Week 6 Problem
Flexible Budget and Variances
NOTE: It is expected that this problem will be completed using an Excel spreadsheet using formulas. Please see the Excel Tutorial that is available under the course home tab.
The Grant Company had developed a Static Budget for 2005 for one of its major departments. By the end of the year, the owner was quite pleased since he knew that sales were running above the projections. He was confident that 2005 was going to be the best year ever for this important part of the company!
When the 2005 financial statements were completed, it was discovered that the gross profit for the department was lower than had been originally projected. But sales were up! What happened?
You have been hired to determine why 2005 was not a "banner year"! You have been supplied with the original Static Budget and the actual results as follows:
Static Budget Actual 2005 Figures
Units Sold 10,000 11,000
Revenue $1,000,000 $1,078,000
Material 300,000 350,900
Labor 250,000 247,500
Variable Overhead 150,000 194,700
Fixed Overhead 200,000 195,000
Gross Profit $100,000 $89,900
You are also provided with the following information regarding standards and actual results:
Selling price $100 per unit $98 per unit
Cost of materials $15 per foot $14.50 per foot
Materials per unit 2 feet per unit 2.2 feet per unit
Labor rate $25 per hour $30 per hour
Labor usage 1 hour per unit 0.75 hours per unit
Variable overhead rate $30 per machine hour $29.50 per machine hour
Variable overhead usage 0.5 machine hours per unit 0.6 machine hours per unit
Assume purchase quantities equal usage for materials.
Part 1: Prepare a flexible budget for 2005
Part 2: Calculate the following variances
a. Sales volume variance (use CM)
b. Sales price variance
c. Material price variance
d. Material usage variance
e. Labor rate variance
f. Labor efficiency variance
g. Variable overhead spending variance
h. Variable overhead efficiency variance
i. Fixed overhead spending variance
j. Fixed overhead volume variance (Unit Volume is application base)
Part 3: Prepare a short report indicating possible reasons for the lower than expected gross profit.
The solution contains the detailed flexible budget and also detailed calculations for the variances. The profits are reconciled and shown to prove that the variances obtained are exact. The answer to the third part is also included in the excel file attached.
MCQ Managerial Accounting: Blockbuster, Quaker, overhead, budgeted, residual income
Please review all of the problems and make sure they can all be answered correctly before taking on this assignment. I will only need to see the math work for problems 2 and 4.
1. Which one of the following is possible if Blockbuster Video cuts its DVD rental rates by 20%?
A) Its fixed costs will decrease.
B) It profit will decrease by 20%.
C) Total costs increase.
D) A profit can be earned by increasing the number of videos rented.
2. Quaker Corporation sells its product for $40. The variable costs are $18 per unit. Fixed costs are $16,000. The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs. Which of the following is true about the break-even point in units?
A) It will remain unchanged.
B) It will decrease.
C) It will increase.
D) It cannot be determined from the information provided.
3. Which of the following is correct regarding the manufacturing overhead budget?
A) The manufacturing overhead budget should include all costs of marketing and advertising.
B) The budget should show only indirect materials and indirect labor.
C) Manufacturing overhead costs should be broken down by cost behavior.
D) Total budgeted manufacturing overhead should be calculated using a predetermined overhead rate.
4. A department has budgeted monthly manufacturing overhead cost of $40,000 plus $5 per direct labor hour. The flexible budget report reflects $120,000 for total budgeted manufacturing cost for the month. What is the actual level of activity achieved during the month?
A) 32,000 direct labor hours
B) 24,000 direct labor hours
C) 16,000 direct labor hours
D) Cannot be determined
5. What budgeted amounts appear on the flexible budget?
A) Original budgeted amounts at the static budget activity level
B) Actual costs for the budgeted activity level
C) Budgeted amounts for the actual activity level achieved
D) Actual costs for the estimated activity level
6. For what purpose do companies calculate residual income?
A) To determine whether decentralization is possible or not
B) To motivate managers through possible termination
C) To evaluate management performance
D) To measure company profits
7. In what standard might a company include an allowance for spoilage?
A) Labor price standard
B) Materials quantity standard
C) Labor quantity standard
D) Materials price standard
8. What should be the focus when management is investigating variances?
A) Focus on only unfavorable variances
B) Focus on quantity variances
C) Focus on all actual amounts that differ from budgeted amounts
D) A management by exception approach
9. If the price a company paid for factory rent decreased during the year, what variance would the company report?
A) A favorable controllable variance
B) A favorable volume variance
C) An unfavorable volume variance
D) A favorable material price variance
10. Who prepares relevant revenue and cost data for the decision making process?
A) Department heads
B) The controller
C) Management accountants
D) Factory supervisors
11. What is capital budgeting?
A) The process of determining how much capital stock to issue
B) The process of deciding which long-term asset projects are viable
C) The process of eliminating unprofitable product lines
D) The process used in make or buy decisions
12. Project A has a higher rate of return than Project B. Which statement is true about Project A?
A) It is more attractive than Project B.
B) It is less attractive than Project B.
C) It is less than the cost of capital.
D) It is higher than the hurdle rate.
13. Which of the following is a capital budgeting technique which ignores time value of money?
A) Annual rate of return approach
B) Make or buy approach
C) Internal rate of return approach
D) Net present value method
14. An investment was analyzed and determined that NPV was ($1,000). The company's expected rate of return was 12%. Which one of the following statements best describes the results of this analysis?
A) Accept the proposal since the rate of return expected is less than the rate used for the analysis.
B) Accept the proposal since the rate of return expected exceeds the rate used for the analysis.
C) Do not accept the proposal since the rate of return expected is greater than the profit to be generated by the project.
D) Do not accept the proposal since the rate of return expected exceeds the rate used for the analysis.