Midwest Crafts is a manufacturer of high quality wood tables sold throughout the
ID: 2514657 • Letter: M
Question
Midwest Crafts is a manufacturer of high quality wood tables sold throughout the Midwest. At the beginning of the year, its management developed monthly budgets. It reported the following information for October Difference al Revenue Cost Profit $1,800,000 100.00% 1,295,000 71.94% S505000 28.06% $2,100,000 100.00% 1,483,000 70.62% $617000 29.38% $300,000 188,000 5112000 16.67% 14,52% 22 18% Management is delighted to see that profits were more than 22% over budget. Because they had experienced a stock-out, they knew that sales were strong and expected profit to be higher than budgeted. But, they did not expect the good news about costs. From the budget they can see that revenues rose faster than costs and, in fact, cost as a percentage of sales is smaller than what the budget had called for. Because this is such tremendous performance, they are planning to award employees a 5% payroll bonus. Part I - Required- Before Class Answer questions 1-6 before class meets. Include your answers to questions 1-5 on the worksheet entitled "Answers to questions 1-5" 1. Is this report misleading? Explain. Hint: Think about cost behaviors. 2. What information would you need to make this report more valuable? Midwest's intern interviewed management and learned that the original budget was developed using management's assessment of market size, Midwest's market share, and its revenue and cost structure. Based on this new information, the intern prepared a new report, using contribution margin format. See Excel File- Worksheet "Intern Report" The new report concerns Midwest's management. It now appears that only the marketing department has been doing its job well. The production department has had particularly dismal performance, showing a $170,000 unfavorable variance (17%) for its prime costs (DM and DL) Is this new report misleading? Explain. What additional information is needed to make the report useful? What selling price did Midwest plan for October? Write the profit function was used in constructing the budget. a. Hint: Sales - VC 3. 4. 5. FC Profit; Use X for activity level(number of units,) 6. Create Midwest's performance report by modifying the intern's report. Hint: You'll have to add a middle column for the flexible budget. Then calculate all the variances. Finally change this worksheet's name to performance report. Make sure to label them as "r" or “U".Explanation / Answer
Part-1: Answer -1: The report shows only two components i.e. Revenue and Cost. And they compre the report for a particulr month with the budget numbers set. We can see with an additional cost incurrence of $188,000, a revenue of 300,000 has been earned which is a major reason behind inclination of profit beyond the target. This report is not misleading but incomplete. There is no mention of type of cost. It is difficult to build a relation between sales and cost.
Part- 1: Answer 2: To makethis report more valuable, Cost should be splitted in Variable cost, Fixed cost. Fixed cost should further be divided into Fixed Manufacturing overheads, Fixed Selling overheads. Analysing the cost split will give clear picutre where the organisation has improved in context of cost and where it has incurred more. Accordingly, bonus should be announced only for the employees who really contributed in increase of profit.
Part 2- Answer 1: It would be wrong to say Production department has not been doing great job. A Material variance may be due to change in price or change in quantity usage. Both together makes the total variance, Report is misleading since it doesn't present variance categorization. Profit calculation is correct but variance computation in detail will help company more to analyze.
Part 2- Answer 2: Midwest planned to sell 3000 units at $2,100,000. Planned Selling price per unit was $700.
Part 2- Answer 3: Profit calculation under Variable costing is done as follows:
At XX units:
Selling Price XXXX
Less: Variable cost XXXX
Gross Contribution XXXX
Less: Variable Selling overheads XXXX
Net Contribution XXXX
Less: Period Expenses XXXX
Net Income XXXX