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.)

Exhibit 17.8 Profit Graph-Racketeer. Inc. 70,000 Sales at $9 60,000 Profit = $ 14,500 50,000 Total costs 40,000 30,000 S&A costs = $ 7,500 costs Manufacturing costs 20,000 t 10,000 - - 2,000 4,000 6,000 8,000 Number of Rackets

Answer 1

time wasn´t enough to fulfil all the requirements. i hope you find this useful, though

The only FAVORABLE variance is the one regarding to the selling and administrative expenses, because in the actual income statement is less than in the budgeted graph. On the other hand the variations regarding to material, labor and overhead are considered UNFAVORABLE because they represent an increase in the costs, therefore they reduce the operating profit.

Variance
material	(490.00)
labor	(392.00)
overhead	(660.00)
selling and administrative	300.00
total variance	(1,242.00)

Profit reconciliation
profit per chart		14500
Add:
total variance	1242
excess amount of income shown in income statement	4258	5500
		20000
Less:
total variance	(1,242.00)	(1,242.00)
profit per income statement		18,758.00