Assignment
Part 1
Adrian Power manufactures small power supplies for car stereos. The company uses flexible budgeting techniques to deal with the seasonal and cyclical nature of the business. The accounting department provided the accompanying data on budgeted manufacturing costs for the month of January:
Actual operations for January are summarized as
Required:
a. Prepare a report comparing the actual operating results with the flexible budget at actual production.
b. Write a short memo analyzing the report prepared in part (a). What likely managerial implications do you draw from this report? What are the numbers telling you?
Part 2
Artisans Shirtcraft
Background
Artisans Shirtcraft manufactures and sells hand-painted shirts of original design. The company was founded in 2005 by three sisters: Cathy, Linda, and Valerie Montgomery. Shirtcraft started out as a means of financing a hobby; profits from shirt sales were used to pay the cost of supplies. However, word of the sisters' appealing products spread quickly, eventually creating strong and widespread demand for Shirtcraft shirts. By 2009, the year of Shirtcraft's incorporation, the company no longer relied on selling at the occasional crafts fair. It now earned almost all of its revenues through sales to upscale boutiques and department stores. Shirtcraft had grown into a legitimate business, but the hobby mentality remained. The company retained a simple approach that had served it well: Buy quality materials when available at a bargain price and turn them into shirts. At this time, the sisters had a ready market for whatever they could produce.
In 2010, the sisters loosely organized Shirtcraft into three functional areas, each based around a talent at which one of them excelled. Cathy would hunt high and low for the best prices, Linda would oversee the painting of the original designs, and Valerie would sell the shirts and deal with the general annoyances of business administration. No separate departmental financial records were kept.
Demand for Shirtcraft shirts continued to grow. To finance additional production, the company had become increasingly dependent upon debt. By 2013, bankers had become an integral part of life at Shirtcraft. The sisters were devoting themselves primarily to executive administration, leaving most day-to-day operations to hired managers.
By the end of 2015, more than 75 employees were on the payroll. However, some of Shirtcraft's creditors began to get cold feet. Given the sluggish economy, some felt that continued investment in a company such as Shirtcraft would be foolish. In light of the scrutiny under which their industry presently operated, the bankers wondered about the prudence of increased and continued commitment to a company that was virtually devoid of financial controls. The bankers were particularly concerned by Shirtcraft's continuing reliance on the bargain purchase strategy. They thought the company would inevitably vacillate between periods of incurring excessive inventory holding costs for overpurchased materials and periods of lost sales due to underpurchasing. If Shirtcraft wanted the banks to commit long term to a rapidly growing credit line, the sisters would have to demonstrate their willingness to establish organizational structures and controls such as those found in larger companies.
Plan
In April 2016, a plan was established. Three functional areas were organized: purchasing, production, and sales and administration. Purchasing and production would be cost centers, each monitored by comparisons of actual costs to budgeted costs. Compensation for key personnel of the cost centers would be tied to the results of this comparison. The sisters would officially be employees of the sales and administrative department, which would hold final responsibility for all executive and corporate decisions. Key employees of sales and administration would be judged and compensated based on overall firm profitability.
For the 12 months beginning in September 2016, the sisters expected to sell 192,000 shirts at an average price of $23 per shirt. Expenses for the sales and administrative department are estimated at $750,000 for the year. Interest expenses for the period are estimated at $550,000. Incentive pay to the various departments is expected to amount to $75,000 per functional area. Under the plan, all expenses are charged to the individual department that incurs them, except for interest expenses, taxes, and incentive pay. These are treated as corporate profit and loss items. Taxes are expected to be 40 percent of corporate pretax income.
After considerable negotiations between the sisters and the purchasing manager, it was agreed that direct materials costs should average about $7 per shirt if purchases are made based on production department demand. Although this approach results in higher direct materials costs than a bargain purchase strategy, the demand-based purchase strategy is cheaper when opportunity costs such as inventory holding costs and contribution margin forgone due to lost sales are considered. Salaries and other overhead for the purchasing department are expected to amount to $150,000 for the year.
