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Examples of Direct Costing Application: Rainbow Ltd, Book Publishing, Truman Inc

Question 1
The cost formula for the maintenance department of Rainbow, Ltd., is $19,300 per month plus $7.6 per machine hour used by the production department.

(a) Calculate the maintenance cost that would be budgeted for a month in which 6,800 machine hours are planned to be used.
(b) Prepare an appropriate performance report for the maintenance department assuming that 7,060 machine hours were actually used in the month of June and that the total maintenance cost incurred was $68,920.

Question 2
Following is a partially completed performance report for a recent week for direct labor in the binding department of a book publisher:
Direct Labor
Original Budget $3,040
Flex Budget
Actual $4,350

The original budget is based on the expectation that 7,600 books would be bound; the standard is 30 books per hour at a pay rate of $12 per hour. During the week, 7,750 books were actually bound. Employees worked 300 hours at an actual total cost of $4,350.
(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.

Question 3
The president of Truman, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year's traditional model income statement be revised, and she received the following report:
In 000's Total Co. Divison A Divison B Divison C
Sales $108 $43 $26 $39
Variable Expenses 66 23 20 23
Contribution Margin $42 $20 $6 $16
Fixed Expenses 29 9 11 9
Net Income $13 $11 -$5 $7

The president was told that the fixed expenses of $29,000 included $18,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!"
(a) Evaluate the president's remark.
(b) Calculate what the company's net income would be if Division B were closed down.
(c) What is the policy statement related to the allocation of fixed expenses.

Question 4
Stockholm Corporation has three operating divisions and requires a 11% return on all investments. Calculate the missing amounts for each division.

Question 5
The standards for one case of liquid weed killer are:
Direct materials 8 lbs. @ $10.5/lb.
Direct labor 5 hrs. @ $22.4/hr.
Variable overhead (based on machine hours) 1.7 hrs. @ $ 7.7/hr.

During the week ended August 6, the following activity took place:
6,751 machine hours were worked.
33,774 lbs. of raw material were purchased for inventory at a total cost of $361,720.
4,180 cases of finished product were produced.
33,267 lbs. of raw material were used.
20,440 labor hours were worked at an average rate of $22.75 per hour.
$50,160 actual variable overhead costs were incurred.

Calculate each of the following variances:
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.

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Solution Summary

This solution looks at direct cost examples in detail and provides solutions using Excel to allow the reader to follow the path of formulae to better understand the logic in the solution. There will be a greater understanding of Direct Costing principles.