- __________ is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure
Target costing
- The management of Kabanuck Corporation is considering dropping product V41B. Data from the company's accounting system appear below:
Sales $938,000
Variable expenses $413,000
Fixed manufacturing expenses $525,000
Fixed selling and administrative expenses $352,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $215,000 of the fixed manufacturing expenses and $126,000 of the fixed selling and administrative expenses are avoidable if product V41B is discontinued.
What would be the effect on the company's overall net operating income if product V41B were dropped?
Overall net operating income would decrease by $184,000.
Explanation:
Sales $938,000
Variable expenses 413,000
Contribution margin 525,000
Less avoidable fixed expenses:
Fixed manufacturing expenses $215,000
Fixed selling and administrative expenses 126,000 341,000
Effect on net operating income $184000
Net operating income would drop by $184,000 if this product were dropped.
- The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 240,000 wheels annually are:
Direct materials $48,000
Direct labor $72,000
Variable manufacturing overhead $36,000
Fixed manufacturing overhead $74,000
An outside supplier has offered to sell Talbot similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $29,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $76,600 per year. Direct labor is a variable cost.
If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:
decrease by $69,600
Explanation:
Direct materials $48,000
Direct labor 72,000
Variable manufacturing overhead 36,000
Avoidable fixed manufacturing overhead 29,000
Outside purchase price (240,000 wheels × $0.80 per wheel) $192,000
Opportunity cost (76,600)
Total cost $185,000 $115,400
Annual net operating income would increase by $69,600.
- Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
Direct materials $49.3
Direct labor $10.0
Variable manufacturing overhead $2.0
Fixed manufacturing overhead $17.9
Variable selling & administrative expense $2.5
Fixed selling & administrative expense $13.0
The normal selling price of the product is $100.8 per unit.
An order has been received from an overseas customer for 1,700 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.9 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $92.2 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
$51,510
Explanation:
Incremental revenue (1,700 units × $92.20 per unit) $156,740
Less incremental costs:
Direct materials (1,700 units × $49.3 per unit) 83,810
Direct labor (1,700 units × $10.0 per unit) 17,000
Variable manufacturing overhead (1,700 units × $2.0 per unit) 3,400
Fixed manufacturing overhead 0
Variable selling & administrative expense (1,700 units × $0.6 per unit) 1,020
Fixed selling & administrative expense 0
Total incremental cost 105,230
Incremental net operating income $51,510
- Brown Corporation makes four products in a single facility. These products have the following unit product costs:
Products
A B C D
Direct materials $13.60 $9.50 $10.30 $9.90
Direct labor 18.70 26.70 32.90 39.70
Variable manufacturing overhead 3.60 2.00 1.90 2.50
Fixed manufacturing overhead 25.80 34.10 25.90 36.50
Unit product cost $61.70 $72.30 $71.00 $88.60
Additional data concerning these products are listed below.
Products
A B C D
Grinding minutes per unit 3.10 4.20 3.60 2.70
Selling price per unit $75.40 $92.80 $86.70 $103.50
Variable selling cost per unit $ 1.50 $ .50 $ 2.60 $ .90
Monthly demand in units 3,300 3,300 2,300 2,500
The grinding machines are potentially the constraint in the production facility. A total of 53,000 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
How many minutes of grinding machine time would be required to satisfy demand for all four products?
39,120
Explanation:
Grinding minutes per unit 3.10 4.20 3.60 2.70
Monthly demand in units 3,300 3,300 2,300 2,500
Minutes of grinding time 10,230 13,860 8,280 6,750 39,120
- Brown Corporation makes four products in a single facility. These products have the following unit product costs:
Products
A B C D
Direct materials $13.30 $9.20 $10.00 $9.60
Direct labor 18.40 26.40 32.60 39.40
Variable manufacturing overhead 3.30 1.70 1.60 2.20
Fixed manufacturing overhead 25.50 33.80 25.60 36.20
Unit product cost $60.50 $71.10 $69.80 $87.40
Additional data concerning these products are listed below.
Products
A B C D
Grinding minutes per unit 2.80 3.60 3.30 2.40
Selling price per unit $75.10 $92.50 $86.40 $103.20
Variable selling cost per unit $ 1.20 $ .20 $ 2.30 $ .60
Monthly demand in units 3,000 3,000 2,000 2,200
The grinding machines are potentially the constraint in the production facility. A total of 52,700 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
How many minutes of grinding machine time would be required to satisfy demand for all four products?
31,080
Explanation:
Grinding minutes per unit 2.80 3.60 3.30 2.40
Monthly demand in units 3,000 3,000 2,000 2,200
Minutes of grinding time 8,400 10,800 6,600 5,280 31,080
- Kosakowski Corporation processes sugar beets in batches. A batch of sugar beets costs $74 to buy from farmers and $17 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $31 or processed further for $21 to make the end product, industrial fiber that is sold for $52. The beet juice can be sold as is for $50 or processed further for $28 to make the end product, refined sugar that is sold for $100. How much more profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?
$12
Explanation:
Combined final sales value ($52 + $100)=$152
Less costs of producing the end products:
Cost of further processing ($21 + $28)=$49 +
Cost of crushing $17+
Cost of sugar beets $74 =$140
Profit (loss) $12
- Exercise 9-9 Budgeted Balance Sheet [LO9-10]
The management of Mecca Copy, a photocopying center located on University Avenue, has compiled the following data to use in preparing its budgeted balance sheet for next year:
Ending Balances
Cash ?
