A.

Newark Plastics Corporation developed its overhead application rate from the annual budget. The budget is based on an expected total output of 600,000 units requiring 3,000,000 machine hours. The company is able to schedule production uniformly throughout the year. Machine hours is the cost driver for overhead costs. A total of 60,000 units requiring 255,000 machine hours were produced during May. Actual overhead costs for May amounted to $665,000. The actual costs, as compared to the annual budget and to one-twelfth of the annual budget, are as follows: NEWARK PLASTICS CORPORATION Annual Budget Total Per Per Machine Monthly Actual Costs Amount Unit Hour Budget for May Variable overhead: Indirect material $1, 980,000 $ 3.30 $0.66 $165, 600 $183, 000 Indirect labor 1, 380,000 2.30 0. 46 115, 000 115, 000 Fixed overhead: Supervision 1, 200,000 2.00 0. 40 100, 000 94 , 000 Utilities 1, 140, 000 1.90 0. 38 95, 000 113, 000 Depreciation 1,920,000 3.20 0. 64 160, 000 160, 000 Total $7, 620,000 $12.70 $2.54 $635,000 $665, 000 Required: 1. Prepare a schedule showing the following amounts for Newark Plastics for May. a. Applied overhead costs. b. Variable-overhead spending variance. c. Fixed-overhead budget variance. d. Variable-overhead efficiency variance. e. Fixed-overhead volume variance.Req 1A Req 1B and 1D Req 1C and 1E Applied overhead costs. Applied overhead costs $ 762,000Req 1A Req 1B and 1D Req 1C and 1E Variable-overhead Spending Variance and Efficiency Variance. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Round "Projected Overhead" and "Flexible Budget" to 2 decimal places.) Budgeted Flexible Budget Variable Overhead Actual Overhead Spending Variance Overhead at Efficiency Variance (Applied Actual Hours Overhead) Indirect labor S 115,000 Indirect material 183,000 $ 0.00 $ 0.00 Machine hours S 298,000 $ 12,400 Unfavorable 0 Favorable $ 0Req 1A Req 1B and 1D Req 1C and 1E Fixed-overhead Budget Variance and Volume Variance. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Round "Applied Overhead" to 2 decimal places.) Fixed Overhead Actual Overhead Budget Variance Flexible Volume Budget Variance Applied Overhead $ 0.00 Machine hours S 0 $ 0 $ 0Mark Fletcher, president of SoftGro, Inc., was looking forward to seeing the performance reports for November because he knew the company's sales for the month had exceeded budget by a considerable margin. SoGro, a distributor of educational software packages. had been growing steadily for approximately two years. Fletcher's biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports. he was dismayed to see the large unfavorable variance in the company's Monthly Selling Expense Report that follows. SOFTGRO, INC . Monthly Selling Expense Report For the Month of November Annual November November November Budget Budget Actual Variance Unit sales 2,626,666 284,888 366,666 22,666 Dollar sales $121,288,888 $ 17,646,666 $ 18,368,888 $ 1,326,666 Orders processed 66,888 7,588 6,888 (788) Sales personnel per month 98 98 96 (6) Advertising 5 27,666,666 $ 2,366,666 $ 2,316,666 $ 16,666u staff salaries 3,666,666 256,666 256,666 Sales salaries 2,592,666 216,666 232,666 16,666u Commissions 4,648,666 661,666 734,466 52,888 u Per diem expense 3,888,888 324,888 358,588 26,588U Office expenses 7,632,666 586,888 621,888 35,888U Shipping expenses 11,624,888 1,547,888 1,625,888 78,888U Total expenses 5 66,584,666 $ 5,964,666 $ 6,129,766 $ 225,166u Fletcher called in the company's new controller, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the company's reporting format might not be giving Fletcher a true picture of the company's operations. She proposed that SoftGro implement exible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting. Porter discovered the following information about the behavior of SoftGro's selling expenses. The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars. Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of ofce expense is $4,920,000 annually and is incurred uniformly throughout the year. Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report. Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoGro's original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month. The company's shipping expense is a semivariable cost with the variable portion, $5.00 per unit, dependent on the number of units sold. The xed portion is incurred uniformly throughout the year. Required: 1. Why would Susan Porter propose that SoGro use flexible budgeting in this situation? 2. Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoGro's control over selling expenses. Required 1 Required 2 Why would Susan Porter propose that SoftGro use exible budgeting in this situation? (Select "Yes" if the statement is a benet of allocating utility costs to the divisions, and "No" if it is not a benet.) Flexible budgeting provides management with the tools to evaluate the effects of varying levels of activity on costs, revenues, and prots. es Flexible budgeting has a direct impact on actual results. Flexible budgeting improves the analysis of actual results. es Flexible budgeting enables management to improve planning and decision making. es Required 1 Required 2 Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGro's control over selling expenses. [Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Do not