Comprehensive Case 2

Accounting 363

Spring 2024

Appalachian Trail Beverages (ATB) bottles and sells premium root beer (regular and diet). All

inventory is in direct materials and finished goods at the end of each working day. There are no

work-in-process inventories. The syrup for both soft drinks is purchased from a premium New

England wholesaler.

ATB uses a lot size of 1,000 cases as the primary cost object in its budgeting process (Each case

contains 24 bottles). Direct materials are expressed in terms of lots, in which one lot of direct

materials is the input necessary to yield one lot (1,000 cases) of beverage (materials quantity

standards). ATB uses recent-past cost data to establish most of its standards. The following

represents last year's total costs for direct materials used solely to produce 800 lots of root beer and

350 lots of diet root beer (hint: add up purchases, delivery, and taxes & handling fees for each direct

material and divide by lots produced last year to get this year's price standards for materials):

Syrup

Root Beer Diet Root Beer

Purchases $ 1,200,000 $ 461,000

Delivery 137,000 86,000

Taxes & Handling Fees 42,000 40,000

Containers

Both Beverages

Purchases $ 1,001,000

Delivery 250,000

Taxes & Handling Fees 60,000

Packaging

Both Beverages

Purchases $ 990,000

Delivery 192,300

Taxes & Handling Fees 42,500

All direct material purchases are on account. The two drinks are bottled using the same equipment.

The only difference in the bottling process for the two beverages is the syrup.

Hours worked last year relative to the 1,150 lots produced included 27,200 production hours, 2,900

re-work hours, and 3,750 set-up hours. Gross production payroll included $625,000 in regular wages,

$145,000 in payroll taxes and benefits, and $95,270 in overtime wages. Wages are always paid at

the end of the month (hint: add up gross payroll, payroll taxes and benefits, and overtime wages and

divide by the total of production, re-work, and set-up hours to get this year's price standard; divide all

these hours by last year's total lots produced to get this year's quantity standard).Standard costs for variable manufacturing overhead is $700 per hour of bottling time (not the same as

direct labor time); total bottling time is the time the equipment is in operation and is the cost driver or

base for the predetermined overhead rate. Last year's actual total variable manufacturing overhead

was $1,820,450. Standards allow for two bottling hours to bottle one lot of root beer (regular or diet).

Fixed manufacturing overhead is budgeted to be $1,200,000 (last year's amount). Included in this is

a $400,000 estimate for depreciation. Assume all overhead is paid during the same month as

incurred.

Administration costs are forecasted to be 11% of the cost of goods manufactured, and marketing and

distribution costs are expected to be 8% and 9% of revenues respectively. There is no depreciation

or amortization associated with these costs, and all are paid during the same month as incurred.

Additional information:

Projected Current Year Sales Actual Beginning Finished Goods Inventory

Root Beer: 1,700 lots at $9,100 each Root Beer: 100 lots

Diet Root Beer: 1,350 lots at $9,300 each Diet Root Beer: 70 lots

All sales are on account.

Actual Beginning Direct Materials Inventory Target Direct Materials Ending Inventory

Root Beer Syrup: 70 lots at $1,200 each Root Beer Syrup: 30 lots

Diet Root Beer Syrup: 40 lots at $900 each Diet Root Beer Syrup: 40 lots

Containers: 210 lots at $750 each Containers: 80 lots

Packaging: 300 lots at $800 each Packaging: 90 lots

Target Finished Goods Ending Inventory

Root Beer: 20 lots

Diet Root Beer: 20 lots

Actual Beginning Balances

Accounts Receivable (from sales): $560,000

Accounts Payable (for direct materials): $450,000

Cash: $450,000

Budgeted Ending Balances

Accounts Receivable (from sales): $400,000

Accounts Payable (for direct materials): $175,000

Budgeted equipment purchased during the year (summer): $1,150,000 (to be paid in cash)

Estimated income tax expense: $85,000 (to be paid in cash during the current year)

Simply use the given beginning finished goods inventory dollar amount (for both budget and actual),

located in the check figures on the last page of the case.Actual Current Year Sales

Root Beer: 1,120 lots at $8,950 each

Diet Root Beer: 930 lots at $9,000 each

Actual Direct Material Cost during Current Year (At the beginning of the year, ATB negotiated

a two-year deal with suppliers on materials. All prices will be the same for two years, and

calculated actual lot costs at year end will be strictly a function of prices paid for materials

and actual usage of materials for the year.)

Syrup

Root Beer Diet Root Beer

Purchases $ 1,150,000 $ 720,000

Delivery 140,000 96,000

Taxes & Handling Fees 48,000 19,000

Containers

Both Beverages

Purchases $ 1,090,000

Delivery 186,000

Taxes & Handling Fees 115,000

Packaging

Both Beverages

Purchases $ 1,008,000

Delivery 70,000

Taxes & Handling Fees 23,500

Actual Ending Balances

Accounts Receivable (from sales): $425,000

Accounts Payable (for direct materials): $426,700

Actual equipment purchase (July): $1,505,000 (paid in cash)

Actual income tax expense: $115,000 (if owed, paid in cash during the current year)

Actual administration expenses were 11% of cost of goods manufactured. Actual marketing

expenses were 13% of revenues, and actual distribution expenses were 9% of revenues. Actual

variable manufacturing overhead was $1,795,000, and actual fixed manufacturing overhead was

$1,190,000 (including $400,000 of depreciation). Target level for all ending direct materials and for

finished root beer was met, but finished diet root beer had only 17 lots on hand.

