BSJC Problem 10-50

Background - Input Area

Spring Manufacturing Company makes two components identified as C12 and D57. Sel

Requirements for each finished component:

RM1
RM2
RM3
Direct labor
Product information:
Sales price
Sales units
Estimated beginning inventory (units)
Desired ending inventory (units)

Cost per pound

Estimated beginning inventory in pounds
Desired ending inventory in pounds

The firm expects the average wage rate to be $25 per hour in 2019. Spring Manufacturin
year the firm determines the overhead application rate for the year based on the budgete
maintains negligible WIP inventory and expects the cost per unit for both beginning and e
be identical.

Factory Overhead Information

Indirect materials-variable
Miscellaneous supplies and tools-variable
Indirect labor-variable
Supervision-fixed
Payroll taxes and fringe benefits-variable
Maintenance costs-fixed
Maintenance costs-variable
Depreciation-fixed
Heat, light, and power-fixed
Heat, light, and power-variable
 Total

Advertising
Sales salaries
Travel and entertainment
Depreciation-warehouse
Office salaries
Executive salaries
Supplies
Depreciation-office
Total

Income Tax Rate 40%

Requirements

Prepare the following schedules or statements for 2019:

1. Sales budget
2. Production budget
3. Direct materials purchases budget (units and dollars)
4. Direct labor budget
5. Factory overhead budget
6. Cost of goods sold and ending inventory budgets
7. Selling and administrative expense budget
8. Budgeted Income Statement

Solutions - To formulate

Spring Manufacturing Company

Sales Budget 2019

Sales (in units)

× Price Per Unit
Total Revenue

Spring Manufacturing Company

Production Budget 2019
 Sales (in units)
+ Desired finished goods ending inventory
Total units needed
- Beginning finished goods inventory
Production unit

Spring Manufacturing Company

Raw Materials Purchase Budget 2019

Raw Material 1
Production unit
Pounds per unit
RM1 needed in production (pounds)
Desired ending inventory
Total needed (pounds)
Beginning inventory
Total RM1 to purchase (pounds)
Cost per pound
Budgeted purchase cost of RM1

Raw Material 2
Production unit
Pounds per unit
RM2 needed in production (pounds)
Desired ending inventory
Total RM2 needed (pounds)
Beginning inventory
Pounds of RM2 to purchase
Cost per pound
Budgeted purchase cost of RM2

Raw Material 3
Production unit
Pounds per unit
RM3 needed in production (pounds)
Desired ending inventory
Total units of RM3 needed
Beginning inventory
Units of RM3 to purchase
Cost per pound
Budgeted purchase cost of RM3
 Spring Manufacturing Company
Direct Labor Budget 2019

Budgeted production
Direct labor hours per unit
Total direct labor hours needed
Hourly wage rate
Budgeted direct labor costs

Spring Manufacturing Company

Factory Overhead Budget 2019

Variable Factory Overhead:

Indirect materials
Miscellaneous supplies and tools
Indirect labor
Payroll taxes and fringe benefits
Maintenance costs
Heat, light, and power
Total Variable Factory Overhead

Fixed Factory Overhead:

Supervision
Maintenance costs
Heat, light, and power
Total Cash Fixed Factory Overhead
Depreciation
Total Fixed Factory Overhead
Total Budgeted Factory Overhead

Spring Manufacturing Company

Budgeted Cost of Goods Sold and Finished Goods Endin

Sales volume
Cost per unit (Schedules 1 and 2)
Cost of goods sold

Finished goods ending inventory

Cost per unit (Schedules 1 and 2)
Budgeted finished goods ending inventory
Schedule 1: Cost Card - Product C12

Cost Element
Raw material 1
Raw material 3
Direct labor
Variable factory OH ($326,080/50,950)
Fixed factory OH ($254,750/50,950)
Cost Per Unit

Schedule 2: Cost Card - Product D57

Cost Element
Raw material 1
Raw material 2
Raw material 3
Direct labor
Variable factory OH ($326,080/50,950)
Fixed factory OH ($254,750/50,950)
Cost Per Unit

