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ABC Co: Budgeting Variances Breakeven Activity Based Costing

QUESTION 1

You have joined a large logistics companies. During the annual budget meeting one of your work colleagues asks you "why do we waste so much time to develop an annual budget each year?" Should the company use "top-down budgeting" or "bottom-up budgeting"?

Discuss using real world examples to support your discussion. You must disclose the source of your information (referencing).

QUESTION 2

ABC Company uses a standard costing system to assist in the evaluation of production operations. The director of manufacturing after reviewing the monthly performance reports, comments in the management meeting: "Tony has done a great job, our variances are finally under control, direct material variance $9,240 favourable and direct labour $12,350 favourable, as these variances are small they are favourable". (ABC Company's budgeted material and labour costs are usually about $700,000 in total for a similar period).

Additional information:

· The company purchased and consumed 90,000 kilograms of direct materials at $7.70 per kilogram, and paid $16.25 per hour for 41800 direct labour hours of activity.

· Total units produced were 19000.

· A review of the company's standard cost records shows that each completed unit requires 4.2 kilograms of direct material at $8.80 per kilogram, and 2.6 director labour hours at $14 per hour.

Required:

1. On the basis of the information contained in the performance report, should ABC management be concerned about its variances? Explain why.

2. Calculate direct material price and efficiency variances.

3. Calculate direct labour price and efficiency variances.

4. Why are variances generally segregated in terms of a price variance and an efficiency variance?

5. Prepare a brief report explaining the significance and possible cause of each variance based on your answers to requirement 2 and 3.

QUESTION 3
Can you think of reasons why the managers of a business might find it useful to know the break-even point of some activities they are planning?

QUESTION 4

As a strategic management accountant, you have made a recommendation for XYZ Manufacturing to move away from conventional costing systems to activity-based costing at the board meeting. You pointed out that the non-manufacturing costs that are product-related have become substantial in recent years and the business has a diverse product range. The calculation of the overhead rate before and after is as follows:

Before After
Budgeted manufacturing overhead $2 000 000 $ 2 100 000
Budgeted direct labour cost $1 000 000 $ 700 000
Budgeted overhead rate (rate % of direct labour cost) 200% 300%

Your managing director is confused and lamented: "300%, how can we complete with such a high overhead rate?"

Required:

1. Define "manufacturing overhead" and cite three examples of typical costs that would be included in manufacturing overheard.

2. Explain why the increase in the overhead rate should not have a negative financial impact on XYZ manufacturing

3. Discuss how an activity-based costing system might benefit XYZ Manufacturing.

Solution Preview

See the attached Excel file.
QUESTION 1
You have joined a large logistics companies. During the annual budget meeting one of your work colleagues asks you "why do we waste so much time to develop an annual budget each year?" Should the company use "top-down budgeting" or "bottom-up budgeting"?
Discuss using real world examples to support your discussion. You must disclose the source of your information (referencing).

TUTORIAL:

A budget serves a number of useful purposes and is worth spending time on it. It forces communication between parts of the business to coordinate production, sales forecast, overhead and cost of potential new initiatives. It bring a focus on the future and away from the crisis of the moment to help plan and trouble shoot. A budget will identify constraints (not enough materials or cash flow) and bottlenecks so that they can be solved before they become a crisis. The budget authorizes activity, defines goals and indicates initiatives. A budget is also a performance measurement tool and a way to motivate (bonus based on budget).

Top down budgeting is useful when the team is inexperienced or not knowledgeable about future initiatives. Those at the top set the larger goals, profit targets, sales levels and major initiatives and the details of the budget are computed based on these top level goals and constraints. For instance, when I was working for a textile firm, we bought a new plant that processed different items than we were used to. So, the managers gave us the first year's budget assumptions as we didn't have history to budget without this guidance.

A major advantage is that the major initiatives are likely well-aligned with strategy because they are set by the strategic level managers. This reduces re-doing it over and over until it aligns with managers and their targets. The disadvantage is that it does not ask the workers for input and the workers may be confused about the targets. This ...

Solution Summary

Your discussion is 827 words and two references and a spreadsheet showing the four direct standard cost variances: material price variance, material efficiency variance, labor price variance, labor efficiency variance. Variances are interpreted.

$2.19