Montevideo Manufacturing, Inc. produces a single type of small motor. The bookke
ID: 2582348 • Letter: M
Question
Montevideo Manufacturing, Inc. produces a single type of small motor. The bookkeeper who does not have an in-depth understanding of accounting principles prepared the following performance report with the help of the production manager. In a conversation with the sales manager, the production manager was overheard saying, ou sales guys really messed up our May performance, and it is only because production did such a great job controlling costs that we aren't in even worse shape For the Month Ended May 31,2016 Flexible Budget Actual Reaults Master Budget Variance 11125000 250.000 s12sooou $225,000 $12,500 F 45,000 units) (50,000 units) Lass variable cxpenses Direct matorials Direct labor Variable factory ovarhead vanabse4ng and adm istrative expanse Total variable oxpenst Contributon marg n Loss fxed expenses: Flxod tactory overhead axpaso Fund soling and administrative oponse Total fixad expense Income from 4.50 3.75 225 $212,500 175 750 10,250 112,500 100,000 $95,000 $100,000 $5,000F Required: 1. Do you agree with the production manager that the manufacturing area did a good job of controlling costs? 2. Prepare a flexible budget for Montevideo Manufacturing's expenses at the following activity levels: 45,000 units, 50,000 units, and 55,000 units. 3. Prepare a revised performance report, using the most appropriate flexible budget from (2) above 4. Now what is your response to the production manager's claim? 5. Assume that you have just been hired as the new accountant. You observe that the production manager is about to receive a large bonus based on the | favorable materials, labor, and factory overhead variances indicated in the lexible budget prepared by the bookkeeper. Using the IMA Statement of Ethical Professional Practice as your guide, what standards, if any, apply to your responsibilities in this matter?Explanation / Answer
1.
as per the above data easily understood that prosuction managers claim is not fair , budgeted cost and acual performance have variance in the case variable cost, asper budgeted vcost total variable cost should not be more than 540000(12*45000), but actual performance shows huge varince of 29000(569000-540000)
2.
Activity level
Unit cost
45000
50000
55000
sales
25
1125000
1250000
1375000
Less variable cost:
Direct material
4.5
202500
225000
247500
Direct labor
3.75
168750
187500
206250
Variable factory overhead
2.25
101250
112500
123750
Variable selling and administrative
1.5
67500
75000
82500
Total variable expense
12
540000
600000
660000
Contribution margin
13
585000
650000
715000
Less fixed expense:
Fixed factory overhead
100000
100000
100000
Fixed selling administration overhead
150000
150000
150000
Total fixed expense
250000
250000
250000
Income from operation
335000
400000
465000
3.
Activity level
Budgeted
Cost(45000)
Actual performance
(45000)
variance
sales
1125000
1125000
0
Less variable cost:
Direct material
202500
212500
10000(U)
Direct labor
168750
175750
7000(U)
Variable factory overhead
101250
110250
9000(U)
Variable selling and administrative
67500
70500
3000(U)
Total variable expense
540000
569000
29000(U)
Contribution margin
585000
556000
29000(U)
Less fixed expense:
Fixed factory overhead
100000
95000
5000(F)
Fixed selling administration overhead
150000
160000
10000(U)
Total fixed expense
250000
255000
50000(U)
Income from operation
335000
301000
34000(U)
4.
analysis of above table we found that production department have total 21000 un favourable varisance(10000+7000+9000-5000), but selling department have total 13000 un favourable variance, both department performance is not good, production department manager cannot claim his department performance is well becuase data shows performance of production department is low copared to sales deparment.
Activity level
Unit cost
45000
50000
55000
sales
25
1125000
1250000
1375000
Less variable cost:
Direct material
4.5
202500
225000
247500
Direct labor
3.75
168750
187500
206250
Variable factory overhead
2.25
101250
112500
123750
Variable selling and administrative
1.5
67500
75000
82500
Total variable expense
12
540000
600000
660000
Contribution margin
13
585000
650000
715000
Less fixed expense:
Fixed factory overhead
100000
100000
100000
Fixed selling administration overhead
150000
150000
150000
Total fixed expense
250000
250000
250000
Income from operation
335000
400000
465000