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# Manufacturing costs, labour costs and budgeting

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A) At The Peak, Inc., manufactures scientific calculators. Costs incurred in making 25,000 scientific calculators in April included \$ 85,000 of fixed manufacturing overhead. The total absorption cost per scientific calculator was \$ 12.50.
Required:
a. Calculate the variable cost per scientific calculator.
b. The ending inventory of scientific calculators was 1,850 units higher at the end of the month than at the beginning of the month. By how much and in what direction ( higher or lower) would operating income for the month of April be different under variable costing than under absorption costing?

B) Following is a part of a performance report for a recent week for direct labor in the binding department of a magazine publisher:
Original Budget Direct Labor \$ 4,800, Actual Direct Labor \$ 5,330
The original budget is based on the expectation that 8,000 magazines would be bound; the standard is 20 magazines per hour at a pay rate of \$ 12 per hour. During the week, 7,600 magazines were actually bound. Employees worked 410 hours at an actual total cost of \$ 5,330.
Required:
a. Calculate the flexed budget amount against which actual performance should be evaluated, and then calculate the budget variance.
b. Calculate the direct labor efficiency variance in terms of hours.
c. Calculate the direct labor rate variance.

#### Solution Preview

A) At The Peak, Inc., manufactures scientific calculators. Costs incurred in making 25,000 scientific calculators in April included \$ 85,000 of fixed manufacturing overhead. The total absorption cost per scientific calculator was \$ 12.50.

Required:
a. Calculate the variable cost per scientific calculator.
Absorption cost per unit includes the variable cost per unit plus the absorbed fixed cost per unit.
We can state this as:
Absorption cost per unit = Variable manufacturing cost per unit + Absorbed fixed manufacturing cost per unit
\$12.50 = Variable manufacturing cost per unit + [\$85,000/25,000]
\$12.50 = Variable manufacturing cost per unit + \$3.40 per unit
Therefore, variable manufacturing cost per unit = \$12.50 - \$3.40  \$9.10