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    Managerial accounting

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    1.) Production and purchases budgets of Osage Inc. has actual sales for June and July and forecast sales for August, September, October, and November as follows:

    June 4,150 units
    July 4,350 units
    August 4,200 units
    September 4,950 units
    October 3,900 units
    November 3,700 units

    a. The firm's policy is to have finished goods inventory on hand at the end of the month that is equal to 70% of the next month's sales. It is currently estimated that there will be 3,300 units on hand at the end of July. Calculate the number of units to be produced in each of the months of August, September, and October.
    b. Each unit of finished product requires 5 pounds of raw materials. The firm's policy is to have raw material inventory on hand at the end of each month that is equal to 80% of the next month's estimated usage. It is currently estimated that 13,000 pounds of raw materials will be on hand at the end of July. Calculate the number of pounds of raw materials to be purchased in each of the months of August and September.

    2.) Cash receipts budget for flagstaff Co. has actual sales for July and August and forecast sales for September, October, November, and December as follows:

    July $73,500
    August $78,750
    September $85,500
    October $70,500
    November $91,500
    December $80,250

    Based on past experience, it is estimated that 30% of a month's sales are collected in the month of sale, 50% are collected in the month following the sale, and 18% are collected in the second month following the sale.

    Calculate the estimated cash receipts for September, October, and November.

    3.) Developing raw material cost standards for Ozark Manufacturing Co. manufactures and sells household cleaning products. The company's research department has developed a new cleaner for which a standard cost must be determined. The new cleaner is made by mixing 18 quarts of triphate solution and 8 pounds of sobase granules and boiling mixtures for several minutes. After the solution has cooled, 4 ounces of methage are added. This "recipe" produces 15 quarts of the cleaner, which is then packaged in one-quart plastic dispenser bottles. Raw material costs are:

    Triphate $.45 per quart
    Sobase granules .90 per pound
    Methage 1.40 per ounce
    Bottle .25 each

    a. Using the preceding data, calculate the raw material cost for one bottle of the new cleaner.
    b. Assume that the preceding costs are the current best estimates of the costs at which require quantities of the raw material can be purchased. Would you recommend that any other factors be considered in establishing the raw material cost standard for the new cleaner?
    c. Explain the process that would be used to develop the direct labor cost standard for the new product.

    4.) Flexible budgeting for Rocky Mountain Manufacturing produces a single product. The original budget for November was based on expected production of 35,000 units; actual production for November was 33,250 units. The original budget and actual costs incurred for the manufacturing department follow:

    Original Budget Actual Costs
    Direct materials $551,250 $541,500
    Direct labor 427,000 413,500
    Variable overhead 217,000 195,250
    Fixed overhead 170,000 172,500
    Total $1,365,250 $1,322,750

    Prepare an appropriate performance report for the manufacturing department.

    5.) Calculate variable cost variances-explain results. The standards for one case of liquid weed killer are:

    Direct materials 3 lbs. @ $6.00/lb
    Direct labor 1.8 hrs. @ $12.00/hr
    Variable overhead (based on Machine hours) 0.6 hrs. @ $3.50/hr

    During the week ended August 6, the following activity took place:

    2,390 machine hours were worked
    11,400 lbs. of raw material were purchased for inventory at a total cost of $70,680
    3,800 cases of finished product were produced
    11,290 lbs. of raw material were used
    6,720 labor hours were worked at an average rate of $12.25 per hour
    $8,126 actual variable overhead costs were incurred.

    Calculate each of the following variances and provide plausible explanations for the results:

    a. Price variance for raw materials purchased.
    b. Raw Materials usage variance
    c. Direct labor rate variance.
    d. Direct labor efficiency variance
    e. Variable overhead spending variance
    f. Variable overhead efficiency variance

    6.) Direct material variances-the price versus usage trade-off for Bennett, Inc., manufactures quality replacement parts for the auto industry. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling the direct material price variances for hundreds of raw material items that are used in the company's various production processes. Recent experience indicates that, in the aggregate, direct material price variances have been favorable. However, several problems have occurred. Direct material usage variances have become consistently unfavorable for many items, and the company's total budget variance for direct materials has been unfavorable during each of the past six months. Direct laborers have complained about the quality of certain raw material items, and major customers have canceled purchase orders. In the meantime, the company's raw materials inventory has increased by nearly 240%.


    a. Give a probable explanation of why these results have occurred. (This is based on what the purchasing manager might be doing that is dysfunctional for the company as a whole).
    b. How could the performance reporting system be improved to encourage more appropriate behavior on the part of the purchasing manager?

    7.) Considering decisions made by a fire department (a non-profit organization). Present the type of information (types of costs, revenues, sales, capacity, etc. - no specific amounts are required) that is needed for making the decision. Also discuss any qualitative factors that might impact the decision. The information regarding a decision made in a fire department, stating the types of cost and other information, as well as qualitative factors, that are used to make the final decision.

    8.) Investment center analysis; ROI and residual income for Milano Corporation has three operating divisions and requires a 12% return on all investments. Select information is presented here:
    Division A Division B Division C
    Revenues $500,000 ? ?
    Operating income $60,000 ? $80,000
    Operating assets $250,000 $600,000 ?
    Margin ? 12% ?
    Turnover ? 1 turn 2 turns
    ROI ? ? ?
    Residual income ? ? $20,000


    a. Calculate the missing amounts for each division.
    b. Comment on the relative performance of each division.
    c. Provide and example to show how residual income improves decision making at the divisional level.

    9.) Sell or process further? Mizzou Mining Company mines an iron ore called Alpha. During the month of December, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product can be sold as is or processed into the refined products Super Delta and Precision Pi. Selling prices for these products are:
    Delta Super Delta Pi Precision Pi
    Selling price $7/ton $15/ton $12/ton $24/ton

    Processing costs to refine Delta into Super Delta are $2,400,000; processing costs to refine Pi into Precision Pi are $1,600,000.


    a. Should Delta and Pi be sold as is or refined into Super Delta and Precision Pi?
    b. Identify any costs in the problem that are not relevant to this decision.

    10.) The make or buy decision for the Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other purchasing-related costs. The company will need 14,400 of these parts in the next year and is considering making the part internally. After performing a capacity analysis, Sycamore determined that it has sufficient unused capacity to manufacture the 14,400 parts but would need to hire a manager at an annual salary of $43,200 to oversee this production activity. Estimated production costs are determined to be:

    Direct material $18
    Direct labor 8
    Variable overhead 4
    Fixed overhead (includes manager at $3 per unit) 7
    Total unit cost $37


    a. Identify the relevant costs to make this part internally.
    b. Should sycamore produce the part or continue to buy it from the outside supplier?
    c. What other factors are important to this decision?

    11.) The product mix decision for the ABC Company produces Product X, Product Y, and Product Z. All three products require processing on specialized finishing machines. The capacity of these machines is 3,600 hours per month. ABC Company wishes to determine the product mix that should be achieved to meet the high demand for each product and provide the maximum profit. Following is information about each product:
    Product X Product Y Product Z
    Selling price $300 $240 $76
    Variable cost 210 120 60
    Machine time per unit 6 hours 4 hours 2 hours
    Monthly demand (units) 360 240 600

    Determine how the 3,600 hours of machine time should be allocated to the three products to provide the most profitable product mix.

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    Solution Summary

    The solution explains some questions in managerial accounting relating to variances, budgets, sales mix