Atlantic Lighting Systems’s master budget and the actual results for the most re
ID: 2454494 • 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 Required 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 performance 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? g. Is the fixed cost volume variance favorable or unfavorable? Explain the effect of this variance on the cost of each unit produce.
Explanation / Answer
Since, there are multiple parts to the question, the first four have been answered.
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Part A)
As per the information provided in the question, Atlantic's unit sales didn't increase as a result of cut in selling prices. It is evident from the fact, that the actual selling price is higher than the budgeted selling price as shown below:
Budgeted Selling Price = Budgeted Sales Revenue/Budgeted Units = 33,000,000/150,000 = $220 per unit
Actual Selling Price = Actual Sales Revenue/Actual Units = 35,520,000/160,000 = $222 per unit
Therefore, it can be concluded that some other strategy must have been used by Atlantic to increase its unit sales.
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Part B)
From the information available in the question, it can be concluded that Mr. Ludwig is correct in his conclusion that something is wrong with the company’s performance evaluation process. It is so, because bonuses have been paid to employees at lower sales level. Further, the employees are punished at higher sales level. To overcome this problem, the company should use flexible budget variances as against activity variances, as flexible budget variances would provide a better evaluation of actual performance when compared with sales and revenues details.
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Part C)
The flexible budget is given below:
Notes:
Per unit values to be used in the preparation of flexible budget have been calculated below:
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Part D)
An increase/decrease in the actual fixed costs may have been caused by factors such as increase/decrease in factory rent, insurance paid for factory or equipment, salaries paid to production managers, etc. Similarly, fixed selling, general and administrative expenses may have changed as a result of increased/decreased spending on advertising, salaries paid to office staff, etc.
Flexible Budget Actual Results Variances Units 160,000 160,000 Sales Revenue 35,200,000 (160,000*220) 35,520,000 320,000 (F) Variable Manufacturing Costs Materials 5,120,000 (160,000*32) 5,300,000 180,000 (U) Labor 4,480,000 (160,000*28) 4,400,000 80,000 (F) Overhead 2,240,000 (160,000*14) 2,290,000 50,000 (U) Variable Selling, General, and Admin. Costs 5,600,000 (160,000*35) 5,450,000 150,000 (F) Contribution Margin 17,760,000 18,080,000 320,000 (F) Fixed Costs Manufacturing 7,830,000 7,751,000 79,000 (F) Selling, General, and Admin. Costs 6,980,000 7,015,000 35,000 (U) Net Income $2,950,000 $3,314,000 $364,000 (F)Related Questions
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