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Part B CE 24-1 As sales manager, Hank Short was given the following static budget report for selling expenses in the Winter Sports Department of Jennings Outdoor Company for the month of November. Jennings Outdoor Company Winter Sports Department Budget Report For the Month Ended November 30, 2017 Budget U Sales in units Variable expenses Sales commissions Advertising expense Travel expense Demonstration models given out Total variable Fixed expenses Rent Sales salaries Office salaries Depreciation - vans (sales staff) Total fixed Total expenses 4,000 Actual 4,600 Difference Favorable F Unfavorable 500 F $120,000 $128,000 $ 8,000 U 38,000 41,250 3,250 U 185,000 202,125 17,125 U 100,000 90,750 9,250 F 443,000 462,125 19,125 U 7,500 60,000 40,000 7,500 -060,000 -040,000 -02,500 3,000* 500 U 110,000 110,500 500 U $553,000 $572,625 $ 19,625 U *The increase in depreciation was due to a new vehicle that had to be purchased as a result of an accident driving on snowy roads on the way to visit a customer. As a result of this budget report, Hank was called into the president's office and congratulated on his fine sales performance. He was reprimanded, however, for allowing his costs to get out of control. Hank knew something was wrong with the performance report that he had been given. However, he was not sure what to do, and comes to you for advice. Instructions (a) Prepare a budget report based on flexible budget data to help Hank. (b) Should Hank have been reprimanded? Explain. (c) After Hank because familiar with the flexible budget report, he began to analyze the numbers. Hank feels that sales can be increased if Jennings Outdoor Company would increase sales commissions to $31 per unit. This would allow them to reduce advertising expense to $8.00 per unit. Hank thinks that these changes will motivate the sales staff to sell at least 5,500 units. He is allowed to try his plan in December and had the following results. Prepare a budget report based on flexible budget data. The new depreciation amount has been included in the budgeted fixed costs. Do you think the new plan is valid? Explain. CE 24-1 (cont.) Jennings Outdoor Company Winter Sports Department Results For the Month Ended December 31, 2017 Sales in units Variable expenses Sales commissions Advertising expense Travel expense Demonstration models given out Total variable Fixed expenses Rent Sales salaries Office salaries Depreciation - vans (sales staff) Total fixed Total expenses CE 24-2 6,500 $164,000 42,000 247,000 116,000 569,000 7,500 60,000 40,000 3,000 110,500 $679,500 The Camping Division of Custer Company is operated as a profit center. Sales for the division were budgeted for 2017 at $700,000. The only variable costs budgeted for the division were cost of goods sold ($340,000) and selling and administrative ($46,000). Fixed costs were budgeted at $77,000 for cost of goods sold, $70,000 for selling and administrative, and $69,000 for noncontrollable fixed costs. Actual results for these items were: Sales $678,000 Cost of goods sold Variable 315,000 Fixed 81,000 Selling and administrative Variable 47,000 Fixed 51,000 Noncontrollable fixed 69,000 Instructions (a) Prepare a responsibility report for the Camping Division for 2017. (b) Assume the division is an investment center, and average operating assets were $1,000,000. The noncontrollable fixed costs are controllable at the investment center level. Compute ROI. (c) Upon further analysis, Custer Company determined that if it committed to a 12 month advertising campaign costing $18,000, they could increase budgeted sales by 25%. Variable costs also will increase by 25%. Fixed cost of goods sold would remain at $77,000 and selling and administrative expenses increases by the $18,000 cost of this contract to a total of $88,000. Noncontrollable fixed costs would remain at $69,000. This plan resulted in the following results: Sales $973,000 Cost of goods sold Variable 420,000 Fixed 81,000 Selling and administrative Variable 56,000 Fixed 71,000 Noncontrollable fixed 69,000 (1) Prepare a responsibility report for the Camping Division based on the new projections. Did the increase in advertising benefit the company? (2) Assume the division is an investment center, and average operating assets were $1,000,000. The noncontrollable fixed costs are controllable at the investment center level. Compute ROI. Discuss the impact of the change on ROI. (3) Chapter Twenty Five CE 25-1 Anders Painting Service specializes in painting tall office buildings. During a recent month, the company worked on three painting projects (the Arrow Building, the Besler Building and the Cartrwright Building). The company is interested in controlling the materials costs, namely the paint, used for these painting contracts. In order to provide management with useful cost control information, the company uses standard costs and prepares monthly variance reports. Analysis reveals that the purchasing agent mistakenly purchased poor-quality paint for the Arrow Building project. The Besler Building project, however, received higher-than-standard-quality paint that was on sale. The Cartwright Building project received standard-quality paint. However, the price had increased and a new employee was used to paint the building. Shown below are quantity and cost data for each project. Actual ___ Standard Total Project Quantity Costs Quantity Costs Variance Arrow Building 3,750 gallons $285,000 3,500 gallons $280,000 $ 5,000 U Besler Building 3,800 $296,400 4,000 $320,000 23,600 F Cartwright Building 4,500 $369,000 4,200 $336,000 33,000 U Total variance $14,400 U Instructions (a) Prepare a variance report for the purchasing department with the following columns: (1) Project, (2) Actual Gallons Purchased, (3) Actual Price, (4) Standard Price, (5) Price Variance, and (6) Explanation. (b) Prepare a variance report for