Exercise Flexible Budgets

Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget

3. Explain two methods that can be used in order to identify realistic estimations when developing a budget. [2.2]

12. If 12,500 units are produced, what is the total amount of manufacturing overhead cost incurred to support this level of production? What is the total amount expressed on a per unit basis?

|2.2 Explain the purpose of using estimations when developing a budget and ways of doing so |Question 2 Page 3 |

(TCO B) You are the project manager for three projects. You are about to estimate costs for these three projects. Given the below information on each project, recommend an appropriate estimation method and justify your answer for each.

3. Explain two methods that can be used in order to identify realistic estimations when developing a budget. [2.2]

Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.

18. Within the same budget performance report, it is impossible to have both favorable and unfavorable variances.

If the budget for a line-item is $1,000 and 10% is assigned to a particular function (such as General Program), then if an additional 6% is added to that function (due to 3 new projects with 2% per new project) the new budget for that function is [10% + (3 x 2%)] multiplied by the original budget for that line item. In this case, .16 x $1,000 = $160 while the budget for the entire line-item is $1,000 x 1.06 = $1,060.

3. For each of the individual overhead accounts at Bridgeton, do you believe the given cost is variable, fixed, or something else? Why? (Use information or evidence from the case to support your evaluation, if possible. For most of these costs, there is no single right answer from the case information, so the goal is to come up with a reasonable estimate.)

uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company 's manufacturing overhead data:

Manufacturing overhead Rent on production equipment........ $ 6,000 Insurance on factory building ....... 1,500 Depreciation on factory building............................................ 1,500 Utility costs—factory........................ 900 Property taxes on factory building............................................ 400 Miscellaneous expenses— factory .............................................. 1,000 Total manufacturing costs..................... Total cost of work in process ...............

Budgets serve five main purposes; planning, facilitating communication and coordination, allocating resources, controlling profits and operations and evaluating performance and providing incentives. The budgeting process requires both technical and interpersonal leadership skills to achieve each of these purposes effectively. The director’s memo demonstrates several short comings in the budgeting process. The director instituted the “responsibility accounting system” as a means of evaluating performance. However, the DPW director has not consulted Sam in the budget process. Sam understands that his total expenditures are impacted by relatively unpredictable events that contribute to an uncontrollable element of his cost. The

Q.4 Why is it Important that Superior has an effective cost system? What is your overall appraisal of the Company’s cost system and its use in reports to management? List the strength and weaknesses of this system and itsrelated reports for the purposes management uses the system’s output. What recommendations, if any would you make to Waters regarding the company’s cost accounting system and its related reports?

P4. Explain the advantages and disadvantages of different types of planning tools used for budgetary control.