The budgeted number of units of inventory to be purchased during July is ______________ .

e. The budgeted number of units of inventory to be purchased during July is ______________ .

44. Comprehensive budget plan (adapted from CPA exam). Regis Corporation, a manufacturer of vases to hold flowers, decided in October Year 1 that it needed cash to continue oper- ations. It began negotiating for a one-month bank loan of $100,000 starting November 1 Year 1. The bank would charge interest at the rate of 1 percent per month and require the company to repay interest and principal on November 30 Year 1. In considering the loan, the bank requested a projected income statement and cash budget for November.

The following information is available: The company budgeted sales at 100,000 units per month in October Year 1, December

Year 1, and January Year 2, and at 90,000 units in November Year 1. The selling price is $2 per unit. The inventory of finished goods on October 1 was 24,000 units. The number of units of finished goods inventory at the end of each month equals 20 percent of unit sales anticipated for the following month. There is no work in process. The inventory of raw materials on October 1 was 22,800 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials as needed in minimum quantities of 25,000 pounds per shipment.

344 Chapter 9 Prof|t Planning and Budgeting

CASES

47. Solving for unknowns; cost-volume-profit and budget analysis (adapted from a problem by D. O. Green). A partial income statement of IBN Corporation for Year 0 follows. The company uses just-in-time inventory, so production each year equals sales. Each dollar of finished product produced in Year 0 contained $.50 of direct materials, $0.33333 of direct labor, and $0.16667 of overhead costs. During Year 0, fixed overhead costs were $40,000. No changes in production methods or credit policies are anticipated for Year 1.

IBN CORPORATION Partial Income Statement for Year 0

Sales (100,000 units at $10) .........................................................................................

Cost of Goods Sold ............................................................................................................

Gross Margin .......................................................................................................................

Selling Costs .......................................................................................................................

Administrative Costs .........................................................................................................

Operating Profits ...............................................................................................................

Management has estimated the following changes for Year 1:

30 percent increase in number of units sold

20 percent increase in unit cost of materials

15 percent increase in direct labor cost per unit

10 percent increase in variable overhead cost per unit

5 percent increase in fixed overhead costs

8 percent increase in selling costs because of increased volume

6 percent increase in administrative costs arising solely because of increased wages There are no other changes.

a. What must the unit sales price be in Year 1 for IBN Corporation to earn a $200,000 operating profit?

b. What will be the Year 1 operating profit if selling prices are increased as before, but unit sales increase by 10 percent rather than 30 percent? (Selling costs would go up by only one-third of the amount projected previously.)

c. If selling price in Year 1 remains at $10 per unit, how many units must be sold in Year 1 for the operating profit to be $200,000?

48. Budgeting case: River Beverages Review the River Beverages case starting on page 320.

Required

a. Critique the budgeting process at River Beverages. Begin with the division manager’s initial reports, and end with the board of directors’ approval. Evaluate the reasons why the company does each of the activities in the budgeting process.

b. Should the plants be set up as profit centers or as cost centers?

RECOMMENDEDADDITIONALCASES Amgen, Inc.: Planning the Unplannable. Harvard Business School Case no. 492052. This

case explores difficulties in forecasting in a dynamic biotech company. Walker and Company: Profit Plan Decisions. Harvard Business School Case no. 197084. This case requires the student to make decisions, develop a profit plan, calculate free cash flow, and develop performance measures.

Hanson Ski Products. Harvard Business School Case no. 187038. This case involves profit

planning.

Suggested Solutions to Even-Numbered Exercises 345

S ug ge ste d S olutions to Even -Numb ere d Exercis e s

18. Solving for units produced and materials requirements. Finished Units

42,000 Units

24,000 Units in

22,000 Units in

to Be Produced

Beginning Inventory Units to Be

to Be Sold

Ending Inventory

Produced ¼

Units of Raw

4 Units of

Materials to ¼

Raw Materials

Be Produced

per Finished Unit

Units of Raw Materials

to Be Purchased ¼

176,000 Units

110,000 Units Desired

100,000 Units

in Beginning Inventory ¼

to Be Used

Ending Inventory

20. Solving for cash collections (Appendix 9.1).

a. Budgeted cash collections in March:

From January Sales (0.18

From February Sales (0.30

From March Sales (0.50

Total Budgeted Collections in March ........................................................................................................

b. Budgeted cash collections in April: From February Sales (0.18

From March Sales (0.30

From April Sales (0.50

Total Budgeted Collections in April ..........................................................................................................

