Atlantic Lighting Systems’s master budget and the actual results for the most re
ID: 2454503 • Letter: A
Question
Atlantic Lighting Systems’s master budget and the actual results for the most recent year of operating activity follow. Master Budget Actual Results Variances F or U Number of units 150,000 160,000 10,000 Sales revenue $33,000,000 $35,520,000 $2,520,000 F Variable manufacturing costs Materials (4,800,000) (5,300,000) (500,000) U Labor (4,200,000) (4,400,000) (200,000) U Overhead (2,100,000) (2,290,000) (190,000) U Variable selling, general, and admin. costs (5,250,000) (5,450,000) (200,000) U Contribution margin 16,650,000 18,080,000 1,430,000 F Fixed costs Manufacturing overhead (7,830,000) (7,751,000) 79,000 F Sellings, general, and admin. costs (6,980,000) (7,015,000) (35,000) U Net income $ 1,840,000 $ 3,314,000 $1,474,000 F (Static versus flexible budget variances) Answer all questions posed by Case ATC 8-1. a. Did Atlantic increase unit sales by cutting prices or by using some other strategy? b. Is Mr. Ludwig correct in his conclusion that something is wrong with the company’s per- formance evaluation process? If so, what do you suggest be done to improve the system? c. Prepare a flexible budget and recompute the budget variances. d. Explain what might have caused the fixed costs to be different from the amount budgeted. e. Assume that the company’s material price variance was favorable and its material usage vari- ance was unfavorable. Explain why Mr. Ludwig may not be responsible for these variances. Now, explain why he may have been responsible for the material usage variance. f. Assume the labor price variance is unfavorable. Was the labor usage variance favorable or unfavorable?
Explanation / Answer
Answer:
a. Actual sales price was higher than budgeted sale price, as below Budgeted sales price $33,000,000/150,000 units = $220 per unit. Actual sales price $35,520,000/160,000 units = $222 per unit Some other element or strategy was responsible for the increase in sales. There may have been an economic upturn that caused demand for the product(s) to grow or the company may have increased their advertising pushing sales growth b. Yes, Mr. Ludwig is correct in his conclusion that something is wrong with the company’s performance evaluation process, since employees are receiving bonuses when sales are low and being punished when sales are high pushing budget constraints over estimates. I would suggest that the company base performance evaluations on flexible budget variances instead of on the activity variances, since this will give them a better system by which to gauge actual performance versus sales and revenues. c. Flexible Budget in ($) Actual Variance Unit 150000 160000 160000 Sales 33000000 35200000 35520000 -320000 V.Cost 4800000 5120000 5300000 -180000 Labour 4200000 4480000 4400000 80000 OH 2100000 2240000 2290000 -50000 Selling Adm 5250000 5600000 5450000 150000 Contribution 16650000 17760000 18080000 -320000 FC - Manufacture 7830000 7830000 7751000 79000 FC - Admin Selling 6980000 6980000 7015000 -35000 Net Income 1840000 2950000 3314000 -364000 d. An unfavorable fixed overhead budget variance results when the actual amount spent on fixed manufacturing overhead costs exceeds the budgeted amount…” and “are the indirect manufacturing costs that are not expected to change when the volume of activity changes. e. Mr. Ludwig may not be responsible for the variance, as caused by the use of low quality materials causing waste during the production process. However, waste during the production process could also be caused by a lack of employee care in their duties ; which, would be attributed to poor supervision by Mr. Ludwig, since he is responsible as their supervisor to monitor their performance f. If the labor price variance was unfavorable then the labor usage variance would have to be favorable, since the total variance was favorable. This is because the total variance is composed of both labor usage and labor price variances; and, they would have to offset each other in order for the total variance to be favorable. If both were unfavorable then the total variance would also have to be unfavorable, which it is not.Related Questions
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