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Case 09-48 Student Name: Class: PHOTO ARTISTRY COMPANY Master Budget 1. Sales Budget: 20x4 4th Quarter S frame unit sales x S sales price S frame sales revenue L frame unit sales x L sales price L frame sales revenue Total sales revenue Cash sales* Sales on account 50,000 10 500,000 40,000 15 600,000 1,100,000 $ $ $ $ $ $ 440,000 660,000 $ $ $ $ 1st Quarter 55,000 ### 550,000 45,000 ### 675,000 1,225,000 490,000 735,000 $ $ $ $ $ $ 2nd Quarter 60,000 10 600,000 50,000 15 750,000 1,350,000 540,000 810,000 20x5 3rd Quarter 65,000 ### $ 650,000 55,000 ### $ 825,000 $ 1,475,000 $ $ $ $ 590,000 885,000 $ $ $ 4th Quarter 70,000 10 700,000 60,000 15 900,000 1,600,000 Entire Year 25,000 ### $ 2,500,000 210,000 ### $ 3,150,000 $ 5,650,000 640,000 960,000 $ 2,260,000 3,390,000 *40% of total sales. 60% of total sales. 2. Cash receipts budget: 20x5 2nd Quarter 540,000 3rd Quarter $ 590,000 4th Quarter $ 640,000 588,000 648,000 708,000 768,000 2,712,000 132,000 1,210,000 147,000 1,335,000 162,000 1,460,000 177,000 $ 1,585,000 618,000 5,590,000 1st Quarter Cash sales Cash collections from credit sales made during current quarter* Cash collections from credit sales made during previous quarter Total cash receipts $ 490,000 $ $ $ $ $ $ Entire Year 2,260,000 *80% of current quarter's credit sales 20% of previous quarter's credit sales 3. Production budget: 20x4 4th Quarter 1st Quarter 2nd Quarter 20x5 3rd Quarter 4th Quarter Entire Year S frames: Sales (in units) Add: Desired ending inventory Total units needed Less: Expected beginning inventory Units to be produced 50,000 11,000 61,000 10,000 51,000 55,000 12,000 67,000 11,000 56,000 60,000 13,000 73,000 12,000 61,000 65,000 14,000 79,000 13,000 66,000 70,000 15,000 85,000 140,000 71,000 250,000 ### 265,000 11,000 254,000 L frames: Sales (in units) Add: Desired ending inventory Total units needed Less: Expected beginning inventory Units to be produced 40,000 9,000 49,000 8,000 41,000 45,000 10,000 55,000 9,000 46,000 50,000 11,000 61,000 10,000 51,000 55,000 12,000 67,000 11,000 56,000 60,000 13,000 73,000 12,000 61,000 210,000 ### 223,000 9,000 214,000 4. Raw-material budget: 20x4 4th Quarter Metal strips: S frames to be produced Metal quantity per unit (ft.) Needed for S frame production L frames to be produced Metal quantity per unit (ft.) Needed for L frame production Total metal needed for production; to be purchased (ft.) Price per foot Cost of metal strips to be purchased Glass sheets: S frames to be produced Glass quantity per unit (sheets) Needed for S frame production L frames to be produced Glass quantity per unit (sheets) Needed for L frame production Total glass needed for production (sheets) Add: Desired ending inventory Total glass needs Less: Expected beginning inventory Glass to be purchased Price per glass sheet Cost of glass to be purchased Total raw-material purchases (metal and glass) 1st Quarter 2nd Quarter 20x5 3rd Quarter 4th Quarter Entire Year 51,000 2 102,000 41,000 3 123,000 61,000 2 122,000 51,000 3 153,000 66,000 ### 132,000 56,000 ### 168,000 710,000 2 142,000 61,000 3 183,000 254,000 ### 508,000 214,000 ### 642,000 225,000 1 225,000 $ $ 56,000 ### 112,000 46,000 ### 138,000 250,000 ### $ 250,000 $ 275,000 1 275,000 300,000 ### $ 300,000 $ 325,000 1 325,000 1,150,000 ### $ 1,150,000 71,000 0.25 17,750 61,000 0.50 30,500 48,250 10,400 254,000 ### 63,500 214,000 ### 107,000 170,500 ### 9,650 49,000 8 392,000 7,400 173,500 ### $ 1,388,000 717,000 $ 2,538,000 $ 51,000 0.25 12,750 41,000 0.50 20,500 33,250 7,400 $ $ 6,650 34,000 8 272,000 $ 497,000 56,000 ### 14,000 46,000 ### 23,000 37,000 8,150 $ 61,000 0.25 15,250 51,000 0.50 25,500 40,750 8,900 66,000 ### 16,500 56,000 ### 28,000 44,500 9,650 $ 7,400 37,750 ### $ 302,000 $ 8,150 41,500 8 332,000 $ 8,900 45,250 ### $ 362,000 $ $ 552,000 607,000 $ 662,000 $ $ 5. Cash disbursements budget: 1st Quarter 20x5 2nd Quarter 3rd Quarter 4th Quarter Entire Year Raw-material purchases: Cash payments for purchases during the current quarter* Cash payments for purchases during the preceding quarter Total cash pmts. for raw-material purchases Direct labor: Frames produced (S and L) Direct-labor hours per frame Direct-labor hours to be used Rate per direct-labor hour Total cash payments for direct labor Manufacturing overhead: Indirect material Indirect labor Other Total cash payments for manufacturing OH Cash pmts. for selling and admin. expenses Total cash disbursements $ 441,600 $ 485,600 $ 529,600 $ 573,600 $ 2,030,400 $ 99,400 541,000 $ 110,400 596,000 $ 121,400 651,000 $ 4,132,400 706,000 $ 463,600 2,494,000 $ $ 102,000 0.1 10,200 20 204,000 $ 112,000 ### 11,200 ### $ 224,000 $ 122,000 0.1 12,200 20 244,000 132,000 ### 13,200 ### $ 264,000 $ 468,000 0.1 46,800 20 936,000 13,200 52,800 46,000 112,000 $ 46,800 187,200 154,000 388,000 ### $ $ 1,182,000 $ 400,000 4,218,000 $ $ 10,200 40,800 31,000 82,000 $ $ 11,200 44,800 36,000 92,000 $ $ 12,200 48,800 41,000 102,000 $ $ 100,000 927,000 $ ### $ 1,012,000 $ 100,000 1,097,000 $ $ $ $ *80% of current quarter's purchases 20% of previous quarter's purchases 6. Summary cash budget: 20x5 Quarter Cash receipts Less: Cash disbursements Change in cash balance due to operations Payment of dividends Proceeds from bank loan (1/2/x5) Purchase of equipment Quarterly installment on loan principal Quarterly interest payment* Change in cash balance during the period Cash balance, beginning of period Cash balance, end of period $ 1,210,000 927,000 283,000 50,000 1,000,000 1,000,000 250,000 25,000 (42,000) 95,000 53,000 $ $ $ $ $ $ $ 2nd Quarter 1,335,000 1,012,000 323,000 ### 0 0 ### 18,750 4,250 53,000 57,250 $ $ $ $ PHOTO ARTISTRY COMPANY Budgeted Schedule of Cost of Goods Manufactured and Sold For the Year Ended December 31, 20x5 Direct material: Raw material inventory, 1/1/x1 Add: Purchase of raw material Raw material available for use Deduct: Raw-material inventory, 12/31/x1 Raw material used Direct labor Manufacturing overhead: Indirect material Indirect labor Other overhead Depreciation Total manufacturing overhead Budgeting over/underapplied overhead Overhead applied to work-in-progress* Cost of goods manufactured Add: Finished-goods inventory, 1/1/x1 Cost of goods available for sale Deduct: Finished-goods inventory, 12/31/x1** Cost of Goods Sold * The applied manufacturing overhead may be verified independently as follows: Total number of frames produced Direct-labor hours per frame Total direct-labor hours Predetermined overhead rate per hour Total manufacturing overhead applied The cost of goods manufactured may be verified independently as follows: Frames produced Manufacturing cost per unit Total manufacturing cost Grand total $ $ $ $ 59,200 2,538,000 2,597,200 83,200 2,514,000 936,000 46,800 187,200 154,000 80,000 468,000 $ $ $ $ $ 468,000 0.10 46,800 $ 3,918,000 167,000 4,085,000 235,000 3,850,000 468,000 * S Frames L Frames 214,000 254,000 * * $ 3,918,000 ** The finished-goods inventory on 12/31/x1 may be verified independently as follows: S Frames Projected inventory on 12/31/x1 Manufacturing cost per unit Cost of ending inventory Total cost of ending inventory (S and L) L Frames 13,000 15,000 * * $ 235,000 The cost of goods sold may be verified independently as follows: S Frames Frames sold 250,000 L Frames 210,000 3rd Quarter 1,460,000 1,097,000 363,000 50,000 0 0 250,000 12,500 50,500 57,250 107,750 $ $ $ $ 4th Quarter 1,585,000 1,182,000 403,000 ### 0 0 ### 6,250 96,750 107,750 204,500 $ $ $ $ Entire Year 5,590,000 4,218,000 1,372,000 200,000 1,000,000 1,000,000 1,000,000 62,500 109,500 950,000 204,500 Manufacturing cost per unit Cost of goods sold Total cost of goods