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Master Budgeting and Variances

Please, see attached.

6-2
Define master budget
6-8
Define rolling budget. Give example.
6-9
Outline the steps in preparing an operating budget.
6-15
Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.
7-4
What is the key deference between a static budget and a flexible budget?
7-11
How might the continuous improvement theme be incorporated into the process of setting budgeted costs?
7-14
How can variances be used to analyze costs in individual activity areas?
8-2
How does the planning of fixed overhead costs differ from the planning of variable overhead costs?
8-6
Assume variable manufacturing overhead cost is allocated using machine-hours. Give three possible reasons for a $25,000 favorable overhead efficiency variance.
8-8
What are the steps in developing a budgeted fixed overhead rate?
? Exercises
6-24
Activity-based budgeting. Family supermarkets (FS) is preparing its activity-basing budget for January 2005. Its current concern is with its four activities (which are also indirect-cost categories in its product profitability reporting system);
1. Ordering-covers purchasing activities. The cost driver is number of purchase orders.
2. Delivery-covers the physical delivery and receipt of merchandise. The cost driver is number of deliveries.
3. Shelf-stocking-covers the stocking of merchandise on store shelves and ongoing restocking before sale. The cost driver if hours of stocking time.
4. Customer support-covers assistance provided to customers, including checkout and bagging. The cost driver is number of item sold.
Assume FS has only three product types: soft drinks, fresh produce, and packages food. The budgeted usage of each cost driver is these three product types and the January 2005 budgeted cost-drives rates are
Cost-Driver Rates Cost-Driver Rates Jan.2005 Budgeted Amount of driver used Jan.2005 Budgeted Amount of driver used
Activity and Driver 2004 actual rate Jan. 2005 Budgeted Rate Soft Drinks Fresh Produce Packages Food
Ordering(per purchase order) $100 $90 14 24 14
Delivery(per delivery) $80 $82 12 62 19
Shelf-stocking (per hour) $20 $21 16 172 94
Customer support (per item sold) $0.20 $0.18 4,600 34,200 10,750
1. What is the total budgeting cost for each activity in January 2004?
2. What advantages might FS gain by using an activity-based budgeting approach over, say, an approach that allocates the cost of these activities to products as a percentage of the cost of goods sold?
6-26
Responsibility and controllability. Consider each of the following independent situations:
1. A purchasing agent forgot to order a part. A rush order had to be placed for the part, resulting in extra costs.
2. A supplier has increased price of the materials ordered by a purchasing agent, resulting in higher cost of the materials purchased.
3. A higher-than-budgeted quality of direct materials was used for the output. The supervisor of the production department correctly pointed out that it was due to the standard quality of materials purchased by the purchasing department.
4. A higher-than-budgeted quality of direct materials was used for the output. The cause was traced to abnormal spoilage resulting from a faulty machine setting by machine operator.
5. A higher-than-budgeted quality of direct materials was used for the output. This happened because of the spoilage occurring from the machine breakdown. The machine was to undergo regular maintenance last month. However, maintenance was not performed because the maintenance department is behind schedule due to heavy labor turnover.
6. A newly appointed division manager has high labor cost as a result of the unfavorable terms of a labor contract negotiated by her predecessor. Her predecessor, who was retiring, according to one observer, "gave the story away during labor contract negotiations."
7. A production department operated only at 80% of its capacity during a month. This was done at the instructions of the plant superintendent, who commented that increasing the department output will only build up inventory in the next production department, which is a bottleneck department.
Determine for each situation where:
a. responsibility
b. controllability lie.

