Evaluating a Company?s Budget Procedures Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August, when the president establishes targets for the total dollar sales and the net income before taxes for the next year. The sales target is given to the Marketing Department, where the marketing manager formulates a sales budget by product line in both units and dollars. From this budget, sales quotas by product line in units and dollars are established for each of the corporation?s sales districts. The marketing manager also estimates the cost of the marketing activities required to support the target sales volume and prepares a tentative marketing expense budget. The executive vice president uses the sales and profit targets, the sales budget by product line, and the tentative marketing expense budget to determine the dollar amount that can be devoted to manufacturing and corporate expenses, and then forwards to the Production Department the product-line sales budget in units and the total dollar amount that can be devoted to manufacturing. The production manager meets with the factory managers to develop a manufacturing plan that will produce the required units when needed within the cost constraints set by the executive vice president. The budgeting process usually comes to a halt at this point because the Production Department does not consider the financial resources allocated to be adequate. When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs, while the marketing expense and corporate office expense budgets are cut. The total sales and net income figures proposed by the president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each executive then develops a new detailed budget for the operations in his or her area. None of the areas has achieved its budget in recent years. Sales often run below the target. When budgeted sales are not achieved, each area is expected to cut costs so that the president?s profit target can still be met. However, the profit target is seldom met because costs are not cut enough. In fact, costs often run above the original budget in all functional areas. The president is disturbed that Springfield has not been able to meet the sales and profit targets. He hired a consultant with considerable experience with companies in Springfield?s industry. The consultant reviewed the budgets for the past four years. He concluded that the product-line sales budgets were reasonable and that the cost and expense budgets were adequate for the budgeted sales and production levels. What is Springfield doing incorrectly that is contributing to their failure to achieve the president's sales and profit targets?

Evaluating a Company's Budget Procedures Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August, when the president establishes targets for the total dollar sales and the net income before taxes for the next year. The sales target is given to the Marketing Department, where the marketing manager formulates a sales budget by product line in both units and dollars. From this budget, sales quotas by product line in units and dollars are established for each of the corporation's sales districts. The marketing manager also estimates the cost of the marketing activities required to support the target sales volume and prepares a tentative marketing expense budget. The executive vice president uses the sales and profit targets, the sales budget by product line, and the tentative marketing expense budget to determine the dollar amount that can be devoted to manufacturing and corporate expenses, and then forwards to the Production Department the product-line sales budget in units and the total dollar amount that can be devoted to manufacturing. The production manager meets with the factory managers to develop a manufacturing plan that will produce the required units when needed within the cost constraints set by the executive vice president. The budgeting process usually comes to a halt at this point because the Production Department does not consider the financial resources allocated to be adequate. When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs, while the marketing expense and corporate office expense budgets are cut. The total sales and net income figures proposed by the president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each executive then develops a new detailed budget for the operations in his or her area. None of the areas has achieved its budget in recent years. Sales often run below the target. When budgeted sales are not achieved, each area is expected to cut costs so that the president's profit target can still be met. However, the profit target is seldom met because costs are not cut enough. In fact, costs often run above the original budget in all functional areas. The president is disturbed that Springfield has not been able to meet the sales and profit targets. He hired a consultant with considerable experience with companies in Springfield's industry. The consultant reviewed the budgets for the past four years. He concluded that the product-line sales budgets were reasonable and that the cost and expense budgets were adequate for the budgeted sales and production levels. 1. (TCO A) The variable portion of advertising costs is a Conversion YES... Period NO. Conversion YES .... Period YES. Conversion NO.... Period YES. Conversion NO.... Period NO. 2. (TCO A) The costs of staffing and operating the accounting department at Central Hospital would be considered by the Department of Surgery to be direct costs. sunk costs. incremental costs. None of the above 3. (TCO A) Property taxes on a company's factory building would be classified as a(n) sunk cost. opportunity cost. period cost. variable cost. manufacturing cost. 4. (TCO A) When the activity level is expected to increase within the relevant range, what effects would be anticipated with respect to each of the following? Fixed cost per unit Variable cost per unit (Points : 6) Increase No change Increase Increase Decrease No change No change Increase 5. (TCO F) When manufacturing overhead is applied to production, it is added the Cost of Goods Sold account. the Raw Materials account. the Direct Labor account. None of the above 6. (TCO F) A job-order cost system is employed in those situations where many different products, jobs, or batches of production are being produced each period. manufacturing involves a single, homogeneous product that flows evenly through the production process on a continuous basis. the product moves from department to department before being completed. the unit cost of production is computed by dividing the total production costs by the number of units produced. 7. (TCO F) The FIFO method only provides a major advantage over the weightedaverage method in that the calculation of equivalent units is less complex under the FIFO method. the FIFO method treats units in the beginning inventory as if they were started and completed during the current period. the FIFO method provides measurements of work done during the current period. the weightedaverage method ignores units in the beginning and ending workinprocess inventories. 8. (TCO B) The contribution margin ratio always decreases when the break-even point increases. break-even point decreases. variable expenses as a percentage of net sales increase. variable expenses as a percentage of net sales decrease. 