Calculate the number of direct labor hours budgeted for actual production of the two products. direct labor hours

Performance Report Based on Actual Production
Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget
for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for
healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The
two dog foods use common raw materials in different proportions. The company expects to produce
80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hours per
bag, and SpecialDiet requires 0.30 direct labor hours per bag. Ladan has developed the following fixed
and variable costs for each of the four overhead items:

Overhead Item
Maintenance

Variable Rate per

Fixed Cost

Direct Labor Hour

$57,250

$0.50

Power

0.40

Indirect labor

43,500

Rent

2.10

39,000

Assume that Healthy Pet actually produced 100,000 bags of BasicDiet and 90,000 bags of SpecialDiet.
The actual overhead costs incurred were as follows:

Maintenance
Power

$81,300
18,700

Indirect labor

$143,600

Rent

39,000

1. Calculate the number of direct labor hours budgeted for actual production of the two products.
direct labor hours

2. Prepare a performance report for the period based on actual production. In the variance type
column, select "F" for favorable and "U" for unfavorable. If the variance is zero, enter ("0") in the
variance amount column and "N" for neither in the variance type column.
Healthy Pet Company
Performance Report

For the Current Year
Actual

Budgeted

Variance

$

$

$

$

$

Variance
Type (F
or U or
N)

$

Units
produced
Production
unit:
Maintenance
Power
Indirect
labor
Rent
Total costs

Residual Income
Washington Company has two divisions: the Adams Division and the Jefferson Division. The following
information pertains to last year’s results:

Adams Division

Jefferson Division

Net (after-tax) income

$611,050

$374,850

Total capital employed

4,440,000

3,282,500

In addition, Washington Company’s top management has set a minimum acceptable rate of return
equal to 9%.
Required:
Enter negative values as negative numbers.
1. Calculate the residual income for the Adams Division.
$

2. Calculate the residual income for the Jefferson Division.
$

Return on Investment, Margin, Turnover
Ready Electronics is facing stiff competition from imported goods. Its operating income margin has
been declining steadily for the past several years. The company has been forced to lower prices so
that it can maintain its market share. The operating results for the past 3 years are as follows:

Year 1
Sales

Year 2

Year 3

$13,500,000

Operating income
Average assets

$ 9,500,000

$ 9,000,000

1,200,000

1,145,000

945,000

15,000,000

15,000,000

16,250,000

For the coming year, Ready’s president plans to install a JIT purchasing and manufacturing system. She
estimates that inventories will be reduced by 70% during the first year of operations, producing a 20%
reduction in the average operating assets of the company, which would remain unchanged without the
JIT system. She also estimates that sales and operating income will be restored to Year 1 levels
because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will
allow Ready to expand its market share.
(Note: Round all numbers to two decimal places.)
Required:
1. Compute the ROI, margin, and turnover for Years 1, 2, and 3.

Year 1

Year 2

Year 3

%

%

%

%

%

%

ROI
Margin
Turnover

2. Conceptual Connection: Suppose that in Year 4 the sales and operating income were achieved as
expected, but inventories remained at the same level as in Year 3. Compute the expected ROI, margin,
and turnover.
%
ROI
%
Margin
Turnover

Why did the ROI increase over the Year 3 level?

The ROI increased because expenses increased and assets turned over at a lower rate (sales
decreased).
The ROI increased because expenses decreased and assets turned over at a higher rate (sales

increased).

3. Conceptual Connection: Suppose that the sales and net operating income for Year 4 remained the
same as in Year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and
turnover.
%
ROI
%
Margin
Turnover

Why did the ROI exceed the Year 3 level?
The ROI increased because assets decreased.

The ROI increased because assets increased.

4. Conceptual Connection: Assume that all expectations for Year 4 were realized. Compute the
expected ROI, margin, and turnover.
%
ROI
%
Margin
Turnover

Why did the ROI increase over the Year 3 level?

The ROI increased because expenses decreased and assets turned over at a higher rate.

The ROI increased because expenses increased and assets turned over at a higher rate.

The ROI increased because expenses decreased and assets turned over at a lower rate.

The ROI increased because expenses increased and assets turned over at a lower rate.

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