7-30
Activity-based costing, flexible-budget variances for finance function activities. Josh Sanchez is the chief financial officer of Bouquets.com, an Internet company that enables customers to order deliveries of flowers by accessing its web site. Sanchez is concerned with the efficiency and effectiveness of the finance function. He collects the following information for the three finance activities in 2004:
Rate per unit of Cost Driver Rate per unit of Cost Driver
Activity Activity level Cost driver Static Budget Actual
Receivables Output unit Remittances $0.639 $0.75
Payables Batch Invoices 2.900 2.80
Travel expenses Batch Travel claims 7.6 7.40
The output measure is the number of deliveries, which is the same as the number of remittances. The following is additional information.
Static-Budget amounts Actual amounts
Number of deliveries 1,000,000 948,000
Batch size in term of deliveries
Payable 5 4.468
Travel expenses 500 501.587
1. Calculate the flexible-budget variance for each activity in 2004.
2. Calculate the price and efficiency variances for each activity in 2004.
7-31
Finance function activities, benchmarking (continuation of 7-30). Josh Sanchez, CFO of Bouguets.com. engages The Hackett Group, a consulting firm specializing in benchmarking. He asks Hackett to provide benchmark data of the finance function at "work-class" retail companies (both traditional retail and Internet-based retail). Hackett's cost benchmarks for Bouquets.com three financial activities are
Finance Activities "World-Class" Cost performance
Payable $0.71 per invoice
Receivables $0.10 per remittance
Travel expenses $1.58 per travel claim
1. What new insights might arise with the Hackett benchmark data using the amounts in exercise 7-30?
2. Assume you are in charge of travel-claim processing. What concern might you have with Sanchez using the Hackett benchmark of $1.58 per travel claim as the key to evaluate your performance next period?
8-24
Spending and efficiency overhead variances, service sector. A Meal on Wheels (MOW) operates a hoe meal delivery service. It has agreements with 20 restaurants to pick up and deliver meals to customer who phone or fax orders to MOW. MOW is currently examining its overhead costs for May 2004.
Variable overhead costs for May 2004 were budgeted at $2.00 per hour of home delivery time. Fixed overhead costs were budgeted at $24,000. The budgeted number of home deliveries (MOW's output measure) was $8,000. Delivery time, the allocation base for variable and fixed overhead costs, is budgeted to be 0.80 hour per delivery.
Actual results for May 2004 were
Variable overhead $14,174
Fixed overhead $27,600
Number of home deliveries 7,460
Hours of delivery time 5,595
Customers are charged $12 per delivery. The delivery driver is paid $7 per delivery.
MOW receives a 10% commissions on the meal cost that the restaurants charge customers who use MOW.
1. Compute spending and efficiency variables for MOW's variable overhead in may 2004. Comments on the results.
2. Compute the spending variance for MOW's fixed overhead in May 2004. Comment on the result.
3. How might MOW manage its variable overhead costs differently from its fixed overhead costs?
7-44
Price and efficiency variances, problem in standard setting, benchmarking. Savannah Fashions manufactures shirts for retail chains. Jorge Andersen, the controller is becoming increasingly disenchanted with Savannah's standard-costing system. The budgeted and actual amounts for direct materials and direct manufacturing labor for July 2004 were
Budgeted amounts Actual Amounts
Shirts manufactured 4,000 4,488
Direct materials cost $20,000 $20,196
Direct material units (roll of cloth) 400 408
Direct manufacturing labor cost $18,000 $18,462
Direct manufacturing labor-hours 1,000 1,020
There were no beginnings or ending inventories of materials.
The standard-costing system is based on a study of the operations conducted by an independent consultant six month earlier. Andersen observes that since then he has rarely seen an unfavorable variance of any magnitude. He notes that even at their current output levels, the workers seem to have a lot of time for sitting around and gossiping.
At a recent industry conference, a consultant for the Benchmarking Clearing House showed Andersen how she could develop six-month benchmark reports on the estimated costs of Savannah's major competitors. This information would be available by subscribing to the Benchmarking Clearing House monthly service.
1. Compute the price and efficiency variances of Savannah fashions for direct materials and direct manufacturing labor in July 2004.
2. Describe the types of actions the employees at Savannah-Fashions may have taken to reduce the accuracy of the standards set by independent consultant. Why would employees take those actions? Is this behavior ethical?
3. Describe how Savannah might use information from the Benchmarking Clearing House when computing variance in requirement 1.
4. Discuss the pros and cons of Savannah using the Benchmarking Clearing House information to help increase its cost competitiveness.

8-41
Overhead variances, ethics. New Mexico Company uses a standard-costing system. The company prepared its static budget for 2004 at 1,000,000 machine-hours for the year. Total budgeted overhead cost is$12,500,000.The variable overhead rate is $10 per machine-hour ($20 per unit). Actual results for 2004 follow:
Machine-hours 960,000 hours
Output 498,000 units
Variable overhead $10,080,000
Fixed overhead spending variance $600,000 U
1. Compute for the fixed overhead
a. Budgeted amount.
b. Budgeted cost per machine-hour.
c. Actual cost.
d. Production-volume variance.
2. Compute variable overhead spending variance and variable overhead efficiency variance.
3. Jerry Remich, the controller, prepares the variance analysis. It is common knowledge in the company that he and Ron Monroe, the product manager, are not on the best of terms. In recent executive committee meeting, Monroe had complained about the lack of usefulness of accounting reports he receives. To get back at him, Remich manipulated the actual fixed overhead amount by assigning a greater-than-normal share of allocated costs to the production area. And, he decided to depreciate all of newly acquired production equipment using double-declining balance method rather than the straight-line method, contrary to the company practice. As a result, there was a sizable unfavorable fixed overhead spending variance. He boasted to one of his confidants, "I am just returning the favor." Discuss Remich's actions and their ramifications.

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? Questions:
6-2
Define master budget
A master budget is a set of budgets which list out the operating and financial plans of the management. A master budget usually consists of a Sales Budget, Production or purchases budget, expense budget and a cash budget.
6-8
Define rolling budget. Give example.
A rolling budget in one which the budgeting is done on a continuous basis. In a rolling budget, we drop the previous month, quarter or year which has ended and add the coming month, quarter or year. For example if we have a quarterly rolling budget, a four-quarter rolling budget for 2007 is superseded by a four-quarter rolling budget for April 2007 to March 2008, and so on.
6-9
Outline the steps in preparing an operating budget.
The steps in preparing an operating budget are as follows:
1. Prepare the revenues budget
2. Prepare the production budget (in units)
3. Prepare the direct material usage budget and direct material purchases budget
4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the nonmanufacturing costs budget
9. Prepare the budgeted income statement
6-15
Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.
The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager's behavior. For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or investments. The choice of a responsibility center type guides the variables to be included in the budgeting exercise.