Spring Manufacturing Company

Selling and Administrative Expense Budget 2

Selling Expenses:
Advertising
Sales salaries
Travel and entertainment
Depreciation
Total selling expenses

Administrative expenses:
Offices salaries
Executive salaries
Supplies
Depreciation
Total administrative expenses
Total selling and administrative expenses

Spring Manufacturing Company

Budgeted Income Statement For the Year 20
Sales
Cost of goods sold
Gross profit
Selling and admin expenses
Pretax net operating income
Income taxes (40%)
After-tax op income
tified as C12 and D57. Selected budgetary data for 2019 follow:

Finished Components
C12 D57

10 pounds 8 pounds
0 4 pounds
2 pounds 1 pound
2 hours 3 hours

$150 $220
12,000 9,000
400 150
300 200

Direct Materials Information

RM1 RM2 RM3
$2.00 $2.50 $0.50
3,000 1,500 1,000
4,000 1,000 1,500

2019. Spring Manufacturing uses DLHs to apply overhead. Each

year based on the budgeted ouput for the year. The company
unit for both beginning and ending finished products inventories to

actory Overhead Information

$10,000
$5,000
$40,000
$120,000
$250,000
$20,000
$10,080
$71,330
$43,420
$11,000
 $580,830

Selling and Administrative Expense

Information

$60,000
$200,000
$60,000
$5,000
$60,000
$250,000
$4,000
$6,000
$645,000

anufacturing Company
les Budget 2019

C12 D57 Total

12,000 9,000
$150 $220
$ 1,800,000 $ 1,980,000 3,780,000

anufacturing Company
uction Budget 2019

C12 D57
 12,000 9,000
300 200
12,300 9,200
400 150
11,900 9,050

anufacturing Company
als Purchase Budget 2019

C12 D57 Total

11,900 9,050
10 8
119,000 72,400 191,400
4,000
195,400
3,000
192,400
$2.00
$384,800

C12 D57 Total

11,900 9,050
0 4
0 36,200 36,200
1,000
37,200
1,500
35,700
$2.50
$89,250

C12 D57 Total

11,900 9,050
2 1
23,800 9,050 32,850
1,500
34,350
1,000
33,350
$0.50
$16,675
anufacturing Company
Labor Budget 2019

C12 D57 Total

11,900 9,050
2 3
23,800 27,150 50,950
$25
$1,273,750

anufacturing Company
Overhead Budget 2019

$10,000
$5,000
$40,000
$250,000
$10,080
$11,000
$326,080

$120,000
$20,000
$43,420
$183,420
$71,330
$254,750
$580,830

anufacturing Company
and Finished Goods Ending Inventory 2019

C12 D57 Total

12,000 9,000
$93.80 $135.70
$1,125,600 $1,221,300 $2,346,900

C12 D57 Total

300 200
$93.80 $135.70
$28,140 $27,140 $55,280
 Inputs Budget Cost
Unit Input Cost Quantity Per Unit
$2.00 10 $20.00
$0.50 2 $1.00
$25.00 2 $50.00
$6.40 2 $12.80
$5.00 2 $10.00
$93.80

Inputs Budget Cost

Unit Input Cost Quantity Per Unit
$2.00 8 $16.00
$2.50 4 $10.00
$0.50 1 $0.50
$25.00 3 $75.00
$6.40 3 $19.20
$5.00 3 $15.00
$135.70

anufacturing Company
nistrative Expense Budget 2019

$60,000
$200,000
$60,000
$5,000
$325,000

$60,000
$250,000
$4,000
$6,000
$320,000
$645,000

anufacturing Company
e Statement For the Year 2019

C12 D57 Total

$1,800,000 $1,980,000 $3,780,000
(1,125,600) (1,221,300) (2,346,900)
$674,400 $758,700 $1,433,100
(645,000)
$788,100
315,240
$472,860
 Projected Sales and Production Volume
(In Packets) May June July August September
Sales 3,000 4,000 5,000 6,000 7,000
Production 3,000 4,000 5,025 6,050 7,050

