Problem 7 Management Control System and Responsibility Accounting

The manufacturing overhead budget for ABC Company contains the following items.

Variable costs
Indirect materials………….…………… $25,000
Indirect labor…………………………….. 12,000
Maintenance expenses…………….. 10,000
Manufacturing supplies……………. 6,000
Total variable……………………………. $53,000

Fixed costs
Supervision……………………………… . $17,000
Inspection costs……………………….. 1,000
Insurance expenses…………………. 2,000
Depreciation……………………………. 15,000
Total fixed………………………………. $35,000

The budget was based on an estimated 2,000 units being produced. During November 1,500 units were
produced, and the following costs incurred.

Variable costs
Indirect materials……………………… $25,200
Indirect labor……………………………. 13,500
Maintenance expenses……………. 8,200
Manufacturing supplies…………… 5,100
Total variable……………………………. $52,000

Fixed costs
Supervision……………………………… $19,300
Inspection costs………………………. 1,200
Insurance expenses………………… 2,200
Depreciation……………………………. 14,700
Total fixed………………………………. $37,400

Instructions
(a) Determine which items would be controlled by Ed Lopat, the production manager. (Assume
“supervision” excludes Lopat’s own salary>)
(b) How much should have been spent during the month for the manufacture of the 1,500 units?
(c) Prepare a flexible manufacturing overhead budget report for Mr. Lopat.
(d) Prepare a responsibility report. Include only the costs that would have been controllable by Mr.
Lopat. In an attached memo, describe clearly for Mr. Lopat the areas in which his performance
needs to be improved.
Problem 8 Flexible Budget and Variance Analysis

Assume that during the past month XYZ Company produced 10,000 cartons of Liquid Accent
highlighters. Liquid accent offers a translucent barrel and cap with a visible ink supply for see-through
color. The special fluorescent ink is fade- and water-resistant. Each carton contains 100 boxes of
markers , and each box contains five markers. The markers comes in boxes of one of five fluorescent
colors – orange, blue, yellow, green, and pink – and in a five-color set.

Assume the following additional facts: The standard cost for one carton of 500 markers is as follows.

Standard
Manufacturing Cost Elements Quantity x Price = Cost

Direct materials
Tips (boxes of 500) 500 x $3.03 = $15.00
Translucent barrels and caps (boxes of 500) 500 x $0.09 = 45.00
Fluorescent ink (100 oz. containers) 100 oz. x $0.32 = 32.00
Total direct materials 92.00
Direct labor 0.25 hours x $ 9.00 = 2.25
Overhead 0.25 hours x $48.00 = 12.00
$106.25
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During the month, the following transactions occurred in manufacturing the 10,000 cartons of
highlighters.

1. Purchased 10,000 boxes of tips for $148,000 ($14.80 per 500 tips); purchased 10,200 boxes of
translucent barrels and caps for $453,900 ($44.50 per barrels and caps); and purchased 9,900
containers of fluorescent ink for $328,185 (#33.15 per 100 ounces).
2. All materials purchased during the period were used to make markers during the period.
3. 2,300 direct labor hours were worked at a total labor cost of $20,240 (an average hourly rate of
$8.80).
4. Variable manufacturing overhead incurred was $34,600, and fixed overhead incurred was
$84,000.

The manufacturing overhead rate of $48.oo is based on a normal capacity of 2,600 direct labor hours.
The total budget at this capacity is $83,980 fixed and $40,820 variable.

Required:
Determine whether XYZ Company met its price and quantity objectives relative to materials, labor and
overhead.