BRIEF EXERCISE 10-10
III A $300,000 ($2,000,000 X .15) increase in sales will increase contribution
III A decrease in costs results in a corresponding increase in controllable
margin. The new ROI is 30% ($2,400,000 ÷ $8,000,000).
III A decrease in average operating assets reduces the denominator. The
*BRIEF EXERCISE 10-11
Controllable Margin
÷
Average Operating Assets
=
ROI
$660,000
÷
$3,000,000
=
22%
Controllable Margin
–
(Minimum Rate of Return X Average Operating Assets)
=
Residual Income
$660,000
–
(10% X $3,000,000)
=
Residual Income
$660,000
–
$300,000
=
$360,000
*BRIEF EXERCISE 10-12
÷
Average Operating Assets
=
ROI
$800,000
÷
$4,000,000
=
20%
–
(Minimum Rate of Return X Average Operating Assets)
=
Residual Income
$800,000
–
(15% X $4,000,000)
=
Residual Income
–
$600,000
=
$200,000
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 10-1
DO IT! 10-2
Difference
Favorable F
Unfavorable U
Budget
6,000 units
Actual
6,000 units
Units produced
Variable costs
Direct materials ($7)
$ 42,000
$ 38,850
$3,150 F
Direct labor ($13)
78,000
76,440
1,560 F
Overhead ($18)
108,000
116,640
8,640 U
Total variable costs
228,000
231,930
3,930 U
Fixed costs
Depreciation*
8,000
8,000
0
Supervision**
3,800
4,000
200 U
Total fixed costs
11,800
12,000
200 U
Total costs
$239,800
$243,930
$4,130 U
*$96,000/12
**$45,600/12
DO IT! 10-3
WELLSTONE DIVISION
Responsibility Report
For the Year Ended December 31, 2014
Difference
Favorable F
Budget Actual Unfavorable U
Sales $2,000,000 $1,860,000 $140,000 U
Variable costs 800,000 760,000 40,000 F
DO IT! 10-4
(a) Controllable margin for 2013:
Sales ……………………………………………..
$500,000
Variable costs …………………………..……
300,000
Contribution margin ……………………….
200,000
Controllable fixed costs ………………….
75,000
Controllable margin ………………………..
$125,000
Return on investment for 2013:
$125,000
= 20%
$625,000
(b) Expected return on investment for alternative 1:
$125,000*
= 25%
$500,000
*Controllable margin remains unchanged from (a)
DO IT! 10-4 (Continued)
Controllable margin for alternative 2:
Sales ($500,000 + 100,000) ……………………….
$600,000
Variable costs
($300,000/$500,000 X $600,000) ………….….
360,000
Contribution margin …………………………….….
240,000
Controllable fixed costs ……………………….….
75,000
Controllable margin ……………………………..….
$165,000
Expected return on investment
for alternative 2:
$165,000
= 26.4%
$625,000
SOLUTIONS TO EXERCISES
EXERCISE 10-1
1. True.
2. False. Budget reports are prepared as frequently as needed.
3. True.
4. True.
reporting system.
and top management.
