8-A1 Burton Transportation Company?s general manager reports quarterly to the company president on the firm?s operating performance. The company uses a budget based on detailed expectations for the forthcoming quarter. The general manager has just received the condensed quarterly performance report shown in Exhibit 8-10. Although the general manager was upset about not obtaining enough revenue, she was happy that her cost performance was favorable; otherwise, her net operating income would be even worse. The president was totally unhappy and remarked: ?I can see some merit in comparing actual performance with budgeted performance, because we can see whether actual revenue coincided with our best guess for budget purposes. But, I can?t see how this performance report helps me evaluate cost control performance.? Exhibit 8-10 Burton Transportation Operating Performance Report Second Quarter, 20X1 Budget Actual Variance Net revenue $8,000,000 $7,600,000 $400,000 U Variable Costs Fuel $ 160,000 $ 157,000 $ 3,000 F Repairs and maintenance 80,000 85,000 5,000 U Supplies and miscellaneous 800,000 788,000 12,000 F Variable payroll 5,360,000 5,200,000 160,000 F Total variable costs* $6,400,000 $6,230,000 $180,000 F Fixed Costs Supervision $ 180,000 $ 183,000 $ 3,000 U Rent 160,000 160,000 ? Depreciation 480,000 480,000 ? Other fixed costs 160,000 158,000 2,000 F Total fixed costs $ 980,000 $ 981,000 $ 1,000 U Total fixed and variable costs $7,380,000 $7,211,000 $169,000 F Operating income $ 620,000 $ 389,000 $231,000 U U = Unfavorable F = Favorable *For purposes of this analysis, assume that all these costs are totally variable with respect to sales revenue. In practice, many are mixed and have to be subdivided into variable and fixed components before a meaningful analysis can be made. Also, assume that the prices and mix of services sold remain unchanged. 1. Prepare a columnar flexible budget for Burton Transportation at revenue levels of $7,200,000, $8,000,000 and $8,800,000. Assume that the prices and mix of products sold are equal to the budgeted prices and mix. 2. Express the flexible budget for costs in formula form. 3. Prepare a condensed table showing the static-budget variance, the sales-activity variance, and the flexible-budget variance. 8-A3 Barber Brass manufactures trumpets, trombones, tubas, and other brass instruments. The following standards were developed for a line of trumpets. Standard Price per Unit of Input Standard Inputs Expected For Each Unit of Output Achieved ------------------------------------------------- Direct materials 5 pounds $10 per pound Direct labor 10 hours $25 per hour During April, Barber scheduled 550 trumpets for production. However, the company produced only 525. Barber purchased and used 3,100 pounds of direct materials at a unit price of $8.50 per pound. It used 5,500 hours of direct labor at an actual rate of $26.00 per hour. 1. Compute the standard cost per trumpet for direct materials and direct labor. 2. Compute the price variances and quantity variances for direct materials and direct labor. 3. Based on there sketchy data, what clues for investigation are provided by the variances? 8-43 Crescent Tool Works uses a standard cost system. The month?s data regarding its iron castings follow: ? Materials purchased and used, 3,300 pounds ? Direct-labor costs incurred, 5,500 hours, $42,350 ? Variable-overhead costs incurred, $4,620 ? Finished units produced, 1,000 ? Actual materials cost, $.97 per pound ? Standard variable-overhead rate, $.80 per direct-labor hour ? Standard direct-labor cost, $8 per hour ? Standard materials cost, $1 per pound ? Standard pounds of material in a finished unit, 3 ? Standard direct-labor hours per finished unit, 5 Prepare schedules of all variances, using the formats of Exhibits 8-8 and 8-9 Exhibit 8-8 Exhibit 8-9 9-B2 The president of North Shore Railroad wants to obtain an overview of the company's operations, particularly with respect to comparing freight and passenger business. He has heard about ?contribution? approaches to cost allocations that emphasize cost behavior patterns and contribution margins, contributions controllable by segment managers, and contributions by segments. The president has hired you as a consultant to help him. He has given you the following information. Total revenue in 20X3 was $80 million, of which $72 million was freight traffic and $8 million was passenger traffic. 