Based on Chapter 6 and 7 of Cost Accounting book(http://www.turboteamhu.com/wp-content/uploads/2015/10/cost-accounting-a-managerial-emphasis-14ed-horengren1.pdf) answer the attached document

Week 5 Chapter 6 1. Describe the benefits to an organization of preparing an operating budget. Answer: 2. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during August. b. Determine the total costs of direct materials for August purchases. Answer: 3. Christy Enterprises reports the year-end information from 2011 as follows: Sales (100,000 units) $500,000 Less: Cost of goods sold 300,000 Gross profit 200,000 Operating expenses (includes $20,000 of Depreciation) 120,000 Net income $ 80,000 Christy is developing the 2012 budget. In 2012 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2012. Answer: Chapter 7 4. Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. Answer: 5. The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: Week 5 Chapter 6 1. Describe the benefits to an organization of preparing an operating budget. Answer: Running businesses quite often requires the owners or managers to carefully plan and execute the operations and review business finances. To be able to manage the finances, detailed analysis of how a company expects to spend money in the future time. This detailed analysis is achieved through budgeting which go beyond the financial dimension and have more to do with business management. Operating budgets has got the following benefits to the organization Budgeting forces managers to do better forecasting since they constantly scan both internal and external business environment to identify changes that will impact on the business Budgeting provides a drive rather motivates managers and employees by providing useful benchmarks upon which actual performance is measured. Thus the motivation creates and incentive for both managers and organization employees to strive to achieve the set goals or targets Operating budgets can help facilitate communication between different levels in the management ladder since the business expectations are put in black and white in the form of budgeted financial statements. This minimizes confusion and creates a sense of a common language. Operating budgets is also essential in writing a business plan as it can be used to present new and emerging business needs so as to be able to convince people to finance the business operations Operating budget also helps businesses or organizations to build financial reserves as the company save, invest and plan for the future. Operating budgeting fosters accountability since the tendency to spend beyond the budget is controlled. Operating budget too cab ne used by organizations to project future expenses and thus become forward looking or strategic in terms of the operations and decision making. 2. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during August. b. Determine the total costs of direct materials for August purchases. Answer: Production budget Framin g 10,000 2,250 1,500 Glass 10,000 750 500 Budgeted sales in units Add: Planned ending units Less: beginning units Planned production in units 10,750 10,250 From this budget, we then can prepare direct materials purchases budget Backin Framing Glass g Budgeted production in units 10,750 10,250 10,250 direct materials require per unit 4 1 2 DM required per unit 43000 10250 20500 Add: Budgeted ending DM 2,250 750 750 45,250 11,000 21,250 Less: Beginning direct materials 1,500 500 500 Budgeted direct materials purchases 43,750 10,500 20,750 Total cost of direct materials purchases Direct materials purchases 43,750 10,500 20,750 cost per square $0.90 $8 $4 Backin g 10,000 750 500 10,250 unit Total costs $39,375.0 0 $84,00 0 $83,00 0 3. Christy Enterprises reports the year-end information from 2011 as follows: Sales (100,000 units) $500,000 Less: Cost of goods sold 300,000 Gross profit 200,000 Operating expenses (includes $20,000 of Depreciation) 120,000 Net income $ 80,000 Christy is developing the 2012 budget. In 2012 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2012. Answer: Budgeted income for 2012 Given that 2011 selling price= $500,000/100,000= $5 Costs of goods sold= 300,000, operating expenses= 120,000. In 2012, the company selling price by 10%, which will decrease sales by 5%, costs of goods sold is expected to increase by 62% Thus new costs of items appear as below Selling price Units sold Sales revenue Cost of goods sold 2011 $5 100,000 $500,00 0 $300,00 0 Budgeted 2012 $5.50 95000 $522,500.0 0 $486,000.0 0 Thus budgeted income statement for 2012 Sales Less Costs of goods sold Gross profit Operating expense Net income $522,500 486,000 $36,500 120,000 ($83,500 ) Chapter 7 4. Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. Answer: Static and flexible budgets differ in many respects. The quite apparent one is that a static budget is prepared under the assumption that all conditions will remain unchanged while flexible budget is prepared at different levels of activities putting into considerations the possible changes in the operations activities of the business for which the budget is done. A static budget cannot ascertain costs in case of any change as opposed to flexible one which can. Static budget variance is thus a variance analysis prepared from a static budget in which the actual results are compared with static budget figures. Flexible budget variance on the other hand is a variance analysis prepared from flexible budget figures. It is the difference between actual result and flexible budgeted amount 5. The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: Level 0 variance analysis is the difference between the actual result and the corresponding static budget amount. It involves a static budget variance which is discussed above. Level 1 variance analysis is the decomposing of static budget variance according to categories Level 2 analysis provides information on the two components of static-budget variance i.e. flexible budget variance and sales volume variance. Put differently, it involves flexible-budget- based variance analysis. Flexible budget variance is the difference between actual and flexible - budget amount of revenue and cost drivers. Sales -volume variance is the difference