The Brown Bag company makes a two varieties of bags for its customers. The first
ID: 2436484 • Letter: T
Question
The Brown Bag company makes a two varieties of bags for its customers. The first is an organically created, Non-GMO, totally biodegradable bag used at a large number of Whole Foods stores and various other high end groceries. The company sells these bags for $10.00 per hundred (1 unit). The second bag is a reusable bag that sells for $5.00 each. The company currently uses a plant-wide allocation for factory overhead based upon machine hours, however, the company feels like there is something amiss since they believe the biodegradable bag should be its greatest profit center but the results of the plant-wide allocation seem to be allocating in a manner not consistent with the true allocation. The company has hired your firm to give a budget, by product type, under both the plant-wide and activity based costing method and are seeking you to explain the results and give any recommendations. They are seeking a budgeted income statement under both methods for both products.
The direct materials for the Biodegradable bags is $1.50 per hundred/per unit (please note for the purposes of presentation and internal books, the company considers 100 of these bags to be 1 unit). The cost for materials for the reusable bag is $0.50 per unit. In addition, the direct labor for the biodegradable is $1.50 per unit, whereas for the reusable it is a $1.00 per unit.
The company expects to sell 50,000 units of the biodegradable units (5,000,000 individual bags) and 50,000 of the reusable bags.
The following information has been given regarding production, factory overhead.
Activity
Budgeted Overhead
Estimated Volume
Material Handing/Processing
$240,000
60,000 Machine Hours
Production Set-ups
$64,000
20 Set-ups
Packing and Shipping
$44,000
100,000 shipments
Activity
Bio-Degradable Bags (1 unit = 100 bags)
Reusable Bags
Overall Totals for the Company
Material Handing/Processing
50,000 Machine Hours
10,000 machine Hours
60,000 Machine Hours
Production Set-ups
5 Set-ups
15 Set-ups
20 Set-ups
Packing and Shipping
50,000 Shipments
50,000 Shipments
100,000 Shipments
In addition, the company pays $0.25 sales commission per unit for the biodegradable bags and $0.50 for the reusable bags. Last, the company has other general and administrative expenses, i.e. fixed expenses, in the amount of $40,000.
Please prepare the required income statements, analysis and explanation. For the biodegradable bags, please give in units not per bag, for the reusable use per unit which equals one bag.
After you finished your budget, the company came and reported the following, they want you to do a comparison and determine the variances and give any other items you view as important. An actual contribution margin might be helpful.
The company sold 52,000 units of the bio-bags, and 55,000 units of the reusable bags at the expected sales price.
The overall labor costs for the bio-bag per unit was $1.55 and for the reusable it was $0.90. For the direct materials, there was a bio-material shortage, so the cost per unit of the bio-bag was $2.00, whereas plastic fibers went down and the cost was $0.45 per unit.
For the variable overhead above, the material handing was actually $275,000, production and packing and shipping were the same as budgeted.
Please prepare a variance report based upon the actual versus budgeted on a flexible budget methodology.
Activity
Budgeted Overhead
Estimated Volume
Material Handing/Processing
$240,000
60,000 Machine Hours
Production Set-ups
$64,000
20 Set-ups
Packing and Shipping
$44,000
100,000 shipments
Explanation / Answer
Calculation of Factory Overhead Rate :-
Total Overheads - $240,000+$64,000+$44,000+$40,000
$388,000
Total Machine Hours- 60,000 hours
Overhead Rate- $388,000/60,000 hours
$6.47/ hour
Recommendation :- It is recommended to use Activity Based Costing method as it is the more logical approach for multi product companies and also it gives more logical results as compared to plant wide costing.
Flexible Budget
Budget as per Plant Wide Costing Particulars Biodegradable Bags Total- Bio Reusable Bags Total- Reusable Sales 50,000 units*$10 $500,000 50,000bags*$5 $250,000 (-) Direct Material 50,000*$1.50 $75,000 50,000*0.50 $25,000 (-) Direct Labour 50,000*$1.50 $75,000 50,000*$1.00 $50,000 (-) Factory Overhead 50,000 Machine Hours*$6.47 (see calculation below) $323,500 10,000 Machine Hours*$6.47 $64,700 (-) Sales Commission 50,000 units*$0.25 $12,500 50,000 bags*$0.50 25,000 Income as per Plant wide costing $14,000 $85,700Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.