7-4
What is the key deference between a statistic budget and a flexible budget?
The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period. A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period.
7-11
How might the continuous improvement theme be incorporated into the process of setting budgeted costs?
The theme can be incorporated by making the budgeted costs successively lower over consecutive time periods. This will ensure that all persons are always looking at ways to do improvement.
7-14
How can variances be used to analyze costs in individual activity areas?
Variances can be calculated at the activity level as well as at the company level. For example, a price variance and an efficiency variance can be computed for an activity area. An analysis of the variances indicate where the costs are higher than the budgeted costs.
8-2
How does the planning of fixed overhead costs differ from the planning of variable overhead costs?
Fixed costs are usually planned at the start of the investment. Depending on how the plant is set up or the process are organized, the fixed costs get determined. So planning for fixed costs is a strategic decision and there may not be much discretion once the costs are fixed. Variable costs change and so the planning horizon will be shorter and there can be considerable discretion in changing the variable costs.

8-6
Assume variable manufacturing overhead cost is allocated using machine-hours. Give three possible reasons for a $25,000 favorable overhead efficiency variance.
Since the variable manufacturing overhead is allocated based on machine hours, the variance is a result of using lower machine hours than budgeted. The reasons for a $25,000 favorable variable-overhead efficiency variance could be:
? Workers more skillful in using machines than budgeted,
? Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours,
? Machines operated with fewer slowdowns than budgeted, and
? Machine time standards set with padding built in by machine workers.
8-8
What are the steps in developing a budgeted fixed overhead rate?
Steps in developing a budgeted fixed-overhead rate are:
1. Choose the period to use for the budget,
2. Select the cost-allocation base to use in allocating fixed overhead costs to output produced,
3. Identify the fixed-overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.

? Exercises
6-24
Activity-based budgeting. Family supermarkets (FS) is preparing its activity-basing budget for January 2005. Its current concern is with its four activities (which are also indirect-cost categories in its product profitability reporting system);
1. Ordering-covers purchasing activities. The cost driver is number of purchase orders.
2. Delivery-covers the physical delivery and receipt of merchandise. The cost driver is number of deliveries.
3. Shelf-stocking-covers the stocking of merchandise on store shelves and ongoing restocking before sale. The cost driver if hours of stocking time.
4. Customer support-covers assistance provided to customers, including checkout and bagging. The cost driver is number of item sold.
Assume FS has only three product types: soft drinks, fresh produce, and packages food. The budgeted usage of each cost driver is these three product types and the January 2005 budgeted cost-drives rates are
Cost-Driver Rates Cost-Driver Rates Jan.2005 Budgeted Amount of driver used Jan.2005 Budgeted Amount of driver used
Activity and Driver 2004 actual rate Jan. 2005 Budgeted Rate Soft Drinks Fresh Produce Packages Food
Ordering(per purchase order) $100 $90 14 24 14
Delivery(per delivery) $80 $82 12 62 19
Shelf-stocking (per hour) $20 $21 16 172 94
Customer support (per item sold) $0.20 $0.18 4,600 34,200 10,750
1. What is the total budgeting cost for each activity in January 2004?
The budgeted cost can be calculated by multiplying the cost driver rate by the budgeted activity

Activity Cost
Hierarchy Soft
Drinks Fresh
Produce Packaged
Food
Total
Ordering
$90  14; 24; 14
Delivery
$82  12; 62; 19
Shelf-stocking
$21  16; 172; 94
Customer support
$0.18  4,600; 34,200; 10,750
Total budgeted indirect costs

Batch-level

Batch-level
Output-unit-level

Output-unit-level
$1,260

984

336

828
$3,408

$ 2,160

5,084

3,612

6,156
$17,012

$1,260

1,558

1,974

1,935
$6,727

$ 4,680

7,626

5,922

8,919
$27,147
2. What advantages might FS gain by using an activity-based budgeting approach over, say, an approach that allocates the cost of these activities to products as a percentage of the cost of goods sold?
An ABB approach recognizes how different products require different mixes of support activities. The relative percentage of how each product area uses the cost driver at each activity area is:

Activity Cost
Hierarchy Soft
Drinks Fresh
Produce Packaged
Food
Total
Ordering
Delivery
Shelf-stocking
Customer support Batch-level
Batch-level
Output-unit-level
Output-unit-level 27%
13
6
9 46%
67
61
69 27%
20
33
22 100%
100
100
100

By recognizing these differences, FS managers are better able to budget for different unit sales levels and different mixes of ...

Solution Summary

The solution explains various questions relating to budgeting and variance analysis

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