(a) Prepare a monthly schedule for cash collection for July and August 20x3

May June July August

Sales (Packet) 3,000 4,000 5,000 6,000
Price ($) 40 36 36 36
Sales ($) $120,000 $144,000 $180,000 $216,000
Sales on account(70% of sales)
1st Month (30% of 84,000 100,800 126,000 151,200
sales)
2nd Month (85% of 36,000 43,200 54,000 64,800
Cash Collection sales on account)
3rd Month (10% of 71,400 85,680 107,100 128,520
sales on account) 8,400 10,080 12,600 15,120

Monthly Schedule for Cash Collection for July & August 20x3
Cash Collection $
Month of Sales
July August
May 8,400 -
June 85,680 10,080
July 54,000 107,100
August - 64,800
Total 148,080 181,980

(b) Prepare a monthly schedule of cash disbursements for raw material purchases for July and August 20x3
(In Packets) May June July August
Production (kg) 3,000 4,000 5,025 6,050
Raw materials used in production (kg) 15,000 20,000 25,125 30,250
Beginning raw material (kg) 1,500 2,000 2,513 3,000
Ending raw material (kg) 2,000 2,513 3,000 3,000
Raw materials to purchase (kg) 15,500 20,513 25,612 30,250

Month of Purchase June July August

Raw materials required to purchase (kg 20,513 25,612 30,250
Purchase ($) + 80% of 80% on 51,283 64,030 75,625
Cash account) 43,078 53,786 63,525
Disbursements 2nd Month (20% of
($) 80% on account) 8,206 10,245 12,100

Monthly schedule of cash disbursements of raw materials for July and August 20x3
Cash disbursements $
Month of Sales
July August
 June 8,206 -
July 53,786 10,245
August - 63,525
Total 61,992 73,770

(c) Prepare PC's monthly cash budget for July and August 20x3

Direct labour
July August
Hours needed:High skilled 670 807
Salaries : High skilled ($) 13,400 16,140
Hours needed: Medium skilled 1,340 1,614
Salaries : Medium skilled ($) 13,400 16,140
Total salaries paid ($) 26,800 32,280

Manufacturing overhead
July August
Production (Packets) 5,025 6,050
Variable overhead (packets) ($) 6,030 7,260
Varible overhead (Direct labor) ($) 10,050 12,105
Fixed overhead (First 4,000) ($) 8,000 8,000
Fixed overhead (Next 1,000) ($) 2,000 3,000
Total production overhead ($) 26,080 30,365

Selling and administrative costs

July ($) August ($)
Fixed selling and administrative cost 5,625 5,625
Expected sales revenue 180,000 216,000
Variable selling and administrative cost 5,062.50 6,075.00
Total selling and administrative cost 10,688 11,700

PC's monthly schedule of cash budget for July and August 20x3
July ($) August ($)
Beginning cash 40,000 40,441
Cash Collections
Cash collected from sales 148,080 181,980
Cash DIsbursements
Cash disbursement for raw materials 61,992 73,770
Salary paid for high skilled labor 13,400 16,140
Salary paid for medium skilled labor 13,400 16,140
Variable Overhead (Packets) 6,030 7,260
Varible overhead (Direct labor) 10,050 12,105
Fixed overhead (First 4,000) 8,000 8,000
Fixed overhead (Next 1,000) 2,000 3,000
Fixed selling and administrative cost 5,625 5,625
Variable selling and administrative cost 5,063 6,075
*Equipment Purchase 30,000 0
Cash surplus/deficit 32,520.50 74,305.50
Financing cost
*Loan from bank 8,000 0
*Interest expense 80 80
Loan repayment at end of the month 0 8,000
Ending cash balance 40,440.50 66,225.50
 September
7,000
36
$252,000
176,400
75,600
149,940
17,640

y and August 20x3

September *Each packet requires 5kg of raw materials
7,050 *Raw materials cost $2.5/kg
35,250
3,000
-
-
(a)Explain the difference between static planning budget and a flexible budget.

Static Budget
Prepared for single, planned level Flexible Budget for any activity
May be prepared
of activity
Does not show the reason for the level in the
control relevant
(Activity range
Variance,
variance Revenue and spending variance)

(b) Which of the two budgets would be more useful when planning the company's cash needs over a range of activity?

