Chapter 24

CHAPTER 24 55. The master budget of Benedict Company shows that the planned activity level for next

year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected:

Indirect labor $240,000Machine supplies 60,000Indirect materials 70,000Depreciation on factory building 50,000Total manufacturing overhead $420,000

A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of

a. $494,000.b. $420,000.c. $504,000.d. $454,000.

56. Rickets Crickets prepared a 2008 budget for 60,000 units of product. Actual production in 2008 was 65,000 units. To be most useful, what amounts should a performance report for this company compare?a. The actual results for 65,000 units with the original budget for 60,000 unitsb. The actual results for 65,000 units with a new budget for 65,000 units.c. The actual results for 65,000 units with last year's actual results for 67,000 unitsd. It doesn't matter. All of these choices are equally useful.

57. A department has budgeted monthly manufacturing overhead cost of $270,000 plus $3 per direct labor hour. If a flexible budget report reflects $522,000 for total budgeted manu-facturing cost for the month, the actual level of activity achieved during the month wasa. 264,000 direct labor hours.b. 84,000 direct labor hours.c. 174,000 direct labor hours.d. Cannot be determined from the information provided.

64. If a company plans to sell 24,000 units of product but sells 30,000, the most appropriate comparison of the cost data associated with the sales will be by a budget based ona. the original planned level of activity.b. 27,000 units of activity.c. 30,000 units of activity.d. 24,000 units of activity.

70. Romano Roofing's budgeted manufacturing costs for 25,000 squares of shingles are:

Fixed manufacturing costs $15,000Variable manufacturing costs $20.00 per square

Romano produced 20,000 squares of shingles during March. How much are budgeted total manufacturing costs in March?a. $400,000b. $515,000c. $500,000d. $415,000

Test Bank for Accounting Principles, Eighth Edition

74. Trepid Manufacturing Company prepared a fixed budget of 40,000 direct labor hours, with estimated overhead costs of $200,000 for variable overhead and $60,000 for fixed overhead. Trepid then prepared a flexible budget at 38,000 labor hours. How much is total overhead costs at this level of activity?a. $190,000b. $250,000c. $247,000d. $260,000

75. For June, Mark Manufacturing estimated sales revenue at $200,000. It pays sales commissions that are 4% of sales. The sales manager's salary is $95,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses are $5,000. How much are budgeted selling expenses for the month of July if sales are expected to be $180,000?a. $14,000b. $109,000c. $9,000d. $110,000

76. Ziglar’s Sipit Company budgeted manufacturing costs for 25,000 sipits are:

Fixed manufacturing costs $25,000 per month Variable manufacturing costs $12.00 per sipit

Ziglar’s produced 20,000 sipits during March. How much is the flexible budget for total manufacturing costs for March?a. $260,000b. $325,000c. $240,000d. $265,000

77. True Masons budgeted costs for 25,000 linear feet of block are:

Fixed manufacturing costs $12,000 per month Variable manufacturing costs $16.00 per linear

True Masons installed 20,000 linear feet of block during March. How much is budgeted total manufacturing costs in March?a. $320,000b. $412,000c. $400,000d. $332,000

78. In the Klugman Company, indirect labor is budgeted for $36,000 and factory supervision is budgeted for $12,000 at normal capacity of 80,000 direct labor hours. If 90,000 direct labor hours are worked, flexible budget total for these costs isa. $48,000.b. $54,000.c. $52,500.d. $49,500.

79. Wayman Company uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is: $48,000 variable and $135,000 fixed. If Wayman had actual

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Budgetary Planning and Responsibility Accounting

overhead costs of $187,500 for 9,000 units produced, what is the difference between actual and budgeted costs?a. $1,500 unfavorableb. $1,500 favorablec. $4,500 unfavorabled. $6,000 favorable

80. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:

Variable Fixed Indirect materials $140,000 Depreciation $60,000Indirect labor 200,000 Taxes 10,000Factory supplies 20,000 Supervision 50,000

A flexible budget prepared at the 80,000 machine hours level of activity would show total manufacturing overhead costs ofa. $288,000.b. $360,000.c. $384,000.d. $408,000.

