Accounting Budgets And Variance Analysis Homework Help
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1. XYZ Company is a retailer of upscale widget products. The sales forecast for the coming months is: Revenues April $ 250,000 May $ 275,000 June $ 300,000 July $ 350,000 August $ 375,000 XYZ Company’s sales are 60% cash and 40% store credit. The credit sales are 70% in the month of sale, and the remainder is collected in the following month. Accounts receivable on April 1 are $50,000 XYZ Company’s cost of sales are averages 60% of revenues. The inventory policy is to carry 25% of next month’s sales needs. April 1 inventory will be as expected under the policy. XYZ Company pays for purchases 56% in the month of purchase and the remaining amount in the following month. Accounts Payable on April 1 are $90,000.
a. Prepare a purchases budget for as many months as is possible.
b. Prepare a cash payments budget for April through June.
c. Prepare a cash receipts budget for April through June.
2.Monterey Corporation has a union contract provision that guarantees a minimum wage of $1,250 per month to each direct labour employee. Currently, 125 employees are covered by this provision. All direct labour employees are paid $10 per hour. The direct labour budget for the current fiscal year was based on an annual rate of 250,000 direct labour-hours at $10 per hour, or a total of $2,500,000 per year. Because of the contract provision, $156,250 (125 × $1,250 per month) was treated as a fixed monthly cost. Each month’s budget was calculated using the following formula: $156,250 + $7 per direct labour-hour.
Figures for the first three months of the fiscal year are as follows
|Direct Labour Hours Worked||27,500||40,000||60,000|
|Direct Labour Costs Budgeted||?||?||?|
|Direct Labour Costs Incurred||$275,000||$400,000||$600,000|
These figures are a source of concern because they show unfavourable variances when production is high, and favourable variances during slow months. The factory manager is certain that this trend does not reflect reality.
a. Calculate the variances for each of the months of April, May, and June. What is the explanation for the variances relative to the company’s budget cost formula?
b. Explain the error in logic in this variance calculation and, using a formula for direct labour costs more appropriate to the actual cost behaviour, recalculate the variances for April, May, and June.
3.Terry Travers is the manufacturing supervisor of Aurora Manufacturing Company, which produces a variety of plastic products. Some of these products are standard items listed in the company’s catalogue, while others are made to customer specifications. Every month, Travers receives a performance report showing the budget for the month, the actual activity, and the variance between budget and actual. Part of Travers’s annual performance evaluation is based on his department’s performance against budget. Aurora’s purchasing manager, Sally Christensen, also receives monthly performance reports, and she, too, is evaluated partly on the basis of these reports.
The monthly reports for June had just been distributed when Travers met Christensen in the hallway outside their offices. Scowling, Travers began the conversation, “I see we have another set of monthly performance reports hand-delivered by that not-very-nice junior employee in the budget office. He seemed pleased to tell me that I’m in trouble with my performance again.”
Christensen: I got the same treatment. All I ever hear about are the things I haven’t done right. Now I’ll have to spend a lot of time reviewing the report and preparing explanations. The worst part is that it’s now the 21st of July so the information is almost a month old, and we have to spend all this time on history.
Travers: My biggest gripe is that our production activity varies a lot from month to month, but we’re given an annual budget that’s written in stone. Last month, we were shut down for three days when a strike delayed delivery of the basic ingredient used in our plastic formulation, and we had already exhausted our inventory. You know about that problem, though, because we asked you to call all over the country to find an alternative source of supply. When we got what we needed on a rush basis, we had to pay more than we normally do.
Christensen: I expect problems like that to pop up from time to time—that’s part of my job—but now we’ll both have to take a careful look at our reports to see where the charges are reflected for that rush order. Every month, I spend more time making sure I should be charged for each item reported than I do making plans for my department’s daily work. It’s really frustrating to see charges for things I have no control over.
Travers: The way we get information doesn’t help, either. I don’t get copies of the reports you get, and yet a lot of what I do is affected by your department and by most of the other departments we have. Why do the budget and accounting people assume that I should only be told about my operations, even though the president regularly gives us pep talks about how we all need to work together as a team?
Christensen: I seem to get more reports than I need, and I am never asked to comment on them until top management calls me on the carpet about my department’s shortcomings. Do you ever hear comments when your department shines?
Travers: I guess they don’t have time to review the good news. One of my problems is that all the reports are in dollars and cents. I work with people, machines, and materials. I need information to help me this month to solve this month’s problems—not another report of the dollars expended last month or the month before.
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Your team should discuss and then respond to the following questions. All team members should agree with and understand the answers and be prepared to report on those answers in class. (Each teammate can assume responsibility for a different part of the presentation.)
a. On the basis of the conversation between Terry Travers and Sally Christensen, describe the likely motivation and behaviour of these two employees as a result of the standard cost and variance reporting system that is used by Aurora Manufacturing Company.
b. List the recommendations that your team would make to Aurora Manufacturing Company to enhance employee motivation as it relates to the company’s standard cost and variance reporting system.
4.Norwall Company’s flexible budget for manufacturing overhead (in condensed form) is given below
|Cost Formula Per Machine Hour||Machine Hours|
|Total Overhead Cosst||$500,000||$540,000||$580,000|
The following information is available for a recent period
1. A denominator activity of 60,000 machine-hours is used to compute the predetermined overhead rate.
2. At the 60,000 standard machine-hours level of activity, the company should produce 40,000 units of product.
3. The company’s actual operating results were as follows:
Number of units produced 41,000
Actual machine-hours 62,500
Actual variable overhead costs $251,250
Actual fixed overhead costs 302,400
a. Compute the predetermined overhead rate, and break it down into variable and fixed cost elements.
b. Compute the standard hours allowed for the actual production.
c.Compute the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.
Product Code: ACC150
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