Flexible budget is more useful because the company produces at different activity levels. A flexible budget can be prepar
activity level of the company and this would also allow us to find out whether any variance found is due to difference in a
other processes.
It also provides a fairer performance evaluation for employees as certain things such as increase in prices of materials o
control.

(c) Prepare a performance report that compares budgeted and actual costs for the period just ended (The one Ken Tan li

Master Budget Cost Budgeted (Static) Actual

Direct Material $ 40.00 $ 960,000.00 $ 865,000.00
Direct Labor $ 10.00 $ 240,000.00 $ 221,200.00
Variable production overhead $ 12.50 $ 300,000.00 $ 304,000.00
Depreciation $ 48,000.00 $ 48,000.00 $ 48,000.00
Supervisory salaries $ 72,000.00 $ 72,000.00 $ 75,600.00
Other fixed production overhead $ 480,000.00 $ 480,000.00 $ 478,000.00
Total $ 2,100,000.00 $ 1,991,800.00

(d) Prepare a performance report that compares budgeted and actual costs for the period just ended (The one general m

Master Budget Cost Budgeted (Flexible)Actual

Direct Material $ 40.00 $ 800,000.00 $ 865,000.00
Direct Labor $ 10.00 $ 200,000.00 $ 221,200.00
Variable production overhead $ 12.50 $ 250,000.00 $ 304,000.00
Depreciation $ 48,000.00 $ 48,000.00 $ 48,000.00
Supervisory salaries $ 72,000.00 $ 72,000.00 $ 75,600.00
Other fixed production overhead $ 480,000.00 $ 480,000.00 $ 478,000.00
Total $ 1,850,000.00 $ 1,991,800.00

(e) Which of the two reports is preferred?

Should Ken Tan be praised for outstanding performance or is the general manager's warning appropriate?
Explain, citing any apparent problems for the company.
In Ken's report he calculated the budgeted level of activity based on manufacturing 24,000 fans when in fact the compan
Based on the general manager's report, Ken actually exceeded the budget by $141,800.
1. There was a storm and the damage caused by the storm could have resulted in higher direct material cost as some raw
2. The factory was closed for a few days due to the storm and that could have resulted in higher labor costs since worker
ver a range of activity?

ble budget can be prepared based on the different

d is due to difference in activity level or inefficiencies in

e in prices of materials or labor are not within their

nded (The one Ken Tan likely used).

Difference Favourable?
$ 95,000.00 F
$ 18,800.00 F
$ (4,000.00) U
$ -
$ (3,600.00) U
$ 2,000.00 F
$ 108,200.00 F

nded (The one general manager likely used).

Difference Favourable?
$ (65,000.00) U
$ (21,200.00) U
$ (54,000.00) U
$ -
$ (3,600.00) U
$ 2,000.00 F
$(141,800.00) U
when in fact the company only manufactured 20,000 fans.

material cost as some raw material might be damaged and needed to be replaced.
labor costs since workers might need to work overtime to manufacture enough fans.
a) Compute the material price and usage variance

Standard Price Actual Price

Total Price Total Quantity Unit
Direct Material $5.00 per kg $752,000.00 160000 $4.70
Direct
FactoryLabor $12.00 per Hour $533,000.00 41000 $13.00
Overhead $8.00 per Hour $314,000.00 41000 $7.66

Standard quantity for one unit of drum Standard Price for per drum
Direct Material 3 kg Direct Material $15.00
Direct
FactoryLabor 0.8 Hour Direct
FactoryLabor $9.60
Overhead 0.8 Hour Overhead $6.40
Total $31.00
Standard Standard Actual Q x Actual Q x
Actual Quantity Actual Price Price Quantity Actual P Standard P
160000 $4.70 $5.00 150000 $752,000.00 $800,000.00

Price Variance $48,000.00

Usage Variance -$50,000.00

b) Compute the labor rate & efficiency variance

Standard Actual H x Actual H x
Actual Hours Actual Rate Hour Standard Rate Actual R Standard R
41000 $13.00 40000 $12.00 $533,000.00 $492,000.00
Labor Rate
Variance
Efficiency -$41,000.00
Variance -$12,000.00

c) Compute the material price variance (supply contract)

Actual Q x Actual Q x
Actual Quantity Actual Price Standard Price Actual P Standard P Price Variance
160000 $4.90 $4.90 $784,000.00 $784,000.00 $0.00

d)
Explain behavior of Alan & Barry using relevant concepts on agency theory and organization architecture.

