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# Varilux, Avant, Milian Pasta, DVDS, Wedig Diagnostics

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10-3
Varilux manufactures a single product and sells it for \$10 per unit. At the beginning of the year, there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had \$3 of fixed manufacturing cost and \$2 of variable manufacturing cost. During the year, Varilux produced 10,000 units of product. Each unit produced generated \$3 of varible manufacturing cost. Total fixed manufacturing cost for the current year was \$40,000. Selling and administrative cost consisted of \$12,000 of variable cost and \$18,000 of fixed cost. There were no inventories at the end of the year.

Required:
Prepare two incomes statements for the current year: one on a variable cost basis and the other on an absorption cost basis. Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.

10-14
Avant Designs and manufactures polished-nickle fashion bracelets. It offers two bracelets: Aztec and Mayan. The following data summarized budgeted operations for the current year:

AVANT DESIGNS
Summary of Budgeted Operations
Current Year

Aztec Mayan
Sales price/unit \$12 \$15
Variable cost/unit \$4 \$5
Units sold 30,000 20,000
Machine minutes/units 2 3
Beginning inventory 0 0
Ending inventory 3,000 1,000

Budgeted fixed manufacturing overhead for the year was \$258,000.

Required:
a. Prepare the budgeted income statement for the year using variable costing.

b. Prepare the budgeted income statement for the year using absorbtion costing. budgeted fixed manufacturing overhead is allocated to the bracelets using machine minutes.

c. Explain the difference in earnings and explain why it occurs.

11-4
At it's Lyle Avenue plant, Milian Pasta produces two types of pasta: Spaghetti and fettuccine. The two pastas are produced on the same machine, with different setting and slightly different raw materials. The fettuccine, being a wider noodle and more susceptible to curling edges, requires more inspection time. The total daily cost of inspection is \$500. Here are daily production data for rhe two products:

Spaghetti Fettuccine
Pounds produced 6,000 2,000
Machine minutes per pound 0.20 0.40
Inspection hours per product 8 24

Required:
a. Calculate the inspection cost per pound of pasta using traditional absorption costing with number of machine hours as the allocation base.

b. Calculate the inspection cost per pound of pasta using activity-based costing. Assume inpection time is the cost driver.

c. Analyze why inspection cost differ between the methods used in (a) and (b).

11-8
DVDS Manufactures and sells DVD players in two countries. It manufactures two models- Basic an Custom_ in the same plant. The Basic DVD has fewre options and provides lower-quality output than the Custom DVD. The basic model is sold only in a developing country and while the custom model is sold only in a developed country. DVDS pays income taxes to the country where the final sale of the DVD player takes place. The following table summarizes DVDS operations.

DVDS
Summary of Operatios
Current Year

Basic Custom
Quality produced and sold 60,000 70,000
Price \$75 \$140
Direct labor/unit \$15 \$30
Direct materials/unit \$40 \$80
Income tax rate 15% 35%

Besides direct materials and direct labor, manufacturing overhead amounts to \$2 milloin and is currently assigned to products based on direct labor dollars. Manufacturing overhead is a fixed cost (does not vary with the number of units produced).

Required:

a. Calculate the unit manufacturing cost of the Basic and Custom DVD models using traditional absorption costiong. Manufacturing overhead is allocated based on direct labor dollars.

b. DVDS hires a consulting firm to analyz its costing methods. After performing an extensive review, the consultants determine that the vast majority of the \$2 million of overhead varies with the number of different parts in the two DVD models. The number of parts drives purchasing department activities. More engineering time is spent on the more complex Custom DVD models. More accounting depreciation of assembly and testing equipment is incurred producing the Custom DVD model than the Basic DVD model. The Basic DVD has 140 different parts and the Custom DVD model has 160 different parts. Calculate the unit manufacturing cost of the Basic and Custom DVD models using activity-based costing.

c. Should DVDS change its costing methodology from its traditional absorption costing to ABC? Explain why it should or should not.

11-14
Wedig Diagnostics manufactures two laser photometers that are used in preparing DNA test. The U.S. model is designed for use in the United States and the EU model is designed to meet the specifications in most of the European Union. Both models are manufactured in the United States. The EU models are shipped to Wedig's wholly owned European subsidiary, which sells them. All units manufactured are sold. The following table summarizes the selling prices, direct materials and labor, and number of units sold.

U.S. Model EU Model
Selling price/unit \$2,500 \$2,200
Direct materials/unit \$235 \$260
Direct labor/unit \$560 \$500
Number sold annually 15,000 16,800

The EU units are sold in U.S. dollars. Wedig has total manufacturing overhead of \$39 million annually. This overhead is allocated to both U.S. and EU models using total direct labor dollars. Wedig transfers its EU model to its European subsidiary at full cost(direct materials and labor plus allocated overhead). Assume that Wedig pays U.S. taxes only on the profits it makes on sales in the United States and the Wedig EU subsidiary pays taxes only on the profits it makes on sales in the EU. The U.S. income taxe rate is 30 percent and the Wedig European subsidiary has a tax rate of 15 percent.

Wedig hires a consulting firm to perform an ABC anaylsis of its overhead costing methodology. This analysis reveals that the \$39 million of overhead consist of three cost pools: batch-related cost (\$18 million). Each model is produced in batches, and batche-related cost consist of engineering, quality control, and machine cost that vary with the number of batches produced. The U.S. model is produced in 45 batches each year and the EU model is produced in 55 batches a year.

The U.S. And EU models differ in terma of the number of different parts in each unit. The U.S. model has 40 different part numbers and the EU model has 80 different part numbers. Part-related cost consist of the cost of operating the purchasing department(excluding the cost of the parts purchased), inspecting the parts upon arrival, inventory ing the parts, and managing the parts inventory. Parts-related cost vary with the number of part numbers in each product. Finally, the direct labor-related cost consist of human resourses, accounting, and other overhead cost that vary with the amount of direct labor in each model.

Required:

a. Calculate the unit manufacturing cost of the U.S. and EU models using total direct labor dollars to allocate the \$39 million of manufacturing overhead.

b. Calculate the unit manufacturing cost of the U.S. and EU models using the ABC analysis to allocate the \$39 million of manufacturing overhead.

c. Prepare income statements (including income tax expense) for Wedig and its European subsidary using the unit manufacturing cost calculated in part (a) (overhead is allocated using total direct labor dollars).

d. Prepare income statements (including income tax expense) for Wedig and its European subsidary using the unit manufacturing cost calculated in part (b) (overhead is allocated using the ABC analysis).

e. Discuss the advantages and disadvantages of using direct labor versus ABC to allocate the \$39 million of overhead.

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#### Solution Summary

The solution explains various questions in management accounting

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