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# Average cost per unit and budgeted direct materials

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1. A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores.

The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are:
A B C
Units Produced 10,000,000 20,000,000 30,000,000
Variable Costs \$200,000 \$450,000 \$650,000
Fixed Costs \$1,000,000 \$1,000,000 \$1,000,000

a. Estimate the average cost per unit for each plant.
b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?

2. The Jung Corporation's budget calls for the following production:
Quarter 1 45,000 units
Quarter 2 38,000 units
Quarter 3 34,000 units
Quarter 4 48,000 units

Each unit of production requires three pounds of direct material. The company's policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter's direct material requirements. Compute budgeted direct materials purchases for the third quarter.

3.The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of \$500,000 and variable costs of \$30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.

a. What is the application rate for the maintenance department?
b. What is the additional cost to the maintenance department of providing another hour of maintenance?
c. What problem exists if the managers of other departments can choose how much maintenance to be performed?
d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

4. The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be \$600,000 and variable costs to be \$800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are \$700,000 and the actual variable overhead costs are \$750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000.

a. How much overhead is allocated?
b. What is the over/underabsorbed overhead?

5. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the direct costs of one unit of product.

Standard Standard Standard
Quantity Price Cost

Direct materials 8 pounds \$1.80 per pound \$14.40
Direct labor 0.25 hour \$8.00 per hour 2.00
\$16.40

During May, Arrow purchased 160,000 pounds of direct materials at a total cost of \$304,000. The total factory wages for May were \$42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.

a. Calculate the direct materials price variance for May.
b. Calculate the direct materials quantity variance for May.
c. Calculate the direct labor wage rate variance for May.
d. Calculate the direct labor efficiency variance for May.

6. The Tippa Canoe Company makes fiberglass canoes. The fiberglass resin is initially molded to the shape of a canoe, then sanded and painted. Metal or wooden seats and frames are added for stability. The Tippa Canoe Company was started several years ago in the owner's garage. The owner, Jeff George, did a lot of the initial manual labor with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Because of the expansion, Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system.

a. Describe the procedures Jeff should use in setting standards for direct labor and direct materials.
b. Describe how Jeff could use standards for planning purposes,
c. Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures.
d. Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?