Chapter8 Question 8-20A, 8-27A 8-20A: Flexible budget planning Like Chou, the president of Digitech Computer Service, needs your help. He wonders about the potential effects on the firm?s net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2012. Required a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 30,000 hours of services in 2012. b. A marketing consultant suggests to Mr. Chou that the service rate may affect the number of services hours that the firm can achieve. According to the consultant?s analysis, if Digitech charges customers $75 per hour, the firm can achieve 38,000 hours of services. Prepare a flexible budget using the consultant?s assumption. c. The same consultant also suggests that if the firm raises it rate to $85 per hour, the number of service hours will decline to $25,000. Prepare a flexible budget using the new assumption. d. Evaluate the three possible outcomes you determined in Requirements a, b, and c and recommend a pricing strategy. Question 8-27A Computing standard cost and analyzing variances. Quilter Company manufactures molded candles that are finished by hand. The company developed the following standards for a new line of drip candles: During 2010, Quilter planned to produce 30,000 drip candles. Production lagged behind expectations, and it actually produced only 24,000 drip candles. At year-end, direct materials purchased and used amounted to 40,000 pounds at a unit price of $.54 per pound. Direct labor costs were actually $7.50 per hour and 26,400 actual hours were worked to produce the drip candles. Overhead for the year actually amounted to $132,000. Overhead is applied to products using a predetermined overhead rate based on estimated units. Required (Round all computations to two decimal places) a. Compute the standard cost per candle for direct materials, direct labor, and overhead. b. Determine the total standard cost for one drip candle. c. Compute the actual cost per candle for direct materials, direct labor, and overhead. d. Compute the total actual cost per candle. e. Compute the price and usage variances for direct materials and direct labor. Identify any variances that Quilter should investigate. Offer possible cause(s) for the variances. f. Compute the fixed cost spending and volume variance. Explain your findings? g. Although the individual variances (prices, usage, and overhead) were large, the standard cost per unit and the actual cost per unit differed by only a few cents. Explain why?

Student Name: Class: Problem 08-20A DEGITECH COMPUTER SERVICES Standard Costs Per Hour Services Revenue Variable Costs: Labor Cost Overhead Cost General, Selling, & Admin. Cost Contribution Margin Fixed Costs: Facility Repair General, Selling, & Admin. Cost Net Income d. Evaluation a. Master Budget b. Flexible Budget c. Flexible Budget Per Hr. Per Hr. Per Hr. Hours Hours Hours Given Data P08-20A: DEGITECH COMPUTER SERVICES Standard rate and variable costs: Service rate per hour Labor cost Overhead cost General, selling, and admin. cost Expected fixed costs: Facility repair General, selling, and admin. cost Part a. Expected hours of repair services Part b. Hourly charge Hours of repair services Part c. Hourly charge Hours of repair services $80.00 40.00 7.20 4.30 $525,000.00 150,000.00 30,000 $75 38,000 $85 25,000 Student Name: Class: Problem 08-24A INMAN CORPORATION a. Materials Variance Information Table Standard Price Per Pound Actual Price Per Pound Standard Quantity for Flexible Budget Actual Quantity for Flexible Budget b. Materials Price Variance: Materials Usage Variance: c. Labor Variance Information Table Standard Rate Per Hour Actual Rate Per Hour Standard Hours for Flexible Budget Actual Hours Used d. Labor Price Variance: Labor Usage Variance: e. Predetermined Overhead Rate: f. Overhead Spending Variance: g. Overhead Volume Variance: Pounds Pounds