Actual direct labor hours per lot averaged 22 and was paid out at an average of $24 per hour.

ATB uses averages to compute lot costs and FG inventory.

Average actual bottling time per lot was 1.9 hours for root beer and 2.05 hours for diet root beer.

Actual average root beer syrup used to make one lot of finished product was 1.1 units instead of 1,

due to a truck accident and resulting spill. Other material quantity standards for containers and

packaging were met. ATB uses averages to compute lot costs and FG inventory.Required:

Prepare the following:

Revenues budget (in dollars)

Production budget (in units)

Direct materials usage budget (in units and dollars) for COGM and COGS

Direct materials purchases budget (in units and dollars) for Cash budget

Direct labor budget for COGM, COGS, and Cash budget

Manufacturing overhead costs budget for COGM, COGS, and Cash budget

Ending finished goods inventory budget including budgeted total lot cost for both products

(use standards to estimate average lot cost for both products) for COGS

Cost of goods sold budget

Budgeted income statement

Cash budget

After you have completed the above, prepare similar reports for each of these relative to the actual

results. Assume that any over(under)applied overhead is already closed out to COGS (in other

words, use actual - not applied - overhead in your COGM and COGS calculations). Similar to

budgeted work, for ending FG inventory and actual lot costs, use actual average costs incurred for

materials for both products.

Compute the following (one combined variance for both regular and diet root beer products):

Direct materials price and efficiency variances (a variance for each of the four direct materials,

along with the total (net) of these, should be computed)

Direct labor price and efficiency variances

Variable overhead price and efficiency variances

Fixed overhead spending and volume variances

Show the T-Account for Manufacturing Overhead and its activity. Don't forget to apply overhead

using the standard bottling hours (not the actual bottling hours). Reconcile the over(under)applied

overhead to the net of the four overhead variances above (they should be the same number).

The controller for ATB is concerned about possible budgetary slack being introduced into the

standards and budgets by line managers. When confronted tactfully about this issue, these

employees maintain that they are using past data (the facts don't lie) for many of the standards and

that any potential slack introduced is "practical" slack, which allows for occasional human error or

unforeseen events (i.e. power outages, machine breakdowns).

Comment on whether you feel "practical" slack is ethical and how this type of slack may affect

(positively or negatively) the decision-making ability of key operations executives. Also, briefly

comment on how you might investigate this issue further to determine the degree of potential slack

being introduced and how you would determine whether the level of such slack was acceptable or

unacceptable.Similar to Pepsico (but on a much smaller scale), ATB would like to get involved in the salty snack

business (Pepsico owns Frito-Lay). ATB is considering making an offer to buy Insane Gator (IG) and

sell its gourmet potato chips. At this point in the negotiations, ATB is interested in IG's market share

and product mix. The following budgeted data was provided to ATB from IG for a recent month:

Original Spicy Cajun Creole

Sales in Cases 8,000 800 5,000

Variable Costs $250,000 $ 46,000 $132,000

Actual results for May are as follows:

Original Spicy Cajun Creole

Sales in Cases 2,750 1,800 4,600

Variable Costs $210,000 $ 41,000 $132,700

Each case of chips (regardless of flavor) is sold for $65. IG has gathered industry information from

the Southeast Independent Potato Chip Council for two years to determine its relative position in the

industry and to examine current consumer trends. Using this information, IG's controller estimated

total cases sold in the regional market for the recent month in question to be 22,000. Actual cases

sold (19,000) were less than estimated.

Prepare the sales volume (activity) variance, the sales mix and quantity variances and the

market share and industry volume variances. Reconcile the market share and industry

volume variances to the sales quantity variance and the sales mix and quantity variances to

the sales volume (activity) variance. In preparing the sales mix and quantity variances, as

well as the sales volume (activity) variance, present a variance for each flavor of chips and

in total.

Finally, briefly comment on all your case results. Discuss possible reasons for some of the larger

variances computed and larger deviations from predicted numbers.

Check Figures:

Hint: do not round numbers during calculations (take decimal points out many places).

Direct Materials Usage Budget Total: 11,182,326.41

Direct Materials Purchases Budget Total: 10,970,678.54

Budgeted Lot Cost (Root Beer): 6,492.16

Actual Lot Cost (Root Beer): 4,787.687

Beginning FG Inventory (same for Budget and Actual - just plug this number in): 1,239,043.17

Budgeted Net Income(Loss): 1,474,691.74

Actual Net Income: 3,192,182.37

Budgeted Ending Cash: 2,251,628.49

Actual Ending Cash: 4,037,951.61

Total Direct Material Price Variance: 2,563,583.50

Fixed Overhead Volume Variance: (412,191.78)

Total Sales Mix Variance: (27,095) result here rounded to nearest dollar

Market Share Variance: (94,078) result here rounded to nearest dollar