Crafts Inc., is a manufacturer of furniture. The company has 2 responsibility ce
ID: 2573623 • Letter: C
Question
Crafts Inc., is a manufacturer of furniture. The company has 2 responsibility centers: Production and Selling and Distribution. Production and administration are cost centers while Selling and Distribution is a profit center. Presented below are the budgeted and actual contribution income statement for October along with applicable unit information. Budgeted unit information: Units 900 Sale price per unit $250 Direct material per unit $50 Direct labor per unit $20 Variable manufacturing overhead per unit $15 Variable selling and distribution per unit 60 Actual Units: 1,000 Craft Inc. Budgeted Contribution Income Statement For Month of October Sales $ 225,000 Less Variable costs Variable cost of goods sold: Direct materials $ 45,000 Direct labor 18,000 Manufacturing overhead 13,500 $ 76,500 Selling and distribution 54,000 (130,500) Contribution Margin 94,500 Less Fixed Costs: Manufacturing overhead 40,000 Selling and Distribution 30,000 (70,000) Net Income 24,500 Craft Inc. Actual Contribution Income Statement For Month of October Sales $ 275,000 Less Variable costs Variable cost of goods sold: Direct materials $ 50,000 Direct labor 25,000 Manufacturing overhead 20,000 $ 95,000 Selling and distribution 88,000 (183,000) Contribution Margin 92,000 Less Fixed Costs: Manufacturing overhead 38,000 Selling and Distribution 40,000 (78,000) Net Income(Loss) 14,000 Required: 1. Prepare a flexible budget performance report for Production that compares actual and allowed costs. 2. Prepare a flexible budget performance report for selling and distribution that compares actual and allowed costs. 3. Determine the revenue variance. 4. Determine the sales price variance. 5. Determine the sales volume variance. 6. Explain to management the areas that should be investigated. You should also include why the actual income is less than budgeted Explain why you picked these areas to look at. Crafts Inc., is a manufacturer of furniture. The company has 2 responsibility centers: Production and Selling and Distribution. Production and administration are cost centers while Selling and Distribution is a profit center. Presented below are the budgeted and actual contribution income statement for October along with applicable unit information. Budgeted unit information: Units 900 Sale price per unit $250 Direct material per unit $50 Direct labor per unit $20 Variable manufacturing overhead per unit $15 Variable selling and distribution per unit 60 Actual Units: 1,000 Craft Inc. Budgeted Contribution Income Statement For Month of October Sales $ 225,000 Less Variable costs Variable cost of goods sold: Direct materials $ 45,000 Direct labor 18,000 Manufacturing overhead 13,500 $ 76,500 Selling and distribution 54,000 (130,500) Contribution Margin 94,500 Less Fixed Costs: Manufacturing overhead 40,000 Selling and Distribution 30,000 (70,000) Net Income 24,500 Craft Inc. Actual Contribution Income Statement For Month of October Sales $ 275,000 Less Variable costs Variable cost of goods sold: Direct materials $ 50,000 Direct labor 25,000 Manufacturing overhead 20,000 $ 95,000 Selling and distribution 88,000 (183,000) Contribution Margin 92,000 Less Fixed Costs: Manufacturing overhead 38,000 Selling and Distribution 40,000 (78,000) Net Income(Loss) 14,000 Required: 1. Prepare a flexible budget performance report for Production that compares actual and allowed costs. 2. Prepare a flexible budget performance report for selling and distribution that compares actual and allowed costs. 3. Determine the revenue variance. 4. Determine the sales price variance. 5. Determine the sales volume variance. 6. Explain to management the areas that should be investigated. You should also include why the actual income is less than budgeted Explain why you picked these areas to look at.Explanation / Answer
2.
6.
Even though the sales price variance has contributed to a favourable variance of 25,000 the overall profits have gone down from $35,000 (flexible budget) to $14,000 (actual results) due to the following reasons which need to be looked into and corrective steps to be taken.
a. Direct labor cost has gone up form $20,000 to $25,000 . The reasons for this may be (i) increase in the labor rate ,or (ii) decrease in the efficiency of the labor. This needs to be analysed.
b. Variable manufacturing overhead has also icreased by $5,000 from the budget. The reason may be (i) increase in labor rate as discussed above ,(ii) poor planning of the manufacturing thereby increasing the cost of indirect material, (iii) increase in setup costs, etc.
c. Both variable and fixed selling and distribution costs have gone up indicating that , the higher price achieved by the selling and distribution department ($275 per unit compared to $250 as per budget) has been achived at a higher cost thereby reducing the overall profitability. The manegement needs to have a look at the various aspects of the costs, such as travel,commissions, incentives etc. which are the variable costs to arrive at the reasosn for the icrease in th variable component of the costs by $28,000.
1. Flexible budget performance reoprt for Production Flexible budget Actual Sales units 1000 1000 Per unit Total Per unit Total Direct material 50 50000 50000 Direct labor 20 20000 25000 Variable manufacturing overhead 15 15000 20000 Fixed manufacturing overhead 40000 38000 Total manufacturing cost 125000 133000