sold (S and L) * * $ 3,850,000 $ $ 5,650,000 3,850,000 1,800,000 $ 462,500 1,337,500 PHOTO ARTISTRY COMPANY Budgeted Income Statement For the Year Ended December 31, 20x5 Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Interest expense Net income $ 400,000 62,500 PHOTO ARTISTRY COMPANY Budgeted Statement of Retained Earnings For the Year Ended December 31, 20x5 Retained earnings, 12/31/x0 Add: Net income Deduct: Dividends Retained earnings, 12/31/x1 $ $ 3,353,800 1,337,500 200,000 4,491,300 PHOTO ARTISTRY COMPANY Budgeted Balance Sheet December 31, 20x5 Cash Accounts receivable Inventory: Raw material Finished goods Plant and equipment (net of accumulated depreciation) Total assets $ Accounts payable Common stock Retained earnings Total liabilities and stockholders' equity $ $ $ 204,500 192,000 83,200 235,000 8,920,000 9,634,700 143,400 5,000,000 4,491,300 9,634,700 Problem 11.42 Mark Fletcher, president of SoftGro, Inc., was looking forward to seeing the performance reports for November because he knew the company's sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, had been growing steadily for approximately two years. Fletcher's biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the company's Monthly Selling Expense Report that follows. SOFTGRO, INC. Monthly Selling Expense Report For the Month of November Unit sales Dollar sales Orders processed Sales personnel per month Advertising Staff salaries Sales salaries Commissions Per diem expense Office expenses Shipping expenses Total expenses Fletcher called in the company's new controller, Susan Porter, to discuss the implications of the variances reported for November and to plan a strategy for improving performance. Porter suggested that the company's reporting format might not be giving Fletcher a true picture of the company's operations. She proposed that SoftGro implement flexible budgeting. Porter offered to redo the Monthly Selling Expense Report for November using flexible budgeting so that Fletcher could compare the two reports and see the advantages of flexible budgeting. Porter discovered the following information about the behavior of SoftGro's selling expenses. The total compensation paid to the sales force consists of a monthly base salary and a commission; the commission varies with sales dollars. Sales office expense is a semivariable cost with the variable portion related to the number of orders processed. The fixed portion of office expense is $3,000,000 annually and is incurred uniformly throughout the year. Subsequent to the adoption of the annual budget for the current year, SoftGro decided to open a new sales territory. As a consequence, approval was given to hire six additional salespeople effective November 1. Porter decided that these additional six people should be recognized in her revised report. Per diem reimbursement to the sales force, while a fixed amount per day, is variable with the number of sales personnel and the number of days spent traveling. SoftGro's original budget was based on an average sales force of 90 people throughout the year with each salesperson traveling 15 days per month. The company's shipping expense is a semivariable cost with the variable portion, $3.00 per unit, dependent on the number of units sold. The fixed portion is incurred uniformly throughout the year. Required: 1. Citing the benefits of flexible budgeting, explain why Susan Porter would propose that SoftGro use flexible budgeting in this situation. 