Mills Company uses standard costing for direct materials and direct labor. Management would like to use standard costing for variable and fixed overhead.
The following monthly cost functions were developed for manufacturing overhead items:
Overhead Item Cost Function
Indirect materials $1.00 per DLH
Indirect labor $1.25 per DLH
Utilities $0.50 per DLH
Insurance $10,000
Depreciation $40,000
The cost functions are considered reliable within a relevant range of 20,000 to 40,000 direct labor hours. The company expects to operate at 25,000 direct labor hours per month.
Information for the month of June is as follows:
Actual overhead costs incurred:
Indirect materials $ 20,000
Indirect labor 30,000
Utilities 12,000
Insurance 11,000
Depreciation 40,000
Total $113,000
Actual direct labor hours worked: 24,000
Standard direct labor hours allowed for production achieved: 27,000
Required:
a. Calculate the following standard manufacturing overhead rates based upon expected capacity:
Variable manufacturing overhead
Fixed manufacturing overhead rate
Total manufacturing overhead rate
b. Calculate the following variances:
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending variance
Fixed overhead volume variance
2.. Marconi, Inc., a retailer of specialty paints, prepares a monthly master budget. Data for the September master budget are given below:
a. The August 31st balance sheet:
Cash $ 25,500 Accounts payable $ 53,760
Accounts receivable 90,000 Capital stock 265,000
Inventory 28,800 Retained earnings 25,540
Building and equipment (net) 200,000
b. Actual sales for August and budgeted sales for September, October, and November are given below:
August $120,000
September 360,000
October 200,000
November 180,000
c. Sales are 25 percent for cash and 75 percent on credit. All credit sales are collected in the month following the sale. There are no bad debts.
d. The gross margin percentage is 60 percent of sales. The desired ending inventory is equal to 20 percent of the following month's sales. One fifth of the purchases are paid for in the month of purchase and the others are purchased on account and paid in full the following month.
e. The monthly cash operating expenses are $80,000 including the monthly depreciation expense of $7,000.
f. During September, Marconi Company will purchase new office equipment for $17,000 cash.
g. Dividends of $13,500 were declared and paid in September.
h. The company must maintain a minimum cash balance of $25,000. A line of credit is used to maintain this balance. Borrowing will be made in increments of $1,000. All borrowing is done at the beginning of the month and repayments are made at the end of the month. The annual interest rate is 12 percent, paid when the loan is repaid (ignore accrual of interest).
3. Smithson Corporation has the following budgeted sales for the selected six-month period:
Month Unit Sales
June 15,000
July 20,000
August 35,000
September 25,000
October 30,000
November 20,000
There were 7,500 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished product equal to 20 percent of the unit sales for the next month.
Three pounds of materials are required for each unit produced. Each pound of material costs $20. Inventory levels for materials equal 30 percent of the needs for the next month. Materials inventory on June 1 was 5,000 pounds.
Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds and dollars for July, August, and September.
4. Horn Bank has two bank locations: Main and Rural. The central office provides check-processing services for the two banks. Information pertaining to the banks is as follows:
Check Processing Main Rural
Budgeted fixed costs $100,000 - -
Budgeted variable rate per hour $20 - -
Normal usage in hours - 600 400
Actual fixed costs $107,500 - -
Actual variable costs $ 17,500 - -
Actual usage in hours - 550 250
Required:
a. Use the direct method to allocate the check-processing center costs to each bank to provide information for setting service charges.
b. Use the direct method to allocate the computer center costs to each bank for performance evaluation purposes.
c. Determine the costs of the check-processing center NOT allocated to the two banks. Why were these costs not allocated to the operating units?
5 Earl, Inc., has two producing departments. Each producing department is held responsible for a share of the costs of a support department.
Actual and budgeted data are as follows:
2006
Support department hours used:
Department X 8,000
Department Y 16,000
Total hours 24,000
Support department costs:
Actual support department costs $72,000
Budgeted fixed service center costs $24,000
Budgeted variable rate per hour $3.00
Normal support department usage is 12,000 hours each for Department X and Department Y.
