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Ch06 tutorial answer
Management Accounting (ACCT2112)
University of Western Australia
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CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1 What are the four elements of the budgeting cycle? The budgeting cycle includes the following elements: a. Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected. b. Providing a frame of reference, a set of specific expectations against which actual results can be compared. c. Investigating variations from plans. If necessary, corrective action follows investigation. d. Planning again, in light of feedback and changed conditions.
6-2 Define master budget. The master budget expresses management’s operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period.
6-3 List five the key questions which must be considered by managers for developing successful strategies. What are our main objectives? How can we create value for our customers and differentiate ourselves from our competitors? Where is our market and who are our customers? What is the best organizational and financial structure for us? What are the alternative strategies and opportunities and their relevant risks?
6-4 “Budgets provide a framework for evaluating performance and improving learning.” Do you agree? Explain. Yes, budgets can help a company’s managers to measure and evaluate actual performance against predicted performance. When actual outcomes differ from budgeted or planned results, it prompts managers to investigate and find out the reason(s) for the variance(s). This exercise leads to an improved learning for future budgeting.
6-5 “Budgets can promote coordination and communication among subunits within the company.” Do you agree? Explain. Yes, budgets can promote coordination and communication among all aspects of production or service and all departments in a company. Budgets can provide a communication mechanism that seamlessly links all subunits and their employees, helping them understand their individual goals or objectives of the company. This understanding can facilitate coordination among individual departments within the company.
6-6 “Budgets motivate managers and other employees to the company’s goals.” Do you agree? Explain. Yes, budgets create goals as well as challenges for managers and employees, and motivate them to improve their performances and to achieve their goals. Managers and employees regard not meeting their budgets as a failure and, therefore, they are motivated to work harder in order to avoid such situations.
6-7 Define rolling budget. Give an example. A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2017 is superseded by a four-quarter rolling budget for April 2017 to March 2018, and so on.
6-8 Outline the steps in preparing an operating budget. The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget. 2. Prepare the production budget (in units). 3. Prepare the direct material usage budget and direct material purchases budget. 4. Prepare the direct manufacturing labor budget. 5. Prepare the manufacturing overhead budget. 6. Prepare the ending inventories budget. 7. Prepare the cost of goods sold budget. 8. Prepare the nonmanufacturing costs budget. 9. Prepare the budgeted income statement.
6-9 What is the usual starting point for the operating budget? Usually, a revenues budget is the starting point for the operating budget because the forecasted level of unit sales or revenues has a major impact on the production capacity, the inventory levels planned, and determines all of the costs required to support the budgeted revenues.
6-10 How can sensitivity analysis be used to increase the benefits of budgeting? How can sensitivity analysis be used to increase the benefits of budgeting? Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change with changes in the underlying assumptions. This assists managers in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate.
6-11 What is the key emphasis in Kaizen budgeting? The key emphasis in Kaizen budgeting is continuous improvement, resulting in cost reductions, during the budget period.
6-12 Describe how nonoutput-based cost drivers can be incorporated into budgeting. Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell products and services. Nonoutput-based cost drivers, such as the number of parts, number of batches, and number of new products can be used with ABB.
6-13 Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior. The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager’s behavior. For example, if a revenue center is chosen, the
6-17Operating and financial budgets. Which of the following statements is correct regarding the drivers of operating and financial budgets? a sales budget will drive the cost of goods sold budget. b cost of goods sold budget will drive the units of production budget. c production budget will drive the selling and administrative expense budget. d cash budget will drive the production and selling and administrative expense budgets.
SOLUTION
Operating and financial budgets. Choice "a" is correct. The sales (or revenues) budget is the primary driver of most components of the master budget, which includes both operating and financial budgets. The sales budget will drive the production budget, which in turn drives budgets for direct materials, direct labor, and factory overhead. All three of these budgets combine to form the cost of goods sold budget. Choice "b" is incorrect. The units of production budget drives the budgets for direct materials, direct labor, and manufacturing overhead. These three budgets combine to form the cost of goods sold budget. Choice "c" is incorrect. The selling and administrative expense budget is separate from the production budget, although both are driven by the sales budget. Choice "d" is incorrect. The cash budget is driven by the production and selling and administrative expense budgets. Of course, cash needs might affect the final production and selling budget.
