Budgeting: service company. Sunshine Window Washers (SWW) ...

[bcretired]

Budgeting: service company.
 
  Sunshine Window Washers (SWW) provides window-washing services to commercial clients. The company has enjoyed considerable growth in recent years due to a successful marketing campaign and favorable reviews on service-rating Web sites. Sunshine owner Sam Davis makes sales calls himself and quotes on jobs based on square footage of window surface. Sunshine hires college students to drive the company vans to jobs and wash the windows. A part-time bookkeeper takes care of billing customers and other office tasks. Overhead is accumulated in two cost pools, one for travel to jobs, allocated based on miles driven, and one for window washing, allocated based on direct labor-hours (DLH).
   Sam Davis estimates that his window washers will work a total of 2,000 jobs during the year Each job averages 2,000 square feet of window surface and requires 5 direct labor-hours and 12.5 miles of travel. Davis pays his window washers 12 per hour. Taxes and benefits equal 20 of wages. Wages, taxes, and benefits are considered direct labor costs. The following table presents the budgeted overhead costs for the Travel and Window Washing cost pools:
 
  Required:
  1. Prepare a direct labor budget in both hours and dollars. Calculate the direct labor rate.
  2. Calculate the budgeted overhead allocation rates for travel and window washing based on the budgeted quantity of the cost drivers.
  3. Calculate the budgeted total cost of all jobs for the year and the budgeted cost of an average 2,000-square-foot window-washing job.
  4. Prepare a revenues budget for the year, assuming that Sunshine charges customers 0.10 per square foot.
  5. Calculate the budgeted operating income.
  6. Davis believes that spending 15,000 in additional advertising will lead to a 20 increase in the number of jobs. Recalculate the budgeted revenue and operating income assuming this change is made. Calculate expenses by multiplying the existing budgeted cost per job calculated in requirement 3 by the number of jobs and adding the 15,000 advertising cost. Based on the change in budgeted operating income, would you recommend the investment?
  7. Do you see any flaw in this analysis? How could the analysis be improved? Should SWW spend 15,000 in additional advertising?
  8. What is SWW's profitability if sales should decline to 1,800 jobs annually? What actions can Davis take to improve profitability?

Question 2

Explain how the Drawing account differs from an expense account.

[cassie_ragen]

Answer to Question 1

1.
Direct Labor Budget in Hours and Dollars
Total
Hours Budget
Direct labor hours required
(2,000 jobs  5 hours per job) 10,000 hours

Cost Budget
Wages (10,000 hours  12/hr.) 120,000
Taxes and benefits (10,000 hours  12/hr.  20) 24,000
144,000
Cost per direct-labor hour (144,000/10,000 DLH) 14.40/DLH

2.
Travel budgeted overhead rate = = 2.40 per mile

Window washing budgeted overhead rate = = 12.20 per DLH

3.
Budgeted Cost of Average 2,000 Square-Foot Window Washing Job
Direct labor 144,000
Travel overhead 60,000
Window washing overhead 122,000
Total Cost per Job 326,000
Total Cost of 2,000 jobs 326,000

Budgeted cost of average 2,000 square foot window washing job = 326,000  2,000 = 163 per job.

4.
Revenue Budget

Square Feet Price per Square Foot Total Revenues
2,000 jobs  2,000 sq. ft./job = 4,000,000 sq. ft. 0.10 400,000

5.
2,000 jobs
Revenue 400,000
Expenses 326,000
Operating Income  74,000
6.
Revenue Budget

Square Feet Price per Square Foot Total Revenues
2,400 jobs  2,000 sq. ft./job = 4,800,000 sq. ft. 0.10 480,000

2,400 jobs
Revenue 480,000
Expenses (163  2,400 jobs) + 15,000 406,200
Operating Income  73,800

Decrease in net operating income: 74,000  73,800 = 200. According to this analysis, the increase in revenue would not warrant the 15,000 of additional advertising cost. Therefore, the investment should not be made.

7. Using the budgeted cost per job of 163 ignores the fact that 123,000 of the company's overhead costs are fixed. Because those costs will not increase with an increase in activity from 2,000 to 2,400 jobs, the fixed costs should not be considered in the analysis, and Sunshine's management should examine only incremental costs versus incremental revenues.

Revenues 480,000
Wages (14.40  12,000) 172,800
Supplies (4.40  12,000) 52,800
Fuel (0.60  30,000) 18,000
Fixed travel costs 45,000
Fixed window washing costs 78,000
Advertising costs 15,000 381,600
Operating income  98,400
Sunshine's operating income increases by 24,400 (98,400  74,000) as a result of advertising, and so Sunshine should incur the 15,000 in additional advertising costs.

8. The following table shows Sunshine's profitability if sales decline to 1,800 jobs.

Revenue (1,800 jobs  2,000 sq. ft. 0.10/sq. ft. 360,000
Wages (14.40  9,000) 129,600
Supplies (4.40  9,000) 39,600
Fuel (0.60  22,500) 13,500
Fixed travel costs 45,000
Fixed window washing costs 78,000 305,700
 54,300
If revenue should fall to 1,800 jobs, Sunshine's management should examine the company's fixed overhead costs to determine if any cuts are possible. Variable product costs will naturally decline with a decline in jobs, but fixed costs will not decline without management taking action. While depreciation cost is not likely something that management can reduce, the other fixed overhead costs are significant and should be examined.

Answer to Question 2

The Drawing account is the opposite of an investment by the owner and records personal use of owner. An expense is a cost related to the earning of revenue or the cost of doing business. In both cases, there is usually a decrease to Cash.