Required:
a. Assuming the purpose is product costing, allocate the costs of the support department using the direct method.
b. Assuming the purpose is to evaluate performance, allocate the costs of the support department.
none
a.
To calculate the standard manufacturing overhead rates, we need to determine the expected capacity and the total manufacturing overhead costs.
Expected capacity: 25,000 direct labor hours per month
Variable manufacturing overhead rate:
Total variable manufacturing overhead costs = Indirect materials + Indirect labor + Utilities
= $20,000 + $30,000 + $12,000
= $62,000
Variable manufacturing overhead rate = Total variable manufacturing overhead costs / Expected capacity
= $62,000 / 25,000
= $2.48 per direct labor hour
Fixed manufacturing overhead rate:
Fixed manufacturing overhead rate = Fixed manufacturing overhead costs / Expected capacity
= ($10,000 + $40,000) / 25,000
= $2 per direct labor hour
Total manufacturing overhead rate:
Total manufacturing overhead rate = Variable manufacturing overhead rate + Fixed manufacturing overhead rate
= $2.48 per direct labor hour + $2 per direct labor hour
= $4.48 per direct labor hour
b.
Variable overhead spending variance:
Variable overhead spending variance = (Actual variable overhead costs - Standard variable overhead costs)
= ($62,000 - ($2.48 per direct labor hour * 27,000 direct labor hours))
= ($62,000 - $66,960)
= -$4,960
Variable overhead efficiency variance:
Variable overhead efficiency variance = (Standard variable overhead costs - Standard variable overhead costs for production achieved)
= (($2.48 per direct labor hour * 27,000 direct labor hours) - ($2.48 per direct labor hour * 24,000 direct labor hours))
= ($66,960 - $59,520)
= $7,440
Fixed overhead spending variance:
Fixed overhead spending variance = (Actual fixed overhead costs - Standard fixed overhead costs)
= ($51,000 - $40,000)
= $11,000
Fixed overhead volume variance:
Fixed overhead volume variance = (Standard fixed overhead costs - Standard fixed overhead costs for production achieved)
= ($40,000 - $40,000)
= $0
2.
a.
To prepare the master budget for September, we need to consider the given information:
Beginning cash balance: $25,500
Accounts receivable: $90,000
Inventory: $28,800
Accounts payable: $53,760
Capital stock: $265,000
Retained earnings: $25,540
Building and equipment (net): $200,000
b.
Actual sales for August: $120,000
Budgeted sales for September: $360,000
Budgeted sales for October: $200,000
Budgeted sales for November: $180,000
c.
Sales are 25% cash and 75% on credit, collected in the month following the sale.
d.
Gross margin percentage: 60% of sales
Desired ending inventory: 20% of the following month's sales
Purchases: 1/5 paid for in the month of purchase, rest paid in full the following month
e.
Monthly cash operating expenses: $80,000 (including $7,000 depreciation expense)
f.
New office equipment purchased in September: $17,000 cash
g.
Dividends declared and paid in September: $13,500
h.
Minimum cash balance required: $25,000
Line of credit used to maintain the balance
Borrowing in increments of $1,000, at the beginning of the month
Repayments made at the end of the month
Annual interest rate: 12%, paid when loan is repaid
3.
a.
To prepare the production budgets in units for July, August, and September, we need to consider the following:
Beginning inventory of finished goods in June: 7,500 units
Desired ending inventory equal to 20% of the unit sales for the next month
b.
To prepare the purchases budget in pounds and dollars for July, August, and September, we need to consider the following:
Three pounds of materials required for each unit produced
Cost of each pound of material: $20
Inventory levels for materials equal to 30% of the needs for the next month
Inventory of materials on June 1: 5,000 pounds
4.
a.
To allocate the check-processing center costs to each bank using the direct method, we need to divide the actual and budgeted fixed costs by the normal usage in hours for each bank and multiply the variable rate per hour by the actual and budgeted usage in hours for each bank.
b.