the production department with the following columns: (1) Project, (2) Actual Gallons, (3) Standard Gallons, (4) Standard Price, (5) Quantity Variance, and (6) Explanation. (c) In an effort to improve performance, Anders Painting Service found a new supplier that sold average quality paint. The initial quantity and cost data for each project is below: Actual Standard Total Project Quantity Costs Quantity Costs Variance Arrow Building 3,650 gallons $286,525 3,500 gallons $280,000 $ 6,525 U Besler Building 3,800 $298,300 4,000 $320,000 21,700 F Cartwright Building 4,350 $341,475 4,200 $336,000 5,475 U Total variance $ 9,700 F (1) Prepare a variance report for the purchasing department with the following columns: (1) Project, (2) Actual Gallons Purchased, (3) Actual Price, (4) Standard Price, (5) Price Variance, and (6) Explanation. (2) Prepare a variance report for the production department with the following columns: (1) Project, (2) Actual Gallons, (3) Standard Gallons, (4) Standard Price, (5) Quantity Variance, and (6) Explanation. (3) Discuss whether the change to the new supplier is beneficial to Anders Painting Service and why or why not. CE 25-2 Paulson's Piano Service, Inc. is trying to establish the standard labor cost of tuning a typical piano. The following data have been collected from time and motion studies conducted over the past three months. Actual time spent on tuning a piano 1.25 hours Hourly wage rate $50 Payroll taxes 12% of wage rate Setup and downtime 5% of actual labor time Travel and rest periods 15% of actual labor time Fringe benefits 20% of wage rate Instructions (a) Determine the standard direct labor hour per each piano that is tuned. (b) Determine the standard direct labor hourly rate. (c) Determine the standard direct labor cost per each piano that is tuned. (d) If it took 1.65 hours to tune a piano at the standard hourly rate, what was the direct labor quantity variance? (e) During the month of May, Paulson's Piano service tuned 80 pianos. The average time spent on each piano was 1.75 hours. The average cost per hour was $62.25 per hour. Paulson's had to hire some less experienced part time help in order to handle the demand. (1) Calculate the direct labor price variance. (2) Calculate the direct labor quantity variance. (3) Calculate the total direct labor variance. (4) Explain what might have caused the variances. Chapter Twenty Six CE26-1 Reno Company manufactures toaster ovens. For the first 8 months of 2017, the company reported the following operating results while operating at 95% of plant capacity: Sales revenue (361,000 units) Cost of goods sold Gross profit Operating expenses Net income $4,512,500 2,346,500 2,166,000 866,400 $1,299,600 Cost of goods sold was 75% variable and 25% fixed; operating expenses were 75% variable and 25% fixed. In September, Reno Company receives a special order for 15,000 toasters at $7.60 each from El Camino Company of Tiajuana. Acceptance of the order would result in an additional $4,000 of shipping costs but no increase in fixed operating expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Reno Company accept the special order? Why or why not? (c) Would your answer change if the order was for 20,000 ovens? Show computations. CE26-2 Leung Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Annual Life of Project Investment Income Project 32A $240,000 $16,500 6 years 33A 270,000 20,400 9 years 34A 280,000 17,300 7 years Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Leung Company uses the straight-line method of depreciation. Instructions (a) Determine the internal rate of return for each project. Round the internal rate of return factor to three decimals. (b) If Leung Company's required rate of return is 15%, which projects are acceptable? (c) Assume the minimum cash payback period is 5 years. Would that criterion change your answer to (b), if at all? Show computations. ANSWERS ON VARIENCES CE24-1 a) JENNINGS OUTDOOR COMPANY WINTERSPORTS DEPARTMENT BUDGET REPORT FOR THE MONTH ENDED NOVEMBER 30 2017. BUDGET Sales in units V.C /UNIT ACTUAL 4,000 4,600 DIFERENCE 600 U Variable Expenses Sales Commission $138,000 30 $128,000 Advertising Expense 43,700 9.5 41,250 Travel expense 212,750 46.25 202,125 Demonstration models 115,000 TOTAL VARIABLE 25 $509,450 $10,000F 2450 F 15,625F 90,750 25,000F 462,125 53,075 Fixed Expenses Rent 7,500 7, 500 0 Sales Salaries 60,000 60, 000 0 Office salaries 40,000 40, 000 0 Depreciation 2, 500 3,000 0 Total fixed costs $110,000 $110, 500 500U Total Expenses $619, 450 $572,625 B) Hank should not have reprimanded. This is because the variable costs were $ 53,075 below the budget. C) JENNINGS OUTDOOR COMPANY WINTER SPORTS DEPARTMENT RESULTS BUDGET REPORT FOR THE MONTH ENDED DEC 30 TH 2017 46, 825 Budgeted Sales in units V.C / Unit Actual cost 5, 500 Difference 6, 500 1, 000 F Variable Expenses Sales commission $ 201, 500 Advertising Expense Travel Expenses Demonstration given out 31 164, 000 37, 000 F 52, 000 8 42, 000 10, 000F 300, 625 46.25 247, 000 162, 500 Total variable cost 25 $ 716, 625 53, 625 F 116, 000 46, 000 F $ 569, 000 $ 147, 625 F Fixed Costs Rent 7, 500 Sales salaries Office salaries Depreciation Expense Total fixed expenses Total expenses 7, 500 0 60,000 60, 000 0 40, 000 40, 000 0 3, 000 3, 000 $ 110, 500 $ 110, 500 $ 827, 125 0 0 $ 679, 500 $ 147, 625 CE 24-2 Custer Company Responsibility Report For the period ended 31 Dec 2017 Calculation Of Contribution Margin First Budget Sales $ 700,000 Actual $ 678, 000 Difference 22,000 U Cost of goods sold Variable Fixed 340, 000 77, 000 Selling and Administration 315, 000 81, 000 25, 000 F 4, 000 U Variable 46, 000 Fixed Non Controllable fixed 70,000 69, 000 Contribution margin 455, 000 $ 245, 000 Controllable fixed costs 147, 000 $ 98, 000 B) Return on investment 47, 000 51, 000 69, 000 431, 000 247,000 132, 000 $ 115, 000 1, 000 U 19, 000 F 0 2,000 F 15, 000F $ 17, 000F