Reference no: EM131499896

Part 1 - Business Application Case  

Requirements: Answer the following questions and provide a detailed explanation for your answers for a-g. You must have a minimum of two scholarly sources referenced.

Static versus flexible budget variances Dan Ludwig is the manufacturing production supervisor for Atlantic Lighting Systems. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, "This is the dumbest place I ever worked. Last year the company set up this budget assuming it would sell 150,000 units. Well, it sold only 140,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 150,000 units goal and it sells 160,000. The company's making all kinds of money. You'd think I'd get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if I'd stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I ever worked."

Atlantic Lighting Systems' master budget and the actual results for the most recent year of operating activity follow.

	Master Budget	Actual Results	Variances	F or U
Number of units	150,000	160,000	10,000
Sales revenue	$33,000,000	$35,520,000	$2,520,000	F
Variable manufacturing costs
Materials	(4,800,000)	(5,300,000)	(500,000)	U
Labor	(4,200,000)	(4,400,000)	(200,000)	U
Overhead	(2,100,000)	(2,290,000)	(190,000)	U
Variable selling, general and admin. Costs	(5,250,000)	(5,450,000)	(200,000)	U
Contribution margin	16,650,000	18,080,000	1,430,000	F
Fixed costs
Manufacturing overhead	(7,830,000)	(7,751,000)	79,000	F
Selling, general and admin. costs	(6,980,000)	(7,015,000)	(35,000)	U
Net income	$1,840,000	$3,314,000	$1,474,000	F

a. Did Atlantic increase unit sales by cutting prices or by using some other strategy?

b. Is Mr. Ludwig correct in his conclusion that something is wrong with the company's performance evaluation process? If so, what do you suggest be done to improve the system?

c. Prepare a flexible budget and re-compute the budget variances.

d. Explain what might have caused the fixed costs to be different from the amount budgeted.

e. Assume that the company's material price variance was favorable and its material usage variance was unfavorable. Explain why Mr. Ludwig may not be responsible for these variances. Now, explain why he may have been responsible for the material usage variance.

f. Assume the labor price variance is unfavorable. Was the labor usage variance favorable or unfavorable?

g. Is the fixed cost volume variance favorable or unfavorable? Explain the effect of this variance on the cost of each unit produced.

Part 2 - Analyizing inventory reductions at Supervalu

In a narrative format, answer all question (1-6) presented in the case. Mention some ways other than cost cutting that will improve company operations. You must have a minimum of two scholarly sources referenced.

On January 12, 2010, Supervalu, Inc., announced it was planning to reduce the number of different items it carries in its inventory by as much as 25 percent. Supervalu is one of the largest grocery store companies in the United States. It operates more than 2,400 stores under 14 different brand names, including Albertsons, Farm Fresh, Jewel-Osco, and Save-A-Lot. The company also has a segment that provides third-party supply-chain services. The planned reduction in inventory items was going to be accomplished more by reducing the number of different package sizes than by reducing entire product brands. The new approach Relevant Information for Special Decisions 299 was also intended to allow the company to get better prices from its vendors and to put more emphasis on its own store brands. a. Identify some costs savings Supervalu might realize by reducing the number of items it carries in inventory by 25 percent. Be as specific as possible and use your imagination. b. Consider the additional information presented below, which is hypothetical. All dollar amounts are in thousands; unit amounts are not. Assume that Supervalu decides to eliminate one product line, Sugar-Bits, for one of its segments that currently produces three products. As a result, the following are expected to occur:

(1) The number of units sold for the segment is expected to drop by only 40,000 because of the elimination of Sugar-Bits, since most customers are expected to purchase a Fiber-Treats or Carbo-Crunch product instead. The shift of sales from Sugar-Bits to Fiber-Treats and Carbo-Crunch is expected to be evenly split. In other words, the sales of Fiber-Treats and Carbo-Crunch will each increase by 100,000 units.

(2) Rent is paid for the entire production facility, and the space used by Sugar-Bits cannot be sublet.

(3) Utilities costs are expected to be reduced by $24,000.

(4) The supervisors for Sugar-Bits were all terminated. No new supervisor will be hired for Fiber-Treats or Carbo-Crunch.

(5) The equipment being used to produce Sugar-Bits is also used to produce the other two products. The company believes that as a result of eliminating Sugar-Bits it can eliminate equipment that has a remaining useful life of five years, and a projected salvage value of $20,000. Its current market value is $35,000.

(6) Facility-level costs will continue to be allocated between the product lines based on the number of units produced

Product-line Earnings Statements (Dollar amounts are in thousands)
Annual Costs of Operating Each Product Line	Fiber-Treats	Carbo-Crunch	Sugar-Bits	Total
Sales in units	480,000	480,000	240,000	1,200,000
Sales in dollars	$480,000	$480,000	$240,000	$1,200,000
Unit-level costs:
Cost of production	48,000	48,000	26,400	122,400
Sales of production	6,000	6,000	2,400	14,400
Shipping and handling	10,800	9,600	4,800	25,200
Miscellaneous	3,600	2,400	2,400	8,400
Total unit-level costs	68,400	66,000	36,000	170,400
Product-level costs:
Supervisors salaries	4,800	3,600	1,200	9,600
Facility-level costs:
Rent	48,000	48,000	24,000	120,000
Utilities	60,000	60,000	30,000	150,000
Depreciation on equipment	192,000	192,000	96,000	480,000
Allocated company-wide expenses	12,000	12,000	6,000	30,000
Total facility-level costs	312,000	312,000	156,000	780,000
Total product cost	385,200	381,600	193,200	960,000
Profit on products	$94,800	$98,400	$46,800	$240,000

Prepare revised product-line earnings statements based on the elimination of Sugar-Bits. It will be necessary to calculate some per-unit data to accomplish this.

Part 3 -  

Questions A & B should be a minimum of 200 words and provide a detailed explanation for your answers.  You must have a minimum of two scholarly sources referenced.

A. How do managers go about making segment product line elimination decisions?

B. What is a job order cost system? Describe a situation in which you would use job order   cost information. What type of information is useful in making your decision? Based on your reading and outside research, please communicate your own understanding of the requirements. Citations, references, and outside research are required.