G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

THE UTEASE CORPORATION

The Utease Corporation has many production plants across the U.S. A newly opened plant, the Bellingham plant, produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows: STANDARD PRODUCTION COSTS Manufacturing costs (per unit based on expected activity of 24,000 units or 36,000 direct labor hours): Direct materials (2 pounds at $20) Direct labor (1.5 hours at $90) Variable overhead (1.5 hours at $20) Fixed overhead (1.5 hours at $30) Standard cost per unit Budgeted selling and administrative costs: Variable Fixed Expected sales activity: 20,000 units at $425.00 per unit Desired ending inventories: 10% of sales ACTUAL PRODUCTION COSTS Assume this is the first year of operations for the Bellingham plant. During the year, the company had the following activity: Units produced Units sold Unit selling price Direct labor hours worked Direct labor costs Direct materials purchased Direct materials costs Direct materials used Actual fixed overhead Actual variable overhead Actual selling and administrative costs 50,000 pounds $1,080,000.00 $620,000.00 $2,000,000.00 50,000 pounds $1,000,000.00 34,000hrs $3,094,000.00 23,000 units 21,500 units (Inventory = 1,500) $420.00 $5 per unit $1,800,000.00 $ 40.00 $135.00 $ 30.00 $ 45.00 $250.00

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

A. Prepare a production budget for the coming year based on the available standards, expected sales, and desired ending inventories.

Production Budget
Expected (minimum) num. of units to be sold Add: Closing inventory(10% of sales) Less: Beginning Inventory(23,000 - 21,500) Units to be produced 20,000 2,000 1,500 20,500

The amount of unit that must be produced is 20,000 (standard) plus 10% inventory (2,000) minus beginning inventory (1,500) B. Prepare a budgeted responsibility income statement for the Bellingham plant for the coming year.

Budgeted Income statement for Responsibility centre

Number of units (to be sold) Selling price / unit Direct materials (2 pounds at $20) Direct labor (1.5 hours at $90) Variable overhead (1.5 hours at $20) Fixed overhead (1.5 hours at $30) Cost of goods sold ($250 x 20,000 units) Gross Profit (revenue - COGS) Less: Selling expenses ($5 x 20,000 units) Administrative expenses Net Income 5 100,000 1,800,000 1,900,000 1,600,000 425 40 135 30 45 800,000 2,700,000 600,000 900,000 5,000,000 3,500,000 20,000 8,500,000

Net income is projected based on the available standard figures, buy subtracting Gross Profit (Sales minus COGS) with Other Expenses.

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

C.

Find the direct labor variances. Indicate if they are favorable or unfavorable and why they would be considered as such. Labor rate variance = (Actual Rate - Standard Rate) x Actual Hours of Labor Used Variance = (($3,094,000/34,000hrs) - $90) x 34,000hrs = (91-90)*34000 = 34,000 (UNFAVORABLE) The labor rate variance is above allowed standard of 30,000hrs

D. Find the direct materials variances (materials price variance and quantity variance) Direct material price variance = (Actual price - Standard price) x Actual quantity = ((1,000,000/50,000 pounds) -20) x 50,000 = 0 x 50,000 = (20-20)*50,000 = 0 (NO VARIANCE) The direct material price variance met the standard (has no change) Materials quantity variance = (actual quantity - standard quantity) x standard price per unit = (50,000 - (20,000 x 2 pounds) x $20 = (50,000 40,000) * $20 = $200,000 (UNFAVORABLE) The materials quantity variance is unfavorable because its higher than standard of 40,000 pounds of allowed material. E. Find the total over- or under applied (both fixed and variable) overhead. Would cost of goods sold be a larger or smaller expense item after the adjustment for over- or under applied overhead?

VARIABLE OVERHEAD VARIANCE

1. Variable overhead efficiency variance = (actual labor-hours - standard labor-hours allowed for actual production) x standard var. overhead rate = (34,000 hrs - (23,000 units x 1.5hrs) ) x $20 = (34,000-34,500)*$20 = 10,000 (FAVORABLE) The labor force works more productive (more efficient) than standard rate. 2. Variable overhead spending variance = actual var. overhead costs - (standard rate x actual hours of labor used) = 620,000 - ($20 x 34,000hrs)

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

= -60,000 (FAVORABLE) The Variable Overhead Spending Variance is favorable because the Actual overhead spent is lower than the budgeted amount.

FIXED OVERHEAD VARIANCE

1. Fixed Overhead Spending Variance = Actual Fixed Overhead - (Fixed Overhead Standard Rate x Budgeted Hours) =1,080,000 - ($30 x (1.5*20,000)) = 1,080,000 - (30*30,000) = 180,000 (UNFAVORABLE) The actual fixed overhead cost is higher than standard. The common cause can be events such as unexpected changes in rents, insurance, and property taxes. 2. Volume variance = Budgeted ovrhd - (Standard input hrs * predetermined rate) = 90,000 - (34,500*30) = 135,000 (FAVORABLE) The actual production volume is higher than standard.

F.

Calculate the actual plant operating profit for the year

ACTUAL OPERATING INCOME Sales (21,500 unit sold x $420) Cost of Goods Sold Direct labor 3,094,000 Direct materials 1,000,000 Actual Fixed Overhead 1,080,000 Actual Variable Overhead 620,000 Actual selling & adm.cost 2,000,000 Total Operating profit

9,030,000

7,794,000 1,236,000

The operating profit is calculated by subtracting the total sales revenue with COGS.

