Chapter 12, Problem 30P

1.

To determine

Prepare a performance report for incorporation M for the year 2015.

Explanation of Solution

Prepare a performance report for incorporation M manufacturing:

Incorporation M
Performance Report
For the year 2015
Particulars	Actual costs	Budgeted costs	Budget variance
Direct materials	$ 440,000	$ 480,000(1)	$40,000 F
Direct labour	355,000	320,000(2)	35,000 U
Depreciation	100,000	100,000	0
Maintaining equipment	425,000	435,000(3)	10,000 F
Machining	142,000	137,000(4)	5,000 U
Moving materials	232,500	240,000(5)	7,500 F
Inspecting products	160,000	145,000(6)	15,000 U
Total	$ 1,854,500	$ 1,857,000	$2,500 F

Table (1)

Therefore, the budget variance of incorporation M for the year 2015 is $2,500 favourable.

Note: Budgeted formulas for following items in the above table (1) are ascertained by using the high-low method that is using the appropriate cost driver for each method.

Working notes:

(1)

$\begin{array}{c}\begin{array}{l}\text{Budgeted cost of }\\ \text{direct material}\end{array}]\text{ =}\left[\begin{array}{l}\left(\frac{\text{Direct materials at highest level}-\text{Direct materials at lowest level }}{\text{Direct labor hours at highest level }-\text{Direct labor hours at lowest level }}\right)\\ \times \\ \text{Direct labor hours during 20X1}\end{array}\right]\\ \text{=}\frac{\left(\$600,000-\$300,000\right)}{\left(100,000\text{DLH}-50,000\text{DLH}\right)}\times 80,000\text{DLH}\\ \text{=\$6}\times \text{80,000 DLH}\\ \text{=\$480,000}\end{array}$

(2)

$\begin{array}{c}\begin{array}{l}\text{Budgeted cost of}\\ \text{ direct labor}\end{array})\text{=}\left[\begin{array}{l}\left(\frac{\text{Cost of direct labor at highest level}-\text{Cost of direct labor at lowest level}}{\text{Direct labor hours at highest level}-\text{Direct labor hours at lowest level}}\right)\\ \times \text{Direct labour hours}\text{}\text{during 20X}1\end{array}\right]\\ \text{=}\frac{\left(\$400,000-\$200,000\right)}{\left(100,000\text{ DLH}-50,000\text{DLH}\right)}\times 80,000\text{DLH}\\ \text{=\$4}\times 80,000\text{DLH}\\ \text{=\$320,000}\end{array}$

(3)

The fixed and variable costs portions of maintaining equipment is computed using high-low method as follows:

$\begin{array}{c}\begin{array}{l}\text{Budgeted fixed cost}\\ \text{of maintaining equipment}\\ \left(\text{A}\right)\end{array}\}=\left[\begin{array}{l}\left(\frac{\begin{array}{l}\text{Cost of maintaining equipment at highest level}-\\ \text{Cost of maintaining equipment}\text{at lowest level}\end{array}}{\begin{array}{l}\text{Machine hours at highest level}-\\ \text{Machine hours at lowest level}\end{array}}\right)\\ \times \text{Machine hours during 20X1}\end{array}\right]\\ =\left[\begin{array}{l}\frac{\left(\$510,000-\$360,000\right)}{\left(300,000\text{machine hours}-200,000\text{machine hours}\right)}\\ \times 250,000\text{machine hours}\end{array}\right]\\ \text{=}\frac{\$150,000}{100,000\text{machine hours}}\times 250,000\text{machine hours}\\ \text{=\$1}\text{.50}\times \text{250,000 machine hours}\\ \text{=\$375,000}\end{array}$

$\begin{array}{c}\begin{array}{l}\text{Budgeted varriable cost }\\ \text{of maintaining equipment}\\ \left(\text{B}\right)\end{array}\}=\left[\begin{array}{l}\text{Cost of maintaining equipment}-\\ \left(\begin{array}{l}\text{Budgeted fixed cost of maintainig equipment}\text{per machine hour}\times \\ \text{machine hours}\end{array}\right)\end{array}\right]\\ =\$510,000-\left(\$1.50\times 300,000\text{machine hours}\right)\\ =\$510,000-\$450,000\\ =\$60,000\end{array}$

Therefore,

$\begin{array}{c}\text{Budgeted cost of maintaining equipment}\text{=}\left(\text{A}\right)\text{+}\left(\text{B}\right)\\ \text{=\$375,000}\text{+}\text{\$}\text{60,000}\\ \text{=\$435,000}\end{array}$

(4)

The fixed and variable costs portion of machining is determined using high-low method as follows:

