BUDGETING: UNCLE GRUMPS TOYS
Class Announcements
Traditional Assignment: Assignment #1 is due February 7, 2011;
assignment is available on-line Service Learning Assignment:
Initial meeting with client should be completed CMA Nova Scotia Information Session
Date: January 31, 2012 Time: 5:30pm to 6:30pm Location: 290 Schwartz
CMA Nova Scotia Information Session Date: February 1, 2012 Time: 10:00am to 11:00am Location: 290 Schwartz
Class Objectives
1. Determining the flexible overhead costs (variance and fixed) in a case context
2. Calculating and interpreting variable overhead variances in a case context
3. Calculating and interpreting fixed overhead variances in a case context
Uncle Grumps: Company
Boston based foam rubber toy manufacturer
Manufactured Hobbit like dolls with large noses that sell for $20.00
Baby versions to be introduced in spring 2003
Seasonal sales with high sales level in August to November period (Christmas rush)
Budgeted sales for 2002 were $40 million or 2 million toys; gross margin 24%
Actual sales for 2002 were 2,094,000 units Production is consistent throughout the
year; Actual production for 2002 was 2,050,000
Uncle Grumps: Issues Effectiveness of Evaluation System Effectiveness of Decision Making
Special Order Pricing/Costing Evaluation of Holly Frost, Production Manager –
new manager Variance analysis
Actual vs. budget Decompose into price and quantity variances
Impact of material content reduction – result of improvement in production process
Controllability Impact of special order Impact of Great Blizzard ’02- 20 working days closure
Uncle Grumps: Evaluation System Sizable bonus based on performance evaluations Prefer to base evaluation on objective measures
of performance - an emphasis on achievement of budgeted goals
Board determines management bonuses of prior year in January after reviewing the budget
Evaluation of Holly Frost Reduced material content from 5 lbs to 4.5 lbs Factory closed from Feb 5th to March 4th due to
Great Blizzard of ‘02 Special order required overtime hours
Uncle Grumps: Budgeting Process Budgeting process begins in late August Management team supplies Board with
budget input by mid-November Monitors budget every six months at board
meetings No standard cost system in place because
unit costs were relatively stable Considerations:
Continuous process Participatory process Requires management support
Master Budget vs Actual
Uncle Grumps
2002 Budget
Variable Costs:
Raw materials $1,800 7200 $7,255 Direct labor 3,848 15392 17,530Indirect labor 300 1200 1,366Supplies 75 300 290Power 375 1500 1,550
Fixed Costs:Repairs and maintenance
300 1200 1,030
Depreciation 700 2800 2,800Insurance 250 1000 1,003
$7,648 $30,592 $32,824
Units produced 500 2000 2,050
Quarterly Budget
2002 Actual
Master Budget vs Actual: Variance AnalysisUncle Grumps
2002 Budget
Variable Costs:
Raw materials $1,800 7200 $7,255 $55 UDirect labor 3,848 15392 17,530 $2,138 UIndirect labor 300 1200 1,366 $166 USupplies 75 300 290 ($10) FPower 375 1500 1,550 $50 U
Fixed Costs: $0 URepairs and maintenance
300 1200 1,030 ($170)F
Depreciation 700 2800 2,800 $0 UInsurance 250 1000 1,003 $3 U
$7,648 $30,592 $32,824 $2,232 UUnits produced 500 2000 2,050
Quarterly Budget
2002 Actual Variances
Master Budget vs Flexible BudgetUncle Grumps
2002 Master Budget
2002 Flexible Budget
Variable Costs:
Raw materials 7,200 7,380 7,255 Direct labor 15,392 15,777 17,530 Indirect labor 1,200 1,230 1,366 Supplies 300 308 290 Power 1,500 1,538 1,550
Fixed Costs:Repairs and maintenance
1,200 1,200 1,030
Depreciation 2,800 2,800 2,800 Insurance 1,000 1,000 1,003
30,592 31,232 32,824
Units produced 2,000 2,050 2,050
2002 Actual
Master Budget vs Flexible Budget: Variance AnalysisUncle Grumps
2002 Master Budget
2002 Flexible Budget
Variable Costs:
Raw materials 7,200 7,380 7,255 -125 FDirect labor 15,392 15,777 17,530 1,753 UIndirect labor 1,200 1,230 1,366 136 USupplies 300 308 290 -18 FPower 1,500 1,538 1,550 13 U
Fixed Costs:Repairs and maintenance
1,200 1,200 1,030 -170F
Depreciation 2,800 2,800 2,800 0 UInsurance 1,000 1,000 1,003 3 U
30,592 31,232 32,824 1,592 UUnits produced 2,000 2,050 2,050 2,050
2002 Actual Variances
Blizzard: Financial Implications 1) Half Pay During Closure
Blizzard caused closure from Feb 5th to March 4th (20 working days)
Employees were given half pay 2) Overtime Pay on Saturdays
Four hour Saturday shift - required paying time and a half
Blizzard: Financial Implications
1) Half Pay During Closure 153,000 hours @ 7.68/hr* x1/2 = $587,520
*$3,205,000/(494,000-153,000/2)=$7.68/hr
2) Overtime Premium on Saturdays Four hour Saturday shift required paying time and a
half Q1 – n/a Q2 – 52,000 hr @ $7.62/2 [(4,406/(500+52x1.5)] = $193,120 Q3 – 54,000 hr @ $7.62/2 [(4,466/(505+54x1.5)] = $205,740 Q4 – 63,720*hr @ $7.65/2 [(5,453/(510+135x1.5)] = $243,730
* 135,000 – (12hr x 6 weekends x 990 employees) = 63,720 hr
Total Overtime - $642,590
Special Order: Financial Implications Order Assessment
$750,000 catalog order for 50,000 toys secured in October
Overtime Premium Overtime increased to 16 hours (from 4
hours) per weekend Wages were at time and a half for 16 hours
per weekend for six weekends.
Special Order: Financial ImplicationsUncle Grumps
Special OrderPer Unit Cost (Budget)
Revenue 750,000
Variable Costs:Raw materials 3.13 156,667 Direct labor Direct Labor 50,[email protected]@$7.65 411,188
Overtime Premium 71,[email protected]/2 272,646
Indirect labor 0.68 34,167 Supplies 0.15 7,500 Power 0.75 37,500
919,667
Contribution Margin (169,667)
Overall Variance AnalysisUncle Grumps
2002 Master Budget
2002 Flexible Budget
Variable Costs:
Raw materials 7,200 7,380 7,255 -125 FDirect labor 15,392 15,777 17,530 1,753 UIndirect labor 1,200 1,230 1,366 136 USupplies 300 308 290 -18 FPower 1,500 1,538 1,550 13 U
Fixed Costs:Repairs and maintenance
1,200 1,200 1,030 -170F
Depreciation 2,800 2,800 2,800 0 UInsurance 1,000 1,000 1,003 3 U
30,592 31,232 32,824 1,592 UUnits produced 2,000 2,050 2,050 2,050
Blizzard a) Half Time Closure 588
b) Saturday Overtime Premium 642.6Special Order Overtime Premium 272.6DM recording (purchase vs. usage) 364Total Variance Net of Management and Sales Decisions 274 F
2002 Actual Variances
Variance Analysis: Decompose Variances
Uncle Grumps
Direct LabourAQxAP AQxSP SQxSP16,027 16,776 15,777
Variances Rate Eficiency749 F 999 U
Direct MaterialAQxAP AQxSP SQxSP
6,891 6,890 7,380 Variances Price Quantity
1U 490F