Brief Exercise 170
Data for the Electric Division of Bowden Baseball Company which is operated as an investment centre follows:
Sales $2,750,000
Contribution Margin 900,000
Controllable Fixed Costs 400,000
Return on Investment 10%
Calculate controllable margin and average operating assets.
Solution Brief Exercise 170
Controllable Margin ($900,000 – $400,000) = $500,000 Average Operating Assets ($500,000 ÷ .10) = $5,000,000
Brief Exercise 171
Clark Inc. reported the following items for 2012:
Controllable fixed costs $ 56,000
Contribution margin 235,000
Interest expense 35,000
Variable costs 157,000
Total assets 1,690,000
How much is controllable margin?
Solution Brief Exercise 171
$235,000 - $56,000 = $179,000
Brief Exercise 172
The data for an investment centre is given below.
January 1, 2012 December 31, 2012
Current Assets $ 700,000 $ 900,000
Plant Assets 2,500,000 2,700,000
The controllable margin is $680,000. How much is the return on investment for the centre for 2012?
Solution Brief Exercise 172
Average current assets ($700,000 + $900,000) ÷ 2 = $800,000 Average plant assets ($2,500,000 + $2,700,000) ÷ 2 = $2,600,000 ROI = Controllable Margin ÷ Average Operating Assets
= $680,000 ÷ ($800,000+$2,600,000) = 20%
*Brief Exercise 173
The owner of Shrek Toys has recently expanded his business in order to add an additional product line. In addition to toys, the company will now sell shirts. The company has a minimum rate of return of 11%.
Toys Shirts
Sales $540,000 $326,000
Controllable margin 390,000 15,000
Average operating assets 750,000 300,000 Calculate the residual income for both investment centres.
Solution Brief Exercise 173
Toys Shirts
Controllable margin $390,000 $15,000
Average assets × 11% 82,500 33,000
Residual income $ 307,500 $ (18,000)
Brief Exercise 174
Flames Company produces men’s ties. The following budgeted and actual amounts are for 2012:
Cost Budget at 2,500 units Actual Amounts at 2,900 units
Direct materials $55,000 $65,000
Direct labour 70,000 81,000
Fixed overhead 35,000 34,500
Prepare a performance report for Flames Company for the year.
Solution Brief Exercise 174
Flames Company
Manufacturing Performance Budget Report For the Year Ending December 31, 2012
Budget Actual Differences
Direct materials $ 63,800 $ 65,000 $1,200 U
Direct labour 81,200 81,000 200 F
Fixed overhead 35,000 34,500 500 F
Total costs $180,000 $180,500 $ 500 U
Brief Exercise 175
A flexible budget graph for the waxing department shows the following:
1. At zero direct labour hours, the total budgeted cost line intersects the vertical axis at $75,000.
2. At normal capacity of 80,000 direct labour hours, the line drawn from the total budgeted cost line intersects the vertical axis at $135,000.
Identify the total fixed costs and the variable costs per unit.
Solution Brief Exercise 175 Fixed costs = $75,000
Variable costs = ($135,000 – $75,000) ÷ 80,000 = $0.75 per direct labour hour
Brief Exercise 176
Hastings Manufacturing Co.'s static budget at 6,000 units of production includes $42,000 for direct labour and $6,000 for materials. Total fixed costs are $24,000. How much would appear on Hastings’s flexible budget for 2012 if 9,000 units are produced and sold?
Solution Brief Exercise 176
6,000 Units Unit Variable Cost 9,000 Units Variable costs:
Direct labour $42,000 $7.00 $63,000
Direct materials 6,000 1.00 9,000
Total variable costs 48,000 72,000
Fixed costs 24,000 24,000
Total costs $72,000 $96,000
Brief Exercise 177
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%. Should Wimmer accept this project?
Solution Brief Exercise 177
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.
Brief Exercise 178
Shirk Productions makes a single product. Expected manufacturing costs are as follows:
Variable costs
Direct materials $6.50 per unit
Direct labour 2.40 per unit
Manufacturing overhead 1.10 per unit Fixed costs per month
Supervisory salaries $12,600
Depreciation 3,500
Other fixed costs 2,200
Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month.
