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PROBLEM 1-1: Budgets in Managerial Accounting
Santiago’s Salsa is in the process of preparing a production cost budget for May. Actual costs in April were:
Santiago’s Salsa Production Costs April 2011
Production 25,000 Jars of Salsa
Ingredient cost (variable) $20,000
Labor cost (variable) 12,000
Rent (fixed) 5,000
Depreciation (fixed) 6,000
Other (fixed) 1,000
A. Using this information, prepare a budget for May. Assume that production will increase to 30,000 jars of salsa, reflecting an anticipated sales increase related to a new marketing campaign.
B. Does the budget suggest that additional workers are needed? Suppose the wage rate is $20 per hour. How many additional labor hours are needed in May? What would happen if management did not anticipate the need for additional labor in May?
C. Calculate the actual cost per unit in April and the budgeted cost per unit in May. Explain why the cost per unit is expected to decrease.
Problem P1-3 Budgets in Managerial Accounting
Matthew Gabon, the sales manager Office Furniture Solutions, prepared the following budget for 2011:
Sales Department Budgeted Costs, 2011 (Assuming Sales of $10,000,000)
Salaries (fixed) 400,000
Commissions (variable) 150,000
Charge for Office Space (fixed) 3,000
Office Supplied & Forms (variable) 2,000
After he submitted his budget, the president of Office Furniture Solutions reviewed it and recommended that advertising be increased to $100,000. Further she wanted Matthew to assume a sales level of $11,000,000. The level of sales is to be achieved without adding to the sales force.
Matthew's sales group occupies approximately 250 square feet of office space out of total administrative office space of 20,000 square feet. The $3,000 space charge in Matthew's budget is his share (allocated based on relative square feet) of the company's total cost of rent, utilities, and janitorial costs for the administrative office building.
Provide a revised budget consistent with the president's recommendation.
Problem 1.5 Performance Reports
At the end of 2011, Cyril Fedako Products, received a report comparing budgeted and actual production costs for the company’s plant in Forest Lake, Minnesota.
Forest Lake Plant
Budget versus Actual 2011
Budget Actual Difference(Actual Minus Budget)
Materials $3,200,000 $3,500,000 $300,000
Direct Labor 2,300,000 2,500,000 200,000
Supervisory salaries 475,000 500,000 25,000
Utilities 125,000 135,000 10,000
Machine maintence 350,000 380,000 30,000
Depreciation of building 90,000 90,000 -0-
Depreciation of equipment 250,000 255,000 5,000
Janitorial 220,000 235,000 15,000
Total $7,010,000 $7,595,00 $585,000
His first thought was that costs must be out of control since actual costs exceed the budget by $585,000. However, he quickly recalled that the budget was set assuming a production level of 60,000 units. The Forest Lake plant actually produced 65,000 units in 2011.
1. Give that production was greater than planned, should Cyril expect that all actual costs will be greater than budgeted? Which costs would you expect to increase, and which costs would you expect to remain relatively constant?
2. Cyril is extremely busy – the company has six other plants. Therefore, he cannot spend time investigating every departure from the budget. With this in mind, which cost(s) should Cyril concentrate on in his investigation of budget differences?