BE10-4, E10-3, E10-5,

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1 Chapter 1 Flexible Budgets In Strassel Company s flexible budget graph, the fixed cost line and the total budgeted cost line intersect the vertical axis at $36,. The total budgeted cost line is $186, at an activity level of 5, direct labor hours. Compute total budgeted costs at 3, direct labor hours. 15 Costs (in ) Direct Labor Hours (in ) Apply the formula: Fixed costs 1 Variable costs (Total variable cost per unit 3 Activity level) 5 Total budgeted costs. sing the graph, fixed costs are $36,, and variable costs are $3 per direct labor hour [($186, 2 $36,) 4 5,]. Thus, at 3, direct labor hours, total budgeted costs are $126, [$36, 1 ($3 3 3,)]. Related exercise material: BE1-4, E1-3, E1-5, and DO IT! 1-1. Flexible Budget Reports Lawler Company expects to produce 4, units of product CV93 during the current year. Budgeted variable manufacturing costs per unit are direct materials $6, direct labor $15, and overhead $24. Annual budgeted fixed manufacturing overhead costs are $12, for depreciation and $6, for supervision. In the current month, Lawler produced 5, units and incurred the following costs: direct materials $33,9, direct labor $74,2, variable overhead $12,5, depreciation $1,, and supervision $5,. D-1

15 Costs (in ) 1 5 1 2 3 4 5 Direct Labor Hours (in ) Apply the formula: Fixed costs 1 Variable costs (Total variable cost per unit 3 Activity level) 5 Total budgeted costs.

2 D-2 DO IT! Prepare a flexible budget report. (Note: You do not have to prepare the heading.) Were costs controlled? se budget for actual units produced. Classify each cost as variable or fixed. Determine monthly fixed costs by dividing annual amounts by 12. as favorable or unfavorable. in total variable costs, total fixed costs, and total costs Home P18 Insert nits produced Page Layout A fx Variable costs Direct materials ($6) Direct labor ($15) Overhead ($24) Total variable costs Fixed costs Deprecia on Supervision Total fixed costs Total costs Lawler Company.xls Formulas Data Review View B Budget at 5, units $ 3, 75, 12, 225, 1, 5, 15, $24, C Actual costs at 5, units $ 33,9 74,2 12,5 228,6 1, 5, 15, $243,6 D Favorable - F nfavorable - $3, ,6 $3,6 F The responsibility report indicates that actual direct labor was only about 1% different from the budget, and overhead was less than half a percent different. Both appear to have been well-controlled. This was not the case for direct materials. Its 13% unfavorable difference should probably be investigated. Actual fixed costs had no difference from budget and were well-controlled. Related exercise material: BE1-5, E1-4, E1-6, E1-7, E1-8, E1-1, and DO IT! 1-2. Profit Center Responsibility Report Midwest Division operates as a profit center. It reports the following for the year: Budget Actual Sales $1,5, $1,7, Variable costs 7, 8, Controllable fixed costs 4, 4, Noncontrollable fixed costs 2, 2, Prepare a responsibility report for the Midwest Division for December 31, 214.

1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 Home P18 Insert nits produced Page Layout A fx Variable costs Direct materials ($6) Direct labor ($15) Overhead ($24) Total variable costs Fixed costs

3 Deduct variable costs from sales to show contribution Deduct controllable fixed costs from the contribution margin to show controllable Do not report noncontrollable fixed costs. Midwest Division Responsibility Report For the Year Ended December 31, 214 Favorable F Budget Actual nfavorable Sales $1,5, $1,7, $2, F Variable costs 7, 8, 1, Contribution margin 8, 9, 1, F Controllable fixed costs 4, 4, Controllable margin $ 4, $ 5, $1, F Related exercise material: BE1-7, E1-15, and DO IT! 1-3. Performance Evaluation Recall key formulas: Sales 2 Variable costs 5 Contribution Contribution margin 4 Sales 5 Contribution margin percentage. Contribution margin 2 Controllable fixed costs 5 Controllable Return on investment 5 Controllable margin 4 Average operating assets. The service division of Metro Industries reported the following results for 214. Sales $4, Variable costs 32, Average operating assets 28, Management is considering the following independent courses of action in 215 in order to maximize the return on investment for this division. 1. Reduce average operating assets by $8,, with no change in controllable 2. Increase sales $8,, with no change in the contribution margin percentage. (a) Compute the controllable margin and the return on investment for 214. (b) Compute the controllable margin and the expected return on investment for each proposed alternative. (a) Return on investment for 214 Sales $4, Variable costs 32, Contribution margin 8, Controllable margin $ 39,2 Return on investment $39,2 $28, 5 14% (b) Expected return on investment for alternative 1: $39,2 $28, 2 $8, % Expected return on investment for alternative 2: Sales ($4, 1 $8,) $48, Variable costs ($32,/$4, 3 $48,) 384, Contribution margin 96, Controllable margin $ 55,2 Return on investment $55,2 $28, % Related exercise material: BE1-8, BE1-9, BE1-1, E1-16, E1-17, and DO IT! 1-4. D-3

Controllable fixed costs 4, 4, Controllable margin $ 4, $ 5, $1, F Related exercise material: BE1-7, E1-15, and DO IT! 1-3.

