Preston Recliners Manufactures Leather Recliners And Uses Fl ✓ Solved

Preston Recliners Manufactures Leather Recliners And Uses Flex

Preston Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. Preston allocates overhead based on yards of direct materials. The company’s performance report includes the following selected data:

  • Static Budget Actual Results (1,000 recliners) (980 recliners)
  • Sales (1,000 recliners x $495 each) $ 495, recliners x $475 each) $ 465,500
  • Variable Manufacturing Costs: Direct Materials (6,000 yds. @ $8.80/yd.) 52,150 yds. @ $8.60/yd.) 52,890
  • Direct Labor (10,000 DLHr @ $9.20/DLHr) 92,600 DLHr @ 9.30/DLHr) 89,280
  • Variable Overhead (6,000 yds. @ $5.00/yd.) 30,150 yds. @ $6.40/yd.) 39,360
  • Fixed Manufacturing Costs: Fixed Overhead 60,000 62,000
  • Total Cost of Goods Sold 234,530
  • Gross Profit $ 260,200 $ 221,970

Requirements:

  1. Prepare a flexible budget based on the actual number of recliners sold.
  2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances.
  3. Have Prestons’ managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?

Paper For Above Instructions

In this analysis, we will address the budgeting and cost management practices of Preston Recliners as they manufacture leather recliners. The company employs flexible budgeting and a standard cost system, allowing it to adjust costs according to the actual production levels. Our focus will be on preparing a flexible budget based on actual sales, calculating various cost variances, and evaluating managerial performance regarding cost control.

Preparing the Flexible Budget

To construct a flexible budget for Preston Recliners, we begin with the static budget figures and adjust them according to the actual sales volume of 980 recliners. The flexible budget is prepared as follows:

Sales Revenue

The actual sales for the 980 recliners sold at $475 each is:

Sales Revenue = 980 recliners x $475 each = $465,500

Direct Materials Costs

Based on the standard cost of direct materials, the budgeted quantity is 6,000 yards for 1,000 recliners, calculated as:

Direct Materials per Recliner = 6,000 yds / 1,000 recliners = 6 yds per recliner

The actual quantity used for 980 recliners is:

Actual Direct Materials = 980 recliners x 6 yds/recliner = 5,880 yds

At the standard cost of $8.80 per yard, the budgeted direct material cost for 980 recliners becomes:

Budgeted Direct Material Cost = 5,880 yds x $8.80/yd = $51,784

Direct Labor Costs

For direct labor, we know the budgeted hours for 1,000 recliners is 10,000 DLHr. Hence, for 980 recliners:

Direct Labor Hours = 10,000 DLHr / 1,000 recliners x 980 recliners = 9,800 DLHr

This translates to a budgeted direct labor cost of:

Direct Labor Cost = 9,800 DLHr x $9.20/DLHr = $90,160

Variable Overhead Costs

The variable overhead is based on the direct material usage. As such, the budgeted variable overhead would similarly be:

Variable Overhead = 5,880 yds x $5.00/yd = $29,400

Fixed Overhead Costs

The fixed manufacturing costs remain constant regardless of production changes at:

Fixed Overhead = $60,000

Summary of Flexible Budget

Summarizing these figures, we have:

  • Sales: $465,500
  • Direct Materials: $51,784
  • Direct Labor: $90,160
  • Variable Overhead: $29,400
  • Fixed Overhead: $60,000
  • Total Costs: $231,344
  • Gross Profit: $234,156

Variance Analysis

Next, we will assess the cost variance and efficiency variance for direct materials and direct labor, as well as the variable and fixed overhead variances.

Direct Materials Variance

1. Cost Variance:

Actual cost = 5,880 yds x $8.60/yd = $50,508

Standard cost = $51,784

Direct Materials Cost Variance = Actual - Standard = $50,508 - $51,784 = $1,276 Favorable

2. Efficiency Variance:

Standard quantity allowed = 5,880 yds at standard rate $8.80 = $51,784

Direct Materials Efficiency Variance = $50,508 - $51,784 = $1,276 Favorable

Direct Labor Variance

1. Cost Variance:

Actual labor cost = $89,280

Standard labor cost = $90,160

Direct Labor Cost Variance = $89,280 - $90,160 = $880 Favorable

2. Efficiency Variance:

Standard hours allowed = 9,800 DLH at 9.20 = $90,160

Direct Labor Efficiency Variance = $89,280 - $90,160 = $880 Favorable

Variable Overhead Variance

1. Variable Overhead Cost Variance:

Actual variable overhead = $39,360

Variable Overhead Cost Variance = $39,360 - $29,400 = $9,960 Unfavorable

2. Variable Overhead Efficiency Variance:

Variable overhead efficiency = (Variable Overhead based on standard quantity - Actual Variable Overhead)

Variable Overhead Efficiency Variance = $29,400 - $39,360 = $9,960 Unfavorable

Fixed Overhead Variance

1. Fixed Overhead Cost Variance:

Actual fixed overhead = $62,000

Fixed Overhead Cost Variance = $62,000 - $60,000 = $2,000 Unfavorable

2. Fixed Overhead Volume Variance:

Fixed Overhead Volume Variance = Fixed Overhead Budgeted - Fixed Overhead Actual = $60,000 - $62,000 = $2,000 Unfavorable

Managerial Performance Evaluation

Based on the analysis, Preston's management has performed well in controlling direct material and labor costs, as both categories show favorable variances. This indicates that they managed resources effectively against the budget. However, the unfavorable variances in variable and fixed overhead suggest that there may have been inefficiencies or unexpected cost increases in these areas, which require managerial attention to prevent future losses.

Conclusion

In summary, while Preston Recliners’ management did an effective job in controlling direct labor and material expenses, there is a need for further evaluation and management of overhead costs to improve overall profitability. Strategic adjustments and tighter oversight of variable costs, particularly in overhead, will be essential to enhance production efficiency and cost-effectiveness in the future.

References

  • Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2006). Cost Accounting: A Managerial Emphasis. Prentice Hall.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
  • Weetman, P. (2013). Financial and Management Accounting. Pearson Education.
  • Bhimani, A., & Pigott, D. (2017). Management Accounting: A Comprehensive Guide. The Open University Press.
  • Atkinson, A. A., Kaplan, R. S., & Young, S. M. (2007). Management Accounting. Pearson Prentice Hall.
  • Kaplan, R. S., & Norton, D. P. (1996). The Balanced Scorecard: Translating Strategy into Action. Harvard Business Review Press.
  • Cooper, R. & Kaplan, R. S. (1991). The Design of Cost Management Systems. Prentice Hall.
  • Reeve, J. M., & Fess, P. E. (2020). Managerial Accounting. Cengage Learning.
  • Scapens, R. W. (2006). Understanding Management Accounting Practices: A UK Perspective. Management Accounting Research.

Related Assignments