Case 3
Part 1 Master Budgets
Pizza L.L.C. operates pizza delivery and carry-out restaurants.The annual report describes its business as follows: We offer afocused menu of high-quality, value-priced pizza with three typesof crust (Hand-Tossed, Thin Crust, and Deep Dish), made from freshdough produced in our regional distribution centers. We prepareevery pizza using real cheese, pizza sauce made from freshtomatoes, and a choice of high-quality meat and vegetable toconsistently and efficiently produce the highest-quality pizza.
Over the 41 years since our founding, we have developed asimple, cost-efficient model. We offer a limited menu, our storesare designed for delivery and carry-out, and we do not generallyoffer dine-in service. As a result, our stores require relativelysmall, lower-rent locations and limited capital expenditures.
How would a master budget support planning, directing, andcontrol for Pizza LLC? Include the three major objectives ofbudgeting? Under what circumstances would a static budget beappropriate?
Briefly describe the type of human behavior problems that mightarise if budget goals are set too tightly? Too loosely? Or ifconflicting goals within the budget?
Why should the production requirements set forth in theproduction budget be carefully coordinated with the sales budgetAND Why should the timing of direct materials purchases be closelycoordinated with the production budget?
Budget performance report
The Box Company (BC) manufactures boxes for the pizza industry.The cost standards per 100 boxes are:
Cost Category Standard cost per 100 boxes
Direct labor 2.00
Direct materials 9.10
Factory overhead .55
Total 11.65
At the beginning of July, BC management planned sales andproduction of 400,000 boxes. The actual number of boxes sold andproduced for July was 406,000 boxes.
The actual production costs for July of the current year were asfollows:
Cost Category Standard cost per 100 boxes
Direct labor 7540
Direct materials 35750
Factory overhead 2680
Total 45970
Prepare the July manufacturing standard cost budget (directlabor, direct materials, and overhead) for BC, assuming plannedproduction.
Prepare a budget performance report for manufacturing costs,showing the total cost variances for direct materials, directlabor, and factory overhead for July.
Interpret the budget performance report.
Part 2 Evaluating Divisional Performance and Capital InvestmentAnalysis
The three divisions of a Foods Co. are Snacks, Morning Foods,and Frozen. The divisions are structured as investment centers. Thefollowing responsibility reports were prepared for the threedivisions for the prior year:
Snack Morning Foods Frozen
Revenues 2200000 2520000 2100000
Operating Expenses 1366600 1122000 976800
Income from Op
Before service dept 833400 1398000 1123300
Service dept charges
Promotion 300000 600000 468000
Legal 137400 243600 235200
Total Service Dept charges 437400 843600 703200
Income from Operations 396000 554400 420000
Invested Assets 2000000 1680000 1750000
Which division is making the best use of invested assets andshould be given priority for future capital investments? ConsiderROI, the acceptable and rate of return.
Assuming that the minimum acceptable rate of return on newprojects is 19%, would all investments that produce a return inexcess of 19% be accepted by the divisions?
Can you identify opportunities for improving the company'sfinancial performance?