6-18Production budget. Superior Industries sales budget shows quarterly sales for the next year as follows: Quarter 1–10,000; Quarter 2–8,000; Quarter 3–12,000; Quarter 4–14,000. Company policy is to have a target finished-goods inventory at the end of each quarter equal to 20% of the next quarter’s sales. Budgeted production for the second quarter of next year would be:
- 7,200 units; 2. 8,800 units; 3. 12,000 units; 4. 10,400 units
SOLUTION
Production budget. Choice "2" is correct. 8,800 units are the budgeted production for the second quarter.
The calculation proceeds with first determining the beginning inventory for the second quarter (20% × second quarter sales, 8,000 units = 1,600 units) and the ending inventory for the second quarter (20% × third quarter sales, 12,000 units = 2,400 units). We then use the following equation to calculate production for the second quarter: Beginning inventory + Production = Sales + Ending inventory
Production = Sales + Ending inventory – Beginning inventory
= 8,000 + 2,400 – 1,600 = 8,800 units Check:
Second Quarter Beginning inventory (20% × 8,000) 1,600 units Add Production (plug) 8,800 units 10,400 units Deduct Sales 8,000 units Ending inventory (20% × 12,000) 2,400 units
6-19 Responsibility centers. Elmhurst Corporation is considering changes to its responsibility accounting system. Which of the following statements is/are correct for a responsibility accounting system.
I. In a cost center, managers are responsible for controlling costs but not revenue.
II idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. III. To be effective, a good responsibility accounting system must help managers to plan and to control.
IV. Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. 1 and II only are correct. 2 and III only are correct. 3, II, and III are correct. 4, II and IV are correct.
SOLUTION
Responsibility centers. Choice "3" is correct. The question asks which of a series of statements is/are correct for a responsibility accounting system. "None of the above" is not an available option, and neither is "All of the above." Statement I says that, in a cost center, managers are responsible for controlling costs but not revenue. Statement I is correct. Statement II says that the idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. Statement II is correct. Statement III says that, to be effective, a good responsibility accounting system must help managers to plan and control. Planning without control and control without planning is not effective. Statement III is correct. Statement IV says that costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. Costs that are allocated are normally not controllable by the responsibility center manager. Statement IV is incorrect.
6-20Cash budget. Mary Jacobs, the controller of the Jenks Company is working on Jenks’ cash budget for year 2. She has information on each of the following items:
I. Wages due to workers accrued as of December 31, year 1. II on a line of credit that may be used to fund Jenks’ operations in year 2. III. The balance in accounts payable as of December 31, year 1, from credit purchases made in
Lead Tests 16,400 $240 –10% 14,
Rouse & Sons Sales Budget For the Year Ended December 31, 2018
Selling Price
Units Sold
Total Revenues Radon Tests $290 12,932 $3,750, Lead Tests $240 14,760 3,542, $7,292,
Rouse & Sons
2017
Volume
Planned 2018 Selling Prices
Expected 2018 Change in Volume
Expected 2018 Volume Radon Tests 12,200 $290 +6% 12, Lead Tests 16,400 $230 –7% 15,
Rouse & Sons Sales Budget For the Year Ended December 31, 2018
Selling Price Units Sold
Total Revenues Radon Tests $290 12,932 $3,750, Lead Tests $230 15,252 3,507, $7,258,
Expected revenues at the new 2018 prices are $7,258,240, which is lower than the expected 2018 revenues of $7,292,680 if the prices are unchanged. So, if the goal is to maximize sales revenue and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead test in 2018.
6-22 Sales and production budget. The Albright Company manufactures ball pens and expects sales of 452,000 units in 2018. Albright estimates that its ending inventory for 2018 will be 65,400 pens. The beginning inventory is 46,500 pens. Compute the number of pens budgeted for production in 2018.
