Question

Assume that The AM Bakery is preparing a budget for the month ending December 31. Management prepares the budget for the month ending December 31 by starting with the actual results for August that is shown below. Then, management considers what the differences in costs will be between August and December.

THE AM BAKERY
Bakery sales
Actual and Budgeted Costs
For the Month Ending August 31
	Actual
Ingredients
Flour	$	3,935
Butter		3,535
Oil		1,735
Fruit		1,335
Nuts		935
Chocolate		835
Other		435
Total ingredients	$	12,815
Labor
Channel manager	$	4,850
Other		10,735
Utilities		2,540
Rent		3,740
Marketing		200
Total bakery costs	$	35,605
Revenues		52,550

Management expects revenue to be 100 percent greater in December than in August because of the holiday season. Management expects that all food costs (e.g., flour, butter, and so on) will be 120 percent higher in December than in August because of the increase in sales and because prices for ingredients are generally higher in the high demand holiday months. Management expects “other” labor costs to be 130 percent higher in December than in August, partly because more labor will be required in December and partly because employees will get a pay raise. The manager will get a pay raise that will increase his salary from $4,850 in April to $5,700 in December. Utilities will be 15 percent higher in December than in August. Rent and marketing will be the same in December as in August.

Now, move ahead to January of the following year and assume the following actual results occurred in December:

Required:

a. Prepare a statement that compares the budgeted and actual costs. (Negative amounts should be indicated by a minus sign.)

	actual	budgeted	difference
ingredients
flour	8535
butter	7750
oil	3901
fruit	3089
nuts	2184
chocolate	1670
other	920
total ingredients	27292
labor
channel manager	5700	5700
other	24471
utilities	3550
rent	3740	3740
marketing	217
total bakery costs	64578
revenues	103725

b. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost items would you investigate to see why actual and budgeted costs are different?

• Utilities, other labor and chocolate

• Nuts, chocolate and butter

• Flour, chocolate and other labor

Answer 1