round intermediate calculations.) l=l__ l=l__ _i_ll_ Total expenses Flaming Foliage Sky Tours is a small sightseeing tour company in New Hampshire. The rm specializes in aerial tours ofthe New England countryside during September and October. when the fall color is at its peak. Until recently, the company had not had an accounting department. Routine bookkeeping tasks, such as billing, had been handled by an individual who had little formal training in accounting. As the business began to grow, however, the owner recognized the need for more formal accounting procedures. Jacqueline Frost has recently been hired as the new controller. and she will have the authority to hire an assistant. During her first week on the job, Frost was given the following performance report. The report was prepared by Red Leif. the company's manager of aircraft operations, who was planning to present it to the owner the next morning. \"Look at these favorable variances for fuel and so forth." Leif pointed out, as he showed the report to Frost. \"My operations people are really doing a greatjob." Later that day, Frost looked at the performance report more carefully. She immediately realized that it was improperly prepared and would be misleading to the company's owner. FLAMING FOLIAGE SKY TOURS Per'Formance Report For the Month of September Formula Static Flexible Actual Budget Budget (49,999 air (43,999 air (per air mile) miles) miles) Variance Passenger revenue $ 11.59 $469,999 $494,599 $34, 599 U Less: Variable expenses: Fuel $ 1.69 $ 67,999 $ 68,899 $ 999F Aircraft maintenance 2.25 87,599 96,759 9,259F Flight crew.I salaries 1.69 64,?99 68,899 4,199F Selling and administrative 2.79 196,999 116,199 9,299F Total variable expenses $ 8.15 M m MP Contribution margin $ 3.35 $133,999 $144, 959 $11,959 U Less: Fixed expenses: Per Month Depreciation on aircraft $ 19,299 $ 19,299 $ 19,299 $ 9 Landing fees 4, 299 4,599 4,299 399 U Supervisory salaries 39,999 35,999 39,999 4,999F Selling and administrative 48,999 53,799 48,999 5,799U Total Fixed expenses $191,499 $193,499 $191,499 $ 2,999U Operating income $ 29,699 $ 42,659 $13,959U Required: 1. Prepare a columnar flexible budget for Flaming Foliage Sky Tours' expenses, using air miles as the cost driver at the following activity levels: 40,000 air miles, 43,000 air miles, and 46,000 air miles. 2. In spite of several favorable expense variances shown on the report above, the company's September operating income was only about twothirds of the expected level. Identify some of the possible reasons. 4. Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part {1). 5. Jacqueline Frost presented the revised expense report to Leif along with the memo explaining why the original performance report was misleading. Leifdid not take it well. He complained of Frost's \"interference\" and pointed out that the company had been doing just fine without her. \"I'm taking my report to the owner tomorrow," Leif insisted. \"Yoursjust makes us look bad." What are Frost's ethical obligations in this matter? Required 1 Required 2 Required 4 Required 5 Prepare a columnar flexible budget for Flaming Foliage Sky Tours' expenses, using air miles as the cost driver at the following activity levels: 40,000 air miles, 43,000 air miles, and 46,000 air miles. Activity Level (Air Miles) 40,000 43,000 46,000 Variable expenses: Total variable expenses $ O $ 0 $ 0 Fixed expenses: Total fixed expenses $ O $ 0 $ 0 Total expensesRequired 1 Required 2 Required 4 Required 5 In spite of several favorable expense variances shown on the report above, the company's September operating income was only about twothirds of the expected level. Identify some of the possible reasons. (Select which of the following statements (is) are true by selecting an "X".] "he variance report is misleading because the activityf levels used for the comparison differ. X a "here is a large unfavorable variance in passenger revenue. X a Favorable expense variances have no impact on operating income. "here are unfavorable variances in xed expenses. X a Required 1 Required 2 Required 4 Required 5 Prepare a revised expense variance report for September, which is based on the flexible budget prepared in part (1). (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select r'None" and enter "0" for no effect (i.e., zero variance). Round "per air mileII answers to 2 decimal places.) Variabmexpenses- __ Total variable expenses Fixed expenses: Total xed expenses Total expenses Required 1 Required 2 Required 4 Required 5 Jacqueline Frost presented the revised expense report to Leif along with the memo explaining why the original performance report was misleading. Leif did not take it well. He complained of Frost's \"interference" and pointed out that the company had been doing just fine without her. \"I'm taking my report to the owner tomorrow," Leif insisted. \"Yours just makes us look bad .\" What are Frost's ethical obligations in this matter? (Select which of the following statements {is} are true by selecting an "X".} Frost should let Leif decide on the best course of action. Show less; Frost should resign in protest. Frost should show the owner her memo to Leif as well as the revised expense variance report. X a Frost has an ethical obligation to make the owner aware that she believes Leifs analysis is faulty. X o