(5 min.) Sales and production budget.
Budgeted sales in units 452, Add target ending finished goods inventory 65, Total requirements 517, Deduct beginning finished goods inventory 46, Units to be produced 470,
6-23 Direct material budget. Polyhidron Corporation produces 5-gallon plastic buckets. The company expects to produce 430,000 buckets in 2018. Polyhidron purchases high quality plastic
granules for the production of buckets. Each pound of plastic granules produces two 5-gallon buckets. Target ending inventory of the company is 35,200 pounds of plastic granules; its beginning inventory is 22,500. Compute how many pounds of plastic granules need to be purchased in 2018.
(5 min.) Direct materials purchases budget.
Direct materials to be used in production (pounds): (430,000÷2) 215, Add target ending direct materials inventory (pounds) 35, Total requirements (pounds) 250, Deduct beginning direct materials inventory (pounds) 22, Direct materials to be purchased (pounds) 227,
6-24 Material purchases budget. The Ceremicon Company produces teapots from stoneware clay. The company has prepared a sales budget of 150,000 units of teapots for a 3-month period. It has an inventory of 34,000 units of teapots on hand at December 31 and has estimated an inventory of 38,000 units of teapots at the end of the succeeding quarter.
One unit of teapot needs 2 pounds of stoneware clay. The company has an inventory of 82,000 pounds of stoneware clay at December 31 and has a target ending inventory of 95, pounds of stoneware clay at the end of the succeeding quarter. How many pounds of direct materials (stoneware clay) should Ceremicon purchase during the 3 months ending March 31?
(10 min.) Budgeting material purchases.
Production Budget: Finished Goods (units) Budgeted sales 150, Add target ending teapots inventory 38, Total requirements 188, Deduct beginning teapots inventory 34, Units to be produced 154,
Direct Materials (stoneware clay) Purchases Budget: Direct Materials (in pounds) Direct materials needed for production (154,000 2) 308, Add target ending direct materials inventory 95, Total requirements 403, Deduct beginning direct materials inventory 82, Direct materials to be purchased 321,
6-25 Revenues, production, and purchases budgets. The Deluxe Motorcar in northern California manufactures motor cars of all categories. Its budgeted sales for the most popular
productivity of the employees by conducting effective training programmes which may result in reduction of the cost of manufacturing tyres with a less number of defective tyres. It would certainly reduce the price the supplier charges Deluxe Motorcar. Toyota routinely aids its suppliers in this way and also reduces costs through better coordination between suppliers and the company.
6-26 Revenues and production budget. Price, Inc., bottles and distributes mineral water from the company’s natural springs in northern Oregon. Price markets two products: 12-ounce disposable plastic bottles and 1-gallon reusable plastic containers.
Required:
For 2015, Price marketing managers project monthly sales of 420,000 12-ounce bottles and 170,000 1-gallon containers. Average selling prices are estimated at $0 per 12-ounce bottle and $1 per 1-gallon container. Prepare a revenues budget for Price, Inc., for the year ending December 31, 2015.
Price begins 2015 with 890,000 12-ounce bottles in inventory. The vice president of operations requests that 12-ounce bottles ending inventory on December 31, 2015, be no less than 680,000 bottles. Based on sales projections as budgeted previously, what is the minimum number of 12-ounce bottles Price must produce during 2015?
The VP of operations requests that ending inventory of 1-gallon containers on December 31, 2015, be 240,000 units. If the production budget calls for Price to produce 1,900,000 1-gallon containers during 2015, what is the beginning inventory of 1-gallon containers on January 1, 2015?
SOLUTION
(30 min.) Revenues and production budget.
- Selling Price
Units Sold
Total Revenues 12-ounce bottles $0 5,040,000a $1,008, 1-gallon units 1 2,040,000b 3,060, $4,068, a 420,000 × 12 months = 5,040, b 170,000 × 12 months = 2,040,
Budgeted unit sales (12-ounce bottles) 5,040, Add target ending finished goods inventory 680, Total requirements 5,720, Deduct beginning finished goods inventory 890, Units to be produced 4,830,
Beginning Inventory = Budgeted sales + Target ending inventory – Budgeted production
= 2,040,000 + 240,000 1,900, = 380,000 1-gallon units
6-27 Budgeting; direct material usage, manufacturing cost, and gross margin. Xander Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0 gallons of dye at a cost of $6 per gallon. All other materials are indirect. At the beginning of the year Xander has an inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of $23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory cost- flow method. Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero. Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools—one for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH). There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour. It budgets 0. machine-hours to dye each skein in the dyeing process. The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:
Required:
- Prepare a direct materials usage budget in both units and dollars.
- Calculate the budgeted overhead allocation rates for weaving and dyeing.
- Calculate the budgeted unit cost of a blue rug for the year.
- Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels).
- Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
- Find the budgeted gross margin for blue rugs under each sales assumption.
- What actions might you take as a manager to improve profitability if sales drop to 185,
Weaving overhead 2 62 DMLH 158. Total $1,127.
1 0 machine hour per skein36 skeins per rug = 7 machine-hrs. per rug.
4.
Revenue Budget
Units
Selling Price Total Revenues Blue Rugs200,000 $2,000 $400,000, Blue Rugs185,000 $2,000 $370,000,
5a. Sales = 200,000 rugs Cost of Goods Sold Budget
From Schedule Total Beginning finished goods inventory $ 0
Direct materials used
$
15,405,480（第
一题）
Direct manufacturing labor ($806 Q3× 200,000) 161,200, Dyeing overhead ($86 × 200,000) 17,280, Weaving overhead ($158 × 200,000) 31,620,000 225,505, Cost of goods available for sale 225,505, Deduct ending finished goods inventory 0 Cost of goods sold $225,505,
5b. Sales = 185,000 rugs Production = 200,000 rugs Cost of Goods Sold Budget
From Schedule Total Beginning finished goods inventory $ 0 Direct materials used $ 15,405, Direct manufacturing labor ($806 × 200,000) 161,200, Dyeing overhead ($86 × 200,000) 17,280, Weaving overhead ($158 × 200,000) 31,620,000 225,505, Cost of goods available for sale 225,505, Deduct ending finished goods inventory ($1,127 × 15,000) 16,909, Cost of goods sold $208,595,
Some students assume that Xander will produce only 185,000 rugs to match 185,000 rugs that ar expected to be sold and carry no finished good inventory of the rugs. In this case the Cost of goods sold budget will be as follows. The Cost of Goods Sold budget is higher because the fixed overhead costs in the dyeing and weaving cost pools do not get “inventoried” in the closing inventory of rugs but are instead expensed in the current period.
Sales = 185,000 rugs Cost of Goods Sold Budget for Producing 185,000 rugs
From Schedule Total Beginning finished goods inventory $ 0 Direct materials useda $ 14,253, Direct manufacturing labor ($806 × 185,000) 149,110, Variable dyeing overhead ($70 × 185,000) 13,051, Fixed dyeing overheadc 3,170, Variable weaving overhead ($119 × 185,000) 22, Fixed weaving overheade 7,790,000 209,417, Cost of goods available for sale 209,417, Deduct ending finished goods inventory 0 Cost of goods sold $209,417, a[$961,800 + (185,000 rugs×36 skeins−458,000)×$2] + [$23,680 + (185,000 rugs×0 gallons−4,000)×$6] bVariable dyeing overhead cost per rug = ($6,560,000 + $7,550,000) ÷ 200,000 rugs = $70 per rug cFixed dyeing overhead costs = $347,000 + $2,100,000 + $723,000 = $3,170, dVariable weaving overhead cost per rug = ($15,400,000 + $5,540,000 + $2,890,000) ÷ 200,000 rugs = $119 per rug eFixed weaving overhead costs = $1,700,000 + $274,000 + $5,816,000 = $7,790,
6.