Solution Brief Exercise 178
3,200 x ($6.50 + $2.40 + $1.10) + ($12,600 + $3,500 + $2,200) = $50,300
Brief Exercise 179
Sekine Company uses flexible budgets. Items from the budget for March in which 2,000 units were produced and sold appear below:
Direct materials $18,000
Indirect materials - variable 2,000
Supervisor salaries 15,000
Depreciation on factory equipment 4,000
Direct labour 10,000
Property taxes on factory 1,000
If Sekine prepares a flexible budget at 3,000 units, how much will its total variable cost be?
Solution Brief Exercise 179
Variable cost per unit: ($18,000 + $2,000 + $10,000)/2,000 = $15 per unit Variable cost at 3,000 units: $15 x 3,000 = $45,000
Brief Exercise 180
SugarTown’s manufacturing costs for August when production was 1,000 units appears below:
Direct material $12 per unit
Direct labour $6,500
Variable overhead 5,000
Factory depreciation 9,000
Factory supervisory salaries 7,800
Other fixed factory costs 2,500
How much is the flexible budget manufacturing cost amount for a month when 800 units are produced?
Solution Brief Exercise 180
Direct material ($12*800) $9,600
Direct labour [($6,500/1,000)*800] 5,200 Variable overhead [($5,000/1,000)*800] 4,000
Factory depreciation -fixed 9,000
Factory supervisory salaries - fixed 7,800 Other fixed factory costs - fixed 2,500
Total $38,100
Brief Exercise 181
Butterfly World budgeted sales for April were estimated at $500,000, sales commissions at 4% of sales, and the sales manager's salary at $80,000. The cost of shipping expenses was estimated at 1% of sales and miscellaneous selling expenses were estimated at $1,000 plus 0.5% of sales.
How much are budgeted selling expenses on a flexible budget for April?
Solution Brief Exercise 181
*Brief Exercise 182 A & B Flooring has 4 divisions. Its hardwood flooring division’s information follows for 2012:
Sales $4,000,000
Controllable margin 250,000
Variable costs 60,000
Average operating assets 1,800,000
A & B’s required rate of return is 9%. How much is residual income?
Solution Brief Exercise 182
$250,000 – [9% x $1,800,000] = $88,000
Brief Exercise 183
Good Chicken Farms produces a single product, eggs. Expected manufacturing costs are as follows (in dozens):
Determine the amount of manufacturing costs for a production level of 3,200 dozen per month.
Solution Brief Exercise 183
[3,200 × ($0.80 + $2.20 + $1.10)] + ($8,600 + $4,500 + $1,200) = $27,420
Brief Exercise 184
EKPN Company is currently generating an ROI of 10%. The Winnipeg division of EKPN is
operating as an investment centre. It is currently generating an ROI of 13% based on $130,000 in operating assets and a controllable margin of $16,900. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30,000, and generate a controllable margin of
$3,600.
1. Would it be in the Winnipeg manager’s best interests to make the investment?
2. Would it be in EKPN’s best interests to make the investment?
Solution Brief Exercise 184
Sales commissions 4% x $500,000 $20,000
Sales manager’s salary 80,000
Shipping expenses 1% x $500,000 5,000
Miscellaneous selling: Fixed portion 1,000 Variable: 0.5% x $500,000 2,500
Budgeted selling expenses $108,500
1. The ROI on the investment is $3,600 / $30,000, or 12%. Since that is less than the
Winnipeg’s current ROI of 13%, it would lower the ROI. The investment is not attractive for the Winnipeg division. New ROI = ($16,900 + $3,600) / ($130,000 + $30,000) or 12.8%.
2. The ROI on the investment of 12% is above EKPN’s current ROI of 10%, and therefore it would raise the company’s ROI. Accordingly, the investment is attractive for EKPN.
* Brief Exercise 185
EKPN Company’s required rate of return is 10%. The Winnipeg division of EKPN is operating as an investment centre. It is currently generating an ROI of 13% based on $130,000 in operating assets and a controllable margin of $16,900. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30,000, and generate a controllable margin of
$3,600. Is the investment opportunity attractive to the Winnipeg division if the division is evaluated based on residual income?
