QUESTION
Additional Budget Information
Product quantity
Basketballs 58,000 Hockey Sticks 85,000 Baseball Gloves 100,000 |
Number of batches (cost driver)
Basketballs 450 Hockey Sticks 300 Baseball Gloves 600 |
Machine hours (cost driver)
Basketballs 13,500 Hockey Sticks 10,500 Baseball Gloves 15,000 |
Square footage of production space used (cost driver)
Basketballs 3,200 Hockey Sticks 5,000 Baseball Gloves 7,800 |
-
Number of batches is the cost driver for setup costs.
-
Number of machine hours is the cost driver for equipment and maintenance costs.
-
Factory rent is paid per square foot.
-
Total available factory square footage is 20,000 and Acme’s Sporting Goods Division is currently using only 80% of this capacity.
-
Acme records the cost of unused capacity as a separate line item and not as a product cost.
——————————————————————————————————————————-
Answer the following questions for Evan. Be sure to show your work as well as your answers in the boxes below (the boxes will expand as your enter your work). Where necessary, round your answers to three places after the decimal point.
- Calculate the budgeted setup cost per unit:
Budgeted setup cost per unit (Basketballs):
Budgeted setup cost per unit (Hockey Sticks): Budgeted setup cost per unit (Baseball Gloves): |
- Calculate the budgeted equipment and maintenance cost per unit:
Budgeted equipment and maintenance cost per unit (Basketballs):
Budgeted equipment and maintenance cost per unit (Hockey Sticks): Budgeted equipment and maintenance cost per unit (Baseball Gloves): |
- Calculate the budgeted production space cost per unit:
Budgeted production space cost per unit (Basketballs):
Budgeted production space cost per unit (Hockey Sticks): Budgeted production space cost per unit (Baseball Gloves): |
- What is the budgeted cost of unused square footage capacity?
- What is the budgeted total cost and the cost per unit of resources used to produce Basketballs, Hockey Sticks and Baseball Gloves? Complete the following table to show your answers:
Basketballs | Hockey Sticks | Baseball Gloves | Totals | |
Direct materials | ||||
Direct manufacturing Labor | ||||
Total direct costs | ||||
Setup | ||||
Equip. & maint. | ||||
Factory rent | ||||
Total indirect costs | ||||
Total costs | ||||
Units | ||||
Total cost/unit |
- Why might excess square footage capacity be beneficial for Acme’s Sporting Goods Division?
- A salesman from the Sewn Up Supply Company has proposed that Acme buy its new, more pliable leather stitching for use in manufacturing baseball gloves. This new material will reduce the time required for manually stitching the gloves from one hour to forty minutes per glove, which Evan estimates will decrease the budgeted direct manufacturing labor cost for baseball gloves to $130,000; increase the direct materials cost for baseball gloves to $525,000; and increase equipment & maintenance costs by $11,800 because the new stitching requires a special type of electronic needle that would be leased from and maintained by the Sewn Up Supply Company. All other things being equal, do you recommend that Acme decide to use this new stitching? Why or why not? Complete the following table and then write your response in the box provided.
Total Costs Before New Stitching | Total Costs After New Stitching | Better/(Worse)?
(and by how much?) |
|
Direct materials | |||
Direct mfg. labor | |||
Total direct costs | |||
Setup | |||
Equip. & maint. | |||
Factory rent | |||
Total indirect costs | |||
Total costs |
Written Response: |
- Acme is considering sending its supervisors and staff to a regional seminar series that shares industry best practices about manufacturing process innovations. The cost of participation (an indirect fixed cost that Acme would allocate equally among its three product lines) is $30,000 but a colleague of one of the Acme executives told him that he had attended the same seminar series and learned about efficiencies that enabled him to increase his company’s production (i.e. number of units produced) by 5% without incurring any additional direct costs. If Acme experienced the same 5% increase in product quantity, what would be its new budgeted total cost and cost per unit of resources used to produce:
a. Basketballs
b. Hockey Sticks
c. Baseball Gloves
Do you recommend that Acme decide to pay to send its supervisors and staff to this seminar? Why or why not? Complete the below tables and write your response in the box provided.
Before the seminar:
Basketballs |
Hockey Sticks |
Baseball Gloves |
Total |
|
Direct materials | ||||
Direct mfg. labor | ||||
Total direct costs | ||||
Setup | ||||
Equip. & maint. | ||||
Space rental | ||||
Total indirect costs | ||||
Total costs | ||||
Units | ||||
Total cost/unit |
After the seminar:
Basketballs |
Hockey Sticks |
Baseball Gloves |
Total |
|
Direct materials | ||||
Direct mfg. labor | ||||
Total direct costs | ||||
Setup | ||||
Equip. & maint. | ||||
Space rental | ||||
Seminar | ||||
Total indirect costs | ||||
Total costs | ||||
Units | ||||
Total cost/unit |
Written Response: |
In preparation for your work evaluating the product lines manufactured by the Sporting Goods Division, answer the following questions in the text boxes provided (Note: the boxes will expand as you type into them):
- What is the Contribution Margin? What equation is used to determine the contribution margin per unit?
