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 50,000@1.075hr@$7.65 411,188

Overtime Premium 71,280@7.65/2 272,646

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