Given Data P08-24A: INMAN CORPORATION Planned unit volume for year (static budget) Standard direct materials cost per unit: Number of pounds Price per pound Standard direct labor cost per unit: Number of hours Price per hour Total expected fixed overhead costs Actual volume for year (flexible budget) Actual direct materials cost per unit: Number of pounds Price per pound Actual direct labor cost per unit: Number of hours Price per hour Total actual fixed overhead costs 4,000 3.1 $1.50 2.0 $4.00 $18,800 4,200 2.7 $2.00 2.3 $3.60 $15,000 Student Name: Class: Problem 08-27A QUILTER COMPANY a. Standard Costs Direct Material Direct Labor Overhead b. Total Standard Cost for One Candle: c. Actual Costs Direct Material Direct Labor Overhead d. Total Actual Cost for One Candle: e. Direct Material and Direct Labor Variances: Direct Material: Price Variance Usage Variance Direct Labor: Price Variance Usage Variance f. Fixed Overhead Spending and Volume Variances: Spending Variance Volume Variance Given Data P08-27A: QUILTER COMPANY Amount of direct material per candle (pounds) Price of direct material per pound Quantity of labor per unit (hours) Price of direct labor per hour Total budgeted fixed overhead Expected quantity to be produced Actual quantity produced Actual direct materials used (pounds) Actual price of direct material per pound Actual direct labor cost per hour Actual labor hours worked Actual overhead 1.6 $0.60 1 $8.00 $156,000 30,000 24,000 40,000 $0.54 $7.50 26,400 $132,000 Student Name: Class: Problem 08-20A DEGITECH COMPUTER SERVICES Standard Costs Per Hour Services Revenue Variable Costs: Labor Cost Overhead Cost General, Selling, & Admin. Cost Contribution Margin Fixed Costs: Facility Repair General, Selling, & Admin. Cost Net Income $40.00 $7.20 $4.30 a. Master Budget $80 Per Hr. 30,000 Hours $2,400,000 b. Flexible Budget $75 Per Hr. 38,000 Hours $2,850,000 c. Flexible Budget $85 Per Hr. 25,000 Hours $2,125,000 1,200,000 216,000 129,000 855,000 1,520,000 273,600 163,400 893,000 1,000,000 180,000 107,500 837,500 525,000 150,000 $180,000 Correct! 525,000 150,000 $218,000 Correct! 525,000 150,000 $162,500 Correct! d. Evaluation The three posibile outcomes have been checked in the above computarions and the results are : (a) $180,000 (b) $218,000 $162,500 The highest Net Income is from keeping service revenue at $75 per hours. Hence it is recommed that option (b) is selected for pricing strategy. Given Data P08-20A: DEGITECH COMPUTER SERVICES Standard rate and variable costs: Service rate per hour Labor cost Overhead cost General, selling, and admin. cost Expected fixed costs: Facility repair General, selling, and admin. cost Part a. Expected hours of repair services Part b. Hourly charge Hours of repair services Part c. Hourly charge Hours of repair services $80.00 40.00 7.20 4.30 $525,000.00 150,000.00 30,000 $75 38,000 $85 25,000 Student Name: Class: Problem 08-24A INMAN CORPORATION a. Materials Variance Information Table Standard Price Per Pound Actual Price Per Pound Standard Quantity for Flexible Budget Actual Quantity for Flexible Budget b. Materials Price Variance: Materials Usage Variance: c. Labor Variance Information Table Standard Rate Per Hour Actual Rate Per Hour Standard Hours for Flexible Budget Actual Hours Used d. Labor Price Variance: Labor Usage Variance: e. Predetermined Overhead Rate: f. Overhead Spending Variance: g. Overhead Volume Variance: $1.50 Pounds Pounds Favorable Given Data P08-24A: INMAN CORPORATION Planned unit volume for year (static budget) Standard direct materials cost per unit: Number of pounds Price per pound Standard direct labor cost per unit: Number of hours Price per hour Total expected fixed overhead costs Actual volume for year (flexible budget) Actual direct materials cost per unit: Number of pounds Price per pound Actual direct labor cost per unit: Number