$\begin{array}{c}\begin{array}{l}\text{Budgeted fixed cost}\\ \text{of machining}\\ \left(\text{A}\right)\end{array}\}=\left[\begin{array}{l}\left(\frac{\text{Cost of machining at highest level}-\text{Cost of machining}\text{at lowest level}}{\text{Machine hours at highest level}-\text{Machine hours at lowest level}}\right)\\ \times \text{Machine hours during 20X1}\end{array}\right]\\ =\left[\begin{array}{l}\frac{\left(\$162,000-\$112,000\right)}{\left(300,000\text{machine hours}-200,000\text{machine hours}\right)}\\ \times 250,000\text{machine hours}\end{array}\right]\\ \text{=}\frac{\$50,000}{100,000\text{machine hours}}\times 250,000\text{machine hours}\\ \text{=\$0}\text{.50}\times \text{250,000 machine hours}\\ \text{=\$125,000}\end{array}$

$\begin{array}{c}\begin{array}{l}\text{Budgeted varriable cost }\\ \text{of machining}\\ \left(\text{B}\right)\end{array}\}=\left[\begin{array}{l}\text{Cost of machining}-\\ \left(\begin{array}{l}\text{Budgeted fixed cost of machining}\text{per machine hour}\times \\ \text{machine hours}\end{array}\right)\end{array}\right]\\ =\$162,000-\left(\$0.50\times 300,000\text{machine hours}\right)\\ =\$162,000-\$150,000\\ =\$12,000\end{array}$

Therefore,

$\begin{array}{c}\text{Budgeted cost of machining}\text{=}\left(\text{A}\right)\text{+}\left(\text{B}\right)\\ \text{=\$125,000}\text{+}\text{\$}\text{12,000}\\ \text{=\$137,000}\end{array}$

(5)

The fixed and variable costs portion of moving materials is calculated using high-low method as follows:

$\begin{array}{c}\begin{array}{l}\text{Budgeted fixed cost}\\ \text{of moving materials}\\ \left(\text{A}\right)\end{array}\}=\left[\begin{array}{l}\left(\frac{\begin{array}{l}\text{Cost of moving materials at highest level}-\\ \text{Cost of moving materials}\text{at lowest level}\end{array}}{\begin{array}{l}\text{Material moves at highest level}-\\ \text{Material moves at lowest level}\end{array}}\right)\\ \times \text{Material moves during 20X1}\end{array}\right]\\ =\left[\begin{array}{l}\frac{\left(\$290,000-\$165,000\right)}{\left(40,000\text{material moves}-20,000\text{material moves}\right)}\\ \times 32,000\text{material moves}\end{array}\right]\\ \text{=}\frac{\$125,000}{20,000\text{material moves}}\times 32,000\text{material moves}\\ \text{=\$6}\text{.25}\times 32\text{,000 material moves}\\ \text{=\$200,000}\end{array}$

$\begin{array}{c}\begin{array}{l}\text{Budgeted varriable cost }\\ \text{of moving materials}\\ \left(\text{B}\right)\end{array}\}=\left[\begin{array}{l}\text{Cost of moving materials}-\\ \left(\begin{array}{l}\text{Budgeted fixed cost of }\text{per material moves}\times \\ \text{material moves}\end{array}\right)\end{array}\right]\\ =\$290,000-\left(\$6.25\times 40,000\text{material moves}\right)\\ =\$290,000-\$250,000\\ =\$40,000\end{array}$

Therefore,

$\begin{array}{c}\text{Budgeted cost of machining}\text{=}\left(\text{A}\right)\text{+}\left(\text{B}\right)\\ \text{=\$200,000}\text{+}\text{\$}40\text{,000}\\ \text{=\$240,000}\end{array}$

(6)

The fixed and variable costs portion of inspecting products is determined using high-low method as follows:

$\begin{array}{c}\begin{array}{l}\text{Budgeted fixed cost}\\ \text{of inspecting products}\\ \left(\text{A}\right)\end{array}\}=\left[\begin{array}{l}\left(\frac{\begin{array}{l}\text{Cost of inspecting products at highest level}-\\ \text{Cost of inspecting products}\text{at lowest level}\end{array}}{\begin{array}{l}\text{Number of batches inspected at highest level}-\\ \text{Number of batches inspected at lowest level}\end{array}}\right)\\ \times \text{Number of batches inspected during 20X1}\end{array}\right]\\ =\left[\begin{array}{l}\frac{\left(\$225,000-\$125,000\right)}{\left(200\text{batch}\text{inspections}-100\text{batch inspections}\right)}\\ \times 120\text{batch inspections}\end{array}\right]\\ \text{=}\frac{\$100,000}{100\text{batch inspections}}\times 120\text{batch inspections}\\ \text{=\$1,000}\times 120\text{batch inspections}\\ \text{=\$120,000}\end{array}$

$\begin{array}{c}\begin{array}{l}\text{Budgeted varriable cost }\\ \text{of inspecting products}\\ \left(\text{B}\right)\end{array}\}=\left[\begin{array}{l}\text{Cost of inspecting products}-\\ \left(\begin{array}{l}\text{Budgeted fixed cost of }\text{per batch inspctions}\times \\ \text{number of batches inspected}\end{array}\right)\end{array}\right]\\ =\$225,000-\left(\$1000\times 200\text{batch inspections}\right)\\ =\$225,000-\$200,000\\ =\$25,000\end{array}$

Therefore,

$\begin{array}{c}\text{Budgeted cost of machining}\text{=}\left(\text{A}\right)\text{+}\left(\text{B}\right)\\ \text{=\$120,000}\text{+}\text{\$}25\text{,000}\\ \text{=\$145,000}\end{array}$

2.