Solution Brief Exercise 185
Current residual income: $16,900 – ($130,000 X 10%) = $3,900
Residual income after investment: $16,900 + $3,600 – ([$130,000 + $30,000] X 10%) = $4,500 The investment is attractive to the Winnipeg division, as it will increase its residual income.
Brief Exercise 186
Custom Air Corporation’s manufacturing costs for July when production was 500 units appears below:
Direct material $20 per unit
Factory depreciation $8,000
Variable overhead 4,000
Direct labour 1,500
Factory supervisory salaries 5,800
Other fixed factory costs 1,500
How much is the flexible budget manufacturing cost amount for a month when 550 units are produced?
Solution Brief Exercise 186
Direct material ($20 x 550) $11,000
Direct labour [($1,500/500) x 550] 1,650
Variable overhead [$4,000/500 x 550] 4,400
Factory depreciation -fixed 8,000
Factory supervisory salaries - fixed 5,800
Other fixed factory costs - fixed 1,500
Total
$32,350
Brief Exercise 187
New Clothing’s static budget at 2,000 units of production includes $10,000 for direct labour,
$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 $52,400. Determine if New is over or under budget.
Solution Brief Exercise 187
2,000 units Unit Variable Cost 6,000 units Variable costs:
Direct labour $10,000 $ 5.00 $30,000
Utilities 2,000 1.00 6,000
12,000 36,000
Fixed costs 16,000 16,000
Total costs $28,000 $52,000
The company is over budget by $400. The flexible budget amount allowed was $52,000, and the company incurred $52,400.
Brief Exercise 188
Back 2 Front Company makes products for the fashion industry. The head office is in Paris and it has branches in all the major cities in the world. All designs are made in the head office and sent to the branches where it is then the responsibility to manufacture the products and ship them to a warehouse. The products then get sent to stores whenever the sales department in Paris gets orders.
The company dictates that each branch complete an Income Statement with the following headings: The Canadian branch has its offices in Vancouver.
Required:
At an annual meeting to discuss results, determine which costs would be under the control of the Vancouver branch manager.
Solution Brief Exercise 188
In a cost centre, the manager would only be responsible for those items directly under his or her control. In this example it would be direct and indirect materials, factory labour, administration costs and factory overhead. All selling, interest and any allocated head office charges would not be considered as being under the control of the manager.
Brief Exercise 189
Back 2 Front Company is considering having each of its branches operate as a profit centre. It will still allocate only certain head office costs to the branches, but all products will be designed in the branches.
Required:
If the changes are made to how the company operates, determine which costs would be under the control of the Vancouver branch manager as a result.
Solution Brief Exercise 189
All costs except for the allocated head office charges and the interest expense if it is still allocated from Paris. It would be thought that the Vancouver manager would now be responsible for any new capital investment decisions as well as the interest cost associated with running the branch.
EXERCISES
Exercise 190
Ashley Sofa Store produces sofas. The following budgeted and actual amounts are for 2012:
Cost Budget at 7,000 units Actual Amounts at 7,500 units
Direct materials $63,000 $64,000
Direct labour 49,000 49,500
Equipment depreciation 10,000 10,000
Indirect labour 5,600 5,700
Indirect materials 14,000 14,900
Rent and insurance 15,000 15,100
Instructions
Prepare a performance report for Ashley Sofa Store for the year.
Solution Exercise 190 (6-8 mins.)
Ashley Sofa Store
Manufacturing Performance Budget Report For the Year Ending December 31, 2012
Budget Actual Differences
Direct materials $67,500 $64,000 $3,500 F
Direct labour 52,500 49,500 3,000 F
Equipment depreciation 10,000 10,000 0
Indirect labour 6,000 5,700 300 F
Indirect materials 15,000 14,900 100 F
Rent and insurance 15,000 15,100 100 U
Total costs $166,000 $159,200 $6,800 F
Exercise 191
Cranium Co.'s static budget at 5,000 units of production includes $60,000 for direct labour and
$35,000 for materials. Total fixed costs are $12,000.
