deluxe 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?
Danner Co. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows.
Operating Data Women’s Shoes Men’s Shoes Children’s Shoes
Contribution margin $280,000 (3) $220,000
Controllable fixed costs 130,000 (4) (5)
Controllable margin (1) $ 90,000 96,000
Sales 800,000 480,000 (6)
Variable costs (2) 330,000 250,000
(a) Compute the missing amounts. Show computations.
(b) Prepare a responsibility report for the Women’s Shoe Division assuming (1) the data are for the month ended June 30, 2013, and (2) all data equal budget except variable costs which are $20,000 over budget.
The Real Estate Products Division of McKenzie Co. is operated as a profit center. Sales for the division were budgeted for 2013 at $1,250,000. The only variable costs budgeted for the division were cost of goods sold ($610,000) and selling and administrative ($80,000). Fixed costs were budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative and $95,000 for noncontrollable fixed costs. Actual results for these items were:
Cost of goods sold
Selling and administrative
Noncontrollable fixed 105,000
(a) Prepare a responsibility report for the Real Estate Products Division for 2013.
(b) Assume the division is an investment center, and average operating assets were $1,200,000. Compute ROI.
The Pacific Division of Henson Industries reported the following data for the current year.
Variable costs 2,600,000
Controllable fixed costs 800,000
Average operating assets 5,000,000
Top management is unhappy with the investment center’s return on investment (ROI). It asks the manager of the Pacific Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action.
1. Increase sales by $400,000 with no change in the contribution margin percentage.
2. Reduce variable costs by $120,000.
3. Reduce average operating assets by 4%
(a) Compute the return on investment (ROI) for the current year.
(b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round to one decimal.)
The Medford Burkett Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.
Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The printout of the actual operating results appeared as follows.
Planes Taxis Limos
Service revenue $ ? $450,000 $ ?
Variable costs 5,000,000 ? 320,000
Contribution margin ? 180,000 380,000
Controllable fixed costs 1,500,000 ? ?
Controllable margin ? 70,000 176,000
Average operating assets 25,000,000 ? 1,600,000
Return on investment 12% 10% ?
Determine the missing pieces of information above.
Perez Corp. reported the following:
Beginning of year operating assets $3,200,000
End of year operating assets 3,000,000
Contribution margin 1,000,000
Controllable fixed costs 643,000
Its required return is 10%.
Compute the company’s ROI.
Lombard, Inc. has two investment centers and has developed the following information:
Department A Department B
Departmental controllable margin $120,000 ?
Average operating assets ? $400,000
Sales 800,000 250,000
ROI 10% 12%
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 $60,000 as a result of reducing variable costs, Department A’s new ROI would be _________________.
The Atlantic Division of Stark Productions Company reported the following results for 2013:
Variable costs 3,200,000
Controllable fixed costs 300,000
Average operating assets 2,500,000
Management is considering the following independent alternative courses of action in 2014 in order to maximize the return on investment for the division.
1. Reduce controllable fixed costs by 10% with no change in sales or variable costs.
2. Reduce average operating assets by 10% with no change in controllable margin.
3. Increase sales $500,000 with no change in the contribution margin percentage.
(a) Compute the return on investment for 2013.
(b) Compute the expected return on investment for each of the alternative courses of action.
Data for the following subsidiaries of Olive Manufacturing, which are operated as investment centers, are as follows:
Fleming Company Oak Company
Sales $3,000,000 $2,000,000
Controllable margin (1) (3)
Average operating assets (2) 4,000,000
Contribution margin 1,200,000 800,000
Controllable fixed costs 500,000 200,000
Return on Investment 10% (4)
Compute the missing amounts using the ROI formula.
The data for an investment center is given below.
Current assets $ 300,000 $ 700,000
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 $760,000.
What is the return on investment for the center for 2013?