Complete Parts I, II, and III.

Part I. Master Budgets

Farmer Manufacturing, Inc. prepares their budgets on a quarterly basis. Below is information which will be used to prepare their first quarter budget.

Forecasted sales in units for each product are as follows:

January

February

March

Product A

22,000 units

25,000 units

33,000 units

The average selling price is $36 per unit.

Below is additional information which will be needed to prepare the master budget:

Company policy requires that each month's ending inventory (finished goods) be equal to 40% of the next month's estimated sales. Ending inventory on December 31 was 8,800 units. Sales for April are projected to be 39,000 units, and sales for May are projected to be 42,000 units.

Information on material and labor requirements include:

Product A

Ingredient Q (per unit)

3 pounds

Price: Ingredient Q

$2.75 per pound

Direct labor hours (per unit)

0.70

Direct labor rate per hour

$16.00

Company policy requires that the ending inventory for raw material be equal to 30% of the following month's estimated material requirements. Ending inventory on December 31 for Ingredient Q was 20,800 pounds.

Manufacturing overhead includes both variable and fixed components. Overhead is allocated based on direct labor hours. Variable overhead is budgeted at $3.25 per direct labor hour required. Fixed overhead is budgeted at $34,500 per month.

Selling expenses include sales commissions and sales salaries. Commissions are paid at 4% of sales. Monthly sales salaries are $4,200. General and administrative expenses are $6,400 per month.

Part I Requirements:

1. monthly Sales Budget for the first quarter.
2. monthly Production Budget for the first quarter.
3. monthly Direct Material Purchases Budget for the first quarter.
4. monthly Direct Labor Budget for the first quarter.
5. monthly Overhead Budget for the first quarter.
6. monthly Selling, General, & Administrative Expense Budget for the first quarter.

Part II. Flexible Budgets

Polyfield Manufacturing prepares their annual budgets at the beginning of the year along with a mid-year update in June for any changes in estimates or business conditions. When the budget was prepared for the year, management made the following estimates for the month of July assuming sales of 65,000 units which sell for $10 each.

Sales

$650,000

Cost of Goods Sold

$406,250

Gross Profit

$243,750

Operating Expenses

Selling expenses (variable)

$58,500

Selling expenses (fixed)

$35,000

Administrative expenses

$22,000

Income before tax

$128,250

Tax expense

$26,933

Net income

$101,318

You are working as Polyfield's cost accountant, and management comes to you in June with some news about the projections for July. They recently received a large unexpected order from one of their biggest customers. Instead of 65,000 units, management is expecting to sell 85,000 units in July. They would like to see what the budget will look like assuming 85,000 units are sold rather than 65,000. Management assumes that the tax rate will remain unchanged.

Part II Requirement:

Use the information above to prepare flexible budget for the month of July assuming 85,000 units will be sold. Assume that the company has existing capacity and will not incur any additional fixed costs.

Part III. Manufacturing Variances

In your chapter reading, you've learned about the primary manufacturing variances which include:

• Material price variance
• Material efficiency variance
• Labor rate variance
• Labor efficiency variance
• Variable overhead efficiency variance
• Variable overhead spending variance
• Fixed overhead spending variance
• Production-volume variance

You're working as an accounting analyst with a large manufacturing company, Bolton & Sons, Inc., when your manager comes to you with a request. The CFO is very concerned about the manufacturing variances from the previous month which are as follows:

Material price variance

$7,300 (unfavorable)

Material efficiency variance

$2,000 (favorable)

Labor rate variance

$6,200 (unfavorable)

Labor efficiency variance

$1,500 (unfavorable)

Variable overhead efficiency variance

$2,400 (unfavorable)

Variable overhead spending variance

$2,900 (favorable)

Fixed overhead spending variance

$3,600 (favorable)

Production-volume variance

$4,700 (unfavorable)

The CFO doesn't understand why these numbers are "all over the place." You have been placed in charge of the research, analysis, and explanation of these variances.

Explain following associate with each variance:

• Causes or drivers of the variance
• Other departments or employees that you consulted for information
• Any plans to adjust or combat these variances moving forward