50% of the passenger revenue was generated by division, 1.40% by division 2, and 10% by divison 3. Total variable costs were $40 million, of which $36 million was caused by freight traffic. Of the $4 million allocable to passenger traffic, $2.1, $1,6, and $.3 million could be allocated to divisions 1, 2, and 3, respectively. Total separable discretionary fixed costs were $8million, of which $7.6 million applied to freight traffic. For the remaining $400,000 applicable to passenger traffic, $80,000 could not be allocated to specific divisions, while $200,000, $100,000, and $20,000, were allocable to divisions 1, 2, and 3 respectively. Total separable committed costs, which were not regarded as being controllable by segment managers, were $25 million of which 80% was allocable to freight traffic. Of the 20% traceable to passenger traffic, divisions 1, 2, and 3 should be allocated $3 million, $700,000, and $300,000, respectively; the balance was unallocable to a specific division. The common fixed costs not clearly allocable to any part of the company amounted to $800,000. 1. The president asks you to prepare statements, dividing the data for the company as a whole between the freight and passenger traffic and then subdividing the passenger traffic into three divisions. 2. Some competing railroads actively promote a series of one-day sightseeing tours on summer weekends. Most often, these tours are timed so that the cars with the tourists are hitched on with regularly scheduled passenger trains. What costs are relevant for making decisions to run such tours? Other railroads, facing the same general cost structure, refuse to conduct such sightseeing tours. Why? 3. Suppose that the railroad has petitioned government authorities for permission to drop division 1. What would be the effect on overall company net income for 20X4 operations are expected to be in all respects a duplication of 20X3 operations? 9-48 In early 20X1, United Communications, a U.S.-based international telephone communications company, purchased the controlling interest in Bucharest Telecom, Ltd. (BTL) in Romania. A key productivity measure monitored by United is the number of customer telephone lines per employee. Consider the following data for United: 20X1 without BTL 20X1 with BTL 20X0 Customer lines 15,054,000 19,994,000 14,615,000 Employees 74,520 114,590 72,350 Lines per employee 202 174 202 1. What are United?s 20X0 productivity and 20X1 productivity without BTL? 2. What are BTL?s 20X1 productivity and United?s 20X1 productivity with BTL? 3. What difficulties do you foresee if United brings BTL?s productivity in line?

8-A1 Burton Transportation Company's general manager reports quarterly to the company president on the firm's operating performance. The company uses a budget based on detailed expectations for the forthcoming quarter. The general manager has just received the condensed quarterly performance report shown in Exhibit 8-10. Although the general manager was upset about not obtaining enough revenue, she was happy that her cost performance was favorable; otherwise, her net operating income would be even worse. The president was totally unhappy and remarked: \"I can see some merit in comparing actual performance with budgeted performance, because we can see whether actual revenue coincided with our best guess for budget purposes. But, I can't see how this performance report helps me evaluate cost control performance.\" Exhibit 8-10 Burton Transportation Operating Performance Report Second Quarter, 20X1 Net revenue Variable Costs Fuel Repairs and maintenance Supplies and miscellaneous Variable payroll Total variable costs* Fixed Costs Supervision Rent Depreciation Other fixed costs Total fixed costs Total fixed and variable costs Operating income Budget $8,000,000 Actual $7,600,000 Variance $400,000 U $ 160,000 80,000 800,000 5,360,000 $6,400,000 $ 157,000 85,000 788,000 5,200,000 $6,230,000 $ 3,000 5,000 12,000 160,000 $180,000 F U F F F $ 180,000 160,000 480,000 160,000 $ 980,000 $7,380,000 $ 620,000 $ 183,000 160,000 480,000 158,000 $ 981,000 $7,211,000 $ 389,000 $ U 3,000 - - 2,000 $ 1,000 $169,000 $231,000 F U F U U = Unfavorable F = Favorable *For purposes of this analysis, assume that all these costs are totally variable with respect to sales revenue. In practice, many are mixed and have to be subdivided into variable and fixed components before a meaningful analysis can be made. Also, assume that the prices and mix of services sold remain unchanged. 1. Prepare a columnar flexible budget for Burton Transportation at revenue levels of $7,200,000, $8,000,000 and $8,800,000. Assume that the prices and mix of products sold are equal to the budgeted prices and mix. 2. Express the flexible budget for costs in formula form. 3. Prepare a condensed table showing the static-budget variance, the sales-activity variance, and the flexible-budget variance. 