Question

"I just don't understand these financial statements at all!” exclaimed Mr. Elmo Knapp. Mr. Knapp explained that he had turned over management of Racketeer, Inc., a division of American Recreation Equipment, Inc., to his son, Otto, the previous month. Racketeer, Inc., manufactures tennis rackets. "I was really proud of Otto,” he beamed. “He was showing us all the tricks he learned in business school, and if I do say so myself, I think he was doing a rather good job for us. For example, he put together this budget for Racketeer, which makes it very easy to see how much profit we'll make at any sales volume ( Exhibit 17.8 ). As best as I can figure it, in March we expected to have a volume of 8,000 units and a profit of $14,500 on our rackets. But we did much better than that! We sold 10,000 rackets, so we should have made almost $21,000 on them." “Another one of Otto's innovations is this standard cost system,” said Mr. Knapp proudly. “He sat down with our production people and came up with a standard production cost per unit (see Exhibit 17.9). He tells me this will let us know how well our production people are performing. Also, he claims it will cut down on our clerical work.” Mr. Knapp continued, “But one thing puzzles me. My calculations show that we should have earned profit of nearly $21,000 in March. However, our accountants came up with less than $19,000 in the monthly income statement ( Exhibit 17.10 ). This bothers me a great deal. Now, I'm sure our accountants are doing their job properly. But still, it appears to me that they're about $2,200 short.” “As you can probably guess," Mr. Knapp concluded, “we are one big happy family around here. I just wish I knew what those accountants were up to... coming in with a low net income like that.” Requried: Prepare a report for Mr. Elmo Knapp and Mr. Otto Knapp that reconciles the profit graph with the actual results for March (see Exhibit 17.11 ). Show the source of each variance from the original plan (8,000 rackets) in as much detail as you can and evaluate Racketeer's performance in March. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Answer 1

Material Price Variance (Actual Price - Standard Price) x Actual Qtuantity ($0.025 $0.03) x 175000 feet $875.00 Favourable i) String ($3.15- $3.15) x 7100 frames ii) Frames 0 x 7100 $0.00 Labor Efficiency Variance (Actual hours - Standard hours) x Standard rate (900 hours 1000 hours*) x $9.60 per hour 100 hours x $9.60 i) Skilled Labor $960.00 Favourable (840 hours 1000 hours*) x $5.60 per hour 160 hours x $5.60 i) Unskilled Labor $ 896.00 Favourable

*Standard Hours for Both skilled and unskilled labor is 1/8 of hour per unit Standard units were 8000 units, Standard hours to produce 8000 units = 1/8 x 8000 10000 hours Standard Variable overhead per unit Indirect Labor per unit Power per unit $ 0.13 $0.10+$0.03 = Variable Overhead Recovered Standard Variable overhead per unit x Actual Units = $0.13 x 7000 rackets $910.00 Indirect Labor Power Actual Variable Overheads = $800 + $250 $1,050.00 Total Variable Overhead Variance = Total Variable overhead recovered - Actual Variable overheads $910 - $1050 $140.00 Unfavorable Efficiency Variance Price Variance String Frames Skilled Labor Unskilled Labo $875.00 $0.0 $960.00 $ 896.00 F Total Variable Overhead Variance U Variable Overhead $140.00

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