816020005
(1) Budget slack is purposely under predicting budgeted revenue or over estimating budgeted
spending so that administrators have a greater chance of meeting their numbers. This typically
happens as performance appraisals and incentives are tied to the attainment of budgeted
figures.
a) Employees will interpret over-projection as a good sign, as they would have more than
sufficient resources to finance the target objective. Another hint that they will get is that they
get to work less if the output is expected downwards. Another thing may be that if incentives
were allocated as compensation due to results, some would profit greatly from the projection,
but not much from over-projection.
b) When you speak from a management viewpoint, it would generate a waste of money if more
resources are to be drawn into revenue, which can be achieved by investing fewer. This is
attributed to over-projection of spending, since the resources used due to over-projection may
have been used in a more profitable manner by the whole business or organization to do more.
(2) (a)
Material Price variance = Actual Quantity * (Actual Price - Standard Price)
Material Price variance = 14,000 * (($72,000/14,000) - $5)
Material Price variance = $2,000 U
Actual price is greater than standard price. So, it will be Unfavorable
Material Quantity variance = Standard Price * (Actual Quantity used - Standard Quantity)
Material Quantity variance = $5 * (14,000 - (1,500*10))
Material Quantity variance = $5,000 F
Actual quantity is less than standard quantity. So, it will be Favorable
b)
Labor rate variance = (actual Rate - Standard Rate) * Actual Quantity
Labor rate variance = (($83,600/7,600) - $10) * 7,600
Labor rate variance = $7,600 U
Actual rate is greater than standard rate. so, it will be Unfavorable
Labor Efficiency Variance = (Actual Hours - Standard Hours) * Standard Rate
Labor Efficiency Variance = (7,600 - (1,500*5)) * $10
Labor Efficiency Variance = $1,000 U
Actual hours are greater than standard hours. So, it will be Unfavorable.
3. (a)
According to the Accounting rule, “The variable overhead efficiency variance is the difference
between the actual and budgeted hours worked, which are then applied to the standard variable
overhead rate per hour. The formula is:
Standard overhead rate x (Actual hours-standard hours)
= Variable overhead efficiency variance
A favorable variance means that the real hours working were fewer than the budgeted hours,
resulting in reduced hours of application of the normal overhead rate, resulting in lower costs
incurred. Although a favorable variance does not actually mean that an organization has accrued
fewer real overheads, it merely means that there has been an increase in the allocation base that
has been used to apply overheads.”
The Accounting rule also states, “The variable overhead spending variance is the difference
between the actual and budgeted rates of spending on variable overhead. The variance is used to
focus attention on those overhead costs that vary from expectations. The formula is:
Actual hours worked x (Actual overhead rate - standard overhead rate)
= Variable overhead spending variance
A favorable variance means that the actual variable overhead expenses incurred per labor hour
were less than expected.”
(b) (I) Accountants worldwide imply that, “Production volume variance is the difference
between the actual number of units produced in a period and the budgeted number of units
that should have been produced, multiplied by the budgeted overhead rate. It has nothing to
do with production capacity but a production volume variance is likely to be useless, since it is
measured against a budget that may have been created months ago. A better measure would
be the ability of a production operation to meet its production schedule for that period.”
(ii) “Production volume variance is favorable if actual production is greater than budgeted
production and when actual production is lower than budgeted production, production volume
variance is unfavorable. It is a useful number that can help a business determine whether and
how it can produce a product at a low enough price and a high enough volume to run at profit.”
(4)
Thus, the cost allocated is $25,177.
5. The Costs of Decentralization
Reduced specialization, they cannot specialize as much as they can within a centralized IT role
when IT workers are dispersed among the business units. For instance, each product line could
have a special number of application developers to support the whole set of financial systems.
Whether the same workers are integrated, they might focus in data objects and modules such as
accounts receivable, accounts payable, general accounts, taxation, and so on.
Fragmentation, IT workforce fragmentation ultimately fragments projects. Where IT is
decentralized, it is not unusual to see in each business unit numerous accounting, consumer and
recruitment applications. Costs escalate for several reasons as processes are fragmented. Efforts
are duplicated. Economies of scale are lost, influencing both the licensing of infrastructure and
applications. And negotiation leverage with manufacturers is weakened.
Conflict, Decentralization puts more burden on departmental management to make money at all
costs. Therefore, resulting in cross-competing, escalating to intense conflicts. At the cost of
everyone else, any departmental director will be forced to create his own dynasty. Coordination
or management problems can also emerge when such 'mini-companies' or minor kingdoms reside
within an organization.
Cost, Decentralization leads to duplication of effort on behalf of workers. Each division should
have access to recruitment, staff, communications and other professionals to be autonomous. As
a consequence, at considerable expense, each division is forced to hold a wide group of
personnel specialists.
Profit Centre Concept, many qualified and knowledgeable people cannot be available to
manage defective organizations. Freedom to act can contribute to a variety of judgments. For a
long time, the control panel from headquarters can prove ineffective as the company expands. In
addition, decentralization requires programmed preparation that can be time-consuming and very
costly.
6. (a) Computed ROI for Riddler = $1,000,000 divided by $9,000,000= 0.111
Computed ROI for Joker = $1,750,000 divided by $10,000,000= 0.175
Computed ROI for Penguin = $2,520,000 divided by $14,000,000= 0.180
(b)
Riddler Joker Penguin
Investment base $9,000,000$10,000,000$14,000,000
Minimum rate × 0.20 × 0.20 × 0.20
Minimum
$1,800,000$2,000,000 $2,800,000
return
Income $1,000,000$1,750,000 $2,520,000
Minimum return 1,800,000 2,000,000 2,800,000
Residual
$(800,000)$(250,000) $(280,000)
income
(c) ROI and residual income Rank:
Penguin 1
Joker 2
Riddler 3
(d) It is tough to say which division is the highest without understanding what the outcomes
are used to test. If the management tests just the return on money, the best ranking is in the
Penguin Category, but not far in front of the Joker. That said, Penguin does have a
substantially greater degree of profits. Both groups fall short of the target in terms of
executive's projections of remaining earnings, with Joker slightly leading Penguin.
