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Kipling will use the Accrual Method of accounting due to the size of their business. Kipling is owned by VF Corporation, a publicly traded business

image text in transcribedKipling will use the Accrual Method of accounting due to the size of their business. Kipling is owned by VF Corporation, a publicly traded business that owns an abundance of apparel companies, including The North Face, Timberland, and Vans. For VF Corporation and Kipling to get the most accurate picture of Kiplings profitability, they want to record their revenues as they are earned and their expenses as soon as they are incurred. As a large retail company where sales fluctuate by season, Kipling tracks their numbers quarterly. An accrual method gives a more accurate look at their profitability for the year. Kipling will use a target price pricing strategy to determine the selling price. Currently, masks on the market range from $8 to $25 in price. Currently, all masks of the same type as Kipling masks are selling out in minutes as different retailers continue to replenish their website every few days. With demand being so high and Kipling being a well-known brand, a slight mark-up from the lower end of the price range will still remain competitive while still being conscious of the profit Kipling is aiming to make. Kipling masks will be priced at $12. Kipling currently produces fabric bags and accessories, meaning they already possess the necessary machinery and materials to produce masks. Non-medical grade masks are not expensive to produce; Kipling can produce the mask for 50 cents. The markup on Kipling masks is 2,300%, leaving Kipling with a large profit margin. Create a 1year Master Budget (refers page 254 & 255 in the textbook) for the business/project. image text in transcribed

vould consider e amounts bad dressing and the from Winter Wonderland Flexible budget (prepared at the end of the period with As you can see, actual costs exceeded budgeted costs. Most managers would such a cost overrun significant. But was there really a cost overrun if the am geted in the master budget are based on an output of 1,000 units of dressin actual output was 1,200 units of dressing? To judge the central kitchen's performance accurately, the company needs to the budgeted data in the master budget to reflect an output of 1,200 units, as ill. Exhibit 4. The flexible budget is used primarily as an evaluation tool at the end Favorable positive, or F) and unfavorable (negative, or U) variances between a and the flexible budget can be further examined by using standard costing specific variances for direct materials, direct labor, and variable and fixed overh eeds to change As illustrated in end of a period een actual cons ring to compute Var Master Variance Actual Results Variance Variance Budget Budget 1,200 200 (F) 1,000 Gallons produced 1,200 Center costs: Direct materials ($0.25 per gallon) $312 $(12) (0) $300 $(50) (U) Direct labor ($0.05 per gallon) 72 (12)(U) (10) (U) Variable overhead ($0.03 per gallon) 33 3 (F) 36 (6) (U) 30. Fixed overhead - 3 (F) 5 0 Total cost $419 $(18) (0) $401 $(66) (U) $333 Performance measures: Defect-free gallons to total produced 0.98 (0.01) (U) N/A Average throughput minutes per gallon 11 1 (F) Note: In this exhibit and others that appear later in this chapter, (F) indicates a favorable variance and (U) indicates an unfavorable variance. 0.99 Evaluating Profit Center Performance Using Variable Costing Restaurants are profit centers, since each is accountable for its own revenues and costs nd for the resulting operating income. A profit center's performance is usually evalu- ted by comparing its actual income statement results to its budgeted income statement. One method of preparing profit center performance reports is variable costing, hich classifies a manager's controllable costs as either variable or fixed. Variable costing Coduces a variable costing income statement instead of a traditional income statement Iso called a full costing or absorption costing income statement), which is used for en 11 reporting purposes. It is an internally prepared income statement that is us rformance management and evaluation because it focuses on cost variability an kefer to the chapter on standard costing for further information on performance evaluation using he flexible budget. uation using