7. True.
8. True.
EXERCISE 10-2
(a) CREDE COMPANY
Selling Expense Report
For the Quarter Ending March 31
By Month
Year–to–Date
Month
Budget
Actual
Difference
Budget
Actual
Difference
January
$30,000
$31,200
$1,200 U
$ 30,000
$ 31,200
$1,200 U
February
$35,000
$34,525
$ 475 F
$ 65,000
$ 65,725
$ 725 U
March
$40,000
$46,000
$6,000 U
$105,000
$111,725
$6,725 U
(b) The purpose of the Selling Expense Report is to help management
(c) Most likely, when management scrutinized the results for January and
February, they would determine that the difference was insignificant
(4% in January and 1.4% in February), and require no action. When
EXERCISE 10-3
THOME COMPANY
Monthly Manufacturing Overhead Flexible Budget
For the Year 2014
Activity level
Direct labor hours
Variable costs
Indirect labor ($1)
Indirect materials ($.60)
Utilities ($.40)
Total variable costs ($2.00)
Fixed costs
Supervision
Depreciation
Property taxes
Total fixed costs
Total costs
7,000
$ 7,000
4,200
2,800
14,000
4,000
1,200
800
6,000
$20,000
8,000
$ 8,000
4,800
3,200
16,000
4,000
1,200
800
6,000
$22,000
9,000
$ 9,000
5,400
3,600
18,000
4,000
1,200
800
6,000
$24,000
10,000
$10,000
6,000
4,000
20,000
4,000
1,200
800
6,000
$26,000
EXERCISE 10-4
(a) THOME COMPANY
Manufacturing Overhead Flexible Budget Report
For the Month Ended July 31, 2014
Difference
Direct labor hours (DLH)
Variable costs
Indirect labor
Indirect materials
Utilities
Total variable costs
Fixed costs
Supervision
Depreciation
Budget at
9,000 DLH
$ 9,000
5,400
3,600
18,000
4,000
1,200
Actual Costs
9,000 DLH
$ 8,800
5,300
3,200
17,300
4,000
1,200
Favorable F
Unfavorable U
$200 F
100 F
400 F
700 F
—
—
EXERCISE 10-4 (Continued)
(b) THOME COMPANY
Manufacturing Overhead Flexible Budget Report
For the Month Ended July 31, 2014
Difference
Direct labor hours (DLH)
Variable costs
Indirect labor ($1.00)
Indirect materials ($0.60)
Utilities ($0.40)
Total variable
costs ($2.00)
Fixed costs
Supervision
Depreciation
Property taxes
Total fixed costs
Total costs
Budget at
8,500 DLH
$ 8,500
5,100
3,400
17,000
4,000
1,200
800
6,000
$23,000
Actual Costs
8,500 DLH
$ 8,800
5,300
3,200
17,300
4,000
1,200
800
6,000
$23,300
Favorable F
Unfavorable U
$300 U
200 U
200 F
300 U
—
—
—
—
$300 U
materials, they might be considered immaterial.
EXERCISE 10-5
DEWITT COMPANY
Monthly Selling Expense Flexible Budget
For the Year 2014
Activity level
Sales
Variable expenses
Sales commissions (6%)
Advertising (4%)
Traveling (3%)
Delivery (2%)
Total variable
expenses (15%)
Fixed expenses
Sales salaries
Depreciation
Insurance
Total fixed expenses
Total expenses
$170,000
$ 10,200
6,800
5,100
3,400
25,500
35,000
7,000
1,000
43,000
$ 68,500
$180,000
$ 10,800
7,200
5,400
3,600
27,000
35,000
7,000
1,000
43,000
$ 70,000
$190,000
$ 11,400
7,600
5,700
3,800
28,500
35,000
7,000
1,000
43,000
$ 71,500
$200,000
$ 12,000
8,000
6,000
4,000
30,000
35,000
7,000
1,000
43,000
$ 73,000
EXERCISE 10-6
(a) DEWITT COMPANY
Selling Expense Flexible Budget Report
For the Month Ended March 31, 2014
Difference
Sales
Variable expenses
Sales commissions
Advertising
Travel
Delivery
Total variable expenses
Budget
$170,000
$ 10,200
6,800
5,100
3,400
25,500
Actual
$170,000
$ 11,000
6,900
5,100
3,450
26,450
Favorable F
Unfavorable U
$800 U
100 U
0 U
50 U
950 U
EXERCISE 10-6 (Continued)
(b) DEWITT COMPANY
Selling Expense Flexible Budget Report
For the Month Ended March 31, 2014
Difference
Sales
Variable expenses
Sales commissions
Advertising
Travel
Delivery
Total variable
expenses
Fixed costs
Sales salaries
Depreciation
Insurance
Total fixed expenses
Total expenses
Budget
$180,000
$ 10,800
7,200
5,400
3,600
27,000
35,000
7,000
1,000
43,000
$ 70,000
Actual
$180,000
$ 11,000
6,900
5,100
3,450
26,450
35,000
7,000
1,000
43,000
$ 69,450
Favorable F
Unfavorable U
$200 U
300 F
300 F
150 F
550 F
0 U
0 U
0 U
0 U
$550 F
EXERCISE 10-7
(a) KITCHEN HELP INC.
Flexible Production Cost Budget
Activity level
Production levels 90,000 100,000 110,000
Variable costs:
Manufacturing ($6) $ 540,000 $ 600,000 $ 660,000
Administrative ($4) 360,000 400,000 440,000
(b) Let (X) represent number of units
Sales price(X) = Variable costs(X) + $240,000 + $200,000
(Sales price – Variable costs)(X) = $440,000