Chapter 8 Exercises

Step-by-Step Exercises

Question 1

Find the sales estimates for each level of the flexible budget.

Redd Corporation has prepared the following master budget:

Description	Amount	Total
Sales revenue (for 2,000,000 units)		11,440,000
Cost of goods sold
Direct materials used	5,400,000
Direct labor	2,900,000
Variable factory overhead	260,000
Fixed factory overhead	300,000	8,860,000
Gross margin		2,580,000
Operating expenses
Variable		785,000
Fixed		1,000,000
Operating income		Single Line250,000Double Line

Find sales estimates for unit sales 5% and 10% higher and lower than expectations.

Question 2

Bloo Corporation budgeted the following:

• Sales (in units): 140,000
• Selling price: $325 per unit
• Direct materials cost: 2 gallons per unit at $25 per pound
• Direct labor cost: 2.1 hours per unit at $20 per hour
• Variable overhead: 120% of direct labor cost
• Fixed overhead: $12,000,000
• Variable period costs: $55 per unit
• Fixed period costs: $3,000,000

Find sales estimates for unit sales 20% and 40% higher and lower than expectations.

Question 3

Yell-O Company has prepared the following budget for next period:

Cost of goods sold is 30% fixed and 70% variable. Operating expenses are 60% fixed and 40% variable.

Find sales estimates for unit sales 5% and 10% higher and lower than expectations.

Copy fixed expenses from the master budget.

Question 4

Grandview, Inc. has the following budget for next period, when they expect to sell 130,000 units:

Description	Amount	Total
Sales revenue		8,580,000
Cost of goods sold
Direct materials used	2,600,000
Direct labor	1,690,000
Variable factory overhead	910,000
Fixed factory overhead	560,000	5,760,000
Gross margin		2,820,000
Operating expenses
Variable	650,000
Fixed	380,000
Operating income		Single Line 1,790,000Double Line

Copy fixed expenses from the master budget to a flexible budget for unit sales 5% and 10% above and below expectations.

Question 5

Seldi Corporation has budgeted the following:

• Sales (in units): 50,000
• Selling price: $149 per unit
• Direct materials cost: 1 pound per unit at $15 per pound
• Direct labor cost: 1.5 hours per unit at $20 per hour
• Variable overhead: 100% of direct labor cost
• Fixed overhead: $650,000
• Variable period costs: $15 per unit
• Fixed period costs: $470,000

Copy fixed expenses from the master budget to a flexible budget for unit sales 15% and 30% above and below expectations.

Question 6

Smart Enterprises has prepared the following budget for next period, when they expect to sell 140,000 units:

Cost of goods sold is 20% fixed and 80% variable. Operating expenses are 40% fixed and 60% variable.

Copy the fixed expenses from the master budget to a flexible budget for unit sales 10% and 20% above and below expectations.

Divide revenues and each variable cost by unit sales on the master budget and multiply by unit sales at each level of the flexible budget.

Question 7

Grand River Manufacturing has prepared the following master budget:

Description	Amount	Total
Sales revenue (for 60,000 units)		5,940,000
Cost of goods sold
Direct materials	1,800,000
Direct labor	1,200,000
Variable factory overhead	660,000
Fixed factory overhead	490,000	4,150,000
Gross margin		1,790,000
Operating expenses
Variable	420,000
Fixed	450,000
Operating income		Single Line920,000Double Line

Find sales revenues and variable costs for a flexible budget for unit sales 5% and 10% above and below expectations.

Question 8

Skipper Corporation has budgeted the following:

• Sales (in units): 20,000
• Selling price: $282 per unit
• Direct materials cost: 2 pounds per unit at $14 per pound
• Direct labor cost: 0.5 hour per unit at $22.60 per hour
• Variable overhead: 150% of direct labor cost
• Fixed overhead: $360,000
• Variable period costs: $31 per unit
• Fixed period costs: $500,000

Find sales revenues and variable costs for a flexible budget for unit sales 15% and 30% above and below expectations.

Question 9

Texine Enterprises has prepared the following budget for next period, when they expect to sell 40,000 units:

Cost of goods sold is 30% fixed and 70% variable. Operating expenses are 50% fixed and 50% variable.

Find sales revenues and variable costs for a flexible budget for unit sales 10% and 20% above and below expectations.

Calculate subtotals and total operating income.

Question 10

Airide Company has prepared the following flexible budget for their expected sales and for sales 5% and 10% above and below expectations.

	Expected	10% below	5% below	5% above	10% above
Units	50,000	45,000	47,500	52,500	55,000
Revenue	14,100,000	12,690,000	13,395,000	14,805,000	15,510,000
COGS:
DM	1,400,000	1,260,000	1,330,000	1,470,000	1,540,000
DL	565,000	508,500	536,750	593,250	621,500
VOh	847,500	762,750	805,125	889,875	932,250
FOh	900,000	900,000	900,000	900,000	900,000
Total:	3,712,500
GM	10,387,500
Var. op.	1,550,000	1,395,000	1,472,500	1,627,500	1,705,000
Fixed op.	500,000	500,000	500,000	500,000	500,000
Income	8,337,500

Calculate subtotals and total operating income.

Question 11

Greenlee Company has prepared the following flexible budget for their expected sales and for sales 15% and 30% above and below expectations.

	Expected	30% below	15% below	15% above	30% above
Units	120,000	84,000	102,000	138,000	156,000
Revenue	11,640,000	8,148,000	9,894,000	13,386,000	15,132,000
COGS:
DM	2,280,000	1,596,000	1,938,000	2,622,000	2,964,000
DL	2,280,000	1,596,000	1,938,000	2,622,000	2,964,000
VOh	3,480,000	2,436,000	2,958,000	4,002,000	4,524,000
FOh	360,000	360,000	360,000	360,000	360,000
Total:	8,400,000
GM	3,240,000
Var. op.	2,040,000	1,428,000	1,734,000	2,346,000	2,652,000
Fixed op.	610,000	610,000	610,000	610,000	610,000
Income	590,000

Calculate subtotals and total operating income.