of hours Price per hour Total actual fixed overhead costs 4,000 3.1 $1.50 2.0 $4.00 $18,800 4,200 2.7 $2.00 2.3 $3.60 $15,000 Student Name: Class: Problem 08-27A QUILTER COMPANY a. Standard Costs Direct Material Direct Labor Overhead b. Total Standard Cost for One Candle: $0.96 $8.00 $5.20 $14.16 c. Actual Costs Direct Material Direct Labor Overhead d. Total Actual Cost for One Candle: $0.90 $8.25 $5.50 $14.65 e. Direct Material and Direct Labor Variances: Direct Material: Price Variance Usage Variance Direct Labor: Price Variance Usage Variance $2,400 Favorable $960 Unfavorable $13,200 Favorable $19,200 Unfavorable f. Fixed Overhead Spending and Volume Variances: Spending Variance Volume Variance $24,000 Favorable $31,200 Favorable Given Data P08-27A: QUILTER COMPANY Amount of direct material per candle (pounds) Price of direct material per pound Quantity of labor per unit (hours) Price of direct labor per hour Total budgeted fixed overhead Expected quantity to be produced Actual quantity produced Actual direct materials used (pounds) Actual price of direct material per pound Actual direct labor cost per hour Actual labor hours worked Actual overhead 1.6 $0.60 1 $8.00 $156,000 30,000 24,000 40,000 $0.54 $7.50 26,400 $132,000 Student Name: Class: Problem 08-20A DEGITECH COMPUTER SERVICES Standard Costs Per Hour Services Revenue Variable Costs: Labor Cost Overhead Cost General, Selling, & Admin. Cost Contribution Margin Fixed Costs: Facility Repair General, Selling, & Admin. Cost Net Income d. Evaluation a. Master Budget b. Flexible Budget c. Flexible Budget Per Hr. Per Hr. Per Hr. Hours Hours Hours Given Data P08-20A: DEGITECH COMPUTER SERVICES Standard rate and variable costs: Service rate per hour Labor cost Overhead cost General, selling, and admin. cost Expected fixed costs: Facility repair General, selling, and admin. cost Part a. Expected hours of repair services Part b. Hourly charge Hours of repair services Part c. Hourly charge Hours of repair services $80.00 40.00 7.20 4.30 $525,000.00 150,000.00 30,000 $75 38,000 $85 25,000 Student Name: Class: Problem 08-24A INMAN CORPORATION a. Materials Variance Information Table Standard Price Per Pound Actual Price Per Pound Standard Quantity for Flexible Budget Actual Quantity for Flexible Budget b. Materials Price Variance: Materials Usage Variance: c. Labor Variance Information Table Standard Rate Per Hour Actual Rate Per Hour Standard Hours for Flexible Budget Actual Hours Used d. Labor Price Variance: Labor Usage Variance: e. Predetermined Overhead Rate: f. Overhead Spending Variance: g. Overhead Volume Variance: Pounds Pounds Given Data P08-24A: INMAN CORPORATION Planned unit volume for year (static budget) Standard direct materials cost per unit: Number of pounds Price per pound Standard direct labor cost per unit: Number of hours Price per hour Total expected fixed overhead costs Actual volume for year (flexible budget) Actual direct materials cost per unit: Number of pounds Price per pound Actual direct labor cost per unit: Number of hours Price per hour Total actual fixed overhead costs 4,000 3.1 $1.50 2.0 $4.00 $18,800 4,200 2.7 $2.00 2.3 $3.60 $15,000 Student Name: Class: Problem 08-27A QUILTER COMPANY a. Standard Costs Direct Material Direct Labor Overhead b. Total Standard Cost for One Candle: c. Actual Costs Direct Material Direct Labor Overhead d. Total Actual Cost for One Candle: e. Direct Material and Direct Labor Variances: Direct Material: Price Variance Usage Variance Direct Labor: Price Variance Usage Variance f. Fixed Overhead Spending and Volume Variances: Spending Variance Volume Variance Given Data P08-27A: QUILTER COMPANY Amount of direct material per candle (pounds) Price of direct material per pound Quantity of labor per unit (hours) Price of direct labor per hour Total budgeted fixed overhead Expected quantity to be produced