PROBLEM 24–5A
(a) OPTIMUS COMPANY
Home Division
Responsibility Report
For the Year Ended December 31, 2017
(in thousands of dollars)
Budget
Actual
Sales
Variable costs
Cost of goods sold
Selling and administrative
Total
$1,300
620
100
720
$1,400
665
125
790
(b) The performance of the manager of the Home Division was slightly
above budget expectations for the year. The item that top manage-
ment would likely investigate is the reason why variable cost of
PROBLEM 24-5A (Continued)
(c) 1.
$360,000 + ($665,000 X 5%)
$2,000,000
= 19.7%.
PROBLEM 24–6A
(a) No. 1
To Cutting Department Manager—Seattle Division Month: January
Controllable Costs:
Budget
Actual
Fav/Unfav
Indirect labor
Indirect materials
$ 70,000
46,000
$ 73,000
47,900
$ 3,000 U
1,900 U
No. 2
To Division Production Manager—Seattle Month: January
Controllable Costs:
Budget
Actual
Fav/Unfav
Seattle Division
Departments:
$ 51,000
$ 52,500
$ 1,500 U
No. 3
To Vice President—Production Month: January
Controllable Costs:
Budget
Actual
Fav/Unfav
V-P Production
Divisions:
$ 64,000
$ 65,000
$ 1,000 U
PROBLEM 24-6A (Continued)
No. 4
To President Month: January
Controllable Costs:
Budget
Actual
Fav/Unfav
President
Vice-Presidents:
$ 74,200
$ 76,400
$ 2,200 U
(b) 1. Within the Seattle division the rankings of the department man-
agers were: (1) Finishing, (2) Shaping, and (3) Cutting. If the rankings
2. At the division manager level, the rankings were: (1) Denver,
CD24 CURRENT DESIGNS
(a) Current Designs
Rotomolded Line
Manufacturing Budget
For the Year Ended December 31, 2017
4,000 kayaks
Units to be produced
Calculation
Amount budgeted
Costs:
Variable costs
Polyethylene powder
4,000 X 54 X $1.50
$ 324,000
Finishing kits
4,000 X $170
680,000
4,000 X 3 X $12
144,000
Indirect materials
Maintenance and utilities
88,000
Total variable costs
Fixed costs
Supervision
Insurance
Total fixed costs
214,200
Total costs
$1,664,000
CD24 (Continued)
(b) Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
For the Quarter Ended March 31, 2017
Units to be produced
900 kayaks
1,000 kayaks
1,050 kayaks
Costs:
Variable costs
Polyethylene powder
(54 X 1.50 per unit)
$ 72,900
$ 81,000
$ 85,050.00
Finishing kits
($170 per unit)
153,000
170,000
178,500.00
$15 per hour)
Labor—type II
$12 per hour)
Indirect materials
Labor—type I
Manufacturing supplies
($13.45** per unit)
12,105
13,450
14,122.50
Maintenance and utilities
($22*** per unit)
19,800
22,000
23,100.00
Fixed costs
22,500
22,500
22,500.00
Total fixed costs
Total costs
Total variable costs
CD24 (Continued)
(c) Current Designs
Rotomolded Line
Manufacturing Flexible Budget Report
For the Quarter Ended March 31, 2017
Units to be produced
Budget for
1,050 kayaks
Actual costs for
1,050 kayaks
Difference
F = favorable
U = unfavorable
Costs:
Variable costs
Polyethylene
powder
$ 85,050.00
$ 87,000.00
$1,950.00
U
U
U
supplies
U
Maintenance and
utilities
23,100.00
26,000.00
2,900.00
U
Total variable costs
380,572.50
387,050.00
6,477.50
U
Fixed costs
F
Total fixed costs
F
Total costs
U
BYP 24-1 DECISION-MAKING ACROSS THE ORGANIZATION
(a) 1. The primary causes of the loss in net income were the decrease in
the number of boarding days and the decrease in the boarding
fee. The number of boarding days decreased by 2,900 or approxi-
mately 13% (2,900 days ÷ 21,900 days), and the boarding fee
2. Management did a poor job in controlling variable expenses.
Given that boarding days declined by about 13%, variable
expenses should decline by about 13%, or more precisely,
variable expenses should decline by $25,520 ($192,720 X
3. Management’s decisions to stay competitive probably were sound.
Given the decline in boarding days, the decision not to replace the
BYP 24-1 (Continued)
(b) GREEN PASTURES
Income Statement
Flexible Budget Report
For the Year Ended December 31, 2017
Difference
Boarding days (BD)
Sales ($25)
Less variable expenses
Feed ($5)
Veterinary fees ($3)
Budget at
19,000 BD
$475,000
95,000
57,000
Actual at
19,000 BD
$380,000
104,390
58,838
Favorable F
Unfavorable U
$ 95,000 U
9,390 U
1,838 U
(c) 1. The primary causes of the decrease in net income are the decreases
in boarding rates and volume. The average daily rate charged
was $20 = ($380,000 ÷ 19,000). This rate resulted in a decrease in
BYP 24-1 (Continued)
2. Management did a poor job of controlling variable expenses. These
expenses in total were $11,190 over budget or 6.7%, or ($11,190 ÷
$167,200).
