You are the accountant for Wok and Egg Roll Express. Following are assumptions about sales for the coming month. Wok offers three basic meals: noodle bowls, egg rolls, and rice bowls. Each meal can be prepared with several different meats or with vegetables only. Costs and prices are similar for all varieties of each meal. Prices for noodle bowls are $4.00 each, egg roll meals are $3.00 each, and rice bowls are $3.50 each. Estimated sales for the next month are 200 noodle bowls, 100 egg roll meals, and 500 rice bowls per day.
PART 1: REVENUES BUDGET, UNCERTAINTIES, REVENUE STRATEGIES
REQUIRED
A. Prepare a revenue budget for the next month, assuming that the month is 30 days long.
B. Discuss factors that affect the budgeted volumes of meals.
C. Identify possible ways the owner could increase total revenues. Discuss the pros and cons of each of your ideas.
PART 2: DIRECT MATERIALS BUDGET, UNCERTAINTIES, COST CONTROL STRATEGIES
The owner of Wok and Egg Roll Express studied the cost of direct materials for each type of meal. He estimates that noodle bowls use about $1.00 in direct materials, egg roll meals use about $0.75, and rice bowls use about $0.90. Food is purchased daily to ensure high quality. Beginning and ending inventory amounts are minimal.
REQUIRED
D. Explain why you would not need to prepare a production budget for Wok and Egg Roll Express.
E. Prepare a direct materials usage budget and a direct materials purchases budget.
F. Discuss reasons why actual costs might be different from budgeted costs in Part E.
G. Suppose the prices of food ingredients increase. Identify possible ways the owner could keep food costs within the budget. Discuss drawbacks for each of your ideas.
PART 3: DIRECT LABOUR BUDGET, UNCERTAINTIES, COST CONTROL STRATEGIES
The owner of Wok and Egg Roll Express employs cooks and cashiers. The cashiers take orders and collect payment, transfer food from the cooks to customers, and clean tables. Cooks are paid $10 per hour, and cashiers are paid $8 per hour. Wok operates four shifts, and weekdays and weekends are staffed similarly. Following are the shifts and required workers:
Shift ................Cooks ................Cashiers
10 a.m. to 2 p.m. ........2........................ 2
11 a.m. to 2 p.m. ........3........................ 3
2 p.m. to 10 p.m. ........2.........................2
5 p.m. to 8 p.m. .........3........................ 3
REQUIRED
H. Prepare a labour budget showing hours and costs for a month. (Assume 30 days per month.)
I. Discuss reasons why actual labour costs might turn out to be different from budgeted costs in Part H.
J. Identify possible ways the owner could reduce labour costs. Discuss possible drawbacks for each of your ideas.
PART 4: OVERHEAD BUDGET, UNCERTAINTIES, COST CONTROL STRATEGIES Wok and Egg Roll Express does not separately account for production versus general overhead. Fixed overhead includes production overhead as well as support services and general administration. Variable overhead includes labour-related costs such as payroll taxes and employee benefits. Wok has estimated variable overhead costs as $2.50 per direct labour hour. Following are the estimated fixed overhead costs for one month:
Fixed overhead costs:
Utilities ..........................$ 1,300
Manager ...........................5,000
Lease ...............................2,000
Miscellaneous ....................2,500
Total ............................$10,800
REQUIRED
K. Prepare an overhead costs budget for one month.
L. Discuss reasons why actual overhead costs might turn out to be different from budgeted costs in Part K.
M. Identify possible ways the owner could reduce overhead costs. Discuss possible drawbacks for each of your ideas.
PART 5: BUDGETED INCOME STATEMENT, UNCERTAINTIES, PROFIT STRATEGIES
Refer to the information from the preceding budgets. The income statement for Wok and Egg Roll Express consists of revenues less direct costs (direct materials and direct labour) to determine the gross margin. Then the overhead costs are deducted to determine operating income.
REQUIRED
N. Prepare a budgeted income statement, ignoring income taxes.
O. What are the major uncertainties in Wok's budget? Explain.
P. Wok's owner would like to increase profits from the store. Suggest several possible ways to accomplish this goal. Explain your reasoning.