Country Charm Shoppe sells a wide variety of home dcor, specializing in selling vintage items as well as items that are made from recycled and repurposed materials. The Country Charm Shoppe purchases some of their inventory for direct re-sale and also manufactures a portion of the goods they sell. The manufactured items Country Charm Shoppe makes internally are wooden furniture made from reclaimed wood. Reclaimed wood is the only direct material item required for these internally manufactured furniture pieces. The Country Charm Shoppe has organized their business into two separate divisions, one division that is devoted to generating sales from a small chain of brick and mortar stores and a second division that is devoted to generating on-line sales. Each division is operated separately and is headed by a division-level manager who is responsible for all aspects of their respective division. Top management at the Country Charm Shoppe prepare budgets each year to help with planning and to help evaluate performance of their division-level managers. Country Charm Shoppe uses a standard costing system and allocates both variable and fixed manufacturing overhead using direct labor hrs. The variable selling and administrative costs reflect sales commissions the division level managers pay to their salespeople to provide an incentive for them to generate as much in sales as possible. The fixed selling and administrative expenses are costs that the company has determined are largely driven by the number of employees so they have chosen to allocate this cost using the number of employees for each division. While the division-level managers are not in charge of manufacturing the items that are made internally, they can choose the type of items that are marketed to customers which affects which specific items are manufactured. Top management is reviewing the following financial information for the overall company and from each division from the last quarter. Revenue Direct re-sale goods Manufactured goods Total sales Cost of Goods Sold - Manufactured Items Direct Materials Direct Labor Variable Manufacturing OH Fixed Manufacturing OH Total Cost of Goods Sold - Manufactured Items Cost of Goods Sold - Resale Items Total Cost of Goods Sold Gross Margin Income Statement Q3 2019- Retail Stores Division Actual Amounts Variable Selling Costs Fixed Selling and Administrative Costs Operating Income $2,128,553 6,677,321 8,805,874 1,460,100 1,580,675 321,633 571,447 3,933,855 1,353,642 5,287,497 3,518,377 567,171 538,901 $2,412,305 Budgeted Amounts $2,100,000 6,468,000 8,568,000 986,370 1,290,366 388,080 582,120 3,246,936 1,417,500 4,664,436 3,903,564 371,700 542,500 $2,989,364 Revenue Direct re-sale goods Manufactured goods Total sales Cost of Goods Sold Manufactured Items Direct Materials Direct Labor Variable Manufacturing OH Fixed Manufacturing OH Total Cost of Goods Sold - Manufactured Items Cost of Goods Sold - Resale Items Total Cost of Goods Sold Gross Margin Variable Selling Costs Fixed Selling and Administrative Costs Operating Income Income Statement Q3 2019- Online Sales Division Budgeted Amounts Actual Amounts $4,012,848 1,279,536 5,292,384 274,350 405,850 114,192 285,295 1,079,687 2,278,058 3,357,745 1,934,639 148,691 149,350 $1,636,598 $3,315,000 2,079,000 5,394,000 381,150 523,908 124,740 249,480 1,279,278 2,340,000 3,619,278 1,774,722 114,825 157,500 $1,502,397 1 As shown above, the Retail Stores division generated approximately $575,000 less in operating income than expected for Q3 2019 while the Online Sales division generated approximately $135,000 more in operating income than expected. Kimberly, the manager for the Retail Stores division has argued that evaluating her division's Q3 2019 results based on expected operating income does not accurately reflect her division's performance. When asked to explain these results Kimberly made the following statement: "While our bottom line is lower than we expected, there are several reasons why this does not reflect my division's underlying performance. When generating the budgeted numbers for my division, the amount of sales was the only number that I had significant input for and as you can see my division actually generated more in total sales for the quarter than was expected. Many of the other budgeted numbers for my division such as the costs for the internally manufactured items are outside of my control as division manager. Also, I do not believe the way fixed selling and administrative costs are allocated to my division is fair. These costs are allocated on the basis of the number of employees in the two divisions which means that since my division requires more employees to staff the retail stores, my division will always receive a much higher allocation of fixed selling and administrative costs than the online sales division which will make their performance look better in comparison to mine." To better evaluate each division managers' performance top management wishes to put together a more in-depth and complete variance analysis for Q3 2019. To do so they have put together the following information underlying the budgeted expectations and the actual results for the quarter: Expected (budget) total number of direct re-sale items to be sold Actual number of direct re-sale items sold by the Retail Stores Division Actual number of direct re-sale items sold by the Online Sales Division Expected (budget) total number of manufactured items to be sold Actual number of manufactured items sold by the Retail Stores Division Actual number of manufactured items sold by the Online Sales Division Exp. cost (budget) per sq. ft of direct materials (price/sq. ft of reclaimed wood) Actual cost per sq. ft. of direct materials (cost per sq. ft. of reclaimed wood) Expected (budget) cost per direct labor hour Actual cost per direct labor hour Expected % of direct resale items sold in the Online- Sales Division Expected % of manufactured items sold in the Retail Stores Division 70 words KX Additional Information 60,000 19,618 42,464 23,100 13,745 4,880 $5.5 $6.2 $13.30 $12.50 65% 70% Required: Part A: Create a flexible budget for each division (include all income statement items). Part B: Calculate the following variances for each division and state whether each is favorable or unfavorable: Overall static budget variance, overall flexible budget variance, sales activity variance (one for resale items and one for manufactured items), sales price variance, direct materials price variance, direct materials efficiency variance, direct labor rate variance, direct labor efficiency variance,-the direct cost variance for the resale items (this variance is based on the expected versus the actual cost per resale item), variable selling cost variance (this variance is based on the expected versus the actual variable selling cost per item), and the fixed selling and administrative cost variance. Note: The actual and budgeted amounts per unit are expected to differ for items sold across the two divisions. Part C: Using the information you have put together so far, what are the items most responsible for the overall difference between the actual and expected income for Q3 operating income for each division? Explain the whys linking the calculations in part B to explain the financial results of both divisions. Utilize additional ratio analysis to support your conclusions if necessary. Provide an overall assessment to the divisions. Explain your answer in no more than 5-6 sentences for each division. Part D: Use the analysis you have done to evaluate Kimberly's objections to using her division's operating income variance to evaluate her performance. In doing so list at least two possible reasons in support of her arguments and two possible reasons why her arguments are not supported. Utilize ratio analysis in addition to the variances calculated in part to support your answer.