Discussions with the production manager led to estimates that production will use fixed overhead costing $240,000. Production's variable overhead consists wholly of direct labor. An average of 1/2 hour of direct labor, at a cost of $6 per hour, is needed for each shirt.
Previously, financial records were kept only on a corporate level. Under the new plan, cost records, both budgeted and actual, will be kept for each department. Of Shirtcraft's sales, 40 percent are expected to occur during September, October, November, and December. Sales are divided equally between months within each group of months. All costs that do not vary with shirt production are divided equally throughout the year. All monthly purchasing and production are based on that month's orders and are assumed to be completely sold during that month. Only negligible inventory is held.
Required:
In general terms, consider the changes in Shirtcraft due to growth. How is the company different from an organizational standpoint? What role do budgeting and cost centers have in attempting to meet the challenges presented by this growth?
Minimum 600 words - Required to have at least 3 references from a creditable source. APA format. References need to be in APA format.
Part 3
St. Ashton Resorts operates high-end, all-inclusive vacation destinations in 12 locations, including Maui, Hawaii; Los Cabos, Mexico; and the Great Barrier Reef, Australia. At St. Ashton properties, the guest pays a flat daily rate that includes lodging, all meals and beverages, golf, and spa treatments.
Each resort is treated as a profit center, and the managers of the resort receive bonuses for achieving or beating the budget. Under the profit center approach, each resort management team is rewarded based on the difference between budgeted and actual profits.
Last year, St. Ashton switched its budgeting methodology. Previously, the CFO's office of St. Ashton set each property's annual budget based on the projected occupancy rate and expected costs. The annual budget was then broken down into monthly budgets adjusted for the number of days in the month and any seasonal fluctuation in the occupancy rate.
The new CFO, hired in the middle of last year, felt the old budget approach, which was set before the year began, did not take into account the dynamic nature of the tourism market. Travelers used to plan their leisure travel 6-9 months ahead, which allowed resorts to develop reasonably accurate forecasts of demand and hence accurate budgets. The Internet and global markets caused the once-predictable demand to become more unpredictable. The old budget was out of date shortly after the new year began, causing managers rewarded under the budget great consternation. The new CFO changed the budgeting system for the current fiscal year to a monthly rolling model. Before the current fiscal year began, the CFO's office sets the spending targets per guest room occupied for each department in each resort (lodging, food and beverage, golf, and spa) as well as annual budgets to cover each department's fixed costs. The annual departmental budgets are converted to monthly budgets by taking the annual budget, dividing it by 365, and multiplying that by the number of days in the month. The following table illustrates the new budget model for the St. Ashton Maui Resort for the current year.
Required:
a. What is the St. Ashton Maui Resort's break-even occupancy rate?
b. Prepare the St. Ashton Maui Resort monthly budget for October (with 31 days) for the current year before the current year begins.
c. To evaluate and reward the performance of the St. Ashton Maui managers under the new budget model, St. Ashton uses the actual number of guest days in the month, the budgeted variable costs per room, and budgeted fixed costs to establish what the target expenses for the month should have been. This is then compared to the actual expenses incurred. Managerial bonuses are paid based on the difference between the target and the actual expenses. For October of the current year, the St. Ashton Maui had 10,500 guest days at $1,700 per day and reported the following revenues and expenses:
Prepare the performance report of the St. Ashton Maui Resort for October that compares actual to budgeted results.
d. Based on the performance report you prepared in part (c), briefly evaluate the performance of the St. Ashton Maui Resort management team.
e. In reviewing the performance of the St. Ashton Maui Resort since the beginning of the current year, St. Ashton's CFO noticed that while favorable cost variances have resulted in most months, an alarming trend in occupancy rates is emerging:
The St. Ashton Maui Resort managers attribute the falling occupancy rate to new luxury resorts opening in the Hawaiian Islands. However, similar trends in cost variances and occupancy rates exist at other St. Ashton resorts where the budgeting system has been changed to the system used at the St. Ashton Maui Resort.
Discuss possible reasons for the declining occupancy rate at the St. Ashton Maui resort.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.
Attachment:- Adrian-Power-Manufactures-Data.rar