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Problem:

Caras Inc. is a large clothing producer that manufacturers and sells just one product-a stylish shirt. They produce these shirts year-round, but sales volume is significantly higher during spring and summer months.

Caras projects annual sales volume for the shirts to increase by 10% in each of 2023 and 2024. The historical sales volume in shirts for the year just ended (2022) and the expected sales for each of the next two years (2023 and 2024) are given below.

2022 (actual) 2023 (expected) 2024 (expected)

Volume in shirts 1,200,000 1,320,000 1,452,000

Each quarters sales are anticipated to follow the pattern below, as a percent of annual unit sales:

Quarter 1 (Jan. to March) 10% Quarter 3 (July to Sept.) 50%

Quarter 2 (Apr. to June) 30% Quarter 4 (Oct. to Dec.) 10%

The average selling price per shirt was, in 2022, and is expected to be during 2023-2024, $40.

The following data pertain to production policies and manufacturing specifications followed by Caras:

a. The desired ending finished goods inventory for each quarter is 25% of next quarters expected sales in units. The ending finished goods inventory at the end of 2022 followed this pattern.

b. Each shirt produced requires $12 of direct materials cost and $13 of direct labor cost. Other materials used in production of these units are insignificant and are treated as indirect materials. Variable manufacturing overhead costs are expected to be 20% of direct labor costs, and fixed manufacturing overhead costs are expected to be $2,300,000 per quarter. These cost patterns are expected to continue throughout 2023 and 2024.

c. Variable selling and administrative expenses are estimated to be $1.50 per shirt sold, and fixed selling and administrative expenses are expected to be $500,000 per quarter.

REQUIRED:

a. Prepare Sales Budgets and Production Budgets for 2023, by quarter and for the year (so youll need at least 5 columns of numeric data for each budget schedule) (Hint: For some of the budget schedules you will also need to complete the schedules for some combination of Q4 of 2022, and Q1 of 2024, so it would be wise to compute those values wherever you can, as some of this data will be necessary for later calculations). Note that beginning and ending inventory for the year correspond with the beginning inventory for Q1 and ending inventory for Q4.

b. Prepare a budgeted income statement for 2023 using the contribution format (that is, costs grouped by cost behavior), by quarter and for the year (so youll need at least 5 columns of numeric data for each budget schedule)

c. Fast forward. Its now the end of 2023. Given below are the actual income statement results for fiscal 2023.

1. Compare the actual 2023 results with the 2023 static (master) budget income statement generated in part b. Compute all variances, and indicate if theyre favorable or unfavorable.

2. Revise the 2023 static budget for the actual volume (i.e. assemble a flexible budget income statement for 2023) and compare this flexible budget with the actual 2023 results given below. Compute all variances, and indicate if theyre favorable or unfavorable.

3. Evaluate the performance of the company and its CEO for 2023 using the flex budget variances. How did he/she perform?

4. Evaluate the CEO using the static budget variances. How did he/she perform?

5. Under what condition(s) is a static budget operating income variance a better performance evaluation metric for evaluating a profit center managers performance than a flexible budget operating income variance? Why? Make sure to include why the agency problem would likely be reduced because of using the static budget variance evaluation (instead of a flex budget variance evaluation) in the condition(s) that you identified.

6. Under what condition(s) is a flexible budget operating income variance a better performance evaluation metric for evaluating a profit center managers performance than a static budget operating income variance? Why? Make sure to include why the agency problem would likely be reduced because of using the flexible budget variance evaluation (instead of a static budget variance evaluation) in the condition(s) that you identified.

2023 Actual Results

Units sold 1,340,000

Revenues $53,600,000

Variable cost of goods sold

Direct materials 16,071,000

Direct labor 17,423,000

Variable MOH 3,431,000

Variable selling & administrative 2,075,000

Total variable costs 39,000,000

Contribution margin 14,600,000

Fixed manufacturing overhead 9,175,000

Fixed selling & administrative expenses 2,011,000

Total fixed costs 11,186,000

Operating income $3,414,000

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