82. Cart Company recorded operating data for its shoe division for the year.

Sales $750,000Contribution margin 150,000Controllable fixed costs 90,000Average total operating assets 300,000

How much is controllable margin for the year?a. 20%b. 50%c. $150,000d. $60

107. Given below is an excerpt from a management performance report:

Budget Actual DifferenceContribution margin $1,000,000 $1,050,000 $50,000Controllable fixed costs $ 500,000 $ 450,000 $50,000

The manager's overall performancea. is 20% below expectations.b. is 20% above expectations.c. is equal to expectations.d. cannot be determined from information given.

109. Given below is an excerpt from a management performance report:

Budget Actual Difference Contribution margin $600,000 $580,000 $20,000 UControllable fixed costs $200,000 $220,000 $20,000 U

The manager's overall performancea. is 10% above expectations.

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b. is 10% below expectations.c. is equal to expectations.d. cannot be determined from the information provided.

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112. Garrison Company recorded operating data for its shoe division for the year. The company’s desired return is 5%.

Sales $500,000Contribution margin 100,000Total direct fixed costs 60,000Average total operating assets 200,000

Which one of the following reflects the controllable margin for the year? a. 20%b. 50%c. $30,000d. $40,000

113. The area manager of the Steak House Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows:

Project Investment Controllable Margin ROICharlotte $120,000 $30,000 25%Richmond $540,000 $50,000 9.25%

The Steak House segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Steak House division’s ROI?a. Both the Charlotte and Richmond optionsb. Only the Charlotte optionc. Only the Richmond optiond. Neither the Charlotte nor the Richmond options

114. Timex Corporation recorded operating data for its Cheap division for the year. Timex requires its return to be 10%.

Sales $ 700,000Controllable margin 80,000Total average assets 2,000,000Fixed costs 50,000

What is the ROI for the year? a. 4%b. 35%c. –6%d. 1.5%

115. Halpern Division’s operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Halpern is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Halpern’s required rate of return is 9%. Should Halpern accept this project?a. Yes, ROI will drop by 6.6% which is still above the required rate of return.b. No, the return is less than the required rate of 9%.c. Yes, ROI still exceeds the cost of capital.d. No, ROI will decrease to 7%.

116. Perot Manufacturing reported the following items for 2008:

Income tax expense $ 30,000

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Contribution margin 100,000Controllable fixed costs 40,000Interest expense 20,000Total operating assets 325,000

How much is controllable margin?a. $100,000b. $60,000c. $30,000d. $10,000

117. Merck Pharmaceuticals is evaluating its Vioxx division, an investment center. The division has a $45,000 controllable margin and $300,000 of sales. How much will Merck’s average operating assets be when its return on investment is 10%?a. $450,000b. $495,000c. $300,000d. $255,000

118. An investment center generated a contribution margin of $200,000, fixed costs of $100,000 and sales of $1,000,000. The center’s average operating assets were $400,000. How much is the return on investment?a. 25%b. 175%c. 50%d. 75%

119. Safety Seats Company recorded operating data for its auto accessories division for the year.

Sales $375,000Contribution margin 75,000Total direct fixed costs 45,000Average total operating assets 200,000

How much is ROI for the year if management is able to identify a way to improve the contribution margin by $15,000, assuming fixed costs are held constant?a. 45.0%b. 22.5%c. 15.0% d. 12.0%

120. The current controllable margin for Claremont Division is $62,000. Its current operating assets are $200,000. The division is considering purchasing equipment for $60,000 that will increase annual controllable margin by an estimated $10,000. If the equipment is purchased, what will happen to the return on investment for Claremont Division?a. An increase of 16.1%b. A decrease of 13.3%c. A decrease of 3.3%d. A decrease of 7.2%

121. CinRich Corporation recorded operating data for its Waterhole division for the year. CinRich requires its return to be 9%.

Sales $500,000

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Controllable margin 90,000Total average assets 300,000Fixed costs 30,000

How much is ROI for the year?a. 10%b. 16.7%c. 20%d. 30%

122. Lou Alabassi is the North Division manager and his performance is evaluated by executive management based on Division ROI. The current controllable margin for North Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division?a. An increase of 0.5%b. A decrease of 0.5%c. A decrease of 3.5%d. It will remain unchanged.

123. Cruise Division of Harrah’s Company’s operating results include: controllable margin, $200,000; sales $2,200,000; and operating assets, $800,000. The Cruise Division’s ROI is 25%. Management is considering a project with sales of $100,000, variable expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000. Should management accept this new project?a. No, since ROI will be lowered.b. Yes, since ROI will increase.c. Yes, since additional sales always mean more customers.d. No, since a loss will be incurred.

