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The Brown Bag company makes a two varieties of bags for its customers. The first is an organically created, Non-GMO, totally biodegradable bag used at

The Brown Bag company makes a two varieties of bags for its customers. The first is an organically created, Non-GMO, totally biodegradable bag used at a large number of Whole Foods stores and various other high end groceries. The company sells these bags for $10.00 per hundred (1 unit). The second bag is a reusable bag that sells for $5.00 each. The company currently uses a plant-wide allocation for factory overhead based upon machine hours, however, the company feels like there is something amiss since they believe the biodegradable bag should be its greatest profit center but the results of the plant-wide allocation seem to be allocating in a manner not consistent with the true allocation. The company has hired your firm to give a budget, by product type, under both the plant-wide and activity based costing method and are seeking you to explain the results and give any recommendations. They are seeking a budgeted income statement under both methods for both products.

The direct materials for the Biodegradable bags is $1.50 per hundred/per unit (please note for the purposes of presentation and internal books, the company considers 100 of these bags to be 1 unit). The cost for materials for the reusable bag is $0.50 per unit. In addition, the direct labor for the biodegradable is $1.50 per unit, whereas for the reusable it is a $1.00 per unit.

The company expects to sell 50,000 units of the biodegradable units (5,000,000 individual bags) and 50,000 of the reusable bags.

The following information has been given regarding production, factory overhead.

Activity

Budgeted Overhead

Estimated Volume

Material Handing/Processing

$240,000

60,000 Machine Hours

Production Set-ups

$64,000

20 Set-ups

Packing and Shipping

$44,000

100,000 shipments

Activity

Bio-Degradable Bags (1 unit = 100 bags)

Reusable Bags

Overall Totals for the Company

Material Handing/Processing

50,000 Machine Hours

10,000 machine Hours

60,000 Machine Hours

Production Set-ups

5 Set-ups

15 Set-ups

20 Set-ups

Packing and Shipping

50,000 Shipments

50,000 Shipments

100,000 Shipments

In addition, the company pays $0.25 sales commission per unit for the biodegradable bags and $0.50 for the reusable bags. Last, the company has other general and administrative expenses, i.e. fixed expenses, in the amount of $40,000.

Please prepare the required income statements, analysis and explanation. For the biodegradable bags, please give in units not per bag, for the reusable use per unit which equals one bag.

After you finished your budget, the company came and reported the following, they want you to do a comparison and determine the variances and give any other items you view as important. An actual contribution margin might be helpful.

The company sold 52,000 units of the bio-bags, and 55,000 units of the reusable bags at the expected sales price.

The overall labor costs for the bio-bag per unit was $1.55 and for the reusable it was $0.90. For the direct materials, there was a bio-material shortage, so the cost per unit of the bio-bag was $2.00, whereas plastic fibers went down and the cost was $0.45 per unit.

For the variable overhead above, the material handing was actually $275,000, production and packing and shipping were the same as budgeted.

Please prepare a variance report based upon the actual versus budgeted on a flexible budget methodology.

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