Instructions
a. Determine how much would appear on Cranium’s flexible budget for 2012 if 6,000 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?
Solution Exercise 191 (7-9 mins.)
a. 5,000 Units Unit Variable Cost 6,000 Units
Variable costs:
Direct labour $60,000 $12 $72,000
Direct materials 35,000 7 42,000
95,000 114,000
Fixed costs 12,000 12,000
Total costs $107,000 $126,000
b. If a static budget were used, budgeted variable costs would be less because they would be based on the static budget level of 5,000 units. The company would appear over budget since the costs incurred would be correlated to a higher level of activity.
Exercise 192
Cheatem Trading Company's master budget reflects budgeted sales information for the month of March, 2012, as follows:
Budgeted Quantity Budgeted Unit Sales Price Baking potatoes 35,000kilograms $0.75 per kilogram Boiling potatoes 20,000kilograms $0.30 per kilogram
During March, the company actually sold 37,000kilograms of baking potatoes at an average price of $0.73 per kilogram and 17,000kilograms of boiling potatoes at an average price of $0.32 per kilogram.
Instructions
Prepare a Sales Budget Report for the month of March for Cheatem Trading Company which shows whether the company achieved its planned objectives.
Solution Exercise 192 (6–8 min.)
Cheatem Trading Company Sales Budget Report
For the Month Ended March 31, 2012
Product Line Budget Actual Difference
Baking potatoes $26,250 $27,010 $760 F
Boiling potatoes 6,000 5,440 560 U
Total sales $32,250 $32,450 $200 F
Exercise 193
Toto Dog Toys developed its annual manufacturing overhead budget for its master budget for 2012 as follows:
Expected annual operating capacity: 90,000 Direct Labour Hours Variable overhead costs
The relevant range for monthly activity is expected to be between 80,000 and 100,000 direct labour hours.
Instructions
Prepare a flexible budget for a monthly activity level of 85,000 direct labour hours.
Solution Exercise 193 (8–10 min.)
Toto Dog Toys
Monthly Flexible Manufacturing Overhead Budget at 85,000 Direct Labour Hours Variable overhead costs:
Jessica Simpson Music Company has prepared the following monthly flexible manufacturing overhead budget for its Lip Sync Department:
4,000 Units 5,000 Units
Prepare a flexible budget at 4,700 units of activity.
Solution Exercise 194 (8–10 min.)
Jessica Simpson Music Company
Monthly Flexible Manufacturing Overhead Budget at 4,700 Units Lip Sync Department
Exercise 195
Usher Music Company uses a flexible budget for overhead based on studio hours. Variable overhead costs per studio hour are as follows:
Indirect Labour $ 4.25
Indirect Materials 1.27 Maintenance 0.34 Utilities 0.15 Fixed overhead costs per month are:
Supervision $900
Insurance 700
Property Taxes 400
Depreciation 600
The company believes it will normally operate in a range of 2,000 to 4,000 studio hours per month.
Instructions
Prepare a flexible manufacturing overhead budget for 2,500 studio hours.
Solution Exercise 195 (8–10 min.)
Usher Music Company
Monthly Flexible Manufacturing Overhead Budget at 2,500 Studio Hours Variable overhead costs
Indirect Labour $10,625
Indirect Materials 3,175
Maintenance 850
Utilities 375
Total variable costs 15,025
Fixed overhead costs
Supervision 900
Insurance 700
Property Taxes 400
Depreciation 600
Total fixed costs 2,600
Total costs $17,625
Exercise 196
Outkast Company uses a flexible budget for manufacturing overhead based on machine hours.
Variable manufacturing overhead costs per machine hour is as follows:
Indirect labour $0.50
Indirect materials 1.50
Maintenance .40
Utilities .20
Budgeted fixed overhead costs per month are:
Supervision $4,000
Insurance 2,000
Property taxes 1,000
Depreciation 9,000
The company believes it will normally operate in a range of 28,000 to 35,000 machine hours per month. During the month of August, 2012, the company incurred the following manufacturing overhead costs:
Prepare a flexible budget report, assuming that the company used 31,000 machine hours during August.
