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