Jimmy V, the vice president of marketing at Alfa Romeo Industries, Inc., is dist

Question

Jimmy V, the vice president of marketing at Alfa Romeo Industries, Inc., is distraught. It is only early August, and he has just received a report from the company's printing and graphic design services showing that her marketing departments has exceeded its budget for printing for the year! The report appears as follows: Printing and Graphic Design Services, Budget Variance Statement For the Alfa Romeo Marketing Department, January July lus nde) Romi Rain, the corporation CEO, demands Gina must either stop using the service or obtain approval of a supplemental budget request from the company CFO, Shyla Stylez. Ms. Luv pulls out her latest statement from June and finds that actual charges at that time were $1,830. Since the main manufacturing plant was shut down for a major overhaul during most of July, she wonders how $2,520 could have been incurred in July. Jimmy discovers that costs for the printing and graphic design services in July were $6,300, of which $700 was for paper, $2,000 for salaries, $2,000 for machine rentals and $1,600 for general overhead (allocated share of a general and administrative, utilities, depreciation, etc.). A total of 35,000 prints were made in July, a relatively low number because of the shutdown. However, several salespersons in the marketing amount of printing done for the winter catalogs and promotion mailers that will not be artment had a substantial distributed until September. The marketing department was responsible for 14,000 of the 35,000 prints. The $2,520 charge was computed by dividing total printing and graphic design services cost for the month by the number of prints $6,300/35,000) to arrive at a charge of S0.18 per print. Turi also learned that during a typical month about $8,600 in cost is incurred and 150,000 prints are processed. Paper is the only variable cost. REQUIRED: Evaluate the cost allocation system used. printing and graphic design services? annual budget? 1. 2. Based on the annual budget. What should be Mr. Jimmy V's monthly expense for 3. From the information given, what is the Printing and Graphic Design Services total 4. What amount of fixed costs should Printing and Graphic Design incur during the year? 5. It appears that this is a static budget. Would it benefit the company switching to a variable budget? Based what you have researched, please make up a bud that will indicate that is more favorable for the marketing department get for only the month of July 6. Now the hard part. Jimmy has asked to meet with Romi Rain and Shyla Stylez to discuss her budget. Please recommend what Jimmy should say to Romi and Shyla in 7. order to convice them to change the corporate budget system.

Explanation / Answer

Total Prints 35000 Details of cost Particulars Type Amount Paper Cost Variable $      700.000 Salaries Fixed $   2,000.000 Machine rentals Fixed $   2,000.000 General Overhead Fixed $   1,600.000 Total $   6,300.000 Optimium Quantity 150000 Fixed Cost per unit Salaries 2000/150000 $         0.0133 Machine rentals 2000/150000 $         0.0133 General Overhead 1600/150000 $         0.0107 Total Fixed Cost per unit B $         0.0373 variable cost per unit Paper Cost 700/35000 $      0.02000 Total Fixed Cost per unit A $      0.02000 1 Total Cost per unit A+B $      0.05733 The cost allocation system adopted is incorrect by the organisation and the above method should be followed 2 Monthly expense for printing services Budgeted Quantity 150000 Cost per unit as per 1 $           0.057 Total budgeted cost $     8,600.00 3 Printing & Graphic service Annual budget Budgeted cost per month $     8,600.00 Annual Cost (8600 *12) $103,200.00 4 Amount of Fixed Cost to be incurred Fixed Cost per unit $         0.0373 Total Unit produced in a year 150000*12 1800000 Budgeted Fixed Cost $   67,200.00 5 If the company switches to variable budget it could save a huge sum by avoiding extra ordinary fixed costs

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