4 D-4 DO IT! > Comprehensive DO IT! Glenda Company uses a flexible budget for manufacturing overhead based on direct labor hours. For 214, the master overhead budget for the Packaging Department based on 3, direct labor hours was as follows. Variable Costs Fixed Costs Indirect labor $36, Supervision $ 6, Supplies and lubricants 15, Depreciation 24, Maintenance 21, Property taxes 18, tilities 12, Insurance 12, $84, $114, During July, 24, direct labor hours were worked. The company incurred the following variable costs in July: indirect labor $3,2, supplies and lubricants $11,6, maintenance $17,5, and utilities $9,2. Actual fixed overhead costs were the same as monthly budgeted fixed costs. Instructions Prepare a flexible budget report for the Packaging Department for July. Classify each cost as variable or fixed. Compute the budgeted cost per direct labor hour for all variable costs. se budget data for actual direct labor hours worked. between budgeted and actual costs. Identify the difference as favorable or unfavorable. in total variable costs, total fixed costs, and total costs. to Comprehensive DO IT! Glenda Company Manufacturing Overhead Budget Report (Flexible) Packaging Department For the Month Ended July 31, 214 Budget Actual Costs Favorable F Direct labor hours (DLH) 24, DLH 24, DLH nfavorable Variable costs Indirect labor ($1.2 a ) $28,8 $3,2 $1,4 Supplies and lubricants ($.5 a ) 12, 11,6 4 F Maintenance ($.7 a ) 16,8 17,5 7 tilities ($.4 a ) 9,6 9,2 4 F Total variable 67,2 68,5 1,3 Fixed costs Supervision $ 5, b $ 5, Depreciation 2, b 2, Property taxes 1,5 b 1,5 Insurance 1, b 1, Total fixed 9,5 9,5 Total costs $76,7 $78, $1,3 a ($36, 4 3,; $15, 4 3,; $21, 4 3,; $12, 4 3,). b Annual cost divided by 12.

Variable Costs Fixed Costs Indirect labor $36, Supervision $ 6, Supplies and lubricants 15, Depreciation 24, Maintenance 21, Property taxes 18, tilities 12, Insurance 12, $84, $114, During July, 24,

5 DO IT! D-5 REVIEW DO IT! 1-1 In Pargo Company s flexible budget graph, the fixed cost line and the total budgeted cost line intersect the vertical axis at $9,. The total budgeted cost line is $33, at an activity level of 5, direct labor hours. Compute total budgeted costs at 65, direct labor hours. DO IT! 1-2 Mussatto Company expects to produce 5, units of product IOA during the current year. Budgeted variable manufacturing costs per unit are direct materials $7, direct labor $13, and overhead $18. Annual budgeted fixed manufacturing overhead costs are $96, for depreciation and $45,6 for supervision. In the current month, Mussatto produced 6, units and incurred the following costs: direct materials $38,85, direct labor $76,44, variable overhead $116,64, depreciation $8,, and supervision $4,. Prepare a flexible budget report. (Note: You do not need to prepare the heading.) Were costs controlled? DO IT! 1-3 The Wellstone Division operates as a profit center. It reports the following for the year. Budget Actual Sales $2,, $1,86, Variable costs 8, 76, Controllable fixed costs 55, 55, Noncontrollable fixed costs 25, 25, Prepare a responsibility report for the Wellstone Division at December 31, 214. DO IT! 1-4 The service division of Raney Industries reported the following results for 213. Sales $5, Variable costs 3, Controllable fixed costs 75, Average operating assets 625, Management is considering the following independent courses of action in 214 in order to maximize the return on investment for this division. 1. Reduce average operating assets by $125,, with no change in controllable 2. Increase sales $1,, with no change in the contribution margin percentage. (a) Compute the controllable margin and the return on investment for 213. (b) Compute the controllable margin and the expected return on investment for each proposed alternative. Compute total budgeted costs in flexible budget. (LO 3), AP Prepare and evaluate a flexible budget report. (LO 3), AP Prepare a responsibility report. (LO 6), AP Compute ROI and expected return on investments. (LO 7), AP

1-2 Mussatto Company expects to produce 5, units of product IOA during the current year. Budgeted variable manufacturing costs per unit are direct materials $7, direct labor $13, and overhead $18.

> DO IT! Chapter 24 Budgetary Control and Responsibility Accounting. Flexible Budgets. Flexible Budget Reports D-125. Solution Action Plan

> DO IT! Chapter 24 Budgetary Control and Responsibility Accounting. Flexible Budgets. Flexible Budget Reports D-125. Solution Action Plan Chapter 24 Budgetary Control and Responsibility Accounting > DO IT! Flexible Budgets In Strassel Company s flexible budget graph, the fixed cost line and the total budgeted cost line intersect the vertical