Problem:

Cold Steel LLP. is a medium sized steak knife producer. They manufacture steak knives year-round, but sales volume is significantly higher during summer and winter months.

Cold Steel projects annual sales volume to increase by 2% in each of 2022 and 2023. The historical sales volume in boxes of steak knives for the year just ended (2021) and the expected sales for each of the next two years (2022 and 2023) are given below.

2021 (actual) 2022 (expected) 2023 (expected)

Boxes of knives 50,000 51,000 52,020

Each quarter's sales are anticipated to follow the pattern below, as a percent of annual unit sales:

Quarter 1 (Jan. to March) 10% Quarter 3 (July to Sept.) 30%

Quarter 2 (Apr. to June) 20% Quarter 4 (Oct. to Dec.) 40%

The average selling price per box of knives was, in 2021, and is expected to be during 2022-2023, $70.

The following data pertain to production policies and manufacturing specifications followed by Cold Steel:

a. The desired ending finished goods inventory for each quarter is 10% of next quarter's expected sales in units. The ending finished goods inventory at the end of 2021 followed this pattern.

b. Each box of knives produced requires $20 of direct materials cost and $15 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 40% of direct labor costs, and fixed manufacturing overhead costs are expected to be $200,000 per quarter. These cost patterns are expected to continue throughout 2022 and 2023.

c. Variable selling and administrative expenses are estimated to be $4 per case sold, and fixed selling and administrative expenses are expected to be $60,000 per quarter.

REQUIRED:

a. Using Sales Budgets and Production Budgets for 2022, 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 2021, and Q1 of 2023, 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. Populate a budgeted income statement for 2022, by way of 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 2022. Given below are the actual results at the end of fiscal 2022.

1. Compare the actual 2022 results with the 2022 static (master) budget income statement generated in part b. Compute all variances.

2. Revise the 2022 static budget for the actual volume (i.e. assemble a flexible budget income statement for 2022) and compare the flexible budget with the actual 2022 results given below. Compute all variances.

3. Evaluate the performance of the company and its CEO for 2022 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.

2022 Actual Results

Units sold 50,700

Revenues $3,549,000

Variable cost of goods sold

Direct materials 1,018,000

Direct labor 759,200

Variable MOH 308,600

Variable selling & administrative 203,200

Total variable costs 2,289,000

Contribution margin 1,260,000

Fixed manufacturing overhead 785,000

Fixed selling & administrative expenses 245,000

Total fixed costs 1,030,000

Operating income $230,000