Question 12

Stoughton Corporation has prepared the following flexible budget for their expected sales and for sales 5% and 10% above and below expectations.

	Expected	10% below	5% below	5% above	10% above
Units	350,000	315,000	332,500	367,500	385,000
Revenue	65,100,000	58,590,000	61,845,000	68,355,000	71,610,000
COGS:
DM	19,600,000	17,640,000	18,620,000	20,580,000	21,560,000
DL	6,650,000	5,985,000	6,317,500	6,982,500	7,315,000
VOh	19,600,000	17,640,000	18,620,000	20,580,000	21,560,000
FOh	470,000	470,000	470,000	470,000	470,000
Total:	46,320,000
GM	18,780,000
Var. op.	16,800,000	15,120,000	15,960,000	17,640,000	18,480,000
Fixed op.	450,000	450,000	450,000	450,000	450,000
Income	1,530,000

Calculate subtotals and total operating income.

Complete Problems

Question 13

Gemm Company has prepared the following budget for January:

Description	Amount	Total
Sales revenue (for 106,000 units)		6,042,000
Cost of goods sold
Direct materials used	742,000
Direct labor	1,060,000
Variable factory overhead	848,000
Fixed factory overhead	915,000	3,565,000
Gross margin		2,477,000
Operating expenses
Variable	742,000
Fixed	346,000	1,088,000
Operating income		Single Line1,389,000Double Line

Prepare a flexible budget for January for sales levels 10% and 20% above and below expectations.

Question 14

Marquay Company has prepared the following budget for June:

Description	Amount	Total
Sales revenue (for 33,000 units)		7,029,000
Cost of goods sold
Direct materials used	1,617,000
Direct labor	1,254,000
Variable factory overhead	990,000
Fixed factory overhead	735,000	4,596,000
Gross margin		2,433,000
Operating expenses
Variable	1,122,000
Fixed	728,000	1,850,000
Operating income		Single Line$ 583,000Double Line

Prepare a flexible budget for June for sales levels 15% and 30% above and below expectations.

Question 15

Anirack Company has prepared the following budget for January:

Description	Amount	Total
Sales revenue (for 60,000 units)		10,500,000
Cost of goods sold
Direct materials used	3,180,000
Direct labor	1,800,000
Variable factory overhead	1,680,000
Fixed factory overhead	485,000	7,145,000
Gross margin		3,355,000
Operating expenses
Variable	1,920,000
Fixed	423,000	2,343,000
Operating income		Single Line1,012,000Double Line

Prepare a flexible budget for January for sales levels 20% and 40% above and below expectations.

Question 16

Wogger, Inc. used the following information to prepare the master budget for next year:

• Sales (in units): 400,000
• Selling price: $250 per unit
• Direct materials cost: 3 pounds per unit at $16 per pound
• Direct labor cost: 2 hours per unit at $27.50 per hour
• Variable overhead: 80% of direct labor cost
• Fixed overhead: $21,000,000
• Variable period costs: $17 per unit
• Fixed period costs: $8,200,000
• Expected income: $5,200,000

Prepare a flexible budget for sales levels 5% and 10% above and below expectations.

Question 17

Kimbell Enterprises has prepared the following budget for next period, when they expect to sell 150,000 units:

Cost of goods sold is 10% fixed and 90% variable. Operating expenses are 20% fixed and 80% variable.

Prepare a flexible budget for next period for sales levels 10% and 20% above and below expectations.

Question 18

Forrester Company prepared the following master budget for next year:

Description	Amount	Total
Sales revenue (for 100,000 units)		3,000,000
Variable costs
Direct materials	400,000
Direct labor	700,000
Variable manufacturing overhead	500,000
Variable period costs	350,000
Contribution margin		1,050,000
Fixed costs
Fixed manufacturing overhead	620,000
Fixed period costs	400,000
Operating income		Single Line30,000Double Line

Prepare a flexible budget for next period for sales levels 10% above and below expectations.

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 19

JaeCorp has prepared the following budget for September:

Cost of goods sold is three-fourths variable, and period costs are two-thirds variable.

Prepare a flexible budget for September for sales levels 5% and 10% above and below expectations.

Challenge Problem

Question 20

Gates Industries prepared the following budget for July as part of their master budget:

Description	Amount	Total
Sales revenue (for 81,000 units)		36,450,000
Cost of goods sold
Direct materials used	6,480,000
Direct labor	4,860,000
Factory overhead	8,290,000	19,630,000
Gross margin		16,820,000
Operating expenses		6,550,000
Operating income		Single Line10,270,000Double Line

Factory overhead consists of variable overhead that is estimated at a rate of 110% of direct labor cost, factory rent, depreciation, and insurance, and supervisory salaries. Operating expenses include office rent, equipment depreciation, sales and administrative salaries, invoicing costs of 10% of direct materials cost, and sales commissions of 5% of revenues.

Prepare a flexible budget for sales levels 5% and 10% above and below expectations.

Pre-Assessment Problem

Use this problem to check whether you are fully prepared for the assessment. Work the problem under assessment conditions – don’t use any notes or other materials!

Question 21

Connery Company planned to sell 30,000 units next year, and used the following information to prepare its budget:

Selling price	$50.00 per unit
Direct materials	$12.00 per unit
Direct labor	$0.75 per unit
Variable manufacturing overhead	$18.00 per unit
Fixed manufacturing overhead	$300,000
Period costs (all fixed)	$200,000

Prepare a master budget and flexible budgets for sales levels 20% above and below budget.