Solution Exercise 196 (10–12 min.)
Outkast Company
Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31, 2012
Budget at 31,000 Hours Actual at 31,000 Hours Difference F or U Variable overhead costs
Indirect Labour $15,500 $14,800 $ 700 F Indirect Materials 46,500 44,000 2,500 F Maintenance 12,400 12,000 400 F
Utilities 6,200 6,500 300 U
Total variable costs 80,600 77,300 3,300 F
Fixed overhead costs
Eastwood Music uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $450,000. Variable costs and their percentage relationships to sales are:
Sales commissions 8%
Advertising 5%
Traveling 15%
Delivery 2%
Fixed selling expenses consist of sales salaries of $50,000 and depreciation on stage and production equipment totalling $12,000.
Instructions
Prepare a flexible budget for $420,000 of sales.
Solution Exercise 197 (7–9 min.)
Eastwood Music
Monthly Flexible Selling Expense Budget at $420,000 of Sales Variable costs
Sales commissions $33,600 Advertising 21,000 Traveling 63,000
Delivery 8,400
Total variable costs 126,000
Fixed costs
Sales salaries 50,000
Depreciation 12,000
Total fixed costs 62,000
Total costs $188,000
Exercise 198
Westwood Music uses flexible budgets to control its selling expenses. Monthly sales are
expected to be from $400,000 to $450,000. Variable costs and their percentage relationships to sales are:
Sales commissions 8%
Advertising 5%
Traveling 15%
Delivery 2%
Fixed selling expenses consist of sales salaries of $50,000 and depreciation on stage and production equipment totalling $12,000.
The actual selling expenses incurred in March, 2012, by Westwood Music are as follows:
Sales commissions $35,000
Advertising 19,800
Traveling 64,000
Delivery 8,200
Fixed selling expenses consist of sales salaries of $48,800 and depreciation on delivery equipment totalling $11,000.
Instructions
Prepare a flexible budget performance report, assuming that March sales were $420,000.
Expected and actual sales are the same.
Solution Exercise 198 (10–12 min.)
Westwood Music
Selling Expense Budget Report (Flexible) For the Month Ended March 31, 2012
Variable costs
Traveling 63,000 64,000 1,000 U
Delivery 8,400 8,200 200 F
Total variable costs 126,000 127,000 1,000 U
Fixed Costs
Sales salaries 50,000 48,800 1,200 F
Depreciation 12,000 11,000 1,000 F
Total fixed costs 62,000 59,800 2,200 F
Total costs $188,000 $186,800 $1,200 F
Exercise 199
Sinclair Components uses flexible budgeting to control manufacturing overhead. The budget below was prepared for the month ending June 30, 2012.
Direct Labour Hours
Total fixed costs 23,500 23,500 23,500
Total costs $43,900 $45,940 $47,980
During the month of June, the company used direct labour hours totalling 11,600 and the following costs were incurred:
Prepare a flexible budget that could be used for performance evaluation of this company.
Solution Exercise 199 (8-9 min.)
Sinclair Components Flexible Budget at 11,600 Units For the Month Ended June 30, 2012 Variable costs:
Indirect materials $13,920
Indirect labour 6,960
Utilities 2,784
Total variable costs 23,664
Fixed costs:
Rent 10,000
Depreciation 8,000
Insurance 5,500
Total fixed costs 23,500
Total costs $47,164
Exercise 200
Data concerning manufacturing overhead for Wilson Audio are presented below. The packaging department is a cost centre.
An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the packaging department, and, out of fixed costs, only 40% of supervisory costs are
controllable at the department level. The flexible budget formula and the cost and activity for the month of August while operating at 1,600 direct labour hours follows:
Flexible Budget Actual August Activity Variable
a. Prepare the responsibility reports for the packaging department for August.
b. Comment on the manager's performance in controlling costs during the month.