between flexible-budget amount and the static budget amount. Level 3 Analysis This variance analysis involves all product costs, direct materials and direct labor both having price and efficiency variances. Addressed are price and efficiency variances Price variance is the difference between actual and budgeted price multiplied with actual input quantity. Efficiency variance is the difference between actual and budgeted quantity multiplied by budgeted input quantity. Week 5 Chapter 6 1. Describe the benefits to an organization of preparing an operating budget. Answer: Running businesses quite often requires the owners or managers to carefully plan and execute the operations and review business finances. To be able to manage the finances, detailed analysis of how a company expects to spend money in the future time. This detailed analysis is achieved through budgeting which go beyond the financial dimension and have more to do with business management. Operating budgets has got the following benefits to the organization Budgeting forces managers to do better forecasting since they constantly scan both internal and external business environment to identify changes that will impact on the business Budgeting provides a drive rather motivates managers and employees by providing useful benchmarks upon which actual performance is measured. Thus the motivation creates and incentive for both managers and organization employees to strive to achieve the set goals or targets Operating budgets can help facilitate communication between different levels in the management ladder since the business expectations are put in black and white in the form of budgeted financial statements. This minimizes confusion and creates a sense of a common language. Operating budgets is also essential in writing a business plan as it can be used to present new and emerging business needs so as to be able to convince people to finance the business operations Operating budget also helps businesses or organizations to build financial reserves as the company save, invest and plan for the future. Operating budgeting fosters accountability since the tendency to spend beyond the budget is controlled. Operating budget too cab ne used by organizations to project future expenses and thus become forward looking or strategic in terms of the operations and decision making. 2. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during August. b. Determine the total costs of direct materials for August purchases. Answer: Production budget Framin g 10,000 2,250 1,500 Glass 10,000 750 500 Budgeted sales in units Add: Planned ending units Less: beginning units Planned production in units 10,750 10,250 From this budget, we then can prepare direct materials purchases budget Backin Framing Glass g Budgeted production in units 10,750 10,250 10,250 direct materials require per unit 4 1 2 DM required per unit 43000 10250 20500 Add: Budgeted ending DM 2,250 750 750 45,250 11,000 21,250 Less: Beginning direct materials 1,500 500 500 Budgeted direct materials purchases 43,750 10,500 20,750 Total cost of direct materials purchases Direct materials purchases 43,750 10,500 20,750 cost per square $0.90 $8 $4 Backin g 10,000 750 500 10,250 unit Total costs $39,375.0 0 $84,00 0 $83,00 0 3. Christy Enterprises reports the year-end information from 2011 as follows: Sales (100,000 units) $500,000 Less: Cost of goods sold 300,000 Gross profit 200,000 Operating expenses (includes $20,000 of Depreciation) 120,000 Net income $ 80,000 Christy is developing the 2012 budget. In 2012 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2012. Answer: Budgeted income for 2012 Given that 2011 selling price= $500,000/100,000= $5 Costs of goods sold= 300,000, operating expenses= 120,000. In 2012, the company selling price by 10%, which will decrease sales by 5%, costs of goods sold is expected to increase by 62% Thus new costs of items appear as below Selling price Units sold Sales revenue Cost of goods sold 2011 $5 100,000 $500,00 0 $300,00 0 Budgeted 2012 $5.50 95000 $522,500.0 0 $486,000.0 0 Thus budgeted income statement for 2012 Sales Less Costs of goods sold Gross profit Operating expense Net income $522,500 486,000 $36,500 120,000 ($83,500 ) Chapter 7 4. Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. Answer: Static and flexible budgets differ in many respects. The quite apparent one is that a static budget is prepared under the assumption that all conditions will remain unchanged while flexible budget is prepared at different levels of activities putting into considerations the possible changes in the operations activities of the business for which the budget is done. A static budget cannot ascertain costs in case of any change as opposed to flexible one which can. Static budget variance is thus a variance analysis prepared from a static budget in which the actual results are compared with static budget figures. Flexible budget variance on the other hand is a variance analysis prepared from flexible budget figures. It is the difference between actual result and flexible budgeted amount 5. The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: Level 0 variance analysis is the difference between the actual result and the corresponding static budget amount. It involves a static budget variance which is discussed above. Level 1 variance analysis is the decomposing of static budget variance according to categories Level 2 analysis provides information on the two components of static-budget variance i.e. flexible budget variance and sales volume variance. Put differently, it involves flexible-budget- based variance analysis. Flexible budget variance is the difference between actual and flexible - budget amount of revenue and cost drivers. Sales -volume variance is the difference between flexible-budget amount and the static budget amount. Level 3 Analysis This variance analysis involves all product costs, direct materials and direct labor both having price and efficiency variances. Addressed are price and efficiency variances Price variance is the difference between actual and budgeted price multiplied with actual input quantity. Efficiency variance is the difference between actual and budgeted quantity multiplied by budgeted input quantity