22. Sales volume variance analysis.

Flexible Budget

Sales Volume

Master Budget

Sales Revenue ..........................................................

$170,400 a $ 2,400 F

$ 168,000 b

Less Variable Costs ..................................................

71,000 c $ 1,000 U

70,000 d

Contribution Margin ...............................................

Less Fixed Costs .......................................................

Operating Profit .......................................................

b $170,400 c $168,000 d $71,000 $70,000

24. Graphic comparison of budgeted and actual costs.

a. $1.60 per Unit

V ¼ $1:60:

b. $5,200,000

TC ¼ F þ VX ¼ $5,200,000:

346 Chapter 9 Prof|t Planning and Budgeting

c. $8,400,000 TC ¼ F þ VX

¼ $8,400,000:

26. Sales volume variance analysis.

Flexible Budget

Sales Volume Master Budget

(170 Units)

Variance (200 Units)

Sales Revenue ..........................................................

$17,000

$3,000 U $20,000

Variable Costs:

Contribution Margin ...............................................

$ 8,500

$1,500 U $10,000

Fixed Costs:

Operating Profit .......................................................

$ 6,000

$1,500 U $ 7,500

28. Interpreting the flexible budget line.

a. Flexible Budget Activity Level (actual units sold): Profit

$ $ 7X ¼ $ð3,500Þ þ $35,000

$ X ¼ ð3,500Þ þ $35,000

$7 X ¼ 4,500 Units:

b. Master Budget Activity Level: $14,000

$7X ¼ $14,000 þ $35,000

$14,000 X ¼ þ $35,000

$7 X ¼ 7,000 Units:

30. Incentives for accurate forecasting (Appendix 9.2).

B $100 ^ Y

Forecasted Sales, ^ Y 20 21 22 23 24 20 $2,000 a $1,950 f $1,900 i

$1,850 $1,800

Actual

21 2,070 b 2,100 g 2,050 j 2,000 1,950

Sales,

22 2,140 c 2,170 h 2,200 2,150 2,100

g $1,950 ¼ $100(21) -- $150(21 -- 20) c $2,070 ¼ $2,000 þ $70(21 -- 20) $2,140

h $2,100 ¼ $100(21)

$2,170 ¼ $2,100 þ $70(22 -- 21), etc. e $2,210 ¼ $2,000 þ $70(23 -- 20)

d ¼ $2,000 þ $70(22 -- 20)

j $1,900 $2,280 ¼ $100(22) -- $150(22 -- 20) ¼ $2,000 þ $70(24 -- 20) $2,050 ¼ $2,200 -- $150(22 -- 21), etc.

348 Chapter 9 Prof|t Planning and Budgeting

Product Z: Total sales volume variance is $2,000 unfavorable, as shown below.

Flexible Budget

Sales Volume Master Budget

(48,000 Units)

Variance (50,000 Units)

Variable Costs ...........................................................

3,000 F 75,000

Contribution Margin ...............................................

$2,000 U $ 50,000

chapter

Profit and Cost Center Performance Evaluation

Learning Objectives

1. Explain the reasons for conducting variance

6. Explain the difference between price and

analyses.

efficiency variances.

2. Describe how to use the budget for

7. Identify the relation between actual,

performance evaluation. budgeted, and applied fixed manufacturing 3. Identify the different types of variances

costs.

between actual results and the flexible

8. Explain why an effective performance

budget.

measurement system requires employee

4. Assign responsibility for variances.

involvement.

5. Describe the role of variance analysis in

9. Explain how to compute the mix variance

service organizations.

(Appendix 10.1).

Chapter 9 presented profit planning and budgeting, which includes preparing a master budget based on budgeted sales volume and a flexible budget based on actual sales volume. This chapter presents variance analysis. Variance analysis provides detailed comparisons of the profits achieved with those budgeted.

Variance An alysis

This chapter continues the Victoria’s Gourmet Coffee example discussed in Chapter 9. Recall that we showed the master budget, the flexible budget, and the resulting sales volume variance in Exhibit 9.8. Here we present the actual financial performance of Victoria’s Gourmet Coffee for period 1.

350 Chapter 10 Prof|t and Cost Center Performance Evaluation