Week 8
1) 6-33 Budgeted income statement. (CMA, adapted) Smart Video Company is a manufacturer of
videoconferencing products. Maintaining the videoconferencing equipment is an important area of
customer satisfaction. A recent downturn in the computer industry has caused the videoconferencing
equipment segment to suffer, leading to a decline in Smart Video’s financial performance. The
following income statement shows results for 2014:
Smart Video Company Income Statement for the Year Ended December 31, 2014 (in
thousands)
Revenues
Equipment
Maintenance Contracts
Total Revenues
Cost of goods sold
Gross margin
Operating Costs
Marketing
Distribution
Customer maintenance
Administration
Total operating costs
Operating income $800
1,900
$9,900
4,000
$5,900
630
100
1100
920
2750
3,150 Smart Video’s management team is preparing the 2015 budget and is studying the
following information:
1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins.
The selling price of each maintenance contract is expected to remain unchanged from 2014.
2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in
units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and
quality improvements.
4. Marketing costs are expected to increase by $290,000, but administration costs are expected to
remain at 2014 levels.
5. Distribution costs vary in proportion to the number of units of equipment sold.
6. Two maintenance technicians are to be hired at a total cost of $160,000, which covers wages and
related travel costs. The objective is to improve customer service and shorten response time
7. There is no beginning or ending inventory of equipment.
8. Prepare a budgeted income statement for the year ending December 31, 2015.
9. How well does the budget align with Smart Video’s strategy?
10. How does preparing the budget help Smart Video’s management team better manage the
company? 2) 7-17 Flexible Budget. Connor Company’s budgeted prices for direct materials, direct
manufacturing labor, and direct marketing (distribution) labor per attaché case are $40, $8, and $12,
respectively. The president is pleased with the following performance report:
Direct materials
Direct manufacturing labor
Direct marketing (distribution labor) Actual Costs
$364,000
78,000
100,00 Static Budget
$400,000
80,000
120,000 Variance
$36,000 F
2,000 F
10,000 F Actual output was 8,800 attaché cases. Assume all three direct-cost items shown are variable costs. Is
the president’s pleasure justified? Prepare a revised performance report that uses a flexible budget
and a static budget.
3) 8-39 Review of Chapters 7 and 8, 3-variance analysis. (CPA, adapted) The Brown
Manufacturing Company’s costing system has two direct-cost categories: direct materials and direct
manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to products on
the basis of standard direct manufacturing labor-hours (DLH). At the beginning of 2014, Beal
adopted the following standards for its manufacturing costs:
Direct materials
Direct manufacturing labor
Manufacturing overhead:
Variable
Fixed
Standard manufacturing cost per put unit Input
5 lb. at $4 per lb
4 hrs. at $16 per hr. Cost per Output Unit
$20.00
64.00 $8 per DLH
$9 per DLH 32.00
36.00
$152.00 The denominator level for total manufacturing overhead per month in 2014 is 37,000 direct
manufacturing labor-hours. Beal’s flexible budget for January 2014 was based on this
denominator level. The records for January indicated the following:
Direct materials purchased
Direct materials used
Direct manufacturing labor
Total actual manufacturing overhead (variable and fixed)
Actual production 40,300 lb. at $3.80 per lb.
37,300 lb.
31,400 hrs. at $16.25 per hr.
$650,000
7,600 output units Required
1. Prepare a schedule of total standard manufacturing costs for the 7,600 output units in January 2014.
2. For the month of January 2014, compute the following variances, indicating whether each is
favorable
(F) or unfavorable (U):
a. Direct materials price variance, based on purchases
b. Direct materials efficiency variance c.
d.
e.
f.
g. Direct manufacturing labor price variance
Direct manufacturing labor efficiency variance
Total manufacturing overhead spending variance
Variable manufacturing overhead efficiency variance
Production-volume variance 4) 9-22 Absorption versus variable costing. Regina Company manufacturers a professionalgrade vacuum cleaner and began operations in 2014. For 2014, Regina budgeted to produce and
sell 20,000 units. The company had no price, spending, or efficiency variances and writes off
production-volume variance to cost of goods sold. Actual data for 2014 are given as follows: 1.
2.
3.
4. Required
Prepare a 2014 income statement for Regina Company using variable costing.
Prepare a 2014 income statement for Regina Company using absorption costing.
Explain the differences in operating incomes obtained in requirements 1 and 2.
Regina’s management is considering implementing a bonus for the supervisors based on gross
margin under absorption costing. What incentives will this bonus plan create for the supervisors?
What modifications could Regina management make to improve such a plan? Explain briefly. 5) 12-22
Strategy, balanced scorecard. Stanmore Corporation makes a special-purpose
machine, D4H, used in the textile industry. Stanmore has designed the D4H machine for 2013 to
be distinct from its competitors. It has been generally regarded as a superior machine. Stanmore
presents the following data for 2012 and 2013.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Units of D4H produced and sold
Selling price
Direct materials (kilograms)
Direct material cost per kilogram
Manufacturing capacity in units of D4H
Total conversion costs
Conversion cost per unit of capacity (row 6 ÷ row 5)
Selling and customer-service capacity
Total selling and customer-service costs
Selling and customer-service capacity cost per customer
(row 9 , row 8) 2012
200
$40,000
300,000
$8
250
2,000,000
$8,000
100 customers
$1,000,000 2013
210
$42,000
310,000
$8.50
250
2,025,000
$8,100
95 customers
$940,500 $10,000 $9,900 Stanmore produces no defective machines, but it wants to reduce direct materials usage per D4H
machine in 2013. Conversion costs in each year depend on production capacity defined in terms
of D4H units that can be produced, not the actual units produced. Selling and customer-service
costs depend on the number of customers that Stanmore can support, not the actual number of
customers it serves. Stanmore has 75customers in 2012 and 80 customers in 2013.
Required
1. Is Stanmore’s strategy one of product differentiation or cost leadership? Explain briefly.
2. Describe briefly key measures that you would include in Stanmore’s balanced scorecard and the
rea-sons for doing so.