- What is the Contribution Margin Approach to decisions? How does the contribution approach change how an income statement is structured?
- What is the Contribution Margin Ratio and what equation is used to calculate it?
- What is the Breakeven Point? What equations are used to calculate the breakeven point for a single product firm in units and in dollars?
- What is the Margin of Safety and what equation is used to calculate it for both units and dollars?
- What is Differential Analysis and how is it used to make management decisions?
Part I. Review the information that Evan provided to you in Project 1. He has now included additional information about the production and sale of 60,000 basketballs. Evan knows that the market price per basketball is $12.00 and the unit variable cost is $6.00.
Additional factors to consider:
-
Note: For purposes of this Project, assume that “Total direct costs” calculated in Project 1 are variable and “Total indirect costs” calculated in Project 1 are fixed.
-
Factory rent is paid per square foot.
-
Total available production square footage is 20,000 and Acme’s Sporting Goods Division is currently using only 80% of this capacity.
-
Acme records the cost of unused capacity as a separate line item and not as a product cost.
Acme Sporting Goods Division
Product Line Data
For the Year Ended December 31, 2015
Product | Units Manufactured | Contribution Margin /Unit | Actual Sales Units 2015 | Projected Sales Units 2016 |
Basketballs | 58,000 | $6 per unit | 60,0001 | 70,000 |
Using the above information, answer the following questions. Be sure to show all of your calculations in the boxes provided.
- Compute the contribution margin ratio for basketballs.
- What is the breakeven point for the basketball product line in units?
- What is the breakeven point for the basketball product line in dollars?
- What is the total product line income for basketballs?
Part II. As Evan explained, Acme’s top management is contemplating adding baseball bats as a fourth product line for 2016. Similar machines are used to create basketballs and baseball bats. Examine the following projected 2016 operating income statement data from Evan for the baseball bat product line:
Units: 50,000 Bats
Revenues |
$500,000 |
Cost of Goods Sold |
|
Variable Manufacturing Costs |
$275,000 |
Operating Costs |
|
Variable Marketing Costs |
$25,000 |
Fixed Setup Costs and Maintenance |
$33,000 |
Fixed Maintenance Costs |
$40,000 |
Fixed General and Administrative Costs |
$15,000 |
With this information in mind, answer the following questions. Be sure to show all of your calculations in the boxes provided.
- Calculate the 2016 contribution margin ratio, breakeven point in both units and dollars, and margin of safety in both units and dollars for bats assuming sales of 45,000 bats.
Contribution Margin Ratio:
Breakeven Point (in units and dollars): Margin of Safety (in units and dollars): |
- Using the projected unit sales for 2016, explain how contribution margin and differential analysis would be used by Acme to determine whether the new product line of baseball bats should be pursued.
- Comparing your analyses of the basketball and baseball bat product lines, do you recommend that the Sporting Goods Division double the number of basketballs produced at Acme OR add the production of baseball bats to Acme’s product line instead? Describe your findings and explain your rationale.
1 Note: Sales may exceed units manufactured due to available existing inventory.
Part I.
Acme Widget Company is preparing its Master Budget for 2016 and Evan has asked you to create the Manufacturing Overhead Budget for the Sporting Goods Division. Once you have reviewed the Project resources and the below data, prepare the Manufacturing Overhead Budget for 2016 on page 2, showing quarterly data. Be sure to add the appropriate data to all of the gray boxes and properly express each figure in terms of units, dollars or direct labor hours (DLH). Please show all calculations in the table.
Sporting Goods Units to be produced (by Quarter):
Q1: 70,000
Q2: 60,000
Q3: 50,000
Q4: 80,000
Direct labor: 1 hour of direct labor is required to produce one unit
Variable overhead costs per direct labor hour:
Indirect materials | $0.80 |
Indirect labor | $1.20 |
Maintenance | $0.50 |
Fixed overhead costs per Quarter:
Supervisory salaries | $42,000 |
Depreciation | $16,000 |
Maintenance | $12,000 |
ACME SPORTING GOODS DIVISION
MANUFACTURING OVERHEAD BUDGET
FOR THE YEAR ENDED DECEMBER 31, 2016
Q1 |
Q2 |
Q3 |
Q4 |
Year |
|
DIRECT LABOR HOURS (DLH) | |||||
VARIABLE COSTS: | |||||
Indirect materials ($.80/DLH) | |||||
Indirect labor ($1.20/DLH) | |||||
Maintenance
($.50/DLH) |
|||||
TOTAL VARIABLE
COSTS |
|||||
FIXED COSTS: | |||||
Supervisory salaries | |||||
Depreciation | |||||
Maintenance | |||||
TOTAL FIXED
COSTS |
|||||
MANUFACTURING OVERHEAD (MO) | |||||
MANUFACTURING OVERHEAD RATE PER DIRECT LABOR HOUR (MO/DLH) |
Part II.
