Case Study: Background
Proven Patio FurnitureLtd manufactures patio tables for residential and restaurant uses. With therecent downturn in the patio furniture market, Proven Patio experienced adecline in financial performance. Themanagement team is in the process of preparing the 2016 budget and put togetherthe following budgeted information.
Annual sales areexpected to be 5000 units. Budgetedsales for the period of April and May 2016 are provided below (Table 1). Allsales are on credit. A 5% discount is offered if payment is made within themonth of sale.
Table1: Expected Salesin Units and Dollars for April and May 2016
|
|
Residential table
|
Restaurant table
|
|
|
Units
|
Price
|
Units
|
Price
|
|
April
|
250
|
$285
|
160
|
$625
|
|
May
|
260
|
$265
|
200
|
$680
|
The annual production is expected to be 5100 patio tables. Table 2 identifies the material requirementsand costs for each table. These costs are not expected to change during thebudgeted period.
Table2: Budgeted DirectMaterials - Inputs and Costs as at April 1, 2016
|
|
Residential table
|
Restaurant table
|
|
|
Quantity*
|
Cost**
|
Quantity*
|
Cost**
|
|
Metal
|
2.5 m
|
$5.50
|
5 m
|
$5.50
|
|
Pine Timber
|
3 m
|
$13
|
4 m
|
$14.50
|
|
Fabric
|
1.5 m
|
$7.50
|
3 m
|
$12.50
|
*metre **per metre
Beginning inventories of Direct Materials are shownbelow. For direct materials, the policy of target ending inventory is to be 20%of the current month's production.
Table3: DirectMaterials Inventory - as at April 1, 2016
|
|
Residential table
(Metres)
|
Cost
|
Restaurant table
(Metres)
|
Cost
|
|
Metal
|
125
|
$625
|
180
|
$900
|
|
Pine Timber
|
300
|
$3750
|
350
|
$4935
|
|
Fabric
|
220
|
$1584
|
215
|
$2580
|
Proven Patio uses a FIFO cost flow assumption for bothdirect materials and finished goods inventory. Finished Goods ending inventory policy is 25% of the current month'ssales. The following information is provided on the current ending inventory offinished goods.
Table4: Finished GoodsInventory as at 31 March, 2016
|
|
Residential table
|
Restaurant table
|
|
In Units
|
45
|
32
|
|
In Dollars
|
$8460
|
$10432
|
Direct labour for patios is divided into twoprocesses: Assembly and Packaging and it is expected that direct labour hoursfor 2016 to be 15 000 hours. Thefollowing information is provided for all classes of direct labour for each ofthe tables.
Table5: DirectManufacturing Labour - Inputs and Costs for April 1, 2016
|
|
Residential table
|
Restaurant table
|
|
|
Hours*
|
Cost**
|
Hours*
|
Cost**
|
|
Labour - Assembly
|
2
|
$30
|
2.5
|
$30
|
|
Labour - Packaging
|
0.3
|
$22.00
|
0.5
|
$22.00
|
*direct labour hours **per hour
Proven Patio uses an activity based costing systemand classifies overhead into three activity pools: setup (based on set-up time);processing (based on machine hour) and inspection (based on inspection time). Activity rates for these activities are $115per machine set-up hour, $8 per machine hour and $21 per inspection hour,respectively. Other information asfollows:
Table6: Cost driver information
|
|
Residential table
|
Restaurant table
|
|
Number of units per batch
|
15 units
|
12 units
|
|
Machine Hour (MH) per unit
|
4 hours
|
6 hours
|
|
Machine set-up time per batch
|
1.5 hours
|
2 hours
|
|
Inspection time per batch
|
5 hours
|
6 hours
|
Non-manufacturing fixed costs for March equal $52 000,of which 50% (half) are Admin and Salaries. Admin and Salaries are expected to increase 8% in April. In addition non-manufacturing cost of salescommission for April is estimated to be 2% of sales revenue.
In June 2017, Proven Patio Furniture Ltd receivedthe following report from the management accountant on its performance over thepast quarter.
Table7: Budget Report
|
Proven Patio Furniture Ltd
|
|
Budget Report for Quarter ending 30 June 2017
|
|
|
Actual
|
Flexible
|
Flexible
|
Sales
|
Static
|
|
Results
|
Budget
|
Budget
|
Volume
|
Budget
|
|
|
Variance
|
|
Variance
|
|
|
Units Sold:
|
|
|
|
|
|
|
Residential
|
3325
|
|
|
|
3500
|
|
Restaurant
|
4620
|
|
|
|
4200
|
|
Revenues:
|
|
|
|
|
|
|
Residential
|
$1,213,212.50
|
|
$1,213,212.50
|
|
$1,250,750.00
|
|
Restaurant
|
$871,563.00
|
|
$889,350.00
|
|
$808,500.00
|
|
Total Sales Revenues
|
$2,084,775.50
|
|
$2,102,562.50
|
|
$2,059,250.00
|
|
Direct Materials:
|
|
|
|
|
|
|
Metal (Residential)
|
$104,363.44
|
|
$99,750.00
|
|
$105,000.00
|
|
Pine Timber (Residential)
|
$170,931.90
|
|
$171,465.00
|
|
$136,762.50
|
|
Fabric (Residential)
|
$9,875.25
|
|
$9,143.75
|
|
$9,625.00
|
|
Metal (Restaurant)
|
$18,534.60
|
|
$15,390.00
|
|
$24,435.00
|
|
Pine Timber (Restaurant)
|
$47,015.50
|
|
$47,381.25
|
|
$49,875.00
|
|
Fabric (Restaurant)
|
$56,368.50
|
|
$52,632.00
|
|
$46,485.00
|
|
Total direct Materials
|
$407,089.19
|
|
$395,762.00
|
|
$372,182.50
|
|
Direct Labour
|
|
|
|
|
|
|
Labour - Assembly
|
$450,495.00
|
|
$412,953.75
|
|
$388,162.50
|
|
Labour - Packaging
|
$31,358.25
|
|
$24,282.00
|
|
$23,490.00
|
|
Total Direct Labour
|
$481,853.25
|
|
$437,235.75
|
|
$411,652.50
|
|
Variable Overhead
|
$339,931.82
|
|
$289,165.45
|
|
$271,945.45
|
|
Total Variable Costs
|
$1,228,874.26
|
|
$1,122,163.20
|
|
$1,055,780.45
|
|
Contribution Margin
|
$855,901.24
|
|
$980,399.30
|
|
$1,003,469.55
|
|
Fixed Manufacturing Costs
|
$236,500.00
|
|
$215,000.00
|
|
$215,000.00
|
|
Operating Profit
|
$619,401.24
|
|
$765,399.30
|
|
$788,469.55
|