2. Prepare a revised Monthly Selling Expense Report for November that would permit Mark Fletcher to more clearly evaluate SoftGro's control over selling expenses. The report should have a line for each selling expense item showing the appropriate budgeted amount, the actual selling expense, and the monthly dollar variance. Annual Budget November Budget November Actual November Variance 2,000,000 280,000 310,000 30,000 80,000,000 11,200,000 12,400,000 1,200,000 54,000 6,500 5,800 (700) 90 90 96 (6) 19,800,000 1,650,000 1,666,000 10,000 U 1,500,000 125,000 ### 1,296,000 108,000 115,400 7,400 U 3,200,000 4,480,000 496,000 48,000 U 1,782,000 148,500 162,600 14,100 U 4,080,000 340,000 358,400 14,800 U 6,750,000 902,500 976,500 74,000 U 38,408,000 3,722,000 3,893,900 171,900 U 1. Flexible budgets are needed and helps the financial team budget the cost and revenue for a business. A budgets helps the finance team make decisions about their business such as buying or accepting an order/sale. Budgets help forecast what the business will have in expenses and income and the net profit potential. Decision making based on flexible budget is more accurate and effective. This company is using Static Budget which only provides a budget for one level of activity. The controller has proposed to use a flexible budgeting method so that the budget can be revised for actual level of activity which will help to compute the variance accurately which will then help in making better business decisions. 2. Chart/Graph Unit Sales Advertising Staff salaries Sales salaries Commissions Per diem expense Office expenses Shipping expenses Total expenses Revised Monthly Selling Report for the Month of November Flexible Budget Actual Results Variance 310,000 ### 1,650,000 1,660,000 10,000 U 125,000 ### 115,200 115,400 200 U 496,000 ### 158,400 162,600 4,200 U 366,000 358,400 7,600 U 992,500 976,500 16,000 F 3,903,100 3,893,900 9,200 F For each of the following independent cases, fill in the missing information. The company budgets and applies manufacturing-overhead costs on the basis of direct-labor hours. (U denotes unfavorable variance; F denotes favorable variance. ) Case A Case B 1. Standard variable-overhead rate .................................................................... $2.50 per hour ? per hour 2. Standard fixed-overhead rate ......................................................................... ? per hour ? per hour 3. Total standard overhead rate .......................................................................... ? per hour $13.00 per hour 4. Flexible budget for variable overhead ............................................................. $90,000 ? 5. Flexible budget for fixed overhead .................................................................. $210,000 ? 6. Actual variable overhead ................................................................................ ? ? 7. Actual fixed overhead .................................................................................... $207,000 ? 8. Variable-overhead spending variance ............................................................. $5,550 U $2,000 U 9. Variable-overhead efficiency variance ............................................................. ? $400 F 10. Fixed-overhead budget variance .................................................................... ? $1,080 U 11. Fixed-overhead volume variance .................................................................... ? $3,600 U 12. Under- (or over-) applied variable overhead ..................................................... ? ? 13. Under- (or over-) applied fixed overhead ......................................................... ? ? 14. Budgeted production (in units) ....................................................................... 5,000 units ? 15. Standard direct-labor hours per unit ............................................................... 6 hours per unit 2 hours per unit 16. Actual production (in units) ............................................................................ ? ? 17. Standard direct-labor hours allowed, given actual production ........................... 