The Sporting Goods Division also uses a flexible budget for planning and budget preparation. For the month of August 2016, the monthly sales forecast is 15,000 units. Manufacturing overhead is based on machine hours. Evan would like you to prepare a Flexible Budget Report, assuming that the division used 6,000 machine hours during August 2016. Be sure to add the appropriate data to all of the gray boxes and properly express each figure. Please show all calculations in the table and in your answers to the questions on pages 5 and 6.
The projected sales price per unit is $9.50 and the following variable costs per unit are projected:
Direct materials $3.00
Direct labor $2.00
Variable manufacturing overhead costs per machine hour planned for August 2016:
Indirect labor $5.00
Indirect materials $2.50
Maintenance $0.50
Utilities $0.30
Fixed overhead costs per month:
Supervision $1,200
Insurance $400
Property taxes $600
Depreciation $1,800
Other notes to consider:
- Acme believes it will operate in a normal range of 4,000 to 8,000 machine hours per month.
- In August 2016, direct material costs were $41,250 and direct labor costs were $29,000 on sales of 14,750 units, or $135,000.
- During the month of August 2016, the company incurred the following manufacturing overhead costs:
Indirect labor $28,000
Indirect materials $16,200
Maintenance $2,800
Utilities $1,900
Supervision $1,440
Insurance $400
Property taxes $600
Depreciation $1,860
ACME SPORTING GOODS DIVISION
MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT
FOR THE MONTH OF AUGUST 2016
AUGUST 2016 BUDGET | AUGUST 2016 ACTUAL | AMOUNT OF VARIANCE | FAVORABLE (OR UNFAVORABLE) VARIANCE | |
Sales | ||||
Variable Costs: | ||||
Direct materials | ||||
Direct labor | ||||
Total Variable Costs | ||||
Contribution Margin | ||||
Manufacturing Overhead Costs: | ||||
Variable Costs: | ||||
Indirect labor | ||||
Indirect materials | ||||
Maintenance | ||||
Utilities | ||||
Total Variable Costs | ||||
Fixed Costs: | ||||
Supervision | ||||
Insurance | ||||
Property taxes | ||||
Depreciation | ||||
Total Fixed Costs | ||||
Total Costs | ||||
Budgeted Net Income |
1. Referring to “Sales” in Acme’s MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT:
a. What was the Sales Variance, i.e., by how much were Acme’s August 2016 actual sales favorable or unfavorable to budget?
b. How much of the Sales Variance was due to selling fewer units than Acme planned to sell? You can determine this by calculating the Sales Volume Variance.
c. How much of the Sales Variance was due to selling each unit at a lower price than Acme planned to sell? You can determine this by calculating the Selling Price Variance.
2. Referring to “Variable Costs: Direct Materials” in Acme’s MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT:
a. What was the Direct Materials Variance, i.e., by how much were Acme’s August 2016
Direct Materials Costs favorable or unfavorable to budget?
b. How much of the Direct Materials Variance was due to selling fewer units than Acme
planned to sell? You can determine this by calculating the Direct Materials Quantity
Variance.
c. How much of the Direct Materials Variance was due to buying each unit at a higher
price than Acme planned to pay? You can determine this by calculating the Direct
Materials Price Variance.
3. Referring to “Variable Costs: Direct Labor” in Acme’s MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT:
a. What was the Direct Labor Variance, i.e., by how much were Acme’s August 2016
Direct Labor Costs favorable or unfavorable to budget?
b. How much of the Direct Labor Variance was due to selling fewer units than Acme
planned to sell? You can determine this by calculating the Labor Efficiency Variance.
c. How much of the Direct Labor Variance was due to paying a lower hourly rate than
Acme planned to pay? You can determine this by calculating the Direct Labor Rate
Variance.
Evan Exert has approached you with the following activity-based costing information and corresponding questions. Read through the information and then respond to the questions below.
Acme Sporting Goods Division
Budgeted Costs and Activities
For the Year Ended December 31, 2015
Direct materials—Basketballs | $168,100 |
Direct materials—Hockey Sticks | 303,280 |
Direct materials—Baseball Gloves | 505,280 |
TOTAL | $976,660 |
Direct manufacturing labor—Basketballs | $111,800 |
Direct manufacturing labor—Hockey Sticks | 100,820 |
Direct manufacturing labor—Baseball Gloves | 150,820 |
TOTAL | $363,440 |
Setup $ 257,500
Equipment and maintenance costs 215,200
Factory rent 310,000
Total $ 782,700
Additional Budget Information
Product quantity
Basketballs 58,000 Hockey Sticks 85,000 Baseball Gloves 100,000 |
Number of batches (cost driver)
Basketballs 450 Hockey Sticks 300 Baseball Gloves 600 |
Machine hours (cost driver)
Basketballs 13,500 Hockey Sticks 10,500 Baseball Gloves 15,000 |
Square footage of production space used (cost driver)
Basketballs 3,200 Hockey Sticks 5,000 Baseball Gloves 7,800 |
-
Number of batches is the cost driver for setup costs.
-
Number of machine hours is the cost driver for equipment and maintenance costs.
-
Factory rent is paid per square foot.
-
Total available factory square footage is 20,000 and Acme’s Sporting Goods Division is currently using only 80% of this capacity.
-
Acme records the cost of unused capacity as a separate line item and not as a product cost.