To allocate the computer center costs to each bank using the direct method for performance evaluation purposes, we need to divide the actual fixed costs by the actual usage in hours for each bank and multiply the variable rate per hour by the actual usage in hours for each bank.
c.
The costs of the check-processing center NOT allocated to the two banks are the actual and budgeted fixed costs that were not allocated using the direct method. These costs were not allocated to the operating units because they are considered as general overhead costs and not directly attributable to any specific unit or division.
1. Calculation of standard manufacturing overhead rates based upon expected capacity:
a. Variable manufacturing overhead:
- Cost function for indirect materials: $1.00 per DLH
- Cost function for indirect labor: $1.25 per DLH
- Cost function for utilities: $0.50 per DLH
Since DLH (direct labor hours) is the allocation base for all three cost functions, we sum the costs and divide by the DLH to get the variable manufacturing overhead rate.
Variable manufacturing overhead rate = ($1.00 + $1.25 + $0.50) / DLH
b. Fixed manufacturing overhead rate:
- Insurance: $10,000
- Depreciation: $40,000
Fixed manufacturing overhead rate is the sum of insurance and depreciation, since they are fixed costs.
Total manufacturing overhead rate is the sum of variable and fixed manufacturing overhead rates.
2. Calculation of variances:
a. Variable overhead spending variance:
Variable overhead spending variance = Actual variable manufacturing overhead - (Actual DLH * Variable manufacturing overhead rate)
b. Variable overhead efficiency variance:
Variable overhead efficiency variance = (Standard DLH for production achieved - Actual DLH) * Variable manufacturing overhead rate
c. Fixed overhead spending variance:
Fixed overhead spending variance = Actual fixed manufacturing overhead - Fixed manufacturing overhead rate * Standard DLH for production achieved
d. Fixed overhead volume variance:
Fixed overhead volume variance = (Standard DLH for production achieved - Normal DLH) * Fixed manufacturing overhead rate
3. Master budget calculation:
a. Cash collections from credit sales in September:
Cash collections from credit sales = Credit sales * Cash collection percentage
Cash collection percentage = 75%
b. Ending inventory for each month:
Ending inventory = Sales for the following month * Ending inventory percentage
Ending inventory percentage = 20%
c. Accounts payable for purchases:
Accounts payable for purchases = (Purchases - Cash purchases) * Payable period
Payable period = 1 month
d. Net cash from operations:
Net cash from operations = Net sales * Gross margin percentage - Cash operating expenses
e. Cash balance at the end of each month:
Cash balance = Beginning cash balance + Net cash from operations + Borrowings - Repayments
f. Borrowing and repayment:
Borrowing = (Minimum cash balance - Cash balance) / Borrowing increment
Repayment = Borrowings * Interest rate
4. Production budgets:
a. July production budget:
July production = August sales * (1 + Ending inventory percentage)
Ending inventory percentage = 20%
August sales = 20,000 units
b. August production budget:
August production = September sales * (1 + Ending inventory percentage)
Ending inventory percentage = 20%
September sales = 35,000 units
c. September production budget:
September production = October sales * (1 + Ending inventory percentage)
Ending inventory percentage = 20%
October sales = 25,000 units
Purchases budget:
a. July purchases budget:
July purchases = July production * Materials required per unit
Materials required per unit = 3 pounds
July production = calculated from the production budget
b. August purchases budget:
August purchases = August production * Materials required per unit
Materials required per unit = 3 pounds
August production = calculated from the production budget
c. September purchases budget:
September purchases = September production * Materials required per unit
Materials required per unit = 3 pounds
September production = calculated from the production budget
6. Allocation of check processing center costs:
a. Allocate fixed costs:
Total budgeted fixed costs = $100,000
Actual fixed costs = $107,500
Allocate the fixed costs based on the actual usage in hours for each bank.
b. Allocate variable costs:
Variable costs per hour = $20
Actual variable costs = $17,500
Allocate variable costs based on the actual usage in hours for each bank.
c. Determine the costs not allocated:
The costs not allocated are the costs of the check-processing center that are not allocated to the Main and Rural banks. These costs are not allocated because there is no usage or activity from these banks in the check-processing center.