Comprehensive Problem 6 (Algo)

Utease Corporation has several production plants nationwide. A newly opened plant in Dubuque produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows.

Manufacturing costs (per unit based on expected activity of 27,000 units or 56,700 direct labor hours):

Direct materials (3.4 pounds at $20)	$	68.00
Direct labor (2.1 hours at $60)		126.00
Variable overhead (2.1 hours at $20)		42.00
Fixed overhead (2.1 hours at $30)		63.00
Standard cost per unit	$	299.00
Budgeted selling and administrative costs:
Variable	$	8		per unit
Fixed	$	1,200,000

Expected sales activity: 23,000 units at $450 per unit

Desired ending inventories: 16% of sales

Assume this is the first year of operations for the Dubuque plant. During the year, the company had the following activity.

Units produced		26,000
Units sold		24,500
Unit selling price	$	445
Direct labor hours worked		54,100
Direct labor costs	$	3,300,100
Direct materials purchased		92,400		pounds
Direct materials costs	$	1,848,000
Direct materials used		92,400		pounds
Actual fixed overhead	$	900,000
Actual variable overhead	$	1,034,000
Actual selling and administrative costs	$	1,984,000

In addition, all over- or underapplied overhead and all product cost variances are adjusted to cost of goods sold.

Comprehensive Problem 6 (Algo) Part a

Required:

a. Prepare a production budget for the coming year based on the available standards, expected sales, and desired ending inventories.

b. Prepare a budgeted responsibility income statement for the Dubuque plant for the coming year.

c. Find the direct labor variances. Indicate if they are favorable or unfavorable. (Do not round your intermediate calculations. Indicate the effect of each variance by selecting Favorable, Unfavorable, and "None" for no effect.)

d. Find the direct materials variances (materials price variance and quantity variance). (Indicate the effect of each variance by selecting Favorable, Unfavorable, and "None" for no effect (i.e., zero variance).)

e-1. Find the total over- or underapplied (both fixed and variable) overhead.

e-2. Would cost of goods sold be a larger or smaller expense item after the adjustment for over- or underapplied overhead?

f. Calculate the actual plant operating profit/loss for the year.

h. Assume Utease Corporation is planning to change its evaluation of business operations in all plants from the profit center format to the investment center format. If the average invested capital at the Dubuque plant is $9,270,000, compute the return on investment (ROI) for the first year of operations. Use the DuPont method of evaluation to compute the return on sales (ROS) and capital turnover (CT) for the plant. (Round your percentage answers to 2 decimal places (i.e., 0.1234 should be considered as 12.34.))

i. Assume that under the investment center evaluation plan the plant manager will be awarded a bonus based on ROI. If the manager has the opportunity in the coming year to invest in new equipment for $700,000 that will generate incremental earnings of $60,000 per year, would the manager undertake the project?

multiple choice

• Yes

• No