——————————————————————————————————————————-
Answer the following questions for Evan. Be sure to show your work as well as your answers in the boxes below (the boxes will expand as your enter your work). Where necessary, round your answers to three places after the decimal point.
- Calculate the budgeted setup cost per unit:
Budgeted setup cost per unit (Basketballs):
Budgeted set up cost for Basket ball=(Set up Cost/ Total no. of batches)*Batches for basketball =257500/(450+300+600)*450 =85833.33 Budgeted setup cost per unit(Basket Ball)=Budgeted set up cost for basket ball/Units of Basket Ball 85833/58000=1.479 Budgeted setup cost per unit (Hockey Sticks): Budgeted set up cost for Hockey Sticks=(Set up Cost/ Total no. of batches)*Batches for Hockey sticks =257500/(450+300+600)*300 =57222.22 Budgeted setup cost per unit(Hockey sticks)=Budgeted set up cost for Hockey stick/Units of Hockey Sticks =57222.22/85000 =0.673 Budgeted setup cost per unit (Baseball Gloves): Budgeted set up cost for Baseball Gloves=(Set up Cost/ Total no. of batches)*Batches for Baseball Gloves =257500/(450+300+600)*600 =114444.44 Budgeted setup cost per unit(Baseball Gloves)=Budgeted set up cost for Baseball Gloves/Units of Baseball Gloves =114444.44/100000 =1.144 |
- Calculate the budgeted equipment and maintenance cost per unit:
Budgeted equipment and maintenance cost per unit (Basketballs):
Budgeted equipment and maintenance cost (Basketballs)=(Equipment and maintenance cost/Total no. of machine hours)*Machine hours in Basketballs =215200/(13500+10500+15000)*13500 =74492.31 Budgeted equipment and maintenance cost per unit (Basketballs)= = Budgeted equipment and maintenance cost (Basketballs)/no. of Basketball units =74492.31/58000 =1.284 Budgeted equipment and maintenance cost per unit (Hockey Sticks): Budgeted equipment and maintenance cost (Hockey Sticks)=(Equipment and maintenance cost/Total no. of machine hours)*Machine hours in Hockey Sticks =215200/(13500+10500+15000)*10500 =57938.46 Budgeted equipment and maintenance cost per unit (Hockey Sticks)= Budgeted equipment and maintenance cost (Hockey Sticks)/Total No. of Hockey sticks =57938.46/85000 =0.682 Budgeted equipment and maintenance cost per unit (Baseball Gloves): Budgeted equipment and maintenance cost (Basket Ball Gloves)=(Equipment and maintenance cost/Total no. of machine hours)*Machine hours in Basket Ball gloves =215200/(13500+10500+15000)*15000 =82769.23 Budgeted equipment and maintenance cost per unit (Basket Ball Gloves)= =Budgeted equipment and maintenance cost (Basket Ball Gloves)/Total No. of Basket Ball Gloves = 82769.23/100000 =0.828 |
- Calculate the budgeted production space cost per unit:
Total Factory Rent=310000
Rent for used space=310000*80% =248000 Budgeted production space cost per unit (Basketballs): Budgeted production space cost (Basketballs)=Rent for used space/Total space used)*Square foot sapce used by Basket ball =248000/(3200+5000+7800)*3200 =49600 Budgeted production space cost per unit (Basketballs)= =Budgeted production space cost (Basketballs)/Total no. of Basket balls =49600/58000 =0.855
Budgeted production space cost per unit (Hockey Sticks): Budgeted production space cost (Hockey Sticks)= Rent for used space/Total space used)*Square foot space used by Hockey sticks =248000/(3200+5000+7800)*5000 =77500 Budgeted production space cost per unit (Hockey Sticks)= Budgeted production space cost (Hockey sticks/Total no. of Hockey sticks) =77500/85000 =0.912
Budgeted production space cost per unit (Baseball Gloves): Budgeted production space cost (Baseball Gloves)= Rent for used space/Total space used)*Square foot space used by Base ballGloves =248000/(3200+5000+7800)*7800 =120900 Budgeted production space cost per unit (Base Ball Gloves)= =Budgeted production space cost(baseball gloves)/Total no. of Base ball Gloves =120900/100000 =1.209 |
- What is the budgeted cost of unused square footage capacity?
Budgeted cost of unused square footage capacity=total rent* unused space
=310000*(1-80%) =62000 |
- What is the budgeted total cost and the cost per unit of resources used to produce Basketballs, Hockey Sticks and Baseball Gloves? Complete the following table to show your answers:
Basketballs | Hockey Sticks | Baseball Gloves | Totals | |
Direct materials | 168100 | 303280 | 505280 | 976660 |
Direct manufacturing Labor | 111800 | 100820 | 150820 | 363440 |
Total direct costs | 279900 | 404100 | 656100 | 1340100 |
Setup | 85833.33 | 57222.22 | 114444.44 | 257500 |
Equip. & maint. | 74492.31 | 57938.46 | 82769.23 | 215200 |
Factory rent | 49600 | 77500 | 120900 | 248000 |
Total indirect costs | 209925.643 | 192660.68 | 318113.7 | 720700 |
Total costs | 489825.6430 | 596760.68 | 974213.7 | 2060800 |
Units | 58000 | 85000 | 100000 | |
Total cost/unit | 8.445 | 7.021 | 9.742 |
- Why might excess square footage capacity be beneficial for Acme’s Sporting Goods Division?
