Group Budgeting and Variance Analysis

This assignment consists of two cases: Water Sport, Inc., and Cyprus Company. For Water Sport, students are required to prepare budgets for the third quarter, including sales, production, direct materials purchases, and cash collections and disbursements. For Cyprus Company, students need to compute various variances related to manufacturing costs, including direct materials price and quantity variances, direct labor rate and efficiency variances, and manufacturing overhead spending and efficiency variances.

Group Assignment: (2 to 3 people)
Due Date: Nov. 30, 2016
Submit in class
Water Sport, Inc., manufactures a small personal water tube used for children learning to
swim. Management is now preparing detailed budgets for the third quarter, July through
September, and has assembled the following information to assist:
1. The Marketing Department has estimated sales as follows for the remainder of the year
(number of water tubes):
July 6,500
August 5,000
September 4,000
October 3,000
November 2,500
December 2,000
The selling price of the water tubes is $60.
2. All sales are on account. Based on past experience, sales are expected to be collected
in the following pattern:
50% in the month of sale
45% in the month following sale
5% uncollectible
The beginning accounts receivable balance (excluding uncollectable amounts) on July 1
will be $160,000.
3. The company maintains finished goods inventories equal to 20% of the following
month's sales. The inventory of finished goods on July 1 will be 1,300 units.
4. Each water tube requires 3 kilograms of synthetic polyisoprene rubber compound
(floating natural rubber). To prevent shortages, the company would like the inventory of
synthetic rubber compound on hand at the end of each month to be equal to 20% of the
following month's production needs. The inventory of synthetic rubber compound on
hand on July 1 will be 3,720 kilograms.
5. The synthetic rubber compound costs $3.50 per kilogram. Water Sport pays for 70% of
its purchases in the month of purchase; the remainder is paid for in the following month.
The accounts payable balance for synthetic rubber compound purchases will be $11,400
on July 1.

Required:
1. Prepare a sales budget, by month and in total, for the third quarter. (Show your budget
in both units of water tubes and dollars.) Also prepare a schedule of expected cash
collections, by month and in total, for the third quarter.
2. Prepare a production budget for each of the months July through October.
3. Prepare a direct materials purchases budget for synthetic rubber compound, by month
and in total, for the third quarter. Also prepare a schedule of expected cash disbursements
for synthetic rubber compound, by month and in total, for the third quarter.

Clarissa McWhirter, vice-president of Cyprus Company, was pleased to see a small
variance on the income statement after the trouble the company had been having in
controlling manufacturing costs. She noted that the $12,250 overall manufacturing
variance reported last period was well below the 3% limit that had been set for variances.
The company produces and sells a single product.
The standard cost card for the product follows:
Standard Cost Card—Per Unit
Direct materials, 4 metres at $3.50 per metre $14
Direct labour, 1.5 direct labour-hours at $12 per direct labour-hour $18
Variable overhead, 1.5 direct labour-hours at $2 per direct labour-hour $3
Fixed overhead, 1.5 direct-labour hours at $6 per direct labour-hour $9
Standard cost per unit $44
The following additional information is available for the year just completed:
1. The company manufactured 20,000 units of product during the year.
2. A total of 78,000 metres of material was purchased during the year at a cost of $3.75
per metre. All of this material was used to manufacture the 20,000 units. There were no
beginning or ending inventories for the year.
3. The company worked 32,500 direct labour-hours during the year at a cost of $11.80
per hour.
4. Overhead cost is applied to products on the basis of standard direct labour-hours. Data
relating to manufacturing overhead costs follow:
Denominator activity level (direct labour-hours) 25,000
Budgeted fixed overhead costs (from the flexible budget),$150,000
Actual fixed overhead costs $148,000
Actual variable overhead costs $68,250

Required:
1. Compute the direct materials price and quantity variances for the year.
2. Compute the direct labour rate and efficiency variances for the year.
3. For manufacturing overhead, compute the following:
a. The variable overhead spending and efficiency variances for the year.
b. The fixed overhead budget and volume variances for the year.
4. Total the variances you have computed, and compare the net amount with the $12,250
mentioned by the vice-president. Do you think that everyone should be congratulated for
a job well done? Explain.