Question

In: Accounting

Assume that The AM Bakery is preparing a budget for the month ending December 31. Management...

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

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