Excess square footage capacity can be used for increasing the production of any of the departments .So, the profitability of the organisation as a whole will increase. |
- A salesman from the Sewn Up Supply Company has proposed that Acme buy its new, more pliable leather stitching for use in manufacturing baseball gloves.This new material will reduce the time required for manually stitchingthe gloves from one hour to forty minutes per glove, which Evan estimates will decrease the budgeted direct manufacturing labor cost for baseball gloves to $130,000; increase the direct materials cost for baseball gloves to $525,000; and increase equipment & maintenance costs by $11,800 because the new stitching requires a special type of electronic needle that would be leased from and maintained by the Sewn Up Supply Company. All other things being equal, do you recommend that Acme decide to use this new stitching? Why or why not? Complete the following table and then write your response in the box provided.
Total Costs Before New Stitching | Total Costs After New Stitching | Better/(Worse)?
(and by how much?) |
|
Direct materials |
505280 |
525000 |
Worse 19720 |
Direct mfg. labor |
150820 |
130000 |
Better 20820 |
Total direct costs |
656100 |
655000 |
Better 1100 |
Setup |
114444.44 |
114444.44 |
— |
Equip. & maint. |
82769.23 |
94569.23 |
Worse 11800 |
Factory rent |
120900 |
120900 |
— |
Total indirect costs |
318113.7 |
329913.7 |
Worse 11800 |
Total costs |
974213.7 |
984913.7 |
Worse 10699.97 |
Written Response: Proposal for buying the new leather stitching is not viable. As we can see from the above table that it leads to increase in total cost by 10699.97. Hence, it is advisable not to use New Stitching
|
- Acme is considering sending its supervisors and staff to a regional seminar series that shares industry best practices about manufacturing process innovations. The cost of participation (an indirect fixed cost that Acme would allocate equally among its three product lines) is $30,000 but a colleague of one of the Acme executives told him that he had attended the same seminar series and learned about efficiencies that enabled him to increase his company’s production (i.e. number of units produced) by 5% without incurring any additional direct costs. If Acme experienced the same 5% increase in product quantity, what would be its new budgeted total cost and cost per unit of resources used to produce:
a. Basketballs
b. Hockey Sticks
c. Baseball Gloves
Do you recommend that Acme decide to pay to send its supervisors and staff to this seminar? Why or why not? Complete the below tables and write your response in the box provided.
Before the seminar:
Basketballs |
Hockey Sticks |
Baseball Gloves |
Total |
|
Direct materials |
168100 |
303280 |
505280 |
976660 |
Direct mfg. labor |
111800 |
100820 |
150820 |
363440 |
Total direct costs |
279900 |
404100 |
656100 |
1340100 |
Setup |
85833.33 |
57222.22 |
114444.44 |
257500 |
Equip. & maint. |
74492.31 |
57938.46 |
82769.23 |
215200 |
Space rental |
49600 |
77500 |
120900 |
248000 |
Total indirect costs |
209925.643 |
192660.68 |
318113.7 |
720700 |
Total costs |
489825.643 |
596760.68 |
974213.7 |
2060800 |
Units |
58000 |
85000 |
100000 |
|
Total cost/unit |
8.445 |
7.021 |
9.742 |
After the seminar:
Basketballs |
Hockey Sticks |
Baseball Gloves |
Total |
|
Direct materials |
168100 |
303280 |
505280 |
976660 |
Direct mfg. labor |
111800 |
100820 |
150820 |
363440 |
Total direct costs |
279900 |
404100 |
656100 |
1340100 |
Setup |
85833.33 |
57222.22 |
114444.44 |
257500 |
Equip. & maint. |
74492.31 |
57938.46 |
82769.23 |
215200 |
Space rental |
49600 |
77500 |
120900 |
248000 |
Seminar |
10000 |
10000 |
10000 |
30000 |
Total indirect costs |
219925.643 |
202660.68 |
328113.7 |
750700 |
Total costs |
499825.643 |
606760.68 |
984213.7 |
2090800 |
Units |
60900 |
89250 |
105000 |
|
Total cost/unit |
8.207 |
6.798 |
9.373 |
Written Response: It is recommended to Acme to send its supervisor to seminar .As it will increase production by 5% which leads to reduction in per unit cost of Basket ball , Hockey sticks, Base ball gloves |
References
http://cfaresources.s3.amazonaws.com/BA%20Management/Investigate%20Managerial%20Accounting/Saylor%20Managerial%20Accounting%20-%20Chapters%201%203%20and%205.pdf. [Online].
Assignment 2
In preparation for your work evaluating the product lines manufactured by the Sporting Goods Division, answer the following questions in the text boxes provided (Note: the boxes will expand as you type into them):
- What is the Contribution Margin? What equation is used to determine the contribution margin per unit?
