ACC 206 Week 4 Assignment, Chapter 6 and 7 Exercises

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ACC 206 Week 4 Assignment: Chapter 6 and 7 Problems

Please complete the following exercises below in either Excel or a word document. You must show your work where appropriate. Save the document, and submit it in the appropriate week.

1. Comprehensive budgeting

The balance sheet of Watson Company as of December 31, 20X1, follows.

The following information has been extracted from the firm's accounting records:

1. All sales are made on account at $20 per unit. Sixty percent of the sales are collected in the month of sale; the remaining 40% are collected in the following month. Forecasted sales for the first five months of 20X2 are: January, 1,500 units, - February, 1,600 units; March, 1,800 units; April, 2,000 units; May, 2,100 units.

2. Management wants to maintain the finished goods inventory at 30% of the following month's sales.

3. Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next six months. Management wants to maintain the ending direct materials inventory at 60% of the following month's production needs.

  1. Seventy percent of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month.
  2. Watson's product requires 30 minutes of direct labor time. Each hour of direct labor costs $7.


a. Rounding computations to the nearest dollar, prepare the following for January through March:

1) Sales budget

2) Schedule of cash collections

3) Production budget

4) Direct material purchases budget&5) Schedule of cash disbursements for material purchases

6) Direct labor budget

b. Determine the balances in the following accounts as of March 31:

1) Accounts Receivable 40% of sales and still will do is 4320.

2) Direct Materials 60% of April sales will be left 1218 unitsindirect materials

3) Accounts Payable is 30% of payables will still be due of $1177

2. Basic flexible budgeting
Centron, Inc., has the following budgeted production costs:

Direct materials

$0.40 per unit

Direct labor

1.80 per unit

Variable factory overhead

2.20 per unit

Fixed factory overhead







The company normally manufactures between 20,000 and 25,000 units each quarter. Should output exceed 25,000 units, maintenance, and other fixed costs are expected to increase by $6,000 and $4,500, respectively.

During the recent quarter ended March 31, Central produced 25,500 units and incurred the following costs:


a. Prepare a flexible budget for 20,000, 22,500, and 25,000 units of activity.
b. Was Central's experience in the quarter cited better or worse than anticipated? Prepare an appropriate performance report and explain your answer.

The highest cost in the budget occurred at 25k units produced, and the total cost was 164k for the budget.  When adding only 500 more units you incur an additional 10,825 in cost.  You may save a little on variable factory overhead, but the major loss comes in maintenance and fixed cost as you can see with the comparison below.

c. Explain the benefit of using flexible budgets (as opposed to static budgets) in the measurement of performance.

When using a flexible budget, you are able to see what will happen in you produce more or less than just one number.  There are so many variables in business it is better to have a range of possible outcomes rather than just one set outcome and not achieving it and having to go back in recalculating the cost of the missed budget.

3. Straightforward variance analysis

Arrow Enterprises uses a standard costing system. The standard cost sheet for aproduct no. 549 follows.

Direct materials: 4 units @ $6.50



Direct labor: 8 hours @ $8.50



Variable factory overhead: 8 hours

@ $7.00


Fixed factory overhead: 8 hours

@ 2.5


Total standard cost per unit



The following information pertains to activity for December:

  1. Direct materials acquired during the month amounted to 26,350 units at $6.40 per unit. All materials were consumed in operations.
  2. Arrow incurred an average wage rate of $8.75 for 51,400 hours of activity.
  3. Total overhead incurred amounted to $508,400. Budgeted fixed overhead totals $1.8 million and is spread evenly throughout the year.
  4. Actual production amounted to 6,500 completed units.


  1. Compute Arrow's direct material variances.
  2. Compute Arrow's direct labor variances.

Compute Arrow's variances for factory overhead.

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