200,000 rugs sold
185,000 rugs sold 200,000 rugs produced
185,000 rugs sold 185,000 rugs produced Revenue $400,000,000 $370,000,000 $370,000, Less: Cost of goods sold 225,505,480 208,595,980 209,417, Gross margin $174,494,520 $161,404,020 $160,582,
If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce less to reduce variable costs and inventory costs.
Top management can look for ways to increase (stretch) sales and improve quality, efficiency, and input prices to reduce costs in each cost category such as direct materials, direct manufacturing labor, and overhead costs. Top management can also use the budget to coordinate and communicate across different parts of the organization, create a framework for judging performance and facilitating learning, and motivate managers and employees to achieve “stretch” targets of higher revenues and lower costs.
6-28 Budgeting, service company. Ever Clean Company provides gutter cleaning services to residential clients. The company has enjoyed considerable growth in recent years due to a
Budgeted overhead rate =
$144, 000
12, 000 DLH
= $12 per DLH
3.
Budgeted Total Cost and Average Cost of 600-Foot Gutter-Cleaning Job Direct labor costs $180, Overhead costs 144, Total costs of 1,000 jobs $324,
Budgeted cost of average 600-foot gutter-cleaning job = $324,000 ÷ 1,000 = $324 per job.
- Revenue Budget
Feet of Gutter Surface Price per Foot Total Revenues 1,000 jobs 600 ft./job = 600,000 ft. $0 $360,
Operating Income Budget 1,000 jobs Revenue $360, Expenses 324, Operating Income $ 36,
The following table shows Ever Clean’s profitability if sales decline to 900 jobs.
Revenue (900 jobs 600 sq. ft. 0/sq. ft. $324, Wages (900 jobs 12 hours per job × $15 per hour) $162, Supplies (900 jobs 12 hours per job × $6 per hour) 70, Fixed indirect labor costs 25, Fixed depreciation costs 17, Other fixed costs 24,000 298, $ 25,
If revenue should fall to 900 jobs, Clark should examine the company’s fixed overhead costs to determine if any cuts are possible. Variable product costs will naturally decline with a decline in jobs, but Clark should evaluate if variable supplies cost of $6 per direct labor hour could be reduced. Fixed costs will not decline without management taking action. While depreciation cost is not likely something that management can reduce, the fixed indirect costs and “other” fixed overhead costs are significant and should be examined.
6-29 Budgets for production and direct manufacturing labor. (CMA, adapted) Roletter Company makes and sells artistic frames for pictures of weddings, graduations, and other special events. Bob Anderson, the controller, is responsible for preparing Roletter’s master budget and has accumulated the following information for 2018:
In addition to wages, direct manufacturing labor-related costs include pension contributions of $0 per hour, worker’s compensation insurance of $0 per hour, employee medical insurance of $0 per hour, and Social Security taxes. Assume that as of January 1, 2018, the Social Security tax rates are 7% for employers and 7% for employees. The cost of employee benefits paid by Roletter on its employees is treated as a direct manufacturing labor cost. Roletter has a labor contract that calls for a wage increase to $13 per hour on April 1, 2018. New laborsaving machinery has been installed and will be fully operational by March 1, 2018. Roletter expects to have 17,500 frames on hand at December 31, 2018, and it has a policy of carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the second following month’s sales.
Required:
- Prepare a production budget and a direct manufacturing labor budget for Roletter Company by month and for the first quarter of 2018. You may combine both budgets in one schedule. The direct manufacturing labor budget should include labor-hours and show the details for each labor cost category.
- What actions has the budget process prompted Roletter’s management to take?
- How might Roletter’s managers use the budget developed in requirement 1 to better manage the company?
SOLUTION
(15-25 min.) Budgets for production and direct manufacturing labor.