Contribution margin is also known as contribution per unit. It is the difference between selling price and variable cost of a product
Contribution= Sale – Variable cost (Squareup, n.d.) |
- What is the Contribution Margin Approach to decisions? How does the contribution approach change how an income statement is structured?
Contribution Margin Approach is a presentation format under which all variable cost are deducted from the revenue and contribution is calculated.
From contribution margin all the fixed costs are deducted and profit or loss is calculated. Revenue XXX Less:Variable Cost XXX =Contribution Margin XXX Less:Fixed Cost XXX =Net Profit/Loss XXX (Squareup, n.d.) |
- What is the Contribution Margin Ratio and what equation is used to calculate it?
Contribution Margin Ratio is percentage of contribution over revenue.
Contribution margin ratio=Contribution/ Price (Squareup, n.d.) |
- What is the Breakeven Point? What equations are used to calculate the breakeven point for a single product firm in units and in dollars?
Breakeven point is a situation where total cost is equal to total revenue. It is a point where firm neither have profit not incur loss. (Squareup, n.d.) Breakeven(Units)= Fixed cost/(Revenue per unit-Variable cost per unit) Breakeven in dollars= Breakeven in units * Sale price per unit |
- What is the Margin of Safety and what equation is used to calculate it for both units and dollars?
Margin of safety is the sales over and above the breakeven point.
Margin of safety(units)= Actual no. of unit sold – Breakeven units Margin of Safety(Dollar)= Actual Sale value- Breakeven value |
- What is Differential Analysis and how is it used to make management decisions?
Differential Analysis is a technique which represents the difference in revenues and costs among the all possible course of action.
It help management in taking the right decision by making analysis of all available course of action by calculating difference in revenue in actions available and calculating difference in cost in different available actions. (saylordotorg, n.d.) |
Part I. Review the information that Evan provided to you in Project 1. He has now included additional information about the production and sale of 60,000 basketballs. Evan knows that the market price per basketball is $12.00 and the unit variable cost is $6.00.
Additional factors to consider:
-
Note: For purposes of this Project, assume that “Total direct costs” calculated in Project 1 are variable and “Total indirect costs” calculated in Project 1 are fixed.
-
Factory rent is paid per square foot.
-
Total available production square footage is 20,000 and Acme’s Sporting Goods Division is currently using only 80% of this capacity.
-
Acme records the cost of unused capacity as a separate line item and not as a product cost.
Acme Sporting Goods Division
Product Line Data
For the Year Ended December 31, 2015
Product | Units Manufactured | Contribution Margin /Unit | Actual Sales Units 2015 | Projected Sales Units 2016 |
Basketballs | 58,000 | $6 per unit | 60,0001 | 70,000 |
Using the above information, answer the following questions. Be sure to show all of your calculations in the boxes provided.
- Compute the contribution margin ratio for basketballs.
Contribution margin ratio= (Total revenue – Variable cost)/Revenue
Total revenue= No of unit sold* Selling price =60000*12 =720000 Variable cost= No of unit sold*Variable cost =60000*6 =360000 Contribution margin ratio= (720000-360000)/720000 =0.5 (Pearson, n.d.) |
- What is the breakeven point for the basketball product line in units?
Break even point in units(Basketball)
= Fixed cost/( Revenue per unit- Variable cost per unit) =209925.643/(12-6) =34987.61 units =34988 units |
- What is the breakeven point for the basketball product line in dollars?
Breakeven Point in dollar( Basket Ball)
=Breakeven in units* price per unit =34988*12 =419856 |
- What is the total product line income for basketballs?
Income for Basketballs =
Revenue= 720000 -Variable cost=360000 Contribution=360000 -Fixed Cost=209925.6 Income=150074. |
Part II.As Evan explained, Acme’s top management is contemplating adding baseball bats as a fourth product line for 2016. Similar machines are used to create basketballs and baseball bats. Examine the following projected 2016 operating income statement data from Evan for the baseball bat product line:
Units: 50,000 Bats
Revenues |
$500,000 |
Cost of Goods Sold |
|
Variable Manufacturing Costs |
$275,000 |
Operating Costs |
|
Variable Marketing Costs |
$25,000 |
Fixed Setup Costs and Maintenance |
$33,000 |
Fixed Maintenance Costs |
$40,000 |
Fixed General and Administrative Costs |
$15,000 |
With this information in mind, answer the following questions. Be sure to show all of your calculations in the boxes provided.
- Calculate the 2016 contribution margin ratio, breakeven point in both units and dollars, and margin of safety in both units and dollars for bats assuming sales of 45,000 bats.
Contribution Margin Ratio:
=(Sale-Variable cost)/ Sale =(500000-(275000+25000))/500000 =(500000-300000)/500000 =0.4 Breakeven Point (in units and dollars): Breakeven point in dollar= Fixed cost/ contribution margin ratio =(33000+40000+15000)/0.4 =88000/0.4 =220000 Breakeven in unit= Breakeven in Dollar/Selling price =220000/100 =22000Units Selling Price per unit=500000/50000=10 Margin of Safety (in units and dollars): Margin of Safety(units)= Actual Sale- Breakeven sale =45000-22000 =23000 Margin of safety(in dollar)=Margin of safety in unit* selling price =23000*10 =230000 |
- Using the projected unit sales for 2016, explain how contribution margin and differential analysis would be used by Acme to determine whether the new product line of baseball bats should be pursued.
