6-38 Smart Video Company is a manufacturer of video­ conferencing products. Maintaining the video conferencing equipment is an important area of customer satisfaction. A recent downturn in the computer industry has caused the videoconferencing equipment segment to suffer, leading to a decline in Smart Video's financial performance. The following income state­ ment shows results for 2017: Smart Video Company Income Statement for the Year Ended December 31, 2017 (in thousands) Revenues Equipment Maintenance contracts Total revenues Cost of goods sold Gross margin Operating costs Marketing Distribution Customer maintenance Administration Total operating costs Operating income $8,000 1,900 630 100 1,100 920 $9,900 4,000 5,900 2,750 $3,150 Smart Video's management team is preparing the 2018 budget and is studying the following information: 1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins. The selling price of each maintenance contract is expected to remain unchanged from 2017. 2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in units of maintenance contracts. 3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and quality improvements. 4. Marketing costs are expected to increase by $290,000, but administration costs are expected to remain at 2017 levels. 5. Distribution costs vary in proportion to the number of units of equipment sold. 6. Two maintenance technicians are to be hired at a total cost of $160,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time. 7. There is no beginning or ending inventory of equipment. 1. Prepare a budgeted income statement for the year ending December 31, 2018. 2. How well does the budget align with Smart Video's strategy? 3. How does preparing the budget help Smart Video's management team better manage the company? 6-39 Responsibility in a restaurant. Christa Schuller owns an outlet of a popular chain of restaurants in the southern part of Germany. One of the chain's popular lunch items is the cheeseburger. It is a hamburger topped with cheese. On demand, purchasing agents from each outlet orders the cheese and meat patties from the Central Warehouse. In January 2018, one of the freezers in Central Warehouse broke down and the pro­ duction of meat patty and storing of cheese were reduced by 20-30% for 4 days. During these 4 days, Christa's franchise runs out of meat patties and cheese slices while facing a high demand for cheeseburgers. Christa's chef, Kelly Lyn, decides to prepare cheeseburgers using ingredients from a local market, sending one of the kitchen helpers to the market to buy the ingredients. Although the customers' are satisfied, Christa's restau­ rant has to pay twice the cost of the Central Warehouse's products to procure meat and cheese from the local market, and the restaurant loses money on this item for those 4 days. Christa is angry with the purchasing agent for not ordering enough meat patty and cheese to avoid running out of stock, and with Kelly for spending too much money on the procurement of meat and cheese. Who is responsible for the cost of the meat patty and cheese as ingredients of a cheeseburger? At what level is the cost controllable? Do you agree that Christa should be angry with the purchasing agent? With Kelly? Why or why not? Required Required 260 CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING V 6-46 Budgeting and ethics. Jayzee Company manufactures a variety of products in a variety of depart­ ments and evaluates departments and departmental managers by comparing actual cost and output rela­ tive to the budget. Departmental managers help create the budgets and usually provide information about input quantities for materials, labor, and overhead costs. Kurt Jackson is the manager of the department that produces product Z. Kurt has estimated these inputs for product Z: Budget Quantity per Unit of Output Input Direct material Direct manufacturing labor Machine time 8 pounds 30 minutes 24 minutes The department produces about 100 units of product Z each day. Kurt's department always gets excellent evaluations, sometimes exceeding budgeted production quantities. For each 100 units of product Z pro­ duced, the company uses, on average, about 48 hours of direct manufacturing labor (eight people working 6 • hours each), 790 pounds of material, and 39.5 machine-hours. Top management of Jayzee Company has decided to implement budget standards that will challenge the workers in each department, and it has asked Kurt to design more challenging input standards for prod­ uct Z. Kurt provides top management with the following input quantities: Budget Quantity per Unit of Output Input Direct material Direct manufacturing labor Machine time Required 7.9 pounds 29 minutes 23.6 minutes Discuss the following: 1. Are these budget standards challenging for the department that produces product Z? 2. Why do you suppose Kurt picked these particular standards? 3. What steps can Jayzee Company's top management take to make sure Kurt's standards really meet the goals of the firm? 6-47 Kaizen budgeting for carbon emissions. Angler Chemical Company currently operates three manu­ facturing plants in Colorado, Utah, and Arizona. Annual carbon emissions for these plants in the first quarter of 2021 arel 40,000 metric tons per quarter (or 560,000 metric tons in 2021 ). Angler management is investigat­ ing improved manufacturing techniques that will reduce annual carbon emissions to below 505,000 metric tons so that the company can meet Environmental Protection Agency guidelines in 2022. Costs and benefits are as follows: Total cost to reduce carbon emissions Fine in 2022 if EPA guidelines are not met $14 per metric ton reduced in 2022 below 560,000 metric tons $800,000 Angler Management has chosen to use Kaizen budgeting to achieve its goal for carbon emissions. Required 1. If Angler reduces emissions by 2% each quarter, beginning with the second quarter of 2021, will the company reach its goal of 505,000 metric tons in 2022? 2. What would be the net financial cost or benefit of their plan? Ignore the time value of money. 3. What factors other than cost might weigh into Angler's decision to carry out this plan? What do you recommend Angler to do?
