Chapter 22: 3DQ (page 1012)
Question: What are controllable costs?
Cost under the control of managers is known as a controllable cost.
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Use the information in the following table to compute each department’s contribution to overhead (both in dollars and as a percent). Which department contributes the largest dollar amount to total overhead? Which contributes the highest percent (as a percent of sales)? Round percents to one decimal.
Dept. A | Dept. B | Dept. C | |
Sales | \(53,000 | \)180,000 | \(84,000 |
Cost of goods sold | 34,185 | 103,700 | 49,560 |
Gross profit | 18,815 | 76,300 | 34,440 |
Total direct expenses | 3,660 | 37,060 | 7,386 |
Contribution to overheads | \) | \( | \) |
Contribution percent of sales | % | % | % |
Direct materials (25 Ibs. @ \(4 per Ib.) | \)100 |
Direct labor (6 hrs. @ \(8 per hr.) | 48 |
Factory overhead—Variable (6 hrs. @ \)5 per hr.) | 30 |
Factory overhead—Fixed (6 hrs. @ \(7 per hr.) | 42 |
Total standard cost | \)220 |
The predetermined overhead rate is based on a planned operating volume of 80% of the productive capacity of 60,000 units per quarter. The following flexible budget information is available.
Operating Levels | |||
70% | 80% | 90% | |
Production in units | 42,000 | 48,000 | 54,000 |
Standard direct labor hours | 252,000 | 288,000 | 324,000 |
Budgeted overhead | |||
Fixed factory overhead | \(2,016,000 | \)2,016,000 | \(2,016,000 |
Variable factory overhead | 1,260,000 | 1,440,000 | 1,620,000 |
During the current quarter, the company operated at 70% of capacity and produced 42,000 units of product; direct labor hours worked were 250,000. Units produced were assigned the following standard costs:
Direct materials (1,050,000 Ibs. @ \)4 per Ib.) | \(4,200,000 |
Direct labor (252,000 hrs. @ \)8 per hr.) | 2,016,000 |
Factory overhead (252,000 hrs. @ \(12 per hr.) | 3,024,000 |
Total standard cost | \)9,240,000 |
Actual costs incurred during the current quarter follow:
Direct materials (1,000,000 Ibs. @ \(4.25 per lb.) | \)4,250,000 |
Direct labor (250,000 hrs. @ \(7.75 per hr.) | 1,937,500 |
Fixed factory overhead costs | 1,960,000 |
Variable factory overhead costs | 1,200,000 |
Total actual costs | \)9,347,500 |
Required
1. Compute the direct materials cost variance, including its price and quantity variances.
2. Compute the direct labor cost variance, including its rate and efficiency variances.
3. Compute the total overhead controllable variance.
You must prepare a return on investment analysis for the regional manager of Fast & Great Burgers. This growing chain is trying to decide which outlet of two alternatives to open. The first location (A) requires a \(1,000,000 investment and is expected to yield annual net income of \)160,000. The second location (B) requires a \(600,000 investment and is expected to yield annual net income of \)108,000. Compute the return on investment for each Fast & Great Burgers alternative and then make your recommendation in a half-page memorandum to the regional manager. (The chain currently generates an 18% return on total assets.)
Nombre Company management predicts \(390,000 of variable costs, \)430,000 of fixed costs, and a pretax income of \(155,000 in the next period. Management also predicts that the contribution margin per unit will be \)9. Use this information to compute the
(1) total expected dollar sales for next period and
(2) number of units expected to be sold next period.
Billie Whitehorse, the plant manager of Travel Free’s Indiana plant, is responsible for all of that plant’s costs other than her own salary. The plant has two operating departments and one service department. The camper and trailer operating departments manufacture different products and have their own managers. The office department, which Whitehorse also manages, provides services equally to the two operating departments. A budget is prepared for each operating department and the office department. The company’s responsibility accounting system must assemble information to present budgeted and actual costs in performance reports for each operating department manager and the plant manager. Each performance report includes only those costs that a particular operating department manager can control: raw materials, wages, supplies used, and equipment depreciation. The plant manager is responsible for the department managers’ salaries, utilities, building rent, office salaries other than her own, and other office costs plus all costs controlled by the two operating department managers. The annual departmental budgets and actual costs for the two operating departments follow.
Budget | Actual | |||||
Campers | Trailers | Combined | Campers | Trailers | Combined | |
Raw material | \(195,000 | \)275,000 | \(470,000 | \)194,200 | \(273,200 | \)467,400 |
Employee wages | 104,000 | 205,000 | 309,000 | 106,600 | 206,400 | 313,000 |
Dept. manager salary | 43,000 | 52,000 | 95,000 | 44,000 | 53,500 | 97,500 |
Supplies used | 33,000 | 90,000 | 123,000 | 31,700 | 91,600 | 123,300 |
Depreciation -Equipment | 60,000 | 125,000 | 185,000 | 60,000 | 125,000 | 185,000 |
Utilities | 3,600 | 5,400 | 9,000 | 3,300 | 5,000 | 8,300 |
Building rent | 5,700 | 9,300 | 15,000 | 5,300 | 8,700 | 14,000 |
Office department cost | 68,750 | 68,750 | 137,500 | 67,550 | 67,550 | 135,100 |
Totals | \(513,050 | \)830,450 | \(1,343,500 | \)512,650 | \(830,950 | \)1,343,600 |
The office department’s annual budget and its actual costs follow.
Budget | Actual | |
Plant manager salary | \(80,000 | \)82,000 |
Other office salaries | \(32,500 | 30,100 |
Other office costs | 25,000 | 23,000 |
Totals | \)137,500 | $135,100 |
Required
1. Prepare responsibility accounting performance reports like those in Exhibit 22.2 that list costs controlled by the following:
a. Manager of the camper department.
b. Manager of the trailer department.
c. Manager of the Indiana plant. In each report, include the budgeted and actual costs and show the amount that each actual cost is over or under the budgeted amount.
Analysis Component
2. Did the plant manager or the operating department managers better manage costs? Explain
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