9. (TCO B) Which of the following would not affect the break-even point? Number of units sold Variable expense per unit Total fixed expenses Selling price per unit 10. (TCO E) In an income statement prepared using the variable costing method, variable selling and administrative expenses would (Points : 6) be used in the computation of the contribution margin. be used in the computation of net operating income but not in the computation of the contribution margin. be treated differently from variable manufacturing expenses. not be used. 1. (TCO A) The following data (in thousands of dollars) have been taken from the accounting records of Larden Corporation for the just-completed year. Sales Purchases of raw materials Direct labor $210 Manufacturing overhead $220 Administrative expenses $180 Selling expenses $140 Raw materials inventory, beginning $70 Raw materials inventory, ending $80 Work-in-process inventory, beginning $30 Work-in-process inventory, ending $20 Finished goods inventory, beginning Finished goods inventory, ending $950 $170 $100 $70 Required: Prepare a Schedule of Cost of Goods Manufactured statement in the text box below. 2. (TCO F) The Illinois Company manufactures a product that goes through three processing departments. Information relating to activity in the first department during June is given below. Percentage Completed Units Materials Conversion Work in process, June 1 150,000 75% 55% Work in process, Jun 30 145,000 85% 75% The department started 475,000 units into production during the month and transferred 480,000 completed units to the next department. Required: Compute the equivalent units of production for the first department for June, assuming that the company uses the weightedaverage method of accounting for units and costs. 3. (TCO B) A tile manufacturer has supplied the following data: Boxes of tile produced and sold 625,000 Sales revenue $2,975,000 Variable manufacturing expense $1,720,000 Fixed manufacturing expense $790,000 Variable selling and admin expense $152,000 Fixed selling and admin expense $133,000 Net operating income $180,000 Required: a. Calculate the company's unit contribution margin. b. Calculate the company's unit contribution ratio. c. If the company increases its unit sales volume by 5% without increasing its fixed expenses, what would the company's net operating income be? 4. (TCO E) Lehne Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ 125 Units in beginning inventory Units oroduced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and admin 600 3000 3500 100 $ 15 $ 50 $ 8 $ 12 Fixed costs: Fixed manufacturing overhead $ 75,000 Fixed selling and admin $ 20,000 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare an income statement for the month using the variable costing method. d. Prepare an income statement for the month using the absorption costing method. 1. (TCO A) The variable portion of advertising costs is a Conversion YES... Period NO. Conversion YES .... Period YES. Conversion NO.... Period YES. Conversion NO.... Period NO. 2. (TCO A) The costs of staffing and operating the accounting department at Central Hospital would be considered by the Department of Surgery to be direct costs. sunk costs. incremental costs. None of the above 3. (TCO A) Property taxes on a company's factory building would be classified as a(n) sunk cost. opportunity cost. period cost. variable cost. manufacturing cost. 4. (TCO A) When the activity level is expected to increase within the relevant range, what effects would be anticipated with respect to each of the following? Fixed cost per unit Variable cost per unit (Points : 6) Increase No change Increase Increase Decrease No change No change Increase 5. (TCO F) When manufacturing overhead is applied to production, it is added the Cost of Goods Sold account. the Raw Materials account. the Direct Labor account. None of the above 6. (TCO F) A job-order cost system is employed in those situations where many different products, jobs, or batches of production are being produced each period. manufacturing involves a single, homogeneous product that flows evenly through the production process on a continuous basis. the product moves from department to department before being completed. the unit cost of production is computed by dividing the total production costs by the number of units produced. 7. (TCO F) The FIFO method only provides a major advantage over the weightedaverage method in that the calculation of equivalent units is less complex under the FIFO method. the FIFO method treats units in the beginning inventory as if they were started and completed during the current period. the FIFO method provides measurements of work done during the current period. the weightedaverage method ignores units in the beginning and ending workinprocess inventories. 8. (TCO B) The contribution margin ratio always decreases when the break-even point increases. break-even point decreases. variable expenses as a percentage of net sales increase. variable expenses as a percentage of net sales decrease. 9. (TCO B) Which of the following would not affect the break-even point? Number of units sold Variable expense per unit Total fixed expenses Selling price per unit 10. (TCO E) In an income statement prepared using the variable costing method, variable selling and administrative expenses would (Points : 6) be used in the computation of the contribution margin. be used in the computation of net operating income but not in the computation of the contribution margin. be treated differently from variable manufacturing expenses. not be used. 1. (TCO A) The following data (in thousands of dollars) have been taken from the accounting records of Larden Corporation for the just-completed year. Sales Purchases of raw materials Direct labor $210 Manufacturing overhead $220 Administrative expenses $180 Selling expenses $140 Raw materials inventory, beginning $70 Raw materials inventory, ending $80 Work-in-process inventory, beginning $30 Work-in-process inventory, ending $20 Finished goods inventory, beginning Finished goods inventory, ending $950 $170 $100 $70 Required: Prepare a Schedule of Cost of Goods Manufactured statement in the text box below. 2. (TCO F) The Illinois Company manufactures a product that goes through three processing departments. Information relating to activity in the first department during June is given below. Percentage Completed Units Materials Conversion Work in process, June 1 150,000 75% 55% Work in process, Jun 30 145,000 85% 75% The department started 475,000 units into production during the month and transferred 480,000 completed units to the next department. Required: Compute the equivalent units of production for the first department for June, assuming that the company uses the weightedaverage method of accounting for units and costs. 3. (TCO B) A tile manufacturer has supplied the following data: Boxes of tile produced and sold 625,000 Sales revenue $2,975,000 Variable manufacturing expense $1,720,000 Fixed manufacturing expense $790,000 Variable selling and admin expense $152,000 Fixed selling and admin expense $133,000 Net operating income $180,000 Required: a. Calculate the company's unit contribution margin. b. Calculate the company's unit contribution ratio. c. If the company increases its unit sales volume by 5% without increasing its fixed expenses, what would the company's net operating income be? 4. (TCO E) Lehne Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ 125 Units in beginning inventory Units oroduced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and admin 600 3000 3500 100 $ 15 $ 50 $ 8 $ 12 Fixed costs: Fixed manufacturing overhead $ 75,000 Fixed selling and admin $ 20,000 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare an income statement for the month using the variable costing method. d. Prepare an income statement for the month using the absorption costing method