Roletter Company Budget for Production and Direct Manufacturing Labor for the Quarter Ended March 31, 2018 January February March Quarter Budgeted sales (units)
10,000 14,000 7,000 31,
Add target ending finished goods inventorya (units)
17,500=14000+3500 11,000=7000+4000 12,000=8000+4000 12,000(equal March's ending value) Total requirements (units)
27,500 25,000 19,000 43,
Deduct beginning finished goods 17,500 17,500 11,000 17,500(January's
and workers’ compensation insurance may be fixed by law, while pension contributions and medical insurance might be features that make Roletter an attractive employer.
- We already see one example of a decision that Roletter’s management took based on the budgeted expenses—installing labor-saving machines ahead of wage increases. Roletter’s management should also continue to work with employees to increase labor productivity.
6-30 Activity-based budgeting. The Jerico store of Jiffy Mart, a chain of small neighborhood convenience stores, is preparing its activity-based budget for January 2018. Jiffy Mart has three product categories: soft drinks (35% of cost of goods sold [COGS]), fresh produce (25% of COGS), and packaged food (40% of COGS). The following table shows the four activities that consume indirect resources at the Jerico store, the cost drivers and their rates, and the cost-driver amount budgeted to be consumed by each activity in January 2018.
Required:
- What is the total budgeted indirect cost at the Jerico store in January 2018? What is the total budgeted cost of each activity at the Jerico store for January 2018? What is the budgeted indirect cost of each product category for January 2018?
- Which product category has the largest fraction of total budgeted indirect costs?
- Given your answer in requirement 2, what advantage does Jiffy Mart gain by using an activity-based approach to budgeting over, say, allocating indirect costs to products based on cost of goods sold?
SOLUTION
(20–30 min.) Activity-based budgeting.
Activity
Cost Hierarchy
Soft Drinks
Fresh Snacks
Packaged Food Total
Ordering $45 14; 24; 14 Delivery $41 12; 62; 19 Shelf-stocking $10 16; 172; 94 Customer support $0 4,600; 34,200; 10, Total budgeted indirect costs
Percentage of total indirect costs
Batch-level
Batch-level Output-unit- level Output-unit- level
$ 630
492
168
414 $1,
12%
$1,
2,
1,
3, $8,
62%
$ 630
779
987
968 $3,
24%
$ 2,
3,
2,
4, $13,
Total indirect costs allocated according to COGS (35%; 25%; 40% 13,574) $4,751 $3,393 $5,
Refer to the last row of the table in requirement 1. Fresh snacks, which represents the smallest portion of COGS (25%), is the product category that consumes the largest share (62%) of the indirect resources. Fresh snacks demand the highest level of ordering, delivery, shelf- stocking, and customer support resources of all three product categories—it has to be ordered, delivered, and stocked in small, perishable batches, and convenience store customers often require more assistance when purchasing.
An ABB approach recognizes how different products require different mixes of support activities. The relative percentage of how each product area uses the cost driver at each activity area is:
Activity
Cost Hierarchy
Soft Drinks
Fresh Snacks
Packaged Food Total Ordering Delivery Shelf-stocking Customer support
Batch-level Batch-level Output-unit-level Output-unit-level
27%
13
6
9
46%
67
61
69
27%
20
33
22
100%
100
100
100
By recognizing these differences, Jiffy Mart’s managers are better able to budget for different unit sales levels and different mixes of individual product-line items sold. Using a single cost driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities) across product lines which does not occur at Jiffy Mart. If Jiffy Mart had used COGS to allocate costs, Fresh Snacks would have been allocated 25% of the indirect costs, much lower than the 62% of the indirect costs based on an analysis of the activities it actually uses. Soft Drinks would have been allocated 35% and Packaged Food 40% of the indirect costs, much higher than the 12% and 24% respectively based on the cost of activities they actually use. Other benefits cited by managers include: (1) better identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3) identification of budgetary slack.
6-31 Kaizen approach to activity-based budgeting (continuation of 6-30). Jiffy Mart has a Kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of 2018. Each successive month, the budgeted cost-driver rate decreases by 0% relative to the
Ch06 tutorial answer
Course: Management Accounting (ACCT2112)
University: University of Western Australia
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