COMPREHENSIVE BUDGETING PROBLEM HONDA

  1. ACTUAL TRANSACTIONS FOR YEARS 1-3.



1. Year 1:

Honda makers produced and sold 1,000 Hondas in Year 1, its first year of operation. Actual costs of production were as follows:

Direct Materials 11,000 pounds at $19 = $209,000
Direct Labor 1,950 hours at $21 = $ 40,950
Manufacturing Overhead   $245,000




Actual marketing and administrative costs were   $380,000
Total revenue: 1,000 units at $940 = $940,000
Actual machine hours worked:   1,100 hours



2.Year 2:

Honda makers produced 1,500 Hondas and sold 1,200 Hondas. Actual costs of production were as follows:

Direct Materials

16,000 pounds purchased at $21
14,000 pounds used
2,000 pounds in inventory

Direct Labor 3,100 hours at $21 = $ 65,100
Manufacturing Overhead   $ 270,000
Actual Marketing and Administrative Costs   $ 440,000
Total Revenue 1,200 Hondas at $980 = $1,176,000
Actual machine hours worked 700 hours

3. Year 3:

Honda makers produced 1,200 Hondas and sold 1,500 Hondas. Actual costs of production were as follows:

Direct Materials 10,000 pounds purchased at $22
  11,000 pounds used; 1,000
pounds of which was
destroyed in warehouse		  
Direct Labor 2,300 hours at $21 = $ 48,300
Manufacturing Overhead   $ 261,000
Actual Marketing and Administrative Costs   $ 460,000
Total Revenue 1,500 Hondas at $1,050 = $ 1,575,000
Actual Machine Hours worked 600 hours  


B. PREDETERMINED OVERHEAD RATES FOR NORMAL COSTING

For each year, predetermined manufacturing overhead could have been on any of the following basics:

1. Output (i.e., Honda's produced): Estimated overhead = $200,000 + $40 per Honda

  1. Direct Labor Hours: Estimated overhead = $200,000 + $20 per hour
  2. Machine Hours (assume an estimated 0.5 machine hours per Honda):
    Estimated overhead = $200,000 + $80 per hour
  3. Percent of Direct Labor costs: Estimated overhead = $200,000 + $1 per direct labor dollar


The predetermined overhead rates for each year for each overhead basis are:


  Year 1 Year 2 Year 3
Estimated Production      
Volume:      
Output 1,000 1,250 1,250
DLH 2,000 2,500 2,500
MH 500 625 625
DL$ $ 40,000 $ 50,000 $ 50,000
       
Total O.H. Rate:      
Output $ 240 $ 200  
DLH $ 120 $ 100  
MH $ 480 $ 400  
DL$ 600% 500%  
       
Fixed O.H. Rate:      
Output $ 200 $ 160 $ 160
DLH $ 100 $ 80 $ 80
MH $ 400 $ 320 $ 320
DL$ 500% 400% 400%
       
Variable O.H. Rate:      
Output $ 40 $ 40 $ 40
DLH $ 20 $ 20 $ 20
MH $ 80 $ 80 $ 80
DL$ 100% 100% 100%


C. STANDARD COSTS PER HONDAS YEAR 1

Materials: 10 pounds at $20 = > $200
Labor: 2 hours at $20 = $ 40
Variable O.H.:   $ 40
Fixed O.H.:   $200
Standard cost per Honda   $480



D. PARTITION OF OVERHEAD AND MARKETING/ADMINISTRATIVE INTO VARIABLE AND FIXED COMPONENTS

  Year 1 Year 2 Year 3
Overhead:      
Fixed $205,000 $190,000 $195,000
Variable 40,000 80,000 66,000
Total $245,000 $270,000 $261,000
       
M & A:      
Fixed $320,000 $360,000 $360,000
Variable 60,000 80,000 100,000
Total $380,000 $440,000 $460,000



E. BUDGET INFORMATION

Master budget sales volume: Year 1 - 900
Year 2 - 1,300
Year 3 - 1,300
Budget M & A: $350,000 + $50 per unit sold
Budgeted sales price: $1,000 in each of years 1 to 3



QUESTIONS:

  1. Do Master and Flexible Budgets and compare to actual results. Use a contribution margin Income Statement format.
  2. Calculate price and efficiency variances for direct material, direct labor and variable overhead. Calculate price and volume variances for fixed overhead.
  3. Do cost flows through the inventory accounts into cost of goods sold under: (1) Actual Costing, (2) Normal Costing, and (3) Standard Costing.
  4. Do the Income Statements under the above cost systems and reconcile any differences.

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