124. The Eastern Division of Flint Corp. had an ROI of 25% when sales were $1 million and controllable margin was $200,000. What were the average operating assets?a. $50,000b. $250,000c. $800,000d. $4,000

125. Cart Company recorded operating data for its shoe division for the year.

Sales $500,000Contribution margin 90,000Total fixed costs 60,000Average total operating assets 200,000

How much is ROI for the year if management is able to identify a way to improve the contribution margin by $20,000, assuming fixed costs are held constant?a. 25%b. 18%c. 45%d. 12%

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130. If an investment center has generated a controllable margin of $75,000 and sales of $300,000, what is the return on investment for the investment center if average operating assets were $500,000 during the period?a. 15%b. 25%c. 45%d. 60%

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135. Dodge City Parts has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available, for which the following estimates have been made:

Project A - Annual controllable margin = $24,000, operating assets = $400,000Project B - Annual controllable margin = $60,000, operating assets = $550,000

Which project should be funded?a. Both projectsb. Project Ac. Project Bd. Neither project

136. If an investment center has a $45,000 controllable margin and $600,000 of sales, what average operating assets are needed to have a return on investment of 10%?a. $60,000b. $105,000c. $450,000d. $600,000

141. Weiser Company uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is $64,000 variable and $180,000 fixed. If Weiser had actual overhead costs of $250,000 for 9,000 units produced, what is the difference between actual and budgeted costs?a. $2,000 unfavorableb. $2,000 favorablec. $6,000 unfavorabled. $8,000 favorable

142. To develop the flexible budget, management takes all of the following steps except identify thea. activity index and the relevant range of activity.b. variable costs and determine the budgeted variable cost per unit.c. fixed costs and determine the budgeted fixed cost per unit.d. All of these options are steps in developing the flexible budget.

143. A flexible budget is appropriate for

Direct Labor Costs Manufacturing Overhead Costsa. No Nob. Yes Yesc. Yes Nod. No Yes

149. If controllable margin is $300,000 and the average investment center operating assets are $1,000,000, the return on investment isa. .33%.b. 3.33%.c. 10%.d. 30%.

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Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.38. c 54. b 70. d 86. c 102. b 118. a 134. d39. b 55. a 71. d 87. c 103. c 119. b 135. c40. d 56. b 72. d 88. c 104. c 120. c 136. c41. d 57. b 73. b 89. d 105. c 121. d 137. c42. d 58. d 74. b 90. b 106. a 122. c 138. d43. c 59. b 75. b 91. a 107. b 123. a 139. a44. d 60. c 76. d 92. b 108. a 124. c 140. d45. c 61. d 77. d 93. d 109. b 125. a 141. b46. d 62. d 78. c 94. c 110. b 126. c 142. c47. a 63. a 79. b 95. c 111. b 127. b 143. b48. b 64. c 80. d 96. a 112. d 128. d 144. b49. c 65. a 81. c 97. b 113. b 129. a 145. a50. d 66. c 82. d 98. d 114. a 130. a 146. c51. a 67. d 83. a 99. c 115. b 131. a 147. c52. c 68. d 84. c 100. c 116. b 132. c 148. b53. b 69. c 85. b 101. d 117. a 133. c 149. d

EXERCISES

BE 150

Shirk Productions makes a single product. Expected manufacturing costs are as follows:

Variable costsDirect materials $6.50 per unitDirect labor 2.40 per unitManufacturing overhead 1.10 per unit

Fixed costs per monthSupervisory salaries $12,600Depreciation 3,500Other fixed costs 2,200

InstructionsDetermine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.

Solution 150 (4 min.)

3,200 × ($6.50 + $2.40 + $1.10) + ($12,600 + $3,500 + $2,200) = $50,300

BE 151

Sekine Company uses flexible budgets. Items from the budget for March in which 2,000 units were produced and sold appear below:

Direct materials $18,000Indirect materials - variable 2,000Supervisor salaries 15,000Depreciation on factory equipment 4,000Direct labor 10,000

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Property taxes on factory 1,000

InstructionsIf Sekine prepares a flexible budget at 3,000 units, compute its total variable cost.