To determine

Determine the budgeted unit manufacturing cost for Incorporation M.

Explanation of Solution

Compute the pool rates:

$\begin{array}{c}\left(\text{a}\right)\text{ Pool rate for direct labour hour = }\frac{\left(\text{Direct materials + direct labor + depreciation}\right)}{\text{Direct labour hours}}\\ =\frac{\left(\$600,000+\$400,000+\$100,000\right)}{100,000\text{DLH}}\\ =\frac{\$1,100,000}{100,000\text{DLH}}\\ =\$11\text{per direct labor hour}\end{array}$

$\begin{array}{c}\left(\text{b}\right)\text{Pool rate for machine hour = }\frac{\left(\text{Cost of maintaining equipment}\text{+}\text{cost of machining}\right)}{\text{Machine hours}}\\ =\frac{\left(\$510,000+\$162,000\right)}{300,000\text{machine hours}}\\ =\$2.24\text{per machine hour}\end{array}$

$\begin{array}{c}\left(\text{c}\right)\text{Pool rate for material moves = }\frac{\text{Cost of moving materials}}{\text{Number of material moves}}\\ =\frac{\$290,000}{40,000\text{material moves}}\\ =7.25\text{per material moves}\end{array}$

$\begin{array}{c}\left(\text{d}\right)\text{Pool rate for inspecting products = }\frac{\text{Cost of inspecting products}}{\text{Number of batches inspected}}\\ =\frac{\$225,000}{200\text{batch inspections}}\\ =\$1,125\text{per batch}\end{array}$

Note: The pool (a) incorporates both material and labor costs. The total for each pool represents the appropriate costs related with the given driver in the flexible budget. The totals represent the second activity level of the budget.

Determine the unit cost:

Pool	Calculation	Amount ($)
a	$\begin{array}{l}\text{Pools rate}\times \text{direct labor hours}\\ \text{\$11}\times \text{10,000}\text{DLH}\end{array}$	$ 110,000
b	$\begin{array}{l}\text{Pool rate }\times \text{machine hours}\\ \text{\$2}\text{.24}\times \text{15,000 machine hours}\end{array}$	$ 33,600
c	$\begin{array}{l}\text{Pool rate }\times \text{moves}\\ \text{\$7}\text{.25}\times \text{500 moves}\end{array}$	$ 3,625
d	$\begin{array}{l}\text{Pool rate }\times \text{batch inspections}\\ \text{\$1,125}\times \text{5}\text{batch inspections}\end{array}$	$ 5,625
Total		$ 152,850
Divide: Units		10,000 units
Unit cost	$\frac{\$152,850}{10,000\text{units}}$	$ 15.29 (rounded off)

Table (2)

Therefore, the unit cost for the incorporation M is $15.29.

3.

To determine

Describe how activity-based budgeting may provide useful data for non-value-added activities.

Explanation of Solution

To provide more insight into controlling the activity and its associated cost, it is necessary to have significant knowledge about how the resource costs change with activity drivers and the consumption of resources by each activity.

Example: - The moving material is deemed to be a non-value-added activity, and efforts should be made to diminish the demands for this activity. If the number of moves can able to decrease to 20,000 from the expected 40,000, then the costs can be reduced by not only eliminating the need for the four operators but also by decreasing the demand to lease from four to two forklifts. Whereas, while considering in the short run, if the demand for their service is reduced the cost of leasing forklifts may insist.    

Particulars	20,000 moves	40,000 moves
Materials handling:
Forklifts	$ 40,000	$ 40,000
Operators	$ 120,000	$ 240,000
Fuel	$ 5,000	$ 10,000
Total	$ 165,000	$ 290,000

Table (3)

The information unveils that in the short run the forklift leases must remain but the number of operators should be cut down and it is assumed that each operator can do 5,000 moves per year. An extra benefit of $20,000 can be achieved by subleasing the two forklifts. Therefore, the budget points out that by reducing the requirement for materials handling to 20,000 moves can able to save between $125,000 and $145,000 relative to the 40,000-move level. If the activity requirement is reduced to nil, an additional amount can able to save (up to $165,000).