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Budgeting, Standard Cost and Variance Calculation

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E14.4
Osage inc., has actual sales for June and July and forecast sales for august, September, October and November as follows:

Actual
June 4,150 units
July 4,350 units
Forecasted
August 4,200 units
September 4,950 units
October 3,900 units
November 3,700 units

a. The firm's policy is to have finished goods inventory on hand at the end of the month that is equal to 70% of the next month's sales. It is currently estimated that there would be 3300 units on hand at the end of July. Calculate the number of units to be produced in each of the month of august, September and October.
b. Each unit of finished product requires 5 pounds of raw materials. The firm's policy is to have raw material inventory on hand at the end of each month that is equal to 80% of the next month's estimated usage. It is currently estimated that 13,000 pounds of raw materials will be on hand at the end of July. Calculate the number of pounds of raw materials in each of the month of august and September.
c.
E14.6
Flagstaff co. has actual sales for July and august and forecast sales for September, October, November and December as follows:

Actual
July \$73500
August 78750
Forecasted
September 85500
October 70500
November 91500
December 80250
Based on past experience, it is estimated that 30% of a month's sales are collected in the month of sales. 50% are collected in the month following the sale, and 18% are collected in the second month following the sale.

A. Calculate the estimated cash receipt for September, October and November.

E14.8
Ozark manufacturing company manufactures and sells household cleaning products. The company's research department has developed a new cleaner for which a standard cost must be determined. The new cleaner is made by mixing 18 quarts of triphate solution and 8 pounds of sobase granules and boiling the mixture for several minutes. After the solution has cooled, 4 ounces of methage are added. This "recipe" produces 15 quarts of the cleaner, which is then packaged in one-quart plastic dispenser bottles. Raw material costs are:

Triphate solution \$.45 per quart
Sobase granules .90 per pound
Methage 1.40 per ounce
Bottle .25 each

a. Using the preceding data, calculate the raw material cost for one bottle of the new cleaner.
b. Assuming that the preceding cost are the current best estimate of the costs at which required quantities of the raw materials can be purchased. Would you recommend that any other factors be considered in establishing the raw material cost standard for the new cleaner?
c. Explain the process that will be used to develop the direct labor cost standard for the new product.

E15.2
Rocky mountain manufacturing produces a single product. The original budget for November was based on expected production of 35,000 units; actual production for November was 33, 250 units. The original budget and actual costs incurred for the manufacturing department follow:

Original budget actual costs
Direct materials \$551,250 \$541,500
Direct labor 427,000 413,500
Total \$1,365,250 \$1,322,750

a. Prepare an appropriate performance report for the manufacturing department.

P15.14
The standards for one case of liquid weed killer are;

Direct materials 3lbs@\$6.00/lb
Direct labor 1.8hrs@\$12.00/hr
Variable overhead (based on machine hours) 0.6hrs@\$3.50/hr

During the week ended august 6, the following activity took place
2390 machine hrs were worked
11400lbs of raw materials were purchased for inventory at a total cost of \$70,680
3,800 cases of finished products were produced
6,720 labor hrs were worked at an average rate of \$12.25 per hr
\$8,126 actual variable overhead costs were incurred.
Calculate the following variances and provide plausible explanations for the results.
a. price variance for raw materials purchased
b. raw materials usage variance
c. direct labor rate variance
d. direct labor efficiency variance

C15.23
Bennett inc., manufactures quality replacement parts for the auto industry. The co. uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling the direct material price variances for hundreds of raw material items that are used in the company's various production processes. Recent experience indicates that, in the aggregate, direct material price variances have been favorable. However, several problems have occurred. Direct material usage variances have become consistently unfavorable for many items, and the company's total budget variance for raw materials have been unfavorable during each of the past six months. Direct laborers have complained about the quality of certain raw material items, and major customers have cancelled purchase orders. In the mean time, the company's raw materials inventory has increased by nearly 240%

a. Give a probable explanation why these results have occurred. (What might the purchasing manager be doing hat is dysfunctional for the company as a whole?)
b. How could the performance reporting system be improved to encourage more appropriate behavior on the part of the purchasing manager?

Solution Preview

E14.4
Osage inc., has actual sales for June and July and forecast sales for august, September, October and November as follows:

Actual
June 4,150 units
July 4,350 units
Forecasted
August 4,200 units
September 4,950 units
October 3,900 units
November 3,700 units

a. The firm's policy is to have finished goods inventory on hand at the end of the month that is equal to 70% of the next month's sales. It is currently estimated that there would be 3300 units on hand at the end of July. Calculate the number of units to be produced in each of the month of august, September and October.

August September October
Sales forecast (units) 4,200 4,950 3,900
Ending Inventory (70% of next month sales) 3465 2730 2590 (70% of November)
Total needs 7,665 7,680 6,490
Less Beginning Inventory 3,300 (given) 3,465 2,730
Required Production 4,365 4,215 3,760

b. Each unit of finished product requires 5 pounds of raw materials. The firm's policy is to have raw material inventory on hand at the end of each month that is equal to 80% of the next month's estimated usage. It is currently estimated that 13,000 pounds of raw materials will be on hand at the end of July. Calculate the number of pounds of raw materials in each of the month of august and September.

Raw Material needed/unit (pounds) 5 5 5
Total material needed in Pounds (production X 5 pounds per unit) 21,825 21,075 18,800
Ending Inventory (80% of next month needs) 16,860 15,040
Total needs 38,685 36,115
Beginning Inventory 13,000 (given) 16,860
Required Purchases (pounds) 25,685 19,255

c.
E14.6
Flagstaff co. has actual sales for July and august and forecast sales for September, October, November and December as follows:

Actual
July \$73500
August 78750
Forecasted
September 85500
October 70500
November 91500
December 80250
Based on past experience, it is estimated that 30% of a month's sales are collected in the month of sales. 50% are collected in the month following the sale, and 18% are collected in the second month following the sale.

A. Calculate the estimated cash receipt for September, October and November.

July August Sept Oct Nov
Actual sales 73,500 78,750
Sales forecast 85,500 70,500 91,500
Cash collections:
30% of sales made in the current month 25,650 21,150 27,450
50% of prior month's sale 39,375 (Aug) 42,750 (Sept) 35,250 (Oct)
18% of second prior month's sales 13,230 (July) 14,175 (Aug) 15,390 (Sept)
Total cash collections ...

Solution Summary

The solution explains various questions relating to budgeting, standard cost calculation and calculation of different variances.

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