Differential Analysis
|
- Comparing your analyses of the basketball and baseball bat product lines, do you recommend that the Sporting Goods Division double the number of basketballs produced at Acme OR add the production of baseball bats to Acme’s product line instead? Describe your findings and explain your rationale.
From the above table we can see that the production of Basket ball is more profitable as compare to production of baseball bat. As the income from the Basketball production is higher than the Baseball Bat alternative
Thus it is advisable to double the production of Basketball. |
(Resouces, n.d.)
References
Pearson, n.d. http://www.pearsoncanada.ca/media/highered-showcase/multi-product-showcase/horngren-ch03.pdf. [Online].
Resouces, C., n.d. http://cfaresources.s3.amazonaws.com/BA%20Management/Investigate%20Managerial%20Accounting/Saylor%20Managerial%20Accounting%20-%20Chapters%205%206%20and%207.pdf. [Online].
1 Note: Sales may exceed units manufactured due to available existing inventory.
Assignment 3
Part I.
Acme Widget Company is preparing its Master Budget for 2016 and Evan has asked you to create the Manufacturing Overhead Budget for the Sporting Goods Division. Once you have reviewed the Project resources and the below data, prepare the Manufacturing Overhead Budget for 2016 on page 2, showing quarterly data. Be sure to add the appropriate data to all of the gray boxes and properly express each figure in terms of units, dollars or direct labor hours (DLH). Please show all calculations in the table.
Sporting Goods Units to be produced (by Quarter):
Q1: 70,000
Q2: 60,000
Q3: 50,000
Q4: 80,000
Direct labor: 1 hour of direct labor is required to produce one unit
Variable overhead costs per direct labor hour:
Indirect materials | $0.80 |
Indirect labor | $1.20 |
Maintenance | $0.50 |
Fixed overhead costs per Quarter:
Supervisory salaries | $42,000 |
Depreciation | $16,000 |
Maintenance | $12,000 |
ACME SPORTING GOODS DIVISION
MANUFACTURING OVERHEAD BUDGET
FOR THE YEAR ENDED DECEMBER 31, 2016
Q1 |
Q2 |
Q3 |
Q4 |
Year |
|
DIRECT LABOR HOURS (DLH) |
70000 |
60000 |
50000 |
80000 |
260000 |
VARIABLE COSTS: | |||||
Indirect materials ($.80/DLH) |
56000 |
48000 |
40000 |
64000 |
208000 |
Indirect labor ($1.20/DLH) |
84000 |
72000 |
60000 |
96000 |
312000 |
Maintenance
($.50/DLH) |
35000 |
30000 |
25000 |
40000 |
130000 |
TOTAL VARIABLE
COSTS |
175000 |
150000 |
125000 |
200000 |
650000 |
FIXED COSTS: | |||||
Supervisory salaries |
42000 |
42000 |
42000 |
42000 |
168000 |
Depreciation |
16000 |
16000 |
16000 |
16000 |
64000 |
Maintenance |
12000 |
12000 |
12000 |
12000 |
48000 |
TOTAL FIXED
COSTS |
70000 |
70000 |
70000 |
70000 |
280000 |
MANUFACTURING OVERHEAD (MO) |
245000 |
220000 |
195000 |
270000 |
930000 |
MANUFACTURING OVERHEAD RATE PER DIRECT LABOR HOUR (MO/DLH) |
=930000/260000 =3.58 |
Part II.
The Sporting Goods Division also uses a flexible budget for planning and budget preparation. For the month of August 2016, the monthly sales forecast is 15,000 units. Manufacturing overhead is based on machine hours. Evan would like you to prepare a Flexible Budget Report, assuming that the division used 6,000 machine hours during August 2016. Be sure to add the appropriate data to all of the gray boxes and properly express each figure. Please show all calculations in the table and in your answersto the questions on pages 5 and 6.
The projected sales price per unit is $9.50 and the following variable costs per unit are projected:
Direct materials $3.00
Direct labor $2.00
Variable manufacturing overhead costs per machine hour planned for August 2016:
Indirect labor $5.00
Indirect materials $2.50
Maintenance $0.50
Utilities $0.30
Fixed overhead costs per month:
Supervision $1,200
Insurance $400
Property taxes $600
Depreciation $1,800
Other notes to consider:
- Acme believes it will operate in a normal range of 4,000 to 8,000 machine hours per month.
- In August 2016, direct material costs were $41,250 and direct labor costs were $29,000 on sales of 14,750 units, or $135,000.