Variable cost per unit: ($18,000 + $2,000 + $10,000) ÷ 2,000 = $15 per unitVariable cost at 3,000 units: $15 × 3,000 = $45,00BE 152SugarTown’s manufacturing costs for August when production was 1,000 units appear below:

Direct material $12 per unitDirect labor $6,500Variable overhead 5,000Factory depreciation 9,000Factory supervisory salaries 7,800Other fixed factory costs 2,500

InstructionsCompute the flexible budget manufacturing cost amount for a month when 800 units are produced.


Direct material ($12 × 800) $ 9,600Direct labor [($6,500 ÷ 1,000) × 800] 5,200Variable overhead [($5,000 ÷ 1,000) × 800] 4,000Factory depreciation—fixed 9,000Factory supervisory salaries—fixed 7,800Other fixed factory costs—fixed 2,500Total $38,100

BE 153

Butterfly World’s budgeted sales for April were estimated at $500,000, sales commissions at 4% of sales, and the sales manager's salary at $80,000. Shipping expenses were estimated at 1% of sales and miscellaneous selling expenses were estimated at $1,000, plus 0.5% of sales.

InstructionsDetermine the budgeted selling expenses on a flexible budget for April.

Solution 153 (min.)

Sales commissions 4% × $500,000 $ 20,000Sales manager’s salary 80,000Shipping expenses 1% × $500,000 5,000Miscellaneous selling: Fixed portion 1,000

Variable: 0.5% × $500,000 2,500Budgeted selling expenses $108,500

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BE 154

Ranger Company produces men’s shirts. The following budgeted and actual amounts are for 2008:

Cost Budget at 2,500 units Actual Amounts at 2,900 unitsDirect materials $55,000 $65,500Direct labor 70,000 81,000Fixed overhead 35,000 34,500

InstructionsPrepare a performance report for Ranger Company for the year.


RANGER COMPANYManufacturing Performance Budget Report

For the Year Ended December 31, 2008

Budget Actual DifferencesDirect materials $ 63,800 $ 65,500 $1,700 UDirect labor 81,200 81,000 200 FFixed overhead 35,000 34,500 500 FTotal costs $180,000 $181,000 $1,000 U

BE 155

Lincoln Inc. reported the following items for 2008:

Controllable fixed costs $ 77,000Contribution margin 142,000Interest expense 20,000Variable costs 80,000Total assets $925,000

InstructionsCompute the controllable margin for 2008.


$142,000 – $77,000 = $65,000

BE 156

The data for an investment center is given below.January 1, 2008 December 31, 2008

Current Assets $ 400,000 $ 800,000Plant Assets 3,000,000 4,000,000

The controllable margin is $615,000.

Instructions

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Compute the return on investment for the center for 2008.Solution 156 (4 min.)

Average current assets ($400,000 + $800,000) ÷ 2 = $600,000Plant assets ($3,000,000 + $4,000,000) ÷ 2 = $3,500,000ROI = Controllable Margin ÷ Average Operating Assets = $615,000 ÷ $4,100,000 = 15%

BE 157

Data for the Electric Division of Bowden Baseball Company which is operated as an investment center follows:

Sales $6,000,000Contribution Margin 800,000Controllable Fixed Costs 500,000Return on Investment 12%

InstructionsCalculate controllable margin and average operating assets.


Controllable Margin ($800,000 – $500,000) = $300,000Average Operating Assets ($300,000 ÷ .12) = $2,500,000

BE 158

Wimmer Division’s operating results include:

Controllable margin, $150,000 Sales revenue, $1,200,000 Operating assets, $500,000

Wimmer is considering a project with sales of $120,000, expenses of $84,000, and an investment of $180,000. Wimmer’s required rate of return is 15%.

InstructionsDetermine whether Wimmer should accept this project.


Current ROI = $150,000 ÷ $500,000 = 30%ROI of new project = $36,000 ÷ $180,000 = 20%New ROI with project = [$150,000 + $36,000] ÷ [$500,000 + $180,000] = 27.4%While ROI decreases, that does not make this a bad investment, since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15%, so the 20% project should be accepted.

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BE 159

An investment center manager is considering three possible investments. The company’s required return is 10%. The required asset investment, controllable margins, and the ROIs of each investment are as follows:

Project Average Investment Controllable Margin ROIBud $160,000 $32,000 20.0%Wise 140,000 16,000 11.4%Er 220,000 66,000 30%

The investment center is currently generating an ROI of 25% based on $1,200,000 in operating assets and a controllable margin of $300,000.