variances e Evaluation of Cost Centers and Profit Centers 255 Awformance Eval profit center's contribution to operating income. Under variable costing, variable costs de direct materials costs, direct labor costs, variable overhead costs, and variable sching, administrative, and general costs. Fixed costs include fixed manufacturing costs, nxed overhead, and fixed selling, administrative, and general costs. The format of a variable costing income statement follows. Sales - Variable costs Contribution margin - Fixed costs Operating income The variable costing income statement differs from the traditional income statement prepared for financial reporting as shown by the two income statements in Exhibit 5 for Trenton Restaurant, which is part of Winter Wonderland's Restaurant Division. In the raditional income statement, all manufacturing costs are assigned to the cost of goods sold. In the variable costing income statement, only the variable manufacturing costs are included in the variable cost of goods sold. Fixed manufacturing costs are considered of the current period and are listed with fixed selling expenses after the contribu- tion margin has been computed. Exhibit 5 riable Costing Income Statement Versus Traditional Income Statement for Trenton Restaurant (Amounts in Thousands) Cengage Learning 2014 Variable Costing Income Statement Sales $ 2,500 Variable cost of goods sold (1,575) Variable selling expenses (325) Contribution margin $ 600 Fixed manufacturing costs (170) Fixed selling expenses (230) Profit center operating income $ 200 Traditional Income Statement Sales $ 2,500 Cost of goods sold ($1,575 + $170) (1,745) Gross margin $ 755 Variable selling expenses (325) Fixed selling expenses (230) Profit center operating income $ 200 Exhibit 6 Performance Report Based on Variable Costing and Flexible Budgeting for Trenton Restaurant (Amounts in Thousands) In addition to tracking financial performance measures, a manager of a profit center may also want to measure and evaluate nonfinancial information, such as the number of food orders processed and the average amount of a sales order at Trenton Restaurant. The resulting report, based on variable costing and flexible budgeting, is shown in Exhibit 6. Variance Actual Results 750 $ 2,500.00 0 Flexible Budget 750 $ 2,137.50 Variance 250 (0) $ 712.50 (U) Master Budget 1,000 $ 2,850.00 $ 362.50 (F) Meals served Sales (average meal $2.85) Controllable variable costs: Variable cost of goods sold ($1.50) Variable selling expenses ($0.40) Contribution margin Controllable fixed costs: Fixed manufacturing expenses Fixed selling expenses ofit center operating income (1,575.00) (325.00) $ 600.00 (450.00) (U) (25.00) (U) $ 112.50 (U) (1.125.00) (300.00) $ 712.50 (375.00) (F) (100.00) (F) $ 237.50 (U) (1,500.00) (400.00) $ 950.00 (170.00) (230.00) 200.00 (30.00) (F) (20.00) (F) $ 62.50 (U) (200.00) (250.00) 262.50 0.00 0.00 $ 237.50 (U) (200.00) (250.00) 500.00 $ $ $ onfinancial performance measures: Number of orders processed Average sales order 300 $8.34 50 (F) $3.06 (U) N/A N/A N/A N/A 250 $11.40 vould consider e amounts bad dressing and the from Winter Wonderland Flexible budget (prepared at the end of the period with As you can see, actual costs exceeded budgeted costs. Most managers would such a cost overrun significant. But was there really a cost overrun if the am geted in the master budget are based on an output of 1,000 units of dressin actual output was 1,200 units of dressing? To judge the central kitchen's performance accurately, the company needs to the budgeted data in the master budget to reflect an output of 1,200 units, as ill. Exhibit 4. The flexible budget is used primarily as an evaluation tool at the end Favorable positive, or F) and unfavorable (negative, or U) variances between a and the flexible budget can be further examined by using standard costing specific variances for direct materials, direct labor, and variable and fixed overh eeds to change As illustrated in end of a period een actual cons ring to compute Var Master Variance Actual Results Variance Variance Budget Budget 1,200 200 (F) 1,000 Gallons produced 1,200 Center costs: Direct materials ($0.25 per gallon) $312 $(12) (0) $300 $(50) (U) Direct labor ($0.05 per gallon) 72 (12)(U) (10) (U) Variable overhead ($0.03 per gallon) 33 3 (F) 36 (6) (U) 30. Fixed overhead - 3 (F) 5 0 Total cost $419 $(18) (0) $401 $(66) (U) $333 Performance measures: Defect-free gallons to total produced 0.98 (0.01) (U) N/A Average throughput minutes per gallon 11 1 (F) Note: In this exhibit and others that appear later in this chapter, (F) indicates a favorable variance and (U) indicates an unfavorable variance. 