Accountguru

BYP20-1 Palmer Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August when the president establishes targets for the total dollar sales and net income before taxes for the next year.   The sales target is given first to the marketing department. The marketing manager formulates a sales budget by product line in both units and dollars. From this budget, sales quotas by product line in units and dollars are established for each of the corporation’s sales districts. The marketing manager also estimates the cost of the marketing activities required to support the target sales volume and prepares a tentative marketing expense budget.   The executive vice president uses the sales and profit targets, the sales budget by product line and the tentative marketing expense budget to determine the dollar amounts that can be devoted to manufacturing and corporate office expense. The executive vice president prepares the budget for corporate expenses. She then forwards to the production department the product-line sales budget in units and the total dollar amount that can be devoted to manufacturing.   The production manager meets with the factory managers to develop a manufacturing plan that will produce the required units when needed within the cost constraints set by the executive vice president.   The budgeting process usually comes to a halt at this point because the production department does not consider the financial resources allocated to be adequate.   When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet together to determine the final budgets for each of the areas.   This normally results in a modest increase in the total amount available for manufacturing costs and cuts in the marketing expense and corporate office expense budgets. The total sales and net income figures proposed by the president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each executive then develops a new detailed budget for the operations in his or her area.   None of the areas has achieved its budget in recent years. Sales often run below the target.   When budgeted sales are not achieved, each area is expected to cut costs so that the president’s profit target can be met. However, the profit target is seldom met because costs are not cut enough.  In fact, costs often run above the original budget in all functional areas (marketing, production, and corporate office).  The president is disturbed that Palmer has not been able to meet the sales and profit targets.  He hired a consultant with considerable experience with companies in Palmer’s industry. The consultant reviewed the budgets for the past 4 years. He concluded that the product line sales budgets were reasonable and that the cost and expense budgets were adequate for the budgeted sales and production levels.

Instructions

With the class divided into groups, answer the following.

(a) Discuss how the budgeting process employed by Palmer Corporation contributes to the failure to achieve the president’s sales and profit targets.

(b) Suggest how Palmer Corporation’s budgeting process could be revised to correct the problems.

(c) Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer. (CMA adapted)

P21-1A Cook Company estimates that 360,000 direct labor hours will be worked during the coming year, 2012, in the Packaging Department. On this basis, the budgeted manufacturing overhead cost data, shown on the next page, are computed for the year. (Prepare flexible budget and budget report for manufacturing overhead).

Fixed Overhead Costs                                                                    Variable Overhead Costs

Supervision $ 90,000                                                                       Indirect labor $126,000

Depreciation 60,000                                                                        Indirect materials 90,000

Insurance 30,000                                                                              Repairs 54,000

Rent 24,000                                                                                        Utilities 72,000

Property taxes 18,000                                                                    Lubricants 18,000

$222,000                                                                                              $360,000

It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours.

During October, 27,000 direct labor hours were worked and the following overhead costs were incurred.

Fixed overhead costs: Supervision $7,500, Depreciation $5,000, Insurance $2,470 Rent $2,000, and Property taxes $1,500.Variable overhead costs: Indirect labor $10,360, Indirect materials, $6,400, Repairs $4,000, Utilities $5,700, and Lubricants $1,640.

Instructions

(a) Prepare a monthly manufacturing overhead flexible budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2012. ((a) Total costs: DLH 27,000, $45,500;DLH 36,000, $54,500)

(b) Prepare a flexible budget report for October. ((b) Total $1,070 U)

(c) Comment on management’s efficiency in controlling manufacturing overhead costs in October.

Exercise 18-8

Meriden Company has a unit selling price of $660, variable costs per unit of $396, and fixed costs of $175,560.

Compute the break-even point in units using the mathematical equation.

Break-even point                                             units

Exercise 18-10

For Turgo Company, variable costs are 61% of sales, and fixed costs are $188,600. Management’s net income goal is $82,177.

Compute the required sales in dollars needed to achieve management’s target net income of $82,177.

Required sales                  $

Exercise 18-11

For Kozy Company, actual sales are $1,110,000 and break-even sales are $765,900.

Compute the margin of safety in dollars and the margin of safety ratio.

Margin of safety                               $

Margin of safety ratio                    %

Exercise 19-16

Montana Company produces basketballs. It incurred the following costs during the year.

Direct materials                                                                $14,799

Direct labor                                                         $25,215

Fixed manufacturing overhead                  $9,668

Variable manufacturing overhead            $32,390

Selling costs                                                        $21,292

What are the total product costs for the company under variable costing?

Total product costs                          $

Exercise 19-17

Polk Company builds custom fishing lures for sporting goods stores. In its first year of operations, 2012, the company incurred the following costs.

Variable Cost per Unit                   

Direct materials                                $8.18

Direct labor                         $2.67

Variable manufacturing overhead                            $6.27

Variable selling and administrative expenses                      $4.25

Fixed Costs per Year                      

Fixed manufacturing overhead                  $256,895

Fixed selling and administrative expenses                            $261,709

Polk Company sells the fishing lures for $27.25. During 2012, the company sold 81,000 lures and produced 95,500 lures.

Collapse question part

(a)

Assuming the company uses variable costing, calculate Polk’s manufacturing cost per unit for 2012. (Round answer to 2 decimal places, e.g.10.50.)

Manufacturing cost per unit                        $

(b)The parts of this question must be completed in order. This part will be available when you complete the part above.                  Expand question part

(c)The parts of this question must be completed in order. This part will be available when you complete the part above.   Expand question part

(d)The parts of this question must be completed in order. This part will be available when you complete the part above.

Exercise 21-1

For the quarter ended March 31, 2012, Maris Company accumulates the following sales data for its product, Garden-Tools: $316,000 budget; $324,400 actual.

Prepare a static budget report for the quarter.

MARIS COMPANY

Sales Budget Report

For the Quarter Ended March 31, 2012

Product Line                       Budget                 Actual                   Difference

Garden-Tools                    $                              $                              $                              $

Exercise 21-4

Gundy Company expects to produce 1,260,240 units of Product XX in 2012. Monthly production is expected to range from 77,110 to 125,810 units. Budgeted variable manufacturing costs per unit are: direct materials $4, direct labor $8, and overhead $10. Budgeted fixed manufacturing costs per unit for depreciation are $5 and for supervision is $2.

Prepare a flexible manufacturing budget for the relevant range value using 24,350 unit increments. (List variable costs before fixed costs.)

GUNDY COMPANY

Monthly Flexible Manufacturing Budget

For the Year 2012

1

2              1                              2                              3

3

4              1                              2                              3

5              1                              2                              3

6              1                              2                              3

7

8              1                              2                              3

9

10           1                              2                              3

11

12           1                              2                              3