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Ratchet Company Budget



Favorable F Manufacturing Cost Budget Actual Unfavorable U

Valuable Costs

Direct materials                                   $48000                        $47000                                       $1000 F    

Direct labor                                          $54000                        $51000                                       $2800 F

Indirect Materials                               $24000                        $24200                                          200 U

Indirect Labor                                        18000                         17500                                            500 F  

Utilities                                                    15000                         14900                                            100 F

Maintenance                                          12000                         12400                                            400 U 

Total Variable                                      171000                        167200                                        3800 F   

Fixed Cost

Rent                                                         12000                          12000                                             -0-       

Supervision                                             17000                          17000                                             -0-   

Depreciation                                             6000                            6000                                             -0- 

Total fixed                                               35000                         35000                                             -0-

Total Costs                                        $206,000                    $202,200                                        $3,800 F

The monthly budget amounts in the report were based on an expected production of 60,000 units per month or 720,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 58,000 units were produced.


a.) State the total monthly budgeted cost formula.

b.) Make a budget report for August using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data? (Budget total costs $200,300)

c.) In September, 64,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each actual variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August. (Budget tot. costs $217,400 and Actual tot. costs $218,920)

2.)Three Point Sports Inc. manufactures basketballs for the Women's National Basketball Association (WNBA). For the first 6 months of 2017, the company reported

the following operating results while operating at 80% of plant capacity and producing 120,000 units.

Sales $4,800,000

Cost of goods sold 3,600,000

selling and administrative expenses 405,000

Net Income 795,000

Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $225,000. In July, normally a slack manufacturing month, Three Point Sports receives a special order for 10,000 basketballs at $28 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.75 per unit because of shipping costs but would not increase fixed costs and expenses.


(a) Make an incremental analysis for the special order.

(b) Should ThreePoint Sports Inc. accept the special order? Explain your answer.

(c) What is the minimum selling price on the special order to produce net income of $5.00 per ball?

(d) What nonfinancial factors should management consider in making its decision?

3.) The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CISCO, is a component of the company's fi nished product. The following information was collected from the accounting records and production

data for the year ending December 31, 2017.

1. 8,000 units of CISCO were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40.

3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item Direct Allocated

Depreciation $2,100 $900

Property Taxes 500 200

Insurance 900 600

TOTAL $3,500 $1,700

All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 8,000 CISCO units from a supplier is $80,000.

5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining



(a) make an incremental analysis for CISCO. Your analysis should have columns for (1) Make CISCO, (2) Buy CISCO, and (3) Net Income Increase/(Decrease). (NI (decrease) $(1,160)

(b) Based on your analysis, what decision should management make?

(c) Would the decision be different if Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO? Show computations. (NI increase $1,840)

(d) What nonfinancial factors should management consider in making its decision?


Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment

exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company's accountant to provide him with cost data on the company's elevator. This information is presented below.

Old Elevator New Elevator

Purchase price $120,000 $160,000

Estimated salvage value 0 0

Estimated useful life 5yrs 4yrs

Depreciation method Straight line Straight line

Annual operating costs

other than depreciation:

Variable $35,000 $10,000

Fixed $23,300 $8,500

Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $25,000.


(a) Determine any gain or loss if the old elevator is replaced.

(b) make a 4-year summarized income statement for each of the following assumptions: (1) The old elevator is retained. (2) The old elevator is replaced.

(c) Using incremental analysis, determine if the old elevator should be replaced.

(d) make a memo to Ron Richter explaining why any gain or loss should be ignored in the decision to replace the old elevator.

Top Answer

1.a. Cost Formula = $35,000 + $2.85 per unit, b. Total cost = 1900 (Unfav.), c. Total... View the full answer


Flexible budget
Difference Fav./Unfav.
3 Units
4 Variable cost
5 Direct material
6 Direct labor

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