Case Study: Background

Proven Patio FurnitureLtd manufactures patio tables for residential and restaurant uses. With therecent downturn in the patio furniture market, Proven Patio experienced adecline in financial performance. Themanagement team is in the process of preparing the 2016 budget and put togetherthe following budgeted information.

Annual sales areexpected to be 5000 units. Budgetedsales for the period of April and May 2016 are provided below (Table 1). Allsales are on credit. A 5% discount is offered if payment is made within themonth of sale.

Table1: Expected Salesin Units and Dollars for April and May 2016

	Residential table	Restaurant table
	Units	Price	Units	Price
April	250	$285	160	$625
May	260	$265	200	$680

The annual production is expected to be 5100 patio tables. Table 2 identifies the material requirementsand costs for each table. These costs are not expected to change during thebudgeted period.

Table2: Budgeted DirectMaterials Inputs and Costs as at April 1, 2016

	Residential table	Restaurant table
	Quantity*	Cost**	Quantity*	Cost**
Metal	2.5 m	$5.50	5 m	$5.50
Pine Timber	3 m	$13	4 m	$14.50
Fabric	1.5 m	$7.50	3 m	$12.50

*metre **per metre

Beginning inventories of Direct Materials are shownbelow. For direct materials, the policy of target ending inventory is to be 20%of the current months production.

Table3: DirectMaterials Inventory as at April 1, 2016

	Residential table (Metres)	Cost	Restaurant table (Metres)	Cost
Metal	125	$625	180	$900
Pine Timber	300	$3750	350	$4935
Fabric	220	$1584	215	$2580

Proven Patio uses a FIFO cost flow assumption for bothdirect materials and finished goods inventory.Finished Goods ending inventory policy is 25% of the current monthssales. The following information is provided on the current ending inventory offinished goods.

Table4: Finished GoodsInventory as at 31 March, 2016

	Residential table	Restaurant table
In Units	45	32
In Dollars	$8460	$10432

Direct labour for patios is divided into twoprocesses: Assembly and Packaging and it is expected that direct labour hoursfor 2016 to be 15 000 hours. Thefollowing information is provided for all classes of direct labour for each ofthe tables.

Table5: DirectManufacturing Labour Inputs and Costs for April 1, 2016

	Residential table	Restaurant table
	Hours*	Cost**	Hours*	Cost**
Labour Assembly	2	$30	2.5	$30
Labour - Packaging	0.3	$22.00	0.5	$22.00

*direct labour hours **per hour

Proven Patio uses an activity based costing systemand classifies overhead into three activity pools: setup (based on set-up time);processing (based on machine hour) and inspection (based on inspection time). Activity rates for these activities are $115per machine set-up hour, $8 per machine hour and $21 per inspection hour,respectively. Other information asfollows:

Table6: Cost driver information

	Residential table	Restaurant table
Number of units per batch	15 units	12 units
Machine Hour (MH) per unit	4 hours	6 hours
Machine set-up time per batch	1.5 hours	2 hours
Inspection time per batch	5 hours	6 hours

Non-manufacturing fixed costs for March equal $52 000,of which 50% (half) are Admin and Salaries.Admin and Salaries are expected to increase 8% in April. In addition non-manufacturing cost of salescommission for April is estimated to be 2% of sales revenue.

In June 2017, Proven Patio Furniture Ltd receivedthe following report from the management accountant on its performance over thepast quarter.

Table7: Budget Report

Proven Patio Furniture Ltd
Budget Report for Quarter ending 30 June 2017
	Actual	Flexible	Flexible	Sales	Static
Results	Budget	Budget	Volume	Budget
	Variance		Variance
Units Sold:
Residential	3325				3500
Restaurant	4620				4200
Revenues:
Residential	$1,213,212.50		$1,213,212.50		$1,250,750.00
Restaurant	$871,563.00		$889,350.00		$808,500.00
Total Sales Revenues	$2,084,775.50		$2,102,562.50		$2,059,250.00
Direct Materials:
Metal (Residential)	$104,363.44		$99,750.00		$105,000.00
Pine Timber (Residential)	$170,931.90		$171,465.00		$136,762.50
Fabric (Residential)	$9,875.25		$9,143.75		$9,625.00
Metal (Restaurant)	$18,534.60		$15,390.00		$24,435.00
Pine Timber (Restaurant)	$47,015.50		$47,381.25		$49,875.00
Fabric (Restaurant)	$56,368.50		$52,632.00		$46,485.00
Total direct Materials	$407,089.19		$395,762.00		$372,182.50
Direct Labour
Labour Assembly	$450,495.00		$412,953.75		$388,162.50
Labour Packaging	$31,358.25		$24,282.00		$23,490.00
Total Direct Labour	$481,853.25		$437,235.75		$411,652.50
Variable Overhead	$339,931.82		$289,165.45		$271,945.45
Total Variable Costs	$1,228,874.26		$1,122,163.20		$1,055,780.45
Contribution Margin	$855,901.24		$980,399.30		$1,003,469.55
Fixed Manufacturing Costs	$236,500.00		$215,000.00		$215,000.00
Operating Profit	$619,401.24		$765,399.30		$788,469.55

Required:

PART A:Operating Budgets (60 marks)

Prepare the followingbudgets for Proven Patio Furniture Ltd, for April, 2016 both in dollars andunits as required (Referring Tables: 1-6).

I.Revenues Budget

II.Production Budget

III.Direct Materials Usage Budget

IV.Direct Materials Purchases Budget

V.Direct Manufacturing Labour Budget

VI.Manufacturing Overhead Budget

VII.Ending Inventories Budgets (DirectMaterials and Finished Goods)

VIII.Cost of Goods Sold Budget

IX.Budgeted Income Statement

All budgets andsupporting schedules must be neatly presented (students are encouraged to useExcel workbook to do all the calculations).Cells and worksheets must be linked via formulas/references wherever possible(Important!!).

PART B: Variance Analysis (40 marks)

1.Calculate the flexible budget variancesand sales volume variances for the quarter ending June 30, 2017 based on theinformation provided in the Table 7 in both dollars and percentages.

2.Write a report (750 words) which analyses thevariances calculated in requirement 1. Your report must include the following:

Potential causes of any variance above5% including both favourable and unfavourable variances

Recommend possible courses of action toaddress the potential causes of significant variances, where this is within thecontrol of Proven Patio Furniture Ltd.

PART B (2) Report should be within the word limit of750 words ( 10%)