Actual quantity produced Actual direct materials used (pounds) Actual price of direct material per pound Actual direct labor cost per hour Actual labor hours worked Actual overhead 1.6 $0.60 1 $8.00 $156,000 30,000 24,000 40,000 $0.54 $7.50 26,400 $132,000 Student Name: Class: Problem 08-20A DEGITECH COMPUTER SERVICES Standard Costs Per Hour Services Revenue Variable Costs: Labor Cost Overhead Cost General, Selling, & Admin. Cost Contribution Margin Fixed Costs: Facility Repair General, Selling, & Admin. Cost Net Income $40.00 $7.20 $4.30 a. Master Budget $80 Per Hr. 30,000 Hours $2,400,000 b. Flexible Budget $75 Per Hr. 38,000 Hours $2,850,000 c. Flexible Budget $85 Per Hr. 25,000 Hours $2,125,000 1,200,000 216,000 129,000 855,000 1,520,000 273,600 163,400 893,000 1,000,000 180,000 107,500 837,500 525,000 150,000 $180,000 Correct! 525,000 150,000 $218,000 Correct! 525,000 150,000 $162,500 Correct! d. Evaluation The three posibile outcomes have been checked in the above computarions and the results are : (a) $180,000 (b) $218,000 $162,500 The highest Net Income is from keeping service revenue at $75 per hours. Hence it is recommed that option (b) is selected for pricing strategy. Given Data P08-20A: DEGITECH COMPUTER SERVICES Standard rate and variable costs: Service rate per hour Labor cost Overhead cost General, selling, and admin. cost Expected fixed costs: Facility repair General, selling, and admin. cost Part a. Expected hours of repair services Part b. Hourly charge Hours of repair services Part c. Hourly charge Hours of repair services $80.00 40.00 7.20 4.30 $525,000.00 150,000.00 30,000 $75 38,000 $85 25,000 Student Name: Class: Problem 08-24A INMAN CORPORATION a. Materials Variance Information Table Standard Price Per Pound Actual Price Per Pound Standard Quantity for Flexible Budget Actual Quantity for Flexible Budget b. Materials Price Variance: Materials Usage Variance: c. Labor Variance Information Table Standard Rate Per Hour Actual Rate Per Hour Standard Hours for Flexible Budget Actual Hours Used d. Labor Price Variance: Labor Usage Variance: e. Predetermined Overhead Rate: f. Overhead Spending Variance: g. Overhead Volume Variance: $1.50 Pounds Pounds Favorable Given Data P08-24A: INMAN CORPORATION Planned unit volume for year (static budget) Standard direct materials cost per unit: Number of pounds Price per pound Standard direct labor cost per unit: Number of hours Price per hour Total expected fixed overhead costs Actual volume for year (flexible budget) Actual direct materials cost per unit: Number of pounds Price per pound Actual direct labor cost per unit: Number of hours Price per hour Total actual fixed overhead costs 4,000 3.1 $1.50 2.0 $4.00 $18,800 4,200 2.7 $2.00 2.3 $3.60 $15,000 Student Name: Class: Problem 08-27A QUILTER COMPANY a. Standard Costs Direct Material Direct Labor Overhead b. Total Standard Cost for One Candle: $0.96 $8.00 $5.20 $14.16 c. Actual Costs Direct Material Direct Labor Overhead d. Total Actual Cost for One Candle: $0.90 $8.25 $5.50 $14.65 e. Direct Material and Direct Labor Variances: Direct Material: Price Variance Usage Variance Direct Labor: Price Variance Usage Variance $2,400 Favorable $960 Unfavorable $13,200 Favorable $19,200 Unfavorable f. Fixed Overhead Spending and Volume Variances: Spending Variance Volume Variance $24,000 Favorable $31,200 Favorable Given Data P08-27A: QUILTER COMPANY Amount of direct material per candle (pounds) Price of direct material per pound Quantity of labor per unit (hours) Price of direct labor per hour Total budgeted fixed overhead Expected quantity to be produced Actual quantity produced Actual direct materials used (pounds) Actual price of direct material per pound Actual direct labor cost per hour Actual labor hours worked Actual overhead 1.6 $0.60 1 $8.00 $156,000 30,000 24,000 40,000 $0.54 $7.50 26,400 $132,000