Question
A simple organizational setting in which wooden spin tops are manufactured and sold will be used as an example of how variance analysis can help
A simple organizational setting in which wooden spin tops are manufactured and sold will be used as an example of how variance analysis can help a manager identify problems in their manufacturing process. In the table contains estimated and actual information about The Wooden Top Company. The only direct material used to make tops is wood. Direct labor consists of the compensation paid to the employees who make the tops by fastening the wood to the lathe, and then carve and polish the tops. The variable manufacturing overhead consists of the cost of electricity to run the lathe and light the room in which the tops are made, the cost of the polish, and the cost of the chisels that are used to carve the wood. The fixed manufacturing overhead consists of the cost of rent, insurance and property taxes for the shed in which the tops are made, the depreciation of the lathe, and the fixed salaries.
Solve:
1) Calculate the budgeted income statement and the actual income statement, and then compare the two. What would be your reaction from this comparison?
2) Calculate the budgeted income statement after adjusting it to reflect the actual number of tops that were produced and sold. This is called the flexible budget. Compare it to the actual income statement. How, if at all, does your reaction change from the comparison you made in requirement 1?
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