Assignment:
Part. 1: Responsibility and controllability.
Consider each of the following independent situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for commercial properties. The company also contracts to service both its own and other brands of fountains. Prestige has a manufactur-ing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair fountains), and 12 service vans. The service technicians drive to customer sites to service the fountains. Prestige owns the vans, pays for the gas, and supplies fountain parts, but the techni-cians own their own tools.
1. In the manufacturing plant, the production manager is not happy with the motors that the purchasing manager has been purchasing. In May, the production manager stops requesting motors from the sup-ply warehouse and starts purchasing them directly from a different motor manufacturer. Actual materi-als costs in May are higher than budgeted.
2. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not figured into the budget.
3. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the driver has been driving the van for personal use.
4. Regency Mall, one of Prestige's fountain service customers, calls the service people only for emer-gencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer.
5. Prestige's service technicians are paid an hourly wage of $22, regardless of experience or time with the company. As a result of an analysis performed last month, the service manager determined that service technicians in their first year of employment worked on average 20% more slowly than other employees. Prestige bills customers per service call, not per hour.
6. The cost of health insurance for service technicians has increased by 40% this year, which caused the actual health insurance costs to greatly exceed the budgeted health insurance costs for the service technicians. For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest ways to solve the problem or to improve the situation.
Part. 2: Cash flow analysis, sensitivity analysis.
HealthMart is a retail store selling home oxygen equip-ment. HealthMart also services home oxygen equipment, for which the company bills customers monthly. HealthMart has budgeted for increases in service revenue of $200 each month due to a recent advertising campaign. The forecast of sales and service revenue for the March-June 2018 is as follows: Sales and Service Revenues Budget March-June 2018 Month Expected Sales Revenue $ 6,000 May June 8,000 7,500 9,000 March April Expected Service Revenue Total Revenue $4,000 4,200 4,400 4,600 $ 10,000 12,200 11,900 13,600Almost all of the sales revenues of the oxygen equipment are credit card sales; cash sales are negligible. The credit card company deposits 97% of the revenues recorded each day into HealthMart's account over-night. For the servicing of home oxygen equipment, 60% of oxygen services billed each month is collected in the month of the service, and 40% is collected in the month following the service.
1. Calculate the cash that HealthMart expects to collect in April, May, and June 2018 from sales and service revenues. Show calculations for each month.
2. HealthMart has budgeted expenditures for May of $11,000 and requires a minimum cash balance of $250 at the end of each month. It has a cash balance on May 1 of $400. a. Given your answer to requirement 1, will HealthMart need to borrow cash to cover its payments for May and maintain a minimum cash balance of $250 at the end of May? b. Assume (independently for each situation) that (1) May total revenues might be 10% lower or that (2) total costs might be 5% higher. Under each of those two scenarios, show the total net cash for May and the amount HealthMart would have to borrow to cover its cash payments for May and maintain a minimum cash balance of $250 at the end of May. (Again, assume a balance of $400 on May 1.)
3. Why do HealthMart's managers prepare a cash budget in addition to the revenue, expenses, and oper-ating income budget? Has preparing the cash budget been helpful? Explain briefly.
Part. 3: Flexible-budget preparation and analysis.
Bank Management Printers, Inc., produces luxury check-books with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September 2017 included these data: Number of checkbooks Selling price per book 15,000 Variable cost per book $ 20 $ Fixed costs for the month $145,000 The actual results for September 2017 were as follows: Number of checkbooks produced and sold Average selling price per book Variable cost per book Fixed costs for the month $ $ 12,000 21 7 $150,000 The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company's management accountant, you have been asked to provide explanations for the disappointing September results. Bank Management develops its flexible budget on the basis of budgeted per-output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs.
1. Prepare a static-budget-based variance analysis of the September performance.
2. Prepare a flexible-budget-based variance analysis of the September performance.
3. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer.
Part.4: Materials and manufacturing labor variances, standard costs.
Dawson, Inc., is a privately held furni-ture manufacturer. For August 2017, Dawson had the following standards for one of its products, a wicker chair: Standards per Chair Direct materials Direct manufacturing labor 3 square yards of input at $5.50 per square yard 0.5 hour of input at $10.50 per hour The following data were compiled regarding actual performance: actual output units (chairs) produced, 2,200; square yards of input purchased and used, 6,200; price per square yard, $5.70; direct manufacturing labor costs, $9,844; actual hours of input, 920; labor price per hour, $10.70.
1. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred.
2. Suppose 8,700 square yards of materials were purchased (at $5.70 per square yard), even though only 6,200 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.
"Budgets meet the cost-benefit test. They force managers to act differently." Do you agree? Explain.
"Strategy, plans, and budgets are unrelated to one another." Do you agree? Explain.
How does variance analysis help in continuous improvement?
Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?