Question

QUESTION 34 Forrest Glump Company is excited about its newly implemented budgeting program. In the month of May, 2017, the Budget Officer presented the following budget report FORREST GLUMP COMPANY BUDGET REPORT FOR THE MONTH ENDED MAY 31, 2017 Difference Favorable F Production Costs Budget Actual Unfavorable U Variable Costs: Direct Materials $ 57,600 $ 56,400 $ 1.200 F Direct labor 64,800 61.440 3.360 F Indirect materials 28.800 29.040 240 U Indirect labor 21,600 21,000 600F Utilities 18,000 17 880 120 F Maintenance 7 200 7.440 240 V Total Variable 198,000 193 200 4.800 F Fixed costs Rent 14.400 14,400 Depreciation 7,200 7200 Supervision 20.400 20 400 Total fored 42.000 Total costs S 240.000 loob The May budget reported above is based on expected manufacturing of 72 000 units per month (864,000 annually). While the budget officer is fairly happy about the report, the CEO, Forrest Gump. is not so amused His expectation was that the company would sell close to 70.000 units You are a summer intern and have been asked to comment on this matter REQUIRED 1. Do you agree that the budget office should be happy about the May 17 report? Explain THOROUGHLY and CLEARLY You might want to prepare another report to support your agreement or disagreement with the budget officer's happiness 3. In June, 76.800 units were produced. The CEO, Forrest Gump, was quite pleased (1) the June variable costs were 10% higher than the May actual variable costs and (2) the fixed costs were the same as in May, should the CEO be pleased? Explain THOROUGHLY CLEARLY Be sure to show ALL supportive reports

Answer 1

Glump Company Budget

1.Here the Budget prepared is for manufacturing of 72,000 units per month, where as the CEO has projected sales of 70,000 units for May 2017,

	Amt in $
	Budget - May 17	Actual - May 17	Variance - F+/U(-)
Direct Material	57,600	56,400	1,200
Direct labor	64,800	61,440	3,360
Indirect Material	28,800	29,040	-240
Indirect labor	21,600	21,000	600
Utilities	18,000	17,880	120
Maintenance	7,200	7,440	-240
Total Variable cost	1,98,000	1,93,200	4,800
Fixed Overheads	42,000	42,000	-
Total Cost	2,40,000	2,35,200	4,800

Since the CEO has projected sales of 70,000 units, the Profit Margin will reduce as the Fixed cost is for 72,000 units The favorable variance of $4,800 does not make any impact since it is for variable overheads only

No of Units produced	72,000
Variable overhead /unit	2.68
Selling Price / Units - Assumed	3.90
Contribution / Unit	1.22
Sale Projected	70,000
Total Contribution	85,167
Fixed Overheads	42,000
Profit	43,167

Here we have assumed, Sale Price / unit is $3.90 so the Profit is $43,167, if the sales would have been 72,000 units, the Profit Margin would have increased. In case the Sales Price / unit is less, Profit will be further less. So the Budget office should not be happy with this.

3.

	Amt in $
	Budget	Actual - Jun 17	Variance - F+/U(-)
Direct Material	57,600	62,040	-4,440
Direct labor	64,800	67,584	-2,784
Indirect Material	28,800	31,944	-3,144
Indirect labor	21,600	23,100	-1,500
Utilities	18,000	19,668	-1,668
Maintenance	7,200	8,184	-984
Total Variable cost	1,98,000	2,12,520	-14,520
Fixed Overheads	42,000	42,000	-
Total Cost	2,40,000	2,54,520	-14,520

variable cost is 10% higher than May 17 Actual, and Fixed cost is same as May 17

No of Units produced	76,800
Variable overhead /unit	2.77
Selling Price / Units	3.90
Contribution / Unit	1.13
Sale Projected	70,000
Total Contribution	79,297
Fixed Overheads	42,000
Profit	37,297

In this case, the variable cost / Unit has increased to $2.77 which will reduce the Contribution per unit further and ultimately the Profit Margin will take a hit, the situation is worse than May 17 so CEO should not be amused.