Moreover, each individual variable expense was over budget,
(d) Given that the industry is “extremely competitive,” management should
consider two options. One, become the lowest cost operator. If Green
Pastures is the company with the lowest operating costs, it can under-
price its competitors and take customers away from them (increasing
Option two is to offer its customers a superior product or service. If cus–
tomers perceive that Green Pastures is the “best” boarding stable in
BYP 24-2 MANAGERIAL ANALYSIS
(a) Mary Gammel—Profit Center: Responsible for sales, inventory cost,
advertising, sales personnel, printing, and travel. She is not responsible
for the assets invested in her division and probably does not control
the rent or depreciation costs either. As a profit center manager she
might have control of the insurance, but she probably does not.
(b) Mary Gammel Budget differences: The cost of goods sold is 28%
($42,000 ÷ $150,000) above budget and so should definitely be brought
to her attention. Travel is 30% ($6,000 ÷ $20,000) below budget.
Students may differ as to whether they believe that this should be
brought to her attention. The differences in rent and depreciation should
not be brought to her attention because she does not control those
costs.
BYP 24-2 (Continued)
Jose Gomez Budget differences: As manager of an investment center,
Mr. Gomez is responsible for all categories of the budget. The
selection in this case would be which differences merit his attention.
Any decrease in a company’s gross profit rate (gross profit ÷ sales) is
BYP 24-3 REAL-WORLD FOCUS
(a) The company’s costs do not increase proportionately with the revenues
increase in the third and fourth quarter because the behavior of the
costs is primarily fixed.
BYP 24-4 REAL-WORLD FOCUS
(a) The two most common pain points are (1) dealing with other managers
and (2) technology issues, mainly frustration of budgeting in Excel
spreadsheets.
(d) The most commonly defined range of acceptable tolerance levels was
that variances were tolerated up to 5 to 10 percent. Beyond that level
there were consequences.
BYP 24-5 COMMUNICATION ACTIVITY
(a) Fred Bedner should be able to control all the variable costs and the
fixed costs of supervision (but not his portion) and inspection.
Insurance and depreciation ordinarily are not the responsibility of the
department manager.
(c) FLEMING COMPANY
Production Department
Manufacturing Overhead Flexible Budget Report
For the Month Ended
Difference
Variable costs
Indirect materials ($11)
Indirect labor ($6)
Fixed costs
Supervision
Inspection costs
Insurance expense
Budget at
1,500 units
$16,500
9,000
17,000
1,000
2,000
Actual at
1,500 units
$22,500
13,500
18,400
1,200
2,200
Favorable F
Unfavorable U
$ 6,000 U
4,500 U
1,400 U
200 U
200 U
(d) A production department is a cost center. Thus, the report should include
only the costs that are controllable by the production manager. This
BYP 24-5 (Continued)
FLEMING COMPANY
Production Department
Manufacturing Overhead Responsibility Report
For the Month Ended
Difference
Controllable Cost
Budget
Actual
Favorable F
Unfavorable U
Indirect materials
Indirect labor
Maintenance expense
$16,500
9,000
7,500
$22,500
13,500
8,200
$ 6,000 U
4,500 U
700 U
*$10,000 is deducted from both budget and actual for Mr. Bedner’s cost.
To: Mr. Fred Bedner, Production Manager
From: , Vice President of Production
Subject: Performance Evaluation for the Month of XXXXX
Your performance in controlling costs that are your responsibility was
very disappointing in the month of XXXXX. As indicated in the accom-
Indirect labor 50%).
BYP 24-5 (Continued)
Fred, it is imperative that you get costs under control in your department
as soon as possible.
BYP 24-6 ETHICS CASE
(a) The stakeholders in this ethical situation are:
The employees and managers of each investment center.
The central management and chief executive officer.
(b) Pressure to perform is a frequently identified cause for unethical
conduct. Employees are more prone to engage in unethical conduct
when unreasonable demands are made upon them. Rather than lose
(c) The company might maintain open lines of communication with its em-
ployees to better know the pressures of its managers. By “keeping in
touch,” the company may avoid making unreasonable demands on its
BYP 24-7 ALL ABOUT YOU
(a) The basic idea is to set up individual envelopes for different expense
categories. Once you have used up the money in a particular envelope,
you can’t use more. Begin by preparing a monthly budget. Identify
those items that you will pay in cash. These would include things like
(b) Answers will vary by student.
BYP 24-8 CONSIDERING YOUR COSTS AND BENEFITS
In general, in past years it has usually been considered prudent to
purchase a home rather than to rent. As noted, over time, home prices have
usually appreciated in most parts of the country. Mortgage interest
provides some tax relief, and by purchasing a home you get some control
over your housing costs. However, recent turbulence in the housing market