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8-27 Identifying favorable and unfavorable variances. Purdue, Inc., manufactures tires for large auto companies. It uses standard costing and allocates variable and fixed manufacturing overhead based on machine-hours. For each independent scenario given, indicate whether each of the manufacturing variances will be favorable or unfavorable or, in case of insufficient information, indicate “CBD” (cannot be determined).
8-28 Flexible-budget variances, review of Chapters 7 and 8. David James is a cost accountant and business analyst for Doorknob Design Company (DDC), which manufactures expensive brass doorknobs. DDC uses two direct cost categories: direct materials and direct manufacturing labor. James feels that manufacturing overhead is most closely related to material usage. Therefore, DDC allocates manufacturing overhead to production based upon pounds of materials used.
At the beginning of 2012, DDC budgeted annual production of 400,000 doorknobs and adopted the following standards for each doorknob: Actual results for April 2012 were as follows:
Actual results for April 2012 were as follows:
Direct materials purchased
12,000 lb. at $11/lb.
Direct materials used
Direct manufacturing labor
38,500 hours for $808,500
Variable manufacturing overhead
Fixed manufacturing overhead
- For the month of April, compute the following variances, indicating whether each is favorable (F) or unfavorable (U):
- Direct materials price variance (based on purchases)
- Direct materials efficiency variance
- Direct manufacturing labor price variance
- Direct manufacturing labor efficiency variance
- Variable manufacturing overhead spending variance
- Variable manufacturing overhead efficiency variance
- Production-volume variance
- Fixed manufacturing overhead spending variance
- Can James use any of the variances to help explain any of the other variances? Give examples.
14-16 Cost allocation in hospitals, alternative allocation criteria. Dave Meltzer vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Meltzer’s insurance company received a $4,800 bill for his two-day stay. One item that caught Meltzer’s attention was an $11.52 charge for a roll of cotton. Meltzer is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton is in the $2.20 to $3.00 range. He asked for a breakdown of the $11.52 charge. The accounting office of the hospital sent him the following information:
Invoiced cost of cotton roll
Cost of processing of paperwork for purchase
Supplies-room management fee
Operating-room and patient-room handling costs
Administrative hospital costs
University teaching-related costs
Malpractice insurance costs
Cost of treating uninsured patients
Meltzer believes the overhead charge is obscene. He comments, “There was nothing I could do about it. When they come in and dab your stitches, it’s not as if you can say, ‘Keep your cotton roll. I brought my own.’”
- Compute the overhead rate Sierra University Hospital charged on the cotton roll.
- What criteria might Sierra use to justify allocation of the overhead items b–i in the preceding list? Examine each item separately and use the allocation criteria listed in Exhibit 14-2 (p. 505) in your answer.
- What should Meltzer do about the $11.52 charge for the cotton roll?
14-17 Cost allocation and decision making. Greenbold Manufacturing has four divisions named after its locations: Arizona, Colorado, Delaware, and Florida. Corporate headquarters is in Minnesota. Greenbold corporate headquarters incurs $5,600,000 per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:
- Allocate the indirect headquarters costs of Greenbold Manufacturing to each of the four divisions using revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate operating margins for each division after allocating headquarters costs.
- Which allocation base do you think the manager of the Florida division would prefer? Explain.
- What factors would you consider in deciding which allocation base Greenbold should use?
- Suppose the Greenbold CEO decides to use direct costs as the allocation base. Should the Florida division be closed? Why or why not?
14-20 Customer profitability, customer-cost hierarchy. Orsack Electronics has only two retail and two wholesale customers. Information relating to each customer for 2012 follows (in thousands):
Orsack’s annual distribution-channel costs are $34 million for wholesale customers and $5 million for retail customers. Its annual corporate-sustaining costs, such as salary for top management and general-administration costs, are $61 million. There is no cause-and-effect or benefits-received relationship between any cost-allocation base and corporate-sustaining costs. That is, corporate-sustaining costs could be saved only if Orsack Electronics were to completely shut down.
- Calculate customer-level operating income using the format in Exhibit 14-5.
- Prepare a customer-cost hierarchy report, using the format in Exhibit 14-6.
- Orsack’s management decides to allocate all corporate-sustaining costs to distribution channels: $48 million to the wholesale channel and $13 million to the retail channel. As a result, distribution channel costs are now $82 million ($34 million + $48 million) for the wholesale channel and $18 million ($5 million + $13 million) for the retail channel. Calculate the distribution-channel-level operating income. On the basis of these calculations, what actions, if any, should Orsack’s managers take? Explain.