One subunit of Track Sports Company had the following financial results last month:
Subunit X Actual Results Flexible Budget Flexible Budget % Variance
Variance (F or U) (F or U)
Revenue $ 474,000 $ 455,000
Expenses 261,000 255,000
Margin 213,000 200,000
Fixed Expenses 38,000 29,000
Segment Margin $ 175,000 $ 171,000
1. Complete the performance evaluation report for this subunit (round to two decimal places).
2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?
3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding $8,000 and exceeding 10% (both criteria must be met)?
4. Should only unfavorable variances be investigated? Explain.
5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.
6. Will management place equal weight on each of the variances exceeding $8,000? Explain.
7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.
8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.
(1) Performance evaluation report is completed in Step 1.
(2) Profit center
(3) Variance equal to and exceeding $8,000 and exceeding 10% should be investigated.
(4) No, both should be investigated, for effective decision making.
(5) No, not possible as fixed expenses may vary
(6) No, equal weights cannot be assigned due to degree of variances.
(7) Financial performance and operational performance
(8) Customer, Internal Business, and Learning & Growth
Flexible Budget Variance (F or U)
% Variance (F or U)
Net Sales Revenue
$ 19,000 (F)
Traceable Fixed Expenses
Divisional Segment Margin
% Variance has been computed by the following formula –
Responsibility centers are created in a decentralized organization to divide the different responsibilities into different subunits so that there can be effective in the decision-making process.
There can be different 4 types of responsibility centers.
Based on the given data, the responsibility center can be categorized as a profit center. The profit center is the center that is responsible for both revenue and cost. The given data set is related to the performance report for Sales revenue and all expenses. So this is a profit center.
The management has set the criteria are for investigating all items having variances –
a) Equal to and exceeding $8,000 and
b) Exceeding 10%
As it is necessary that both conditions must be met, so only the “Traceable Fixed Expenses” should from the performance report be investigated as it has a $9,000 unfavorable variance and variance is 31% (exceeding 10%).
Besides this, items having equal to or more than $8,000 variance has no variance degree exceeding 10%.
Favorable variances are those that perform better than the flexible budget. On the contrary, unfavorable variances are those that perform against the flexible budget.
Businesses give priority to Unfavorable variances to get the reason for having an unfavorable estimate. But at the same time investigating favorable variances also helps in knowing the factors for having favorable results.
Thus for effective decision making both favorable and unfavorable variances should be investigated.
In the given case, the responsibility center is the profit center. And in the profit center, both revenue and cost are controlled.
For every generated revenue, there are some costs associated with it. But some costs are also independent of sales like fixed costs.
Variances are the difference between estimated and actual results.
So in the given case, the variable cost may vary as per the sales level but the fixed cost variance would not be associated with the sales revenue variance.
Thus it is not possible that variances are due to higher-than-expected sales volume. Irrespective of sales volume, the fixed expense may vary from the expected amount.
In the given case, some variances are having $8,000 value but do not vary very much from the flexible budget. On the contrary, some variances exceeding $8,000 has even higher variance percent from the benchmarking. As the management is investigating variances above and equal to $8,000 and also exceeding the 10% benchmark, it will not place equal weight on all variances exceeding $8,000.
The management would place more weight on the items having higher variance than on the items having lower variance. Thus Variance having a 31% result would be given more priority than the variance having only a 10% change.
The balanced scorecard is a performance evaluation report that consists of both financial performance and operational performance.
So the perspective of the balanced scorecard is based on these two performance types.
In the given case, the perspective of the balanced scorecard is Financial. This is so as the key performance indicators are – contribution margin, fixed expenses, Divisional segment margin, etc.
This performance measure is a lag indicator. The reason is that the fanatical performance reported tends to reveal the results of past action only and no indication has been generated for future performance.
The other three different perspectives are – Customer, Internal Business, and Learning & Growth.
The key performance indicator for each perspective is as follows –
Key Performance Indicator
Percentage of market share
Number of new products developed
Learning and Growth
Hours of employee training
Question: Determining transfer pricing
The Hernandez Company is decentralized, and divisions are considered investment centers. Hernandez has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $32 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 1,800 chairs per quarter, and the Cushion Division is operating at capacity, which is 1,800 cushions per quarter. The two divisions report the following information:
Chair Division Cushion Division
Sales Price per Chair $ 95 Sales Price per Cushion $ 34
Variable Cost (other than cushion) 56 Variable Cost per Cushion 12
Variable Cost (cushion) 32
Contribution Margin per Chair $ 7 Contribution Margin per Cushion $ 22
1. Determine the total contribution margin for Hernandez Company for the quarter.
2. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?
