Bouncy Corp. is a small toy manufacturer that makes a high bounce ball for young children. They
Question:
Bouncy Corp. is a small toy manufacturer that makes a high bounce ball for young children. They produce these balls year-round, but sales volume is significantly higher during spring and winter months.
Bouncy forecasts annual sales volume to increase by 5% in each of 2023 and 2024. The historical sales volume in cases of high bounce balls for the year just ended (2022) and the expected sales for each of the next two years (2023 and 2024) are given below.
2022 (actual) 2023 (expected) 2024 (expected)
Cases of knives 700,000 735,000 771,750
Each quarter’s sales are anticipated to follow the pattern below, as a percent of annual unit sales:
Quarter 1 (Jan. to March) 30% Quarter 3 (July to Sept.) 10%
Quarter 2 (Apr. to June) 20% Quarter 4 (Oct. to Dec.) 40%
The average selling price per case of balls was, in 2022, and is expected to be during 2023-2024, $50.
The following data pertain to production policies and manufacturing specifications followed by Bouncy:
a. The desired ending finished goods inventory for each quarter is 20% of next quarter’s expected sales in units. The ending finished goods inventory at the end of 2022 followed this pattern.
b. Each case of balls produced typically requires $15 of direct materials cost and $8 of direct labor cost. Other materials used in production of these units are insignificant and are treated as indirect materials. Variable manufacturing overhead costs are expected to be 50% of direct labor costs, and fixed manufacturing overhead costs are expected to be $1,200,000 per quarter. These cost patterns are expected to continue throughout 2023 and 2024.
c. Variable selling and administrative expenses are estimated to be $5 per case sold, and fixed selling and administrative expenses are expected to be $200,000 per quarter.
REQUIRED:
a. Prepare Sales Budgets and Production Budgets for 2023, by quarter and for the year (so you’ll need at least 5 columns of numeric data for each budget schedule) (Hint: For some of the following budget schedules you will also need to complete the schedules for some combination of Q4 of 2022, and Q1 of 2024, so it would be wise to compute those values wherever you can, as some of this data will be necessary for later calculations). Note that beginning and ending inventory for the year correspond with the beginning inventory for Q1 and ending inventory for Q4.
b. Prepare a budgeted income statement for 2023 using the contribution format (that is, costs grouped by cost behavior), by quarter and for the year (so you’ll need at least 5 columns of numeric data for each budget schedule)
c. Fast forward. It’s now the end of 2023. Given below are the actual results at the end of fiscal 2023.
1. Compare the actual 2023 results with the 2023 static (master) budget income statement generated in part b. Compute all variances.
2. Revise the 2023 static budget for the actual volume (i.e. assemble a flexible budget income statement for 2023) and compare the flexible budget with the actual 2023 results given below. Compute all variances.
3. Evaluate the performance of the company and its CEO for 2023 using the flex budget variances. How did he/she perform?
4. Evaluate the CEO using the static budget variances. How did he/she perform?
5. Under what condition(s) is a static budget operating income variance better for evaluating a profit center manager’s performance than a flexible budget operating income variance? Why? Make sure to include why the agency problem would likely be reduced because of using the static budget variance evaluation (instead of a flex budget variance evaluation) in the condition(s) that you identified.
6. Under what condition(s) is a flexible budget operating income variance better for evaluating a profit center manager’s performance than a static budget operating income variance? Why? Make sure to include why the agency problem would likely be reduced because of using the flexible budget variance evaluation (instead of a static budget variance evaluation) in the condition(s) that you identified.
2023 Actual Results | |
Units sold | 721,800 |
Revenues | $36,090,000 |
Variable cost of goods sold | |
Direct Materials | 10,721,000 |
Direct Labor | 5,752,000 |
Variable MOH | $2,923,000 |
Variable selling & administrative | 3,591,000 |
Total variable costs | 22,987,000 |
Contribution margin | 13,103,000 |
Fixed manufacturing overhead | 5,120,000 |
Fixed selling & administrative expenses | 953,000 |
Total fixed costs | 6,073,000 |
Operating income | $7,030,000 |
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey