Question
Problem 1 Since its inception, Monterey Corporation has produced a single product, Product A24.The company added the technological capability to begin producing a second product,
Problem 1
Since its inception, Monterey Corporation has produced a single product, Product A24.The company added the technological capability to begin producing a second product, Product D36.Because of the success of Product D36, manufacturing has been shifting toward its production.Sales of Product D36 are now 50 percent of the total annual sales of 20,000 units, and the company is optimistic about the new product's future sales growth. Management is thrilled with the new product's initial success but concerned about the company's declining profits since the product's introduction.Suspecting a problem with the company's costing system, management hires you to investigate.
In reviewing the company's records, product specifications, and manufacturing processes, you discover the following information.
The company is in an extremely competitive industry in which markups are low and accurate estimates of cost are critical to success.
The company presently allocates overhead costs to its products based on direct labor hours.
Product D36 has complex parts that require more labor, machine time, setups, and inspections than Product A24.
Total Overhead Costs are $2,016,000.
Budgeted costs per unit for direct materials and labor are as follows:
Direct Cost per Unit
Product A24
Product D36
Direct materials
$48
$48
Direct labor
$30/hour X 2 hours production time
$30/hour X 2.8 hours production time
After carefully studying the company's overhead, you identify four different categories of overhead costs.Using your knowledge of this company and similar companies in the same industry, you estimate the total costs for each of these categories and identify the most appropriate cost driver for measuring each product's overhead consumption.Detailed information for each overhead cost category follows.
Overhead
Category
Estimated Cost
Cost Driver
Use of Cost Driver
Machining
$1,080,000
Number of machine hours
A24: 20,000 hours;
D36: 80,000 hours
Set-ups
456,000
Number of machine setups
A24: 1,500 setups;
D36: 3,500 setups
Inspections
360,000
Number of inspections
A24: 200 inspections;
D36: 400 inspections
Other Factory Overhead
$120,000
Equal percentage for each product
A24: 50%;
D36: 50%
Total Overhead
$2,016,000
1.Determine thetotal cost per unitfor each product when overhead is assigned using the company's current overhead allocation method based ondirect labor hours. [8 points]
A24D36
(continued on next page)
2.Determine thetotal cost per unitfor each product if the company switched to activity-based costing. [12 points]
A24D36
Problem 2
Following is Perry Corporation's original budget for 2014, and their actual results for 2014. [24 points]
Original Budget
(100,000 units)
Materials
Fabric
100,000 yds @ $5.40/yd
$540,000
Steel tubing
25,000 lbs @ $12.10/lb
302,500
Padding
50,000 lbs @ $.50/lb
25,000
Direct Labor
Machining
30,000 hrs @ $19/hr
570,000
Assembly
10,000 hrs @ $11.80/hr
118,000
Overhead
Rent
100,000
Property taxes
10,000
Other Overhead
(25% variable)
200,000
Total
$1,865,500
Actual Results
(125,000 units)
Materials
Fabric
125,000 yds @ $5.50/yd
$687,500
Steel tubing
32,000 lbs @ $12.20/lb
390,400
Padding
65,000 lbs @ .49/lb
31,850
Direct Labor
Machining
35,000 hrs @ $18/hr
630,000
Assembly
11,000 hrs @ $11.50/hr
126,500
Overhead
Rent
96,000
Property taxes
10,000
Other Overhead
210,000
Total
$2,182,250
Using the format on the following page, prepare the flexible budget needed to evaluate Perry Corporation's performance for 2014, and compute the Flex-Actual Variances.Show your calculations.Put your answers to Problem 2 here:
Calculations
Flexible Budget
Actual
(125,000 units)
Flex - Actual
Variances
Materials
Fabric
$687,500
Steel tubing
390,400
Padding
31,850
Direct Labor
Machining
630,000
Assembly
126,500
Overhead
Rent
96,000
Property taxes
10,000
Other Overhead
(25% variable)
210,000
Total
$2,182,250
Problem 3
FreshFruit Drink Company planned to make 200,000 containers of apple juice.It expected to use two cups of frozen apple concentrate to make each container of juice.The standard price of one cup of apple concentrate is $0.25.FreshFruit actually paid $110,168.10 to purchase 408,030 cups of concentrate, which was used to make 201,000 containers of apple juice.
1.[4 points] Compute the materials price variance.
Answer ______________________
2.[4 points] Compute the materials usage variance.
Answer ______________________
Problem 4
Whitley Company makes a product that is expected to use 1.2 pounds of material per unit of product.The material has a standard cost of $2 per pound.
Whitley Company actually used 1.25 pounds of material per unit of product made in January 2015.The actual cost of material was $1.95 per pound.
Based on this information, the materials variances for January 2015 production would be: (Circle or highlight one) [4 points]
A) U for price and U for usage
B) U for price and F for usage
C) F for price and U for usage
D) F for price and F for usage
Problem 5
Simpson Company is analyzing whether its new product will be profitable.The following data are provided for analysis:
Expected variable cost of manufacturing$30 per unit
Expected fixed manufacturing costs$48,000 per year
Expected sales commission$6 per unit
Expected fixed administrative costs$12,000 per year
1.[5 points] Simpson estimates that sales will probably be 10,000 units.What sales price per unit will allow the company to break even?
Answer: _____________________
2.[5 points] Simpson has decided to advertise the product heavily and has set the sales price at $52. If sales are 9,000 units, how much can the company spend on advertising and still break even?
Answer: _____________________
Problem 6
Fifer Company produces two types of entry doors: the Hollow Core and the Solid Door models. The Company has used direct labor dollars to allocate the overhead cost of $47,450,000.
The company's CFO, Brian Smythe, has offered the following information regarding the two products:
Hollow Core
Solid Door
Sales in units
400,000
50,000
Sales price per unit
$475
$650
Direct materials per unit
55
130
Direct labor cost per unit
75
50
The company has hired you as an outside consultant to review the cost system and make recommendations.You decide that an Activity Based Cost system should be considered and compile the following information based on conversations with the production manager:
Activity
Cost Driver
Cost
Order Taking
Number of orders
$500,000
Setups
Number of setups
5,000,000
Machine cost
Number of machine hours
41,950,000
The number of transactions for each cost driver is as follows:
Cost Driver
Total
Hollow
Solid
Number of orders
500
100
400
Number of setups
2,500
2,000
500
Number of machine hours
600,000
300,000
300,000
1. Compute the product cost per door (i.e., per unit) using the traditional allocation system based ondirect labor dollars[8 points]
Hollow CoreSolid Door
Product Cost per door________________________
(continued on next page)
2.Compute the product cost per door (per unit) usingactivity based costingfor each product.[10 points]
Hollow CoreSolid Door
Product Cost per door________________________
3.How should Mr. Smythe explain the reasons for any differences observed in your analysis above?[4 points]
Problem 7
Columbus Company provides the following standard cost data:
Direct Material (3 gallons @ $5 per gallon)$15
Direct Labor (2 hours @ $12 per hour)$24
During the period, Columbus Company produced and sold 24,000 units.Following are the amounts of material and labor used to produce the 24,000 units, and their respective actual costs:
Direct Material:71,500 gallons at $5.05 per gallon
Direct Labor:49,000 hours at $12.00 per hour
Circle (or highlight) the correct answer.
a.The Direct Material price variance was: [3 points]
A) F
B) U
C) 0
b.The Direct Material usage variance was: [3 points]
A) F
B) U
C) 0
c.The Direct Labor rate variance was: [3 points]
A) F
B) U
C) 0
d.The Direct Labor efficiency variance was: [3 points]
A) F
B) U
C) 0
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