0.99 Evaluating Profit Center Performance Using Variable Costing Restaurants are profit centers, since each is accountable for its own revenues and costs nd for the resulting operating income. A profit center's performance is usually evalu- ted by comparing its actual income statement results to its budgeted income statement. One method of preparing profit center performance reports is variable costing, hich classifies a manager's controllable costs as either variable or fixed. Variable costing Coduces a variable costing income statement instead of a traditional income statement Iso called a full costing or absorption costing income statement), which is used for en 11 reporting purposes. It is an internally prepared income statement that is us rformance management and evaluation because it focuses on cost variability an kefer to the chapter on standard costing for further information on performance evaluation using he flexible budget. uation using variances e Evaluation of Cost Centers and Profit Centers 255 Awformance Eval profit center's contribution to operating income. Under variable costing, variable costs de direct materials costs, direct labor costs, variable overhead costs, and variable sching, administrative, and general costs. Fixed costs include fixed manufacturing costs, nxed overhead, and fixed selling, administrative, and general costs. The format of a variable costing income statement follows. Sales - Variable costs Contribution margin - Fixed costs Operating income The variable costing income statement differs from the traditional income statement prepared for financial reporting as shown by the two income statements in Exhibit 5 for Trenton Restaurant, which is part of Winter Wonderland's Restaurant Division. In the raditional income statement, all manufacturing costs are assigned to the cost of goods sold. In the variable costing income statement, only the variable manufacturing costs are included in the variable cost of goods sold. Fixed manufacturing costs are considered of the current period and are listed with fixed selling expenses after the contribu- tion margin has been computed. Exhibit 5 riable Costing Income Statement Versus Traditional Income Statement for Trenton Restaurant (Amounts in Thousands) Cengage Learning 2014 Variable Costing Income Statement Sales $ 2,500 Variable cost of goods sold (1,575) Variable selling expenses (325) Contribution margin $ 600 Fixed manufacturing costs (170) Fixed selling expenses (230) Profit center operating income $ 200 Traditional Income Statement Sales $ 2,500 Cost of goods sold ($1,575 + $170) (1,745) Gross margin $ 755 Variable selling expenses (325) Fixed selling expenses (230) Profit center operating income $ 200 Exhibit 6 Performance Report Based on Variable Costing and Flexible Budgeting for Trenton Restaurant (Amounts in Thousands) In addition to tracking financial performance measures, a manager of a profit center may also want to measure and evaluate nonfinancial information, such as the number of food orders processed and the average amount of a sales order at Trenton Restaurant. The resulting report, based on variable costing and flexible budgeting, is shown in Exhibit 6. Variance Actual Results 750 $ 2,500.00 0 Flexible Budget 750 $ 2,137.50 Variance 250 (0) $ 712.50 (U) Master Budget 1,000 $ 2,850.00 $ 362.50 (F) Meals served Sales (average meal $2.85) Controllable variable costs: Variable cost of goods sold ($1.50) Variable selling expenses ($0.40) Contribution margin Controllable fixed costs: Fixed manufacturing expenses Fixed selling expenses ofit center operating income (1,575.00) (325.00) $ 600.00 (450.00) (U) (25.00) (U) $ 112.50 (U) (1.125.00) (300.00) $ 712.50 (375.00) (F) (100.00) (F) $ 237.50 (U) (1,500.00) (400.00) $ 950.00 (170.00) (230.00) 200.00 (30.00) (F) (20.00) (F) $ 62.50 (U) (200.00) (250.00) 262.50 0.00 0.00 $ 237.50 (U) (200.00) (250.00) 500.00 $ $ $ onfinancial performance measures: Number of orders processed Average sales order 300 $8.34 50 (F) $3.06 (U) N/A N/A N/A N/A 250 $11.40

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