8-A3 Barber Brass manufactures trumpets, trombones, tubas, and other brass instruments. The following standards were developed for a line of trumpets. Standard Price per Unit of Input Standard Inputs Expected For Each Unit of Output Achieved ------------------------------------------------Direct materials Direct labor 5 pounds 10 hours $10 per pound $25 per hour During April, Barber scheduled 550 trumpets for production. However, the company produced only 525. Barber purchased and used 3,100 pounds of direct materials at a unit price of $8.50 per pound. It used 5,500 hours of direct labor at an actual rate of $26.00 per hour. 1. Compute the standard cost per trumpet for direct materials and direct labor. 2. Compute the price variances and quantity variances for direct materials and direct labor. 3. Based on there sketchy data, what clues for investigation are provided by the variances? 8-43 Crescent Tool Works uses a standard cost system. The month's data regarding its iron castings follow: Materials purchased and used, 3,300 pounds Direct-labor costs incurred, 5,500 hours, $42,350 Variable-overhead costs incurred, $4,620 Finished units produced, 1,000 Actual materials cost, $.97 per pound Standard variable-overhead rate, $.80 per direct-labor hour Standard direct-labor cost, $8 per hour Standard materials cost, $1 per pound Standard pounds of material in a finished unit, 3 Standard direct-labor hours per finished unit, 5 Prepare schedules of all variances, using the formats of Exhibits 8-8 and 8-9 Exhibit 8-8 Exhibit 8-9 9-B2 The president of North Shore Railroad wants to obtain an overview of the company's operations, particularly with respect to comparing freight and passenger business. He has heard about \"contribution\" approaches to cost allocations that emphasize cost behavior patterns and contribution margins, contributions controllable by segment managers, and contributions by segments. The president has hired you as a consultant to help him. He has given you the following information. Total revenue in 20X3 was $80 million, of which $72 million was freight traffic and $8 million was passenger traffic. 50% of the passenger revenue was generated by division, 1.40% by division 2, and 10% by divison 3. Total variable costs were $40 million, of which $36 million was caused by freight traffic. Of the $4 million allocable to passenger traffic, $2.1, $1,6, and $.3 million could be allocated to divisions 1, 2, and 3, respectively. Total separable discretionary fixed costs were $8million, of which $7.6 million applied to freight traffic. For the remaining $400,000 applicable to passenger traffic, $80,000 could not be allocated to specific divisions, while $200,000, $100,000, and $20,000, were allocable to divisions 1, 2, and 3 respectively. Total separable committed costs, which were not regarded as being controllable by segment managers, were $25 million of which 80% was allocable to freight traffic. Of the 20% traceable to passenger traffic, divisions 1, 2, and 3 should be allocated $3 million, $700,000, and $300,000, respectively; the balance was unallocable to a specific division. The common fixed costs not clearly allocable to any part of the company amounted to $800,000. 1. The president asks you to prepare statements, dividing the data for the company as a whole between the freight and passenger traffic and then subdividing the passenger traffic into three divisions. 2. Some competing railroads actively promote a series of one-day sightseeing tours on summer weekends. Most often, these tours are timed so that the cars with the tourists are hitched on with regularly scheduled passenger trains. What costs are relevant for making decisions to run such tours? Other railroads, facing the same general cost structure, refuse to conduct such sightseeing tours. Why? 3. Suppose that the railroad has petitioned government authorities for permission to drop division 1. What would be the effect on overall company net income for 20X4 operations are expected to be in all respects a duplication of 20X3 operations? 9-48 In early 20X1, United Communications, a U.S.-based international telephone communications company, purchased the controlling interest in Bucharest Telecom, Ltd. (BTL) in Romania. A key productivity measure monitored by United is the number of customer telephone lines per employee. Consider the following data for United: 20X1 without BTL 20X1 with BTL 20X0 Customer lines Employees Lines per employee 15,054,000 74,520 202 19,994,000 114,590 174 14,615,000 72,350 202 1. What are United's 20X0 productivity and 20X1 productivity without BTL? 2. What are BTL's 20X1 productivity and United's 20X1 productivity with BTL? 3. What difficulties do you foresee if United brings BTL's productivity in line