Exercise 1

Gorgeous Company is contemplating its fifth year operation and is preparing to build its master budget for the coming year (2007). The budget will detail each quarters activity and the activity for the year in total. The master budget is based on the following information.

1. Fourth quarter sales for 2006 are Br. 55,000 units
2. Unit sale by quarter for 2007 are projected as follows

First Quarter 65000

Second Quarter 70000

Third Quarter 75000

Fourth Quarter 90000

The selling price is Br. 400 per unit. 85% of sales are on cash basis and 15% of sales are on credit basis. Credit sale are collected in the following quarter.

3. There is no beginning inventory of finished goods. And the company is planning the following ending finished goods inventories for each quarter:

First Quarter 13000 units

Second Quarter 15000 units

Third Quarter 20000 units

Fourth Quarter 10000 units

4. Each unit uses five hours of direct labor and three units of direct materials. Laborers are paid Br. 10 per hour and one unit of material costs Br. 80
5. There are 65700 units off direct materials as of January 1, 2007. At end of each quarter, gorgeous plans to have 30% of raw materials needed for next quarters unit sales. On December 31,2007 gorgeous will end with the same level of inventory as of January 1,2007
6. Gorgeous buys the materials on account. Half of the purchases are paid in the quarter and the remaining half in the following quarter. Wage and salary maid at end of each month.
7. Variable over head is budgeted at Br. 6 per direct labor hour and paid as incurred
8. Fixed overhead totals Br 1 million each quarter. Of this total Br. 350000 represent depreciation. All other fixed overhead paid as incurred. The fixed overhead allocated by dividing the total by the expected unit produced per year.
9. Variable selling and administrative expenses are budgeted at Br.10 per unit sold.
10. Fixed selling and administrative expenses total Br. 250000 per quarter, including Br. 50000 depreciation. All selling and administrative expenses are paid as incurred.
11. The balance sheet as of December 31,2006 is as follows:

Assets

Cash Br. 250,000

Account receivable 3,300,000

Inventory 5,256,000

Plant &equipment 33,500,000

Total Assets Br. 42,306,000

Liabilities and capital

Accounts payable (for material purchase) Br. 7248,000

X-capital 35058,000

Total Liability and Capital Br. 42,306,000

12. Mr. X withdraws Br. 300000 pre-quarter. At end of the fourth quarter, Br. 2 million of equipment will be purchased.

Required: prepare a master budget for Gorgeous Company for each quarter of 2007 and for the year in total. The following component budgets must be included:

A. Sales budget. G. Ending finished goods inventory budget

B. Production budget. H. Cost of goods sold budget

C. Direct materials purchase budget I. Cash budget

D. Direct labor budget J. Performa (budgeted) income statement

E. Over head budget. K. Performa (budgeted) balance sheet

F. Selling and administrative expense budget

Exercise 2: The Brilliant Furniture Company has established standard costs for the cabinet department in which one size of a single four-drawer style if dresser is produced. The standard costs are used in evaluating actual performance. The standard costs of producing one of these dressers are shown below:

Direct material: Lumber 50 board feet @ Br. 5 = Br. 250

Direct labor: 3hours @ Br. 24 = 72

Factory over head:

Variable costs: 3 hours @ Br. 10 = 30

Fixed costs : 3hours @ Br. 20 = 60

Total per dresser Br. 412

The actual costs off operations to produce 400 off these dressers during January are as follows (there were no initial inventories)

Direct material purchased: 25000 board feet @5.60 = Br. 140,000

Direct material used: 19000 board feet

Direct labor: 1,100 hours @ Br. 22 = 24,200

Factory over head:

Variable costs = 12,760

Fixed costs = 29,800

The flexible budget for this department at the monthly volume level used to set the budgeted fixed overhead rate called for 1,400 direct labor hours of operation. At this level, the variable overhead was at Br. 14,000 and the fixed overhead at Br. 28,000.

Required: Compute the following variances from standard cost. Label your answers favorable (F) or unfavorable (U).

1. Direct material price variance,, isolated at time off purchase
2. Direct material quantity variance
3. (a) Direct labor price variance

(b) Direct labor efficiency variance

4. (a) Variable overhead flexible budget variance

(b) Fixed over head suspending (flexible budget) variance

(c) Fixed overhead production volume variance

5. (a) Variable overhead spending variance

(b) Variable overhead efficiency variance