Accounts receivable $ 9,500
Supplies inventory $ 3,400
Equipment $ 41,000
Accumulated depreciation $ 16,600
Accounts payable $ 3,200
Common stock $ 5,000
Retained earnings ?
The beginning balance of retained earnings was $31,000, net income is budgeted to be $21,400, and dividends are budgeted to be $3,900.
Required:
Prepare the company's budgeted balance sheet. (Amounts to be deducted should be indicated by a minus sign.)
Current assets:
Cash $19,400
Accounts receivable 9,500
Supplies inventory 3,400
Total current assets $32,300
Plant and equipment:
Equipment 41,000
Accumulated depreciation (16,600)
Plant and equipment, net 24,400
Total assets $56,700
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $3,200
Stockholders' equity:
Common stock $5,000
Retained earnings 48,500
Total stockholders' equity 53,500
Total liabilities and stockholders' equity $56,700
Explanation:
Cash = Plug figure.
Retained earnings is computed as follows:
Retained earnings, beginning balance $31,000
Add net income 21,400
52,400
Deduct dividends 3,900
Retained earnings, ending balance $48,500
- Becton Labs, Inc., produces various chemical compounds for industrial use. One compound, called Fludex, is prepared using an elaborate distilling process. The company has developed standard costs for one unit of Fludex, as follows:
Standard Quantity Standard Price
or Rate Standard Cost
Direct materials 2.30 ounces $ 26.00 per ounce $ 59.80
Direct labor 0.50 hours $ 14.00 per hour 7.00
Variable manufacturing overhead 0.50 hours $ 3.40 per hour 1.70
$ 68.50
During November, the following activity was recorded relative to production of Fludex:
a. Materials purchased, 12,500 ounces at a cost of $305,625.
b. There was no beginning inventory of materials; however, at the end of the month, 2,800 ounces of material remained in ending inventory.
c. The company employs 21 lab technicians to work on the production of Fludex. During November, they worked an average of 150 hours at an average rate of $12.00 per hour.
d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,200.
e. During November, 4,200 good units of Fludex were produced .
Required:
1. For direct materials:
a. Compute the price and quantity variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)
b. The materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract?
2. For direct labor:
a. Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)
b. In the past, the 21 technicians employed in the production of Fludex consisted of 4 senior technicians and 17 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recommend that the new labor mix be continued?
3. Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)
1.
a.
Materials price variance $19,375 F
Materials quantity variance $1,040 U
b.
Yes
2.
a.
Labor rate variance $6,300 F
Labor efficiency variance $14,700 U
b.
No
1.
a.
In the solution below, the materials price variance is computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production:
Actual Quantity
of Input,
at Actual Price Actual Quantity of
Input, at
Standard Price Standard Quantity Allowed
for Output,
at Standard Price
(AQ × AP)
(AQ × SP)
(SQ × SP)
12,500 ounces ×
$26.00 per ounce 9,660 ounces* ×
$26.00 per ounce
$305,625 = $325,000 = $251,160
Price variance, $19,375 F
9,700 ounces × $26.00 per ounce
= $252,200
Quantity Variance,
$1,040 U
*4,200 units × 2.3 ounces per unit = 9,660 ounces
Materials price variance:
Actual Price = $305,625 ÷ 12,500 ounces = $24.45 per ounce
b.
Yes, the contract probably should be signed. The new price of $24.45 per ounce is substantially lower than the old price of $26.00 per ounce, resulting in a favorable price variance of $19,375 for the month. Moreover, the material from the new supplier appears to cause little or no problem in production as shown by the small materials quantity variance for the month.
2.
a.
Actual Hours
of Input,
at the Actual Rate Actual Hours of
Input, at
the Standard Rate Standard Hours Allowed
for Output,
at the Standard Rate
(AH × AR)
(AH × SR)
(SH × SR)
3,150 hours* ×
$12.00 per hour 3,150 hours ×
$14.00 per hour 2,100 hours** ×
$14.00 per hour
= $37,800 = $44,100 = $29,400
Rate Variance,
$6,300 F
Efficiency Variance,
$14,700 U
Spending variance, $8,400 U
*21 technicians × 150 hours per technician = 3,150 hours
**4,200 units × 0.50 hours per technician = 2,100 hours
b.
No, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from $14.00 to $12.00, thereby causing a $6,300 favorable labor rate variance, this savings is more than offset by a large unfavorable labor efficiency variance for the month. Thus, the new labor mix increases overall labor costs.
3.
Actual Hours
of Input,
at the Actual Rate Actual Hours of
Input, at
the Standard Rate Standard Hours Allowed
for Output,
at the Standard Rate
(AH × AR)
(AH × SR)
(SH × SR)
3,150 hours* ×
$3.40 per hour 2,100 hours** ×
$3.40 per hour
$4,200 = $10,710 = $7,140
Rate Variance,
$6,510 F
Efficiency Variance,
$3,570 U
Spending variance, $2,940 F
* Based on direct labor hours:
21 technicians × 150 hours per technician = 3,150 hours
**4,200 units × 0.50 hours per unit = 2,100 hours
