Rand Company manufactures modular homes. The company has two main products that it sells commercially: a 1,000-square-foot, one-bedroom model and a 1,500-square-foot, two bedroom model. The company recently began providing emergency housing (huts) to the Ffederal Emergency Management Agency (FEMA). The emergency housing is similar to the 1,000-square-foot model.

FEMA has requested Rand to create a bid for 150 emergency huts to be sent for wildfire victims in the West. Your manager has asked that you prepare this bid. In preparing the bid, you find a recent invoice tho FEMA for 200 huts provided during the most recent hurricanes season in the South. You also have a standard cost sheet for the 1,000-square-foot model sold commercially. Both are provided as follows:

Standart cost sheet: 1,000-sq.-ft., one-bedroom model

Direct materials $9,500

Direct manufacturing labor 32 hours 704

Manufacturing overhead $3.50 per direct labor dollar 2,464

Total cost $12,668

Retail markup on total cost 25%

Retain price $15,835

INVOICE

DATE: September 15, 2014

BILL TO: FEMA

FOR: 200 Emergency Huts

SHIP TO: Sarasota, Florida

Direct materials $2,090,000

Dire t manufacturing labor** 164,400

Manufacturing overhead 575,400

Total cost 2,829,800

Government contract markup on total cost 20%

Total due $3,395,760

The key issue in this problem: there are errors in the FEMA Invoice dated September 15, 2014. You need to find these errors, determine what bid should be presented to the boss, and discuss the ethical implications of the errors and the bid.

Here are your supplemental instructions and hints:

1.) Calculate the total bid if you base your calculations on the standard cost sheet assuming a cost plus 20% government contract.

Create a table that shows the direct materials, direct manufacturing labor, and manufacturing overhead costs for 150 huts; the amount of the 20% markup; and the total bid. (Check figure: your 20% markup should be $380,040.)

2.) Calculate the total bid if you base your calculations on the September 15, 2014, invoice assuming a cost plus 20% government contract.

Compute the cost per hut based on the invoice and use these amounts to prepare a bid for 150 huts. Create a table similar to the one you created in requirement 1 showing the components of the costs, the amount of markup, and the total bid. (Check figure: your 20% markup should be $424,470.)

3.) What are the main discrepancies between the bids you calculated in #1 and #2?

There are errors in computing each of the three cost components on the FEMA invoice. Use these hints to discover what these errors are:

Direct materials: compare the costs per hut for your two bids and compute the percentage difference between them (take the amount of the difference between them and divide by the standard cost sheet cost per hut). Does this suggest a possible error to you?

Direct manufacturing labor and manufacturing overhead: examine the footnotes for the standard cost sheet (at the very bottom of p. 148) and the FEMA invoice that detail the costs that are included in overhead and direct manufacturing labor. Do you see any problems with the way the direct manufacturing labor and manufacturing overhead are computed on the FEMA invoice?

Direct manufacturing labor: is there any difference between the standard cost sheet labor hours per hut and the FEMA invoice labor hours per hut?

4. What bid should you present to your boss? What principles from the IMA Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management should guide your decision?

5. Write a memo to The Boss that:

Shows and explains your computations of the two bids,

Explains the errors you found in the FEMA invoice,

Indicates which bid you recommend and why, and

Discusses the ethical implications of the errors and your recommended bid.