3. Assume the Chair Division purchases the 1,800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?
4. Review your answers for Requirements 1, 2, and 3. What is the best option for Hernandez Company?
5. Assume the Cushion Division has capacity of 1,800 cushions per quarter and can continue to supply its outside customers with 1,800 cushions per quarter and also supply the Chair Division with 1,800 cushions per quarter. What transfer price should Hernandez Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.
The Trolley Toy Company manufactures toy building block sets for children. Trolley is planning for 2019 by developing a master budget by quarters. Trolley’s balance sheet for December 31, 2018, follows:
|TROLLEY TOY COMPANY|
|December 31, 2018|
Raw material inventory
Finished goods inventory
Total current assets
Property, Plant and Equipment
Less: Accumulated depreciation
Common stock, no par
Total stockholders equity
Total liabilities and stockholders equity
Other budget data for Trolley Toy Company:
a. Budgeted sales are 1,400 sets for the first quarter and expected to increase by 150 sets per quarter. Cash sales are expected to be 30% of total sales, with the remaining 70% of sales on account. Sets are budgeted to sell for $90 per set.
b. Finished Goods Inventory on December 31, 2018, consists of 200 sets at $27 each.
c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 2,000 sets. FIFO inventory costing method is used.
d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds. Direct materials requirement is 3 pounds per set. The cost is $2 per pound.
e. Desired ending Raw Materials Inventory is 10% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019, is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.
f. Each set requires 0.30 hours of direct labor; direct labor costs average $12 per hour.
g. Variable manufacturing overhead is $3.60 per set.
h. Fixed manufacturing overhead includes $7,000 per quarter in depreciation and $2,585 per quarter for other costs, such as utilities, insurance, and property taxes.
i. Fixed selling and administrative expenses include $11,000 per quarter for salaries; $1,500 per quarter for rent; $1,350 per quarter for insurance; and $1,500 per quarter for depreciation.
j. Variable selling and administrative expenses include supplies at 2% of sales.
k. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid for in the first quarter.
l. Cash receipts for sales on account are 40% in the quarter of the sale and 60% in the quarter following the sale; Accounts Receivable balance on December 31, 2018, is expected to be received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
m. Direct materials purchases are paid 90% in the quarter purchased and 10% in the following quarter; Accounts Payable balance on December 31, 2018, is expected to be paid in the first quarter of 2019.
n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
o. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.
p. Trolley desires to maintain a minimum cash balance of $55,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 10% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
1. Prepare Trolley’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours.
2. Prepare Trolley’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.
3. Trolley sold 7,000 sets in 2019, and its actual operating income was as follows:
|TROLLEY TOY COMPANY|
|For the Year Ended December 31, 2019|
Net sales revenue
Cost of goods sold:
Selling and administrative expenses:
Other income and (expenses):
Income before income tax
Income tax expenses
Prepare a flexible budget performance report through operating income for 2019. Show product costs separately from selling and administrative costs. To simplify the calculations due to sets in beginning inventory having a different cost than those produced and sold in 2019, assume the following product costs:
4. What was the effect on Trolley’s operating income of selling 500 sets more than the static budget level of sales?
5. What is Trolley’s static budget variance for operating income?
6. Explain why the flexible budget performance report provides more useful information to Trolley’s managers than the static budget performance report. What insights can Trolley’s managers draw from this performance report?
7. During 2019, Trolley recorded the following cost data:
Standard Cost Information
3 pounds per set
$2.00 per pound
0.30 hours per set
$12.00 per hour
Variable manufacturing overhead
0.30 hours per set
$12.00 per hour
Fixed manufacturing overhead Static budget amount: $38,340
0.30 hours per set
$21.00 per hour
Actual Cost Information
(20,700 pounds @ $2.50 per pound)
(2,060 hours @ $12.40 per hour)
Variable manufacturing overhead
(2,060 hours @ $11.60 per hour)
Fixed manufacturing overhead
Compute the cost and efficiency variances for direct materials and direct labor.
8. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.
9. Prepare the standard cost income statement for 2019.
10. Calculate Trolley’s ROI for 2019. To calculate average total assets, use the December 31, 2018, balance sheet for the beginning balance and the budgeted balance sheet for December 31, 2019, for the ending balance. Round all of your answers to four decimal places.
11. Calculate Trolley’s profit margin ratio for 2019. Interpret your results.
12. Calculate Trolley’s asset turnover ratio for 2019. Interpret your results.
13. Use the expanded ROI formula to confirm your results from Requirement 10. Interpret your results.
14. Trolley’s management has specified a 30% target rate of return. Calculate Trolley’s RI for 2019. Interpret your results.
94% of StudySmarter users get better grades.Sign up for free