Sidiqi Bowling Ball Inc. manufactures bowling balls at its Kabul factory. The factory has been experiencing problems as shown by its April contribution format income statement below: Budgeted Actual Sales (15,000 pools) . . . . . . . . . . . . . . . . . . $450,000 $450,000 Variable expenses: Variable cost of goods sold * . . . . . . . . . . 180,000 196,290 Variable selling expenses . . . . . . . . . . . . . 20,000 20,000 Total variable expenses . . . . . . . . . . . . . . . . 200,000 216,290 Contribution margin . . . . . . . . . . . . . . . . . . . 250,000 233,710 Fixed expenses: Manufacturing overhead . . . . . . . . . . . . . 130,000 130,000 Selling and administrative . . . . . . . . . . . . 84,000 84,000 Total fixed expenses . . . . . . . . . . . . . . . . . . 214,000 214,000 Net operating income . . . . . . . . . . . . . . . . . $ 36,000 $ 19,710 *Contains direct materials, direct labor, and variable manufacturing overhead. Nargis Tafari, has recently been appointed manager of the Kabul factory, and has been given instructions to “fix things.” Upon reviewing the plant’s income statement, Nargis has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard cost per bowling ball: Standard Quantity or Hours Standard Price or Rate Standard Cost Direct materials . . . . .. . . . . . . . 3.0 pounds $2.00 per pound $ 6.00 Direct labor . . . . . . . . . . . . . . . . 0.8 hours $6.00 per hour 4.80 Variable manufacturing overhead . 0.4 hours * $3.00 per hour 1.20 Total standard cost . . . . . . . .. . . . . . $12.00 *Based on machine-hours. During April the plant produced 15,000 bowling balls and incurred the following costs: a. Purchased 60,000 pounds of materials at a cost of $1.95 per pound. b. Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 11,800 direct labor-hours at a cost of $7.00 per hour. d. Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of 5,900 machine-hours was recorded. It is the company’s policy to close all variances to cost of goods sold on a monthly basis. Required: 1. Compute the following variances for April: a. Materials price and quantity variances. b. Labor rate and efficiency variances. c. Variable overhead rate and efficiency variances.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
2. Sidiqi Bowling Ball Inc. manufactures bowling balls at its Kabul factory. The factory has been experiencing problems as shown by its April contribution format income statement below:
Budgeted Actual
Sales (15,000 pools) . . . . . . . . . . . . . . . . . . $450,000 $450,000
Variable expenses:
Variable cost of goods sold * . . . . . . . . . . 180,000 196,290
Variable selling expenses . . . . . . . . . . . . . 20,000 20,000
Total variable expenses . . . . . . . . . . . . . . . . 200,000 216,290
Contribution margin . . . . . . . . . . . . . . . . . . . 250,000 233,710
Fixed expenses:
Manufacturing overhead . . . . . . . . . . . . . 130,000 130,000
Selling and administrative . . . . . . . . . . . . 84,000 84,000
Total fixed expenses . . . . . . . . . . . . . . . . . . 214,000 214,000
Net operating income . . . . . . . . . . . . . . . . . $ 36,000 $ 19,710
*Contains direct materials, direct labor, and variable manufacturing overhead.
Nargis Tafari, has recently been appointed manager of the Kabul factory, and has been given instructions to “fix things.” Upon reviewing the plant’s income statement, Nargis has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following
Standard Quantity or Hours Standard Price or Rate Standard Cost
Direct materials . . . . .. . . . . . . . 3.0 pounds $2.00 per pound $ 6.00
Direct labor . . . . . . . . . . . . . . . . 0.8 hours $6.00 per hour 4.80
Variable manufacturing overhead . 0.4 hours * $3.00 per hour 1.20
Total standard cost . . . . . . . .. . . . . . $12.00
*Based on machine-hours.
During April the plant produced 15,000 bowling balls and incurred the following costs:
a. Purchased 60,000 pounds of materials at a cost of $1.95 per pound.
b. Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c. Worked 11,800 direct labor-hours at a cost of $7.00 per hour.
d. Incurred variable
It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for April:
a. Materials price and quantity variances.
b. Labor rate and efficiency variances.
c. Variable overhead rate and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. What impact did this figure have on the company’s income statement? Show computations.
- Pick out the two most significant variances that you computed in (1) above. Explain to Nargis possible causes of these variances
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