Answer to Question 1
Failing to make adjustments that will increase expenses will understate expenses and overstate net income. Failure to adjust for depreciation for equipment, for example, will understate not only Depreciation Expense but also Accumulated Depreciation. This in turn will overstate the book value of equipment and thus overstate total assets. The failure to adjust for accrued wages will understate not only the Wages Expense account but also Wages Payable and therefore total liabilities. The corrected net income should be 25,000.
Answer to Question 2
1.
Actual Costs
Incurred
(Actual Input Qty.
Actual Price)
(1)
Actual Input Qty.
Budgeted Price
(2) Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
Budgeted Price)
(3)
Direct
Materials:
Bottles
Pesos 2,205,000 (6,300,000 Peso 0.34)
Pesos 2,142,000 (360,000 15 Peso 0.34)
Pesos 1,836,000
Pesos 63,000 U Pesos 306,000 U
Price variance Efficiency variance
Direct
Manufacturing
Labor
Pesos 739,165 (24,500 Peso 29.30)
Pesos 717,850 (360,000 (2/60) Peso 29.30)
Pesos 351,600
Pesos 21,315 U Pesos 366,250 U
Price variance Efficiency variance
2. If union organizers are targeting our plant, it could suggest employee dissatisfaction with our wage and benefits policies. During this time of targeting, we might expect employees to work more slowly, and they may be less careful with the materials that they are using. These tactics might be seen as helpful in either organizing the union or in receiving increases in wages and/or benefits. We should expect unfavorable efficiency variances for both wages and materials. We may see an unfavorable wage variance, if we need to pay overtime due to work slowdowns. We do, in fact, see a substantial unfavorable materials quantity variance, representing a serious overuse of materials. While we may not expect each bottle to use exactly 15 oz. of materials, we do expect the shrinkage to be much less than this. Similarly, we see well over double the number of hours used relative to what we expect to make and fill this number of bottles. They are able to produce just under 15 bottles per hour, instead of the standard 30 bottles per hour. It is plausible that this waste and inefficiency are either caused by, or are reflective of, the reasons behind the attempt to organize the union at this plant.