InstructionsIf the manager can select only one project, determine which one is the best choice to increase the investment center's ROI. Compute how much the investment center’s ROI will be if the manager selects your recommendation.


Er is the best choice because it increases the ROI (30% is greater than 25%).

Project New ROIBud ($300,000 + $32,000) ÷ ($1,200,000 + $160,000) = 24.4%Wise ($300,000 + $16,000) ÷ ($1,200,000 + $140,000) = 23.6%Er ($300,000 + $66,000) ÷ ($1,200,000 + $220,000) = 25.8%

EXERCISESEx. 160

Doonan Company's master budget reflects budgeted sales information for the month of June, 2008, as follows:

Budgeted Quantity Budgeted Unit Sales PriceProduct A 20,000 $7Product B 24,000 $9

During June, the company actually sold 19,500 units of Product A at an average unit price of $7.10 and 24,800 units of Product B at an average unit price of $8.90.

InstructionsPrepare a Sales Budget Report for the month of June for Doonan Company which shows whether the company achieved its planned objectives.

Solution 160 (10–15 min.)

DOONAN COMPANYSales Budget Report

For the Month Ended June 30, 2008

Product Line Budget Actual DifferenceProduct A $140,000 $138,450 $1,550 UProduct B 216,000 220,720 4,720 F

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Total sales $356,000 $359,170 $3,170 FEx. 161

Colaw Manufacturing Co.'s static budget at 6,000 units of production includes $36,000 for direct labor and $6,000 for direct materials. Total fixed costs are $24,000.

Instructionsa. Determine how much would appear on Colaw's flexible budget for 2008 if 9,000 units are

produced and sold.b. How would this comparison differ if a static budget were used instead of a flexible budget for

performance evaluation?


a. 6,000 Units Unit Variable Cost 9,000 UnitsVariable costs:Direct labor $36,000 $6.00 $54,000Direct materials 6,000 1.00 9,000

42,000 63,000Fixed costs 24,000 24,000Total costs $66,000 $87,000

b. If a static budget were used, budgeted variable costs would be only $42,000 because they would be based on the static budget level of 6,000 units. The company would appear way over budget since the costs incurred would be related to a higher level of activity.

Ex. 162

Jenner Company developed its annual manufacturing overhead budget for its master budget for 2008 as follows:

Expected annual operating capacity 120,000 Direct Labor HoursVariable overhead costs

Indirect labor $420,000Indirect materials 90,000Factory supplies 30,000

Total variable 540,000Fixed overhead costs

Depreciation 180,000Supervision 120,000Property taxes 96,000

Total fixed 396,000Total costs $936,000

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

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

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JENNER COMPANYMonthly Flexible Manufacturing Overhead Budget

Activity levelDirect labor hours 8,000 9,000

Variable costsIndirect labor $28,000 $31,500Indirect materials 6,000 6,750Factory supplies 2,000 2,250

Total variable 36,000 40,500Fixed costs

Depreciation 15,000 15,000Supervision 10,000 10,000Property taxes 8,000 8,000

Total fixed 33,000 33,000Total costs $69,000 $73,500

Ex. 163

Dailey Company has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department:

DAILEY COMPANYMonthly Flexible Manufacturing Overhead Budget

Mixing Department

Activity levelDirect labor hours 3,000 4,000

Variable costsIndirect materials $ 1,500 $ 2,000Indirect labor 15,000 20,000Factory supplies 4,500 6,000

Total variable 21,000 28,000Fixed costs

Depreciation 20,000 20,000Supervision 10,000 10,000

Property taxes 15,000 15,000Total fixed 45,000 45,000

Total costs $66,000 $73,000

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

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DAILEY COMPANYMonthly Flexible Manufacturing Overhead Budget

Mixing Department

Activity levelDirect labor hours 5,000

Variable costsIndirect materials $ 2,500Indirect labor 25,000Factory supplies 7,500

Total variable 35,000Fixed costs

Depreciation 20,000Supervision 10,000Property taxes 15,000

Total fixed 45,000Total costs $80,000

Ex. 164

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

Indirect labor $5.00Indirect materials 2.50Maintenance .50Utilities .30

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

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

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

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FAGAN COMPANYMonthly Flexible Manufacturing Overhead Budget