- During the month of August 2016, the company incurred the following manufacturing overhead costs:
Indirect labor $28,000
Indirect materials $16,200
Maintenance $2,800
Utilities $1,900
Supervision $1,440
Insurance $400
Property taxes $600
Depreciation $1,860
ACME SPORTING GOODS DIVISION
MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT
FOR THE MONTH OF AUGUST 2016
AUGUST 2016 BUDGET | AUGUST 2016 ACTUAL | AMOUNT OF VARIANCE | FAVORABLE (OR UNFAVORABLE) VARIANCE | |
Sales |
142500 (15000*9.5) |
135000 |
7500 |
unfavorable |
Variable Costs: | ||||
Direct materials |
45000 (15000*3) |
41250 |
3750 |
Favorable |
Direct labor |
30000 (15000*2) |
29000 |
1000 |
Favorable |
Total Variable Costs |
75000 |
70250 |
4750 |
Favorable |
Contribution Margin |
67500 |
64750 |
2750 |
Unfavorable |
Manufacturing Overhead Costs: |
75000 |
70250 |
4750 |
Favorable |
Variable Costs: | ||||
Indirect labor |
30000 |
28000 |
2000 |
Favorable |
Indirect materials |
15000 |
16200 |
-1200 |
Unfavorable |
Maintenance |
3000 |
2800 |
200 |
Favorable |
Utilities |
1800 |
1900 |
-100 |
Unfavorable |
Total Variable Costs |
49800 |
48900 |
900 |
Favorable |
Fixed Costs: | ||||
Supervision |
1200 |
1440 |
-240 |
Unfavorable |
Insurance |
400 |
400 |
0 |
Nil |
Property taxes |
600 |
600 |
0 |
Nil |
Depreciation |
1800 |
1860 |
-60 |
Unfavorable |
Total Fixed Costs | 4000 | 4300 | -300 | Unfavorable |
Total Costs |
128800 |
123450 |
5350 |
Favorable |
Budgeted Net Income |
13700 |
11550 |
2150 |
Unfavorable |
1. Referring to “Sales” in Acme’s MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT:
a. What was the Sales Variance, i.e., by how much were Acme’s August 2016 actual sales favorable or unfavorable to budget?
Sales Variance is the difference between actual sale and budgeted sale.
Sale variance= Actual Sale- Budgeted sale =135000-142500 =7500 Unfavorable |
b. How much of the Sales Variance was due to selling fewer units than Acme planned to sell? You can determine this by calculating the Sales Volume Variance.
Sales volume variance=( Actual quantity – Budgeted quantity)* budgeted selling price
=(135000-142500)*9.5 =71250 Unfavorable 71250 of the sales variance is because of selling fewer units of a commodity. |
c. How much of the Sales Variance was due to selling each unit at a lower price than Acme planned to sell? You can determine this by calculating the Selling Price Variance.
Selling price variance=Actual sales revenue- actual sales at budgeted price
=135000-(14750*9.5) =-5125(unfavorable) 5125 of Sales variance was due to selling units at a price lower than budgeted price. |
2. Referring to “Variable Costs: Direct Materials” in Acme’s MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT:
a. What was the Direct Materials Variance, i.e., by how much were Acme’s August 2016
Direct Materials Costs favorable or unfavorable to budget?
Direct material Variance= actual direct material cost- budgeted direct material cost
=41250-45000 =3750 favorable Direct material variance is favorable to the budget as the actual direct material cost incurred is lower than the budgeted cost. |
b. How much of the Direct Materials Variance was due to selling fewer units than Acme
planned to sell? You can determine this by calculating the Direct Materials Quantity
Variance.
Unit less sold= 250
Budgeted price per unit of direct material= $ 3 Direct material Variance due to less unit sold= 250 x $3= $ 750 less paid |
c. How much of the Direct Materials Variance was due to buying each unit at a higher
price than Acme planned to pay? You can determine this by calculating the Direct
Materials Price Variance.
Direct material Price Variance= (Actual price- Budgeted Price)x Actual Quantity
=(41250/14750-3)x14750 = 3000 less paid. |
3. Referring to “Variable Costs: Direct Labor” in Acme’s MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT:
a. What was the Direct Labor Variance, i.e., by how much were Acme’s August 2016
Direct Labor Costs favorable or unfavorable to budget?
Direct labour variance= Actual Labor cost- budgeted labor cost
= 30000-29000= 1000 Favorable |
b. How much of the Direct Labor Variance was due to selling fewer units than Acme
planned to sell? You can determine this by calculating the Labor Efficiency Variance.
Units less produced= 250
Budgeted labour rate= $2 Labour Efficiency variance= 250 x $2 =$ 500 |
c. How much of the Direct Labor Variance was due to paying a lower hourly rate than
Acme planned to pay? You can determine this by calculating the Direct Labor Rate
Variance.
Labor Rate Variance= (Actual Labour rate- Budgted labor rate) X Actual units
==(29000/14750-30000/15000)x14750= 500 Favorable (Less paid) |
(Resources, n.d.)
Larry.M.Walther, n.d. https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/budgeting-and-decision-making.pdf. [Online].
Resources, C., n.d. http://cfaresources.s3.amazonaws.com/BA%20Management/Investigate%20Managerial%20Accounting/Saylor%20Managerial%20Accounting%20-%20Chapters%209-10.pdf. [Online].
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