Case 3

Part 1 Master Budgets

Pizza L.L.C. operates pizza delivery and carry-out restaurants. The annual report describes its business as follows: We offer a focused menu of high-quality, value-priced pizza with three types of crust (Hand-Tossed, Thin Crust, and Deep Dish), made from fresh dough produced in our regional distribution centers. We prepare every pizza using real cheese, pizza sauce made from fresh tomatoes, and a choice of high-quality meat and vegetable to consistently and efficiently produce the highest-quality pizza.

Over the 41 years since our founding, we have developed a simple, cost-efficient model. We offer a limited menu, our stores are designed for delivery and carry-out, and we do not generally offer dine-in service. As a result, our stores require relatively small, lower-rent locations and limited capital expenditures.

How would a master budget support planning, directing, and control for Pizza LLC? Include the three major objectives of budgeting? Under what circumstances would a static budget be appropriate?

Briefly describe the type of human behavior problems that might arise if budget goals are set too tightly? Too loosely? Or if conflicting goals within the budget?

Why should the production requirements set forth in the production budget be carefully coordinated with the sales budget AND Why should the timing of direct materials purchases be closely coordinated with the production budget?

Budget performance report

The Box Company (BC) manufactures boxes for the pizza industry. The cost standards per 100 boxes are:

Cost Category Standard cost per 100 boxes

Direct labor 2.00

Direct materials 9.10

Factory overhead .55

Total 11.65

At the beginning of July, BC management planned sales and production of 400,000 boxes. The actual number of boxes sold and produced for July was 406,000 boxes.

The actual production costs for July of the current year were as follows:

Cost Category Standard cost per 100 boxes

Direct labor 7540

Direct materials 35750

Factory overhead 2680

Total 45970

Prepare the July manufacturing standard cost budget (direct labor, direct materials, and overhead) for BC, assuming planned production.

Prepare a budget performance report for manufacturing costs, showing the total cost variances for direct materials, direct labor, and factory overhead for July.

Interpret the budget performance report.

Part 2 Evaluating Divisional Performance and Capital Investment Analysis

The three divisions of a Foods Co. are Snacks, Morning Foods, and Frozen. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for the prior year:

Snack Morning Foods Frozen

Revenues 2200000 2520000 2100000

Operating Expenses 1366600 1122000 976800

Income from Op

Before service dept 833400 1398000 1123300

Service dept charges

Promotion 300000 600000 468000

Legal 137400 243600 235200

Total Service Dept charges 437400 843600 703200

Income from Operations 396000 554400 420000

Invested Assets 2000000 1680000 1750000

Which division is making the best use of invested assets and should be given priority for future capital investments? Consider ROI, the acceptable and rate of return.

Assuming that the minimum acceptable rate of return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions?

Can you identify opportunities for improving the company's financial performance?

Category	Points	Description
Understanding	10	Demonstrate a strong grasp of the problem at hand. Demonstrate understanding of how the course concepts apply to the problem.
Analysis	20	Apply original thought to solving the business problem. Apply concepts from the course material correctly toward solving the business problem.
Execution	20	Write your answer clearly and succinctly using strong organization and proper grammar. Use citations correctly.
Total	50	A quality paper will meet or exceed all of the above requirements.