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

G. Use a flexible budget to explain the difference between the budgeted operating profit and the actual operating profit for the Bellingham plant for its first year of operation. What part of the difference do you believe is the plant managers responsibility? Budgeted 20,000 units 800,000 2,700,000 600,000 900,000 5,000,000 Flexible 23,000 units 920,000 3,105,000 690,000 900,000 5,615,000 Actual 23,000 units 1,000,000 3,094,000 620,000 1,080,000 5,794,000 Actual cost Over (under) Flexible Budget 80,000.00 (11,000.00) (70,000.00) 180,000.00 179,000.00

@unit Direct materials Direct labor Variable overhead Fixed overhead Total manufacturing cost 40 135 30 45 250

From the table above, we can see that the Direct Labor and Actual Variable Overhead cost are under (less than) Flexible Budget. We also see that the cost for Direct Materials and Fixed Overhead is above (more than) Flexible Budget. The plant managers should lower them as theyre considered over budget. The Plant Manager has to find a cheaper material (without sacrificing the quality) to meet the allowed standard costs. Usually, bigger raw material (bulk) order costs less.

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

H. Assume Utease Corporation is planning to change its evaluation of business operations in all plants from the profit center format to the investment center format. If the average invested capital at the Bellingham plant is $8,950,000, compute the return on investment (ROI) for the first year of operation. Use the DuPont method of evaluation to compute the return on sales (ROS) and Capital turnover (CT) for the plant.

ACTUAL OPERATING INCOME

Sales COGS Direct labor Direct materials Actual FO Actual variable Actual selling & adm.cost Op. Income Avg. Invested Capital 3,094,000 1,000,000 1,080,000 620,000 2,000,000 7,794,000 1,236,000 8,950,000 (Opr. Income / Avg. Inv. Capital)) (Opr. Income / Sales) (Sales/Avg. Inv. Cap) 13.81% 13.69% 100.89% 21,500 x 420 9,030,000

FINANCIAL RATIOS
Return on Investment Return on Sales Capital Turnover

Return of Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. Since Utease Corp. has positive ROI, it tells us that this companys asset are generating positive return to its owners/stock holders. Return of Sales (ROS) provides insight into how much profit is being produced per dollar of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles. the Capital Turnover (CT) is good because it the company is generating a lot of sales compared to the money it uses to fund the sales, thus the utilization of every Invested Capital is considered effective. Note that the ROI, ROS, and CT cannot be judged alone, they must be compared in Year-on-Year basis to be fully understood.

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

I.

Assume that under the investment center evaluation plan the plant manager will be awarded a bonus based on ROI. If the manager has the opportunity in the coming year to invest in new equipment for $500,000 that will generate incremental earnings of $75,000 per year, would the manager undertake the project? Why or why not? What other evaluation tools could Utease use for their plants that might be better? ACTUAL OPERATING INCOME 21,500 x 420 3,094,000 1,000,000 1,080,000 620,000 2,000,000 7,794,000 5 x 20,000 1,236,000 BUDGETED + NEW INVESTMENT 20,000 x 425 8,500,000 2,700,000 800,000 900,000 600,000 1900000 Op. Income Additional Income 6,900,000 1,600,000 75,000 1,675,000 8,950,000 500,000 9,450,000

Sales COGS Direct labor

9,030,000

Direct materials Actual FO Actual variable Actual selling & adm.cost Op. Income

Avg. Invested Capital

8,950,000

Avg. Inv. Capital Additional Investment

FINANCIAL RATIOS

Return on Investment

13.81%

>

17.72%

The Plant Manager should accept the opportunity to invest new equipment since it will actually increase the ROI (note that only if the next production year matches the standard cost) Other evaluation tools Utease could use is by calculating the Residual Income which is the amount by which operating earnings exceed a minimum acceptable return on average invested capital. Lets say the minimum Acceptable Return is the current year ROI = 13.81% WITHOUT THE ADDITIONAL INVESTMENT Residual Income = Operating Earnings (Minimum Acceptable Returns x Invested Capital) = 1,600,000 (13.81% x 8,950,000) = 365,005 WITH ADDITIONAL INVESTMENT Residual Income = Operating Earnings (Minimum Acceptable Returns x Invested Capital) = 1,675,000 (13.81% x 9,450,000) = 369,955 An additional residual income of 5,950 with the new investment (favorable) Other methods are by using Economic Value Added (EVA) and Balance Scorecard.

G5019 - Accounting Information for Management Planning and Control (Final Exam)

THE UTEASE CORPORATION (p.1124)

Lecturer: Widiyarto Suwarto Sumitro, MBA Student: Budi Hardiansyah (0940001101)

J.

The chief financial officer of Utease Corporation wants to include a charge in each investment centers income statement for corporate-wide administrative expenses. Should the Bellingham plant managers annual bonus be based on plant ROI after deducting the corporate wide administrative fee? Why or why not? The Plant Manager should accept the annual bonus to be based on Plants ROI only if the Corporate wide administrative fee is below the residual income. Other method is by requesting to have Stock Options, since the Plant is generating positive ROI, the stocks valuation is expected to rise in the future.

Pak Warry, Id like to say thank you for teaching and sharing your knowledge to us. Budi Hardiansyah (0940001101)