Dolt! 3 Assume DoIt! 2 Soriano's Budget Data (when Total Sales 1,200,000 units] In addition, 1. Soriano budgets 0.5 hours (or STANDARD QUANTITY] of direct labor per unit, labor costs [STANDARD RATE] at $15 per DIRECT LABOR hour. 2. PRODUCTION OVERHEAD: Soriano BUDGETS $15,000,000 [ALL FIXED COST] OF TOTAL PRODUCTION OVERHEAD FOR 2017. ASSUMING THE PRODUCTION IS PACED BY LABOR, PER UNIT STANDARD USE OF DIRECT LABOR IS 0.5 HOUR, AND THE STANDARD RATE IS $25 per direct labor hour [= $15,000,000 / (0.5 x 1,200,000), or $15,000,000 / 600,000 Direct Labor Hours allowance). 3. Its budgeted selling and administrative expenses (also FIXED] for 2017 are $12,000,000. (a) Calculate the budgeted total unit cost. [Prepare the Standard Cost table.) Based on the Original, Static Production Volume of 1,200,000 units, THE STANDARD COST TABLE is recorded as an accounting reference file. STANDARD QUANTITY STANDARD PRICE (RATE] STANDARD COST INPUT ITEMS TO PRODUCE 1 OUTPUT PER 1 IN PUT QUANTITY TO PRODUCE 1 OUTPUT 3 lbs. 0.5 DLHS $5 per lb. $15 per DLH $15 per output unit $7.50 per output Direct Material Direct Labor Production Overhead, FIXED $15,000,000 BUDGETED 0.5 DLHS $25 per DLH $12.50 per output Total Standard Cost per output unit..... $35 per output unit THE STANDARD RATE of $25 per direct labor hour is determined as follows: = $15,000,000/(0.5 x 1,200,000), or $15,000,000 /600,000 Direct Labor Hours allowance). (b) Prepare the budgeted income statement for 2017. THE BUDGETED INCOME STATEMENT FOR 2017 Revenue 1,200,000 units x WA Sell Price $51.25.... ... $61,500,000 Less: Cost of Goods Sold: 1,200,000 units x Total Standard Cost $35.... ($42,000,000) Direct material 1,200,000 units x (3 lbs. x $5) = $18,000,000 Direct labor 1,200,000 units x (0.5 DLH x $15) = $9,000,000 Production Fixed Overhead 1,200,000 units x (0.5 DLH x $25) = $15,000,000 Budgeted Gross Profit 1,200,000 units x ($51.25 - $35) ......... Less: Selling and Administrative Expenses, FIXED .... ($12,000,000) Operating Income Budgeted .... ..... $7,500,000 [C] ASSUME NOW WE ARE AT THE END OF 2017. WE FIND OUR ACTUAL SALES = 1,000,000 UNITS AT $50 PER UNIT; PRODUCTION ACCORDINGLY WORKED LESS, PRODUCING 1,000,000 UNITS (WITH THE FINISHED GOODS INVENTORY BEGINNING AT 66,000 UNITS AND ENDING AT 66,000). C-1PREPARE A standard-cost INCOME STATEMENT THAT IS BASED ON THE ACTUAL UNITS SOLD, AND ASSUMING THAT SORIANO APPLIED STANDARD COST TO THE ACTUAL PRODUCTION UNITS THROUGHOUT 2017. THE STANDARD-COST INCOME STATEMENT FOR 2017 Revenue 1,000,000 units x WA Sell Price $50.00.... ... $50,000,000 Less: Standard Cost of Goods Sold: 1,000,000 units x Unit Standard Cost $35... ($35,000,000) Direct material 1,000,000 units x (3 lbs.x $5) = $15,000,000 Direct labor 1,000,000 units x (0.5 DLH x $15) = $7,500,000 Production Overhead 1,000,000 units x (0.5 DLH x $25) = $12.500.000 Gross Profit, under Standard cost system 1,000,000 units x ($50 - $35) Uunits x (550 - $35) ...... $15,000,000 Less: Selling and Administrative Expenses, originally budgeted ($12,000,000) Operating Income, under Standard-cost system .......... $3,000,000 [C-2] SORIANO WOULD LIKE TO EVALUATE PRODUCTION FUNCTION'S PERFORMANCE TO CONTROL COSTS. YOU'RE ASKED TO PREPARE A FLEXIBLE COST BUDGET THAT IS BASED ON THE ACTUAL UNITS PRODUCED; COMPARE IT TO THE STANDARD COSTS THAT WERE APPLIED DURING 2017, ADJUST THE INTERIM INCOME STATEMENT FOR VOLUME VARIANCE. FLEXIBLE BUDGET STANDARD COSTS APPLIED Direct (1,000,000 units x 3 lbs.) x $5 = 1,000,000 units x (3 lbs. x $5) = Material 3,000,000 lbs. Allowed x $5 = $15,000,000 No difference $15,000,000 Direct LABOR (1,000,000 units x 0.5 DLH) x $15= 500,000 DLHs Allowed x $15 = $7,500,000 No difference 1,000,000 units x (0.5 DLH x $15) = $7,500,000 Production 1,000,000 units x(0.5 DLH x $25) = Overhead 1,000,000 x $12.50 per output = FIXED ORIGINAL BUDGET TOTAL $15,000,000 $2,500,000 (Unfavorable) $12,500,000 Production Volume Variance The fixed production overhead was expected to incur $15,000,000 regardless the actual production volume during the year. But the standard cost application system ONLY APPLIED $12.500,000. The under-application of $2,500,000 resulted from the fact that the ACTUAL production 1,000,000 fell short of the originally BUDGETED 1,200,000 units BY 200,000 UNITS. The fixed overhead standard cost $12.50 per unit was under-applied for the 200,000 units of production shortfall $12.50 x 200,000 under-production = $2,500,000 of Production Volume Variance [U]. An ADJUSTED interim income statement follows. THE ADJUSTED INTERIM INCOME STATEMENT FOR 2017 Revenue 1,000,000 units x WA Sell Price $50.00 ....... $50,000,000 Less: Adjusted Cost of Goods Sold: 1,000,000 units x $37.5 Flexible budget cost.... ($37.500,000) Direct material 1,000,000 units x (3 lbs. x $5) = $15,000,000 Direct labor 1,000,000 units x (0.5 DLH x $15) = $7,500,000 Production Overhead, FIXED per Flex Budget = $15,000,000 Standard 1,000,000 units x (0.5 DLH x $25) = $12,500,000 Add: Production Volume Variance [U] ..... $2,500,000 Adjusted, Interim Gross Profit ... ..... ...... ................. $12,500,000 Less: Selling and Administrative Expenses, FIXED originally budgeted ..... ($12,000,000) Adjusted Interim Operating Income, TENTATIVE ........ $500,000 Dolt! 3 Assume DoIt! 2 Soriano's Budget Data (when Total Sales 1,200,000 units] In addition, 1. Soriano budgets 0.5 hours (or STANDARD QUANTITY] of direct labor per unit, labor costs [STANDARD RATE] at $15 per DIRECT LABOR hour. 2. PRODUCTION OVERHEAD: Soriano BUDGETS $15,000,000 [ALL FIXED COST] OF TOTAL PRODUCTION OVERHEAD FOR 2017. ASSUMING THE PRODUCTION IS PACED BY LABOR, PER UNIT STANDARD USE OF DIRECT LABOR IS 0.5 HOUR, AND THE STANDARD RATE IS $25 per direct labor hour [= $15,000,000 / (0.5 x 1,200,000), or $15,000,000 / 600,000 Direct Labor Hours allowance). 3. Its budgeted selling and administrative expenses (also FIXED] for 2017 are $12,000,000. (a) Calculate the budgeted total unit cost. [Prepare the Standard Cost table.) Based on the Original, Static Production Volume of 1,200,000 units, THE STANDARD COST TABLE is recorded as an accounting reference file. STANDARD QUANTITY STANDARD PRICE (RATE] STANDARD COST INPUT ITEMS TO PRODUCE 1 OUTPUT PER 1 IN PUT QUANTITY TO PRODUCE 1 OUTPUT 3 lbs. 0.5 DLHS $5 per lb. $15 per DLH $15 per output unit $7.50 per output Direct Material Direct Labor Production Overhead, FIXED $15,000,000 BUDGETED 0.5 DLHS $25 per DLH $12.50 per output Total Standard Cost per output unit..... $35 per output unit THE STANDARD RATE of $25 per direct labor hour is determined as follows: = $15,000,000/(0.5 x 1,200,000), or $15,000,000 /600,000 Direct Labor Hours allowance). (b) Prepare the budgeted income statement for 2017. THE BUDGETED INCOME STATEMENT FOR 2017 Revenue 1,200,000 units x WA Sell Price $51.25.... ... $61,500,000 Less: Cost of Goods Sold: 1,200,000 units x Total Standard Cost $35.... ($42,000,000) Direct material 1,200,000 units x (3 lbs. x $5) = $18,000,000 Direct labor 1,200,000 units x (0.5 DLH x $15) = $9,000,000 Production Fixed Overhead 1,200,000 units x (0.5 DLH x $25) = $15,000,000 Budgeted Gross Profit 1,200,000 units x ($51.25 - $35) ......... Less: Selling and Administrative Expenses, FIXED .... ($12,000,000) Operating Income Budgeted .... ..... $7,500,000 [C] ASSUME NOW WE ARE AT THE END OF 2017. WE FIND OUR ACTUAL SALES = 1,000,000 UNITS AT $50 PER UNIT; PRODUCTION ACCORDINGLY WORKED LESS, PRODUCING 1,000,000 UNITS (WITH THE FINISHED GOODS INVENTORY BEGINNING AT 66,000 UNITS AND ENDING AT 66,000). C-1PREPARE A standard-cost INCOME STATEMENT THAT IS BASED ON THE ACTUAL UNITS SOLD, AND ASSUMING THAT SORIANO APPLIED STANDARD COST TO THE ACTUAL PRODUCTION UNITS THROUGHOUT 2017. THE STANDARD-COST INCOME STATEMENT FOR 2017 Revenue 1,000,000 units x WA Sell Price $50.00.... ... $50,000,000 Less: Standard Cost of Goods Sold: 1,000,000 units x Unit Standard Cost $35... ($35,000,000) Direct material 1,000,000 units x (3 lbs.x $5) = $15,000,000 Direct labor 1,000,000 units x (0.5 DLH x $15) = $7,500,000 Production Overhead 1,000,000 units x (0.5 DLH x $25) = $12.500.000 Gross Profit, under Standard cost system 1,000,000 units x ($50 - $35) Uunits x (550 - $35) ...... $15,000,000 Less: Selling and Administrative Expenses, originally budgeted ($12,000,000) Operating Income, under Standard-cost system .......... $3,000,000 [C-2] SORIANO WOULD LIKE TO EVALUATE PRODUCTION FUNCTION'S PERFORMANCE TO CONTROL COSTS. YOU'RE ASKED TO PREPARE A FLEXIBLE COST BUDGET THAT IS BASED ON THE ACTUAL UNITS PRODUCED; COMPARE IT TO THE STANDARD COSTS THAT WERE APPLIED DURING 2017, ADJUST THE INTERIM INCOME STATEMENT FOR VOLUME VARIANCE. FLEXIBLE BUDGET STANDARD COSTS APPLIED Direct (1,000,000 units x 3 lbs.) x $5 = 1,000,000 units x (3 lbs. x $5) = Material 3,000,000 lbs. Allowed x $5 = $15,000,000 No difference $15,000,000 Direct LABOR (1,000,000 units x 0.5 DLH) x $15= 500,000 DLHs Allowed x $15 = $7,500,000 No difference 1,000,000 units x (0.5 DLH x $15) = $7,500,000 Production 1,000,000 units x(0.5 DLH x $25) = Overhead 1,000,000 x $12.50 per output = FIXED ORIGINAL BUDGET TOTAL $15,000,000 $2,500,000 (Unfavorable) $12,500,000 Production Volume Variance The fixed production overhead was expected to incur $15,000,000 regardless the actual production volume during the year. But the standard cost application system ONLY APPLIED $12.500,000. The under-application of $2,500,000 resulted from the fact that the ACTUAL production 1,000,000 fell short of the originally BUDGETED 1,200,000 units BY 200,000 UNITS. The fixed overhead standard cost $12.50 per unit was under-applied for the 200,000 units of production shortfall $12.50 x 200,000 under-production = $2,500,000 of Production Volume Variance [U]. An ADJUSTED interim income statement follows. THE ADJUSTED INTERIM INCOME STATEMENT FOR 2017 Revenue 1,000,000 units x WA Sell Price $50.00 ....... $50,000,000 Less: Adjusted Cost of Goods Sold: 1,000,000 units x $37.5 Flexible budget cost.... ($37.500,000) Direct material 1,000,000 units x (3 lbs. x $5) = $15,000,000 Direct labor 1,000,000 units x (0.5 DLH x $15) = $7,500,000 Production Overhead, FIXED per Flex Budget = $15,000,000 Standard 1,000,000 units x (0.5 DLH x $25) = $12,500,000 Add: Production Volume Variance [U] ..... $2,500,000 Adjusted, Interim Gross Profit ... ..... ...... ................. $12,500,000 Less: Selling and Administrative Expenses, FIXED originally budgeted ..... ($12,000,000) Adjusted Interim Operating Income, TENTATIVE ........ $500,000