36,000 hours 1,600 hours 18. Actual direct-labor hours ............................................................................... 37,000 hours 1,500 hours 19. Applied variable overhead .............................................................................. ? ? 20. Applied fixed overhead .................................................................................. ? ? CASE A & B Missing Information 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Standard variable-overhead rate ............................. Standard fixed-overhead rate ................................ Total standard overhead rate ................................ Flexible budget for variable overhead ....................... Flexible budget for fixed overhead .......................... Actual variable overhead .................................... Actual fixed overhead ....................................... Variable-overhead spending variance ......................... Variable-overhead efficiency variance ....................... . Fixed-overhead budget variance ............................. . Fixed-overhead volume variance ............................. . Under- (or over-) applied variable overhead ................ . Under- (or over-) applied fixed overhead ................... . Budgeted production (in units) ............................. . Standard direct-labor hours per unit ....................... . Actual production (in units) ............................... . Standard direct-labor hours allowed, given actual production . Actual direct-labor hours .................................. . Applied variable overhead .................................. . Applied fixed overhead ..................................... 2.50 Per Hour 7.00 Per Hour 9.50 Per Hour 90,000 210,000 98,050 207,000 5,550 U 2500 U 3000 F (42000) 8050 U 45,000 U 5000 Units 6 Hours Per Unit 6,000 Units 36,000 Hours 37,000 Hours 90000 252000 4.00 Per Hour 9.00 Per Hour 13.00 Per Hour 6,400 18,000 8,000 19,080 2,000 U 400 F 1,080 U 3,600 U 1,600 U 4,680 U 1,000 Units 2 Hours Per Unit 800 Units 1,600 Hours 1,500 Hours 6,400 14,400 Budget Actual Case A Solutions Flexible Budget Variable Cost Fixed Cost 90,000 210,000 Variance 98,050 8,050 U 2,070,000 3,000 F Variable Overhead Cost Variance Standard Hours Rate Total 36,000 2.50 90,000 Hours Rate Total 37000 2.65 98050 Actual 5,550U = (2.50- Actual Rate)*37000 2.65 Variable Overhead Efficiency Variance=(Standard Hours-Actual Hours)-*SR Equals (36,000-37,000)*2.50 Ans 2,500 U Underapplied Variable Overheads equals 98,050-90,000= 8,050 Fixed Overhead Variance Budget Actual Units Rate Total Units Total 5000 42 210000 6000 207,000 Applied Overhead Cost = Units Produced*Fixed Overhead Rate 252000 Fixed Overhead Budget Variance = Actual Fixed Overhead-Budgeted Fixed Overhead 3,000 U Fixed Overhead Volume Variance= Budgeted Fixed Overhead-Applied Fixed Overhead -42000 42,000 F Over applied fixed overheads is 252,000 less 210,000 = 42,000 Case B Solutions To find the standard variable overhead rate: Variable-overhead efficiency variance = $400 F = SVR = SVR(AH - SH) SVR(1,500 - 1,600) $4 Standard fixed-overhead rate = total standard overhead rate - SVR = $13 - $4 = $9 = = SH SVR 1,600 $4 = $6,400 = applied fixed overhead + volume variance = = (1,600 $9) + $3,600 $18,000 Flexible budget for variable overhead Flexible budget for fixed overhead Actual variable overhead = applied variable overhead + spending variance + efficiency variance = = (1,600 $4) + $2,000 U - $400 F = budgeted fixed overhead + fixed-overhead budget variance = = $18,000 + $1,080 U = = = spending variance + efficiency variance $2,000 U* + $400 F* $1,600 underapplied = = = fixed-overhead budget variance + volume variance $1,080 U + $3,600 (positive) $4,680 underapplied $8,000 Actual fixed overhead $19,080 Underapplied variable overhead Underapplied fixed overhead 1,60 =80units 2