Accounting Rate of Return Method Implementation Worksheet

Accounting Rate of Return Method Implementation Worksheet

Accounting Rate of Return Method Implementation Worksheet


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Performance Report Calculations


Performance Reports


Once actual data are received, a performance report can be prepared.  A fictional company, the Teddy Bear Toy Company, will be used in the following paragraphs to illustrate how you can read and interpret data to prepare a meaningful performance report.


Teddy Bear Toys is a small company dedicated to making stuffed teddy bears out of various materials such as flannel, fake fur, and suede.  The operations manager has prepared a report on data from the production department. Based on the report, she wants to let the production department manager know that if this situation is not fixed quickly, she will be looking to hold you accountable. Here is the report that you are given.


Teddy Bear Toy Company
Manufacturing Overhead Static Budget Report
For the Month Ended June 20XX


Budget Actual Variance (U or F)
Number of teddy bears produced  25,000  30,000 5,000F
Indirect labor $  65,000 $  78,000 $13,000U
Supplies $  62,500 $  73,750 $11,250U
Utilities $  47,500 $  56,250 $8,750U
$175,000 $208,000 $33,000U


You take a look at the report and, at first glance, you think, “She is right. That manager is not doing the job. He is not controlling costs.” As you think about the report, you realize that the budget called for 25,000 teddy bears to be produced but, in actuality, 30,000 bears were produced. Of course, there will be more costs! You decide to prepare a flexible budget at the 30,000 unit level of activity.

First, determine budgeted costs per bear by dividing the budgeted amount for each cost by the budget level of production.

Indirect labor:$65,000/25,000 bears = $2.60 per bear.

Supplies: $62,500/25,000 bears = $2.50 per bear.

Utilities: $47,500/25,000 bears = $1.90 per bear.

Next, multiply the per bear amount for each cost by the actual number of bears produced.

Indirect labor: $2.60 per bear x 30,000 bears = $78,000

Supplies: $2.50 per bear x 30,000 bears = $75,000

Utilities: $1.90 per bear x 30,000 bears = $57,000

Finally, prepare a performance report for manufacturing overhead for the production department.


Teddy Bear Toy Company
Performance Report – Production Department
For the Month ended June 20XX
Static Budget Actual Variance

(II – I)

Flexible Budget(at 30,000) Variance

(II – IV)

Manufacturing Overhead Costs
  Indirect labor  $ 65,000  $   78,000  $    13,000  U  $   78,000  $          –
  Supplies     62,500        73,750  $    11,250  U        75,000  $       1,250  F
  Utilities     47,500        56,250  $      8,750  U        57,000  $          750  F
Total $175,000  $   208,000  $    33,000  U  $  210,000  $       2,000  F


The manager of the production department is doing a great job of controlling costs. When a flexible budget is used, it is easy to see that the costs are below what is budgeted for a production of 30,000 teddy bears. You need to explain to the operations manager that she should gauge performance against the actual level of activity, not against the static budget numbers. In addition, the production department manager should be complimented for staying within the budget for the actual level of activity.





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