Agency Theory

As individuals are self-interested, Alan and Barry are most likely to act in their own best interests instead of the compan
variances, hence, he would be motivated to source for the cheapest direct materials and disregard quality in order to ma
most likely to be based on production efficiency, hence Barry would prefer to use higher quality materials. Materials of h
by the cost because his performance evaluation is not based on material costs.
Organization Architecture
Alan
Alan is given decision Barry
rights in the sourcing Barry is given decision rights in overseeing
Decision Rights
Monitoring and purchasing of direct materials
department is evaluated based on price the
department is evaluateddrums
production of metal based on efficiency
Performance variance variance
Incentive payments/bonuses are rewarded Incentives payments/bonuses are rewarded
Rewarding for minimizing cost variance for increasing production efficiency
As Alan is monitored and rewarded based on price variance alone, there is no incentive for him to source for high quality

e) Would Barry’s suggestion of using JIT system for the purchase of raw materials resolve the conflict?
will not resolve the conflict, because the problem that Barry is facing now is the low quality of the materials
and not the delivery of the materials.

Possible Solutions
1. The company should specify clearly beforehand the minimum quality of raw materials that suppliers
have to supply and Alan can only purchase from suppliers that meet the required minimum standard of
quality.
2. In order to motivate Alan to consider quality of materials in his purchases, the company can link the
number of work stoppages due to quality problems to his performance evaluation

3 The company can come up with a list of qualified suppliers that Alan is only allowed to purchase from

4. Barry should be allowed to reject any unqualified and undesirable material purchased by Alan
 per kg
per hour
per hour

Standard Q x
Standard P
$750,000.00

Favourable
Unfavourable

Standard H x
Standard R
$480,000.00

Unfavourable
Unfavourable

ce Variance

and organization architecture.

wn best interests instead of the company's. The performance and incentive payments of Alan are closely linked to cost
als and disregard quality in order to maximize his own benefits. The performance evaluation of the production staff is
higher quality materials. Materials of higher quality will tend to be more expensive but Barry would not be affected
 Barry
sion rights in overseeing
metal
uateddrums
based on efficiency
ts/bonuses are rewarded
duction efficiency
entive for him to source for high quality materials

terials resolve the conflict?

ow quality of the materials

aterials that suppliers

minimum standard of

company can link the

n

wed to purchase from

chased by Alan
performing up to standard, we can compare the cashier's performance to the expectations set by the company (i.e. the st
of the workers the company). We can analyse the efficiency variance to determine if the cashier is performing his/her du

(see sheet 6 for the metrics and elaboration on how to measure these metrics)

(4). Increased amount of errors when employees try to rush things since the system does not measure errors (e.g. missin
an item)
(d) In light of the above mentioned benefits and costs of this labour waste elimination system, provide at least tw
minimise the satisfaction
(2). Customer costs of thisshould
systembeand/or maximise
integrated into thethe benefitof
evaluation ofthe
thisemployees
system to provide a more holistic evaluatio
employee to provide a better service
(2). When the company is trying to implement changes to the cashier process, they can evaluate the effciency of the chan
accurately
 Average Actual time takenStandard time taken
Scanning and bag time/item
Cash collection/order
Creditcard payment

Metrics:
Average actual time taken to scan and bag an item = total time taken to scan and bag all items/number of items scanned
Average
Average actual
actual time
time taken
taken to
to collect
collect cash for anpayment
creditcard order= total time
for an takentotal
order= to collect all cash
time taken to payments/number
collect all creditcardofpayments
cash paym
credit card payment collections

How to measure:
average for these timings.
s/number of items scanned and bagged
ments/number
lect all creditcardofpayments/number
cash payment collectio
of
ions