Activity levelMachine hours 2,000 3,000 4,000

Variable costsIndirect labor $10,000 $15,000 $20,000Indirect materials 5,000 7,500 10,000Maintenance 1,000 1,500 2,000Utilities 600 900 1,200

Total variable 16,600 24,900 33,200

Fixed costsSupervision 600 600 600Insurance 200 200 200Property taxes 300 300 300Depreciation 900 900 900

Total fixed 2,000 2,000 2,000Total costs $18,600 $26,900 $35,200

Ex. 165

Dashboard Corporation's manufacturing costs for July when production was 1,000 units appears below:

Direct materials $10 per unitFactory depreciation $8,000Variable overhead 5,000Direct labor 2,000Factory supervisory salaries 5,800Other fixed factory costs 1,500

InstructionsHow much is the flexible budget manufacturing cost amount for a month when 1,100 units are produced?


Direct materials ($10 × 1,100) $11,000Direct labor [($2,000 ÷ 1,000) × 1,100] 2,200Variable overhead [($5,000 ÷ 1,000) × 1,100] 5,500Factory depreciation—fixed 8,000Factory supervisory salaries—fixed 5,800Other fixed factory costs 1,500Total $34,000

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Ex. 166

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

Indirect labor $5.00Indirect materials 2.50Maintenance .50Utilities .30

Fixed overhead costs per month are:Supervision $600Insurance 200Property taxes 300Depreciation 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, 2008, the company incurs the following manufacturing overhead costs:

Indirect labor $14,000Indirect materials 8,100Maintenance 1,400Utilities 950Supervision 720Insurance 200Property taxes 300Depreciation 930

InstructionsPrepare a flexible budget report, assuming that the company used 3,000 machine hours during August.


FAGAN COMPANYManufacturing Overhead Budget Report (Flexible)

For the Month Ended August 31, 2008

DifferenceBudget at Actual at Favorable F3,000 hrs. 3,000 hrs. Unfavorable U

Variable costsIndirect labor $15,000 $14,000 $1,000 FIndirect materials 7,500 8,100 600 UMaintenance 1,500 1,400 100 FUtilities 900 950 50 U

Total variable 24,900 24,450 450 F

Fixed CostsSupervision 600 720 120 UInsurance 200 200 —Property taxes 300 300 —Depreciation 900 930 30 U

Total fixed 2,000 2,150 150 UTotal costs $26,900 $26,600 $ 300 F

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Ex. 167

Molle Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $200,000 to $240,000. 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.

InstructionsPrepare a flexible budget for increments of $20,000 of sales within the relevant range.


MOLLE COMPANYMonthly Flexible Selling Expense Budget

Activity levelSales $200,000 $220,000 $240,000

Variable expensesSales commissions $12,000 $13,200 $14,400Advertising 8,000 8,800 9,600Traveling 10,000 11,000 12,000Delivery 2,000 2,200 2,400

Total variable 32,000 35,200 38,400Fixed expenses

Sales salaries 40,000 40,000 40,000Depreciation 10,000 10,000 10,000

Total fixed 50,000 50,000 50,000Total costs $82,000 $85,200 $88,400

Ex. 168

Molle Company uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $200,000 to $240,000. Variable costs and their percentage relationships to sales are:

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


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Ex. 168 (cont.)

The actual selling expenses incurred in February, 2008, by Molle Company are as follows:

Sales commissions $13,700Advertising 8,000Traveling 11,300Delivery 1,600


InstructionsPrepare a flexible budget performance report, assuming that February sales were $220,000.


MOLLE COMPANYSelling Expense Budget Report (Flexible)For the Month Ended February 29, 2008

DifferenceFavorable F

Budget Actual Unfavorable U$220,000 $220,000

Variable expensesSales commissions $13,200 $13,700 $ 500 UAdvertising 8,800 8,000 800 FTraveling 11,000 11,300 300 UDelivery 2,200 1,600 600 F

Total variable 35,200 34,600 600 FFixed expenses

Sales salaries 40,000 41,000 1,000 UDepreciation 10,000 10,000 —

Total fixed 50,000 51,000 1,000 UTotal expenses $85,200 $85,600 $ 400 U

Ex. 169

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.

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

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Budgeted Costs:Assembly $60,000 + $2.40.