Solution Exercise 200 (9–12 min.)
a. Wilson Audio Packaging Department
Manufacturing Overhead Cost Responsibility Report at 1,600 Direct Labour Hours For the Month of August
Controllable Costs Budget Actual Difference
Indirect materials $ 3,200 $ 3,000 $200 F Indirect labour 4,800 4,500 300 F Factory supplies 800 750 50 F
Supervision 8,000 7,600 400 F
Total costs $16,800 $15,850 $950 F
b. The manager did a good job of controlling costs in August. All of the costs were under budget and none look materially out of line.
Exercise 201
Ozzie Osborne Manufacturing Company’s overhead budget for the first quarter of 2012 contained the following data:
Variable Costs
Indirect Materials $12,000
Indirect Labour 4,000
Utilities 3,000
Actual variable costs for the first quarter were:
Indirect Materials $13,300
Indirect Labour 4,200
Utilities 3,050
Maintenance 5,600
Actual fixed costs were as expected except for property taxes which were $3,100. All costs are considered controllable by the department manager except for the supervisor's salary. The company manufactured and sold 1,100 units, however its budget was based on 1,000 units.
Instructions
Prepare a manufacturing overhead responsibility performance report for the first quarter.
Solution Exercise 201 (8–9 min.)
Ozzie Ozborne Manufacturing Company
Manufacturing Overhead Cost Responsibility Report at 1,100 Units For the Quarter Ended March 31, 2012
Controllable Costs Budget Actual Difference
Indirect materials $13,200 $13,300 $100 U
Indirect labour 4,400 4,200 200 F
Utilities 3,300 3,050 250 F
Maintenance 5,500 5,600 100 U
Depreciation 5,000 5,000 —
Property taxes 3,000 3,100 100 U
Total costs $34,400 $34,250 $150 F
Exercise 202
Maritime Division, a profit centre of Hurricane Weather Company, reported the following data for the first quarter of 2012:
Sales $2,000,000
Variable costs 1,200,000
Controllable direct fixed costs 200,000 Non-controllable direct fixed costs 150,000 Controllable indirect fixed costs 40,000 Instructions
a. Prepare a performance report for the manager of the Maritime Division.
b. How would the responsibility report differ if the division was an investment centre?
Solution Exercise 202(5–6 min.)
a. Maritime Division of Hurricane Weather Company Management Performance Report
For the Quarter Ended March 31, 2012
Sales ... $2,000,000 Variable costs ... 1,200,000 Contribution margin ... 800,000 Controllable fixed costs ... 240,000 Controllable margin ... $ 560,000
b. For an investment centre, the responsibility report would also show the return on investment for the period.
Exercise 203
Myrna’s Market has two divisions: fruits and vegetables. The fruits division had sales of $500,000 and a contribution margin ratio of 15%. The vegetables division had a contribution margin of
$50,000 and variable costs of $300,000. Controllable fixed costs in total were $70,000, with the fruits division having 60% of the total. Myrna’s Market’s net income was $20,000.
Instructions
Prepare an income statement for Myrna’s Market in total and for its two divisions.
Solution Exercise 203(6–8 min.) Contribution Margin 125,000b 75000a 50,000 Controllable Fixed
Costs 70,000 42,000i 28,000j
Controllable Margin 55,000c $33,000 $22,000 Other Fixed Costs 35,000d
h850,000-500,000 or 300,000 + 50,000 i70,000X60%
j70,000X40%
Exercise 204
The Candle Division of Dax Wax Company reported the following results for 2012:
Sales $800,000
Variable costs 420,000
Controllable fixed costs 100,000
Average operating assets 4,000,000
Management is considering the following independent alternative courses of action in 2013 in order to maximize the return on investment for the division.
1. Reduce controllable fixed costs by 50% with no change in sales or variable costs 2. Reduce average operating assets by 30% with no change in controllable margin 3. Increase sales $200,000 with no change in the contribution margin percentage Instructions
a. Calculate the return on investment for 2012.
b. Calculate the expected return on investment for each of the alternative courses of action.
Solution Exercise 204 (6–8 min.)
a. Controllable margin
Return on investment = ————————————
Return on investment = ————————————