Fixed costs are $60,000.Variable costs are $2.40 per labor hour.($180,000 – $60,000) ÷ 50,000.

Ex. 170

Pele Clothing Company's static budget at 2,000 units of production includes $8,000 for direct labor, $2,000 for utilities (variable), and total fixed costs of $16,000. Actual production and sales for the year was 6,000 units, with an actual cost of $47,200.

InstructionsDetermine if Pele Clothing is over or under budget.


2,000 Units Unit Variable Cost 6,000 UnitsVariable costs:Direct labor $ 8,000 $4.00 $24,000Utilities 2,000 1.00 6,000

10,000 30,000Fixed costs 16,000 16,000Total costs $26,000 $46,000

The company is over budget by $1,200. The flexible budget amount allowed was $46,000, and the company incurred $47,200 of actual costs.

Ex. 171

Colter Company produces men's ties. The following budgeted and actual amounts are for 2008:

Cost Budget at 5,000 Units Actual Amounts at 5,800 UnitsDirect materials $60,000 $71,000Direct labor 75,000 86,500Equipment depreciation 5,000 5,000Indirect labor 7,500 8,600Indirect materials 9,000 9,600Rent and insurance 12,000 13,000

InstructionsPrepare a performance budget report for Colter Company for the year.

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COLTER COMPANYManufacturing Performance Budget Report

For the Year Ended December 31, 2008

Budget Actual DifferencesDirect materials $ 69,600 $ 71,000 $1,400 UDirect labor 87,000 86,500 500 FEquipment depreciation 5,000 5,000 0Indirect labor 8,700 8,600 100 FIndirect materials 10,440 9,600 840 FRent and insurance 12,000 13,000 1,000 UTotal costs $192,740 $193,700 $ 960 U

Ex. 172

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:

Flexible Budget PerDirect Labor Hour Actual Costs and Activity

July August Direct labor hours 6,000 7,000Overhead costs

VariableIndirect materials $3.50 $ 20,500 $ 25,100Indirect labor 6.00 39,500 40,700Factory supplies 1.00 7,600 8,200

FixedDepreciation $20,000 15,000 15,000Supervision 25,000 23,000 26,000Property taxes 10,000 12,000 12,000

Total costs $117,600 $127,000

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.

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(a) FRIENDLY COMPANYMixing Department

Manufacturing Overhead Cost Responsibility ReportFor the Months of July and August

July August Controllable Cost Budget Actual Difference Budget Actual Difference Indirect materials 21,000 20,500 500 F 24,500 25,100 600 UIndirect labor 36,000 39,500 3,500 U 42,000 40,700 1,300 FFactory supplies 6,000 7,600 1,600 U 7,000 8,200 1,200 USupervision 12,500 11,500 1,000 F 12,500 13,000 500 UTotal costs 75,500 79,100 3,600 U 86,000 87,000 1,000 U

(b) The manager did a better job of controlling costs in August ($1,000 U) than in July ($3,600 U).

Ex. 173

Gentry Company's manufacturing overhead budget for the first quarter of 2008 contained the following data:

Variable CostsIndirect materials $20,000Indirect labor 12,000Utilities 10,000Maintenance 6,000

Fixed CostsSupervisor's salary $40,000Depreciation 8,000Property taxes 4,500

Actual variable costs for the first quarter were:Indirect materials $18,600Indirect labor 13,200Utilities 10,500Maintenance 5,300

Actual fixed costs were as expected except for property taxes which were $4,500. All costs are considered controllable by the department manager except for the supervisor's salary.

InstructionsPrepare a manufacturing overhead responsibility performance report for the first quarter.

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GENTRY COMPANYManufacturing Overhead Cost Responsibility Report

For the Quarter Ended March 31, 2008

Controllable Costs Budget Actual DifferenceIndirect materials $20,000 $18,600 $1,400 FIndirect labor 12,000 13,200 1,200 UUtilities 10,000 10,500 500 UMaintenance 6,000 5,300 700 FDepreciation 8,000 8,000 —Property taxes 4,000 4,500 500 U

Total costs $60,000 $60,100 $ 100 U

Ex. 174

The Ace Division, a profit center of Berek Engineering Company, reported the following data for the first quarter of 2008:

Sales $6,000,000Variable costs 4,200,000Controllable direct fixed costs 800,000Noncontrollable direct fixed costs 530,000Indirect fixed costs 200,000

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?


(a) BEREK ENGINEERING COMPANYAce Division

Management Performance ReportFor the Quarter Ended March 31, 2008

Sales.............................................................................................. $6,000,000Variable costs................................................................................ 4,200,000Contribution margin....................................................................... 1,800,000Controllable fixed costs.................................................................. 800,000Controllable margin........................................................................ $1,000,000

(b) Controllable margin is the best measure of the manager's performance because this amount equals the excess of controllable revenues over controllable costs.

(c) For an investment center, the responsibility report would also show the return on investment for the period.

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Ex. 175

RTO Rental Company reported the following:

Beginning of year operating assets $2,200,000End of year operating assets 2,000,000Contribution margin 1,000,000Sales 5,000,000Controllable fixed costs 643,000

Its required return is 10%.

InstructionsCompute the company’s ROI.


($1,000,000 – $643,000) ÷ [($2,200,000 + $2,000,000) ÷ 2] = 17%

Ex. 176

Reese Company has two investment centers and has developed the following information:

Department A Department BDepartmental controllable margin $120,000 ?Average operating assets ? $400,000Sales 800,000 250,000ROI 10% 12%

InstructionsAnswer 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 _________________.


1. $1,200,000 ($120,000 ÷ .10)2. $48,000 ($400,000 × .12)3. 16% [$48,000 ÷ ($400,000 – $100,000)]4. 15% [($120,000 + $60,000) ÷ $1,200,000]

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Ex. 177

The Appliance Division of Malone Manufacturing Company reported the following results for 2008:

Sales $4,000,000Variable costs 3,200,000Controllable fixed costs 300,000Average operating assets 2,000,000

Management is considering the following independent alternative courses of action in 2009 in order to maximize the return on investment for the division.

1. Reduce controllable fixed costs by 20% with no change in sales or variable costs.2. Reduce average operating assets by 20% with no change in controllable margin.3. Increase sales $400,000 with no change in the contribution margin percentage.

Instructions(a) Compute the return on investment for 2008.(b) Compute the expected return on investment for each of the alternative courses of action.


(a) Controllable marginReturn on investment = ————————————

Average operating assets

$500,0002008 ROI = —————— = 25%

$2,000,000

$560,000 (a)(b) 1. ——————— = 28%

$2,000,000

$500,0002. ———————— = 31.3%

$1,600,000 (b)

$580,000 (c)3. ——————— = 29%

$2,000,000

(a) $500,000 + ($300,000 × 20%) = $560,000.

(b) $2,000,000 – ($2,000,000 × .20) = $1,600,000.

$4,000,000 – $3,200,000(c) Contribution margin 20% (————————————);

$4,000,000

$500,000 + ($400,000 × 20%) = $580,000.

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Ex. 178

Data for the following subsidiaries of Timmons Company, which are operated as investment centers, are as follows:

Black Company Greer CompanySales $3,000,000 $2,000,000Controllable margin (1) (3)Average operating assets (2) 4,000,000Contribution margin 1,200,000 800,000Controllable fixed costs 500,000 200,000Return on Investment 10% (4)

InstructionsCompute the missing amounts using the ROI formula.


(1) Controllable margin ($1,200,000 – $500,000) = $700,000(2) Average operating assets ($700,000 ÷ .10) = $7,000,000(3) Controllable margin ($800,000 – $200,000) = $600,000(4) ROI ($600,000 ÷ $4,000,000) = 15%

Ex. 179

The data for an investment center is given below.

1/1/08 12/31/08 Current assets $ 300,000 $ 500,000Plant assets 3,000,000 4,000,000Idle plant assets 250,000 330,000Land held for future use 1,200,000 1,200,000

The controllable margin is $780,000.

InstructionsWhat is the return on investment for the center for 2008?


ROI = Controllable margin ÷ Average operating assets

Plant assets ($3,000,000 + $4,000,000) ÷ 2 = $3,500,000Average current assets ($300,000 + $500,000) ÷ 2 = 400,000

$3,900,000

Note: Idle plant assets and land held for future use are not included in average operating assets.

ROI = $780,000 ÷ $3,900,000 = 20%

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Chapter 24

Documents

fixed manufacturing

units manufacturing

total overhead costs

units of activity

trepid manufacturing

fixed budget

units d

units b