explain why if a performance measure in the customer perspective of the balncef scorecard was customer loyalty, then a driver from the process perspective would likely be high-quality production processess 2. If an organization planned to use $44 of material per unit activity but it actually user $42 of material per unit of activity, and it planned to make 1200 units but it actually made 1,000 units. Explain why the flexible budget amount for material is $42,000. include calculation
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1. explain why if a performance measure in the customer perspective of the balncef scorecard was customer loyalty, then a driver from the process perspective would likely be high-quality production processess
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- The controller for Muir Companys Salem plant is analyzing overhead in order to determine appropriate drivers for use in flexible budgeting. She decided to concentrate on the past 12 months since that time period was one in which there was little important change in technology, product lines, and so on. Data on overhead costs, number of machine hours, number of setups, and number of purchase orders are in the following table. Required: 1. Calculate an overhead rate based on machine hours using the total overhead cost and total machine hours. (Round the overhead rate to the nearest cent and predicted overhead to the nearest dollar.) Use this rate to predict overhead for each of the 12 months. 2. Run a regression equation using only machine hours as the independent variable. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the intercept and x-coefficient to the nearest cent and predicted overhead to the nearest dollar.) Is this flexible budget better than the budget in Requirement 1? Why or why not?Gumbrecht Company has the following departmental manufacturing layout for one of its plants: A consulting firm has recommended a value stream with the following manufacturing cell: Required: 1. Calculate the total time it takes to produce a batch of 20 units using the traditional departmental manufacturing layout. 2. Using cellular manufacturing, how much time is saved producing the same batch of 20 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. Assume the processing time of Casting is reduced to 9 minutes, while the times of the other processes stay the same. What is the production rate now, and how long will it take to produce a batch of 20 units if the cell is in a continuous production mode?Mabbut Company has the following departmental manufacturing layout for one of its plants: A consulting firm recommended a value stream with the following manufacturing cell: Required: 1. Calculate the total time it takes to produce a batch of 10 units using the traditional departmental manufacturing layout. 2. Using cellular manufacturing, how much time is saved producing the same batch of 10 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. Assume the processing time of Welding is reduced to 6 minutes, while the times of the other processes stay the same. What is the production rate now, and how long will it take to produce a batch of 10 units if the cell is in a continuous production mode?
- Anderson Company has the following departmental manufacturing structure for one of its products: After some study, the production manager of Anderson recommended the following revised cellular manufacturing approach: Required: 1. Calculate the total time it takes to produce a batch of 20 units using Andersons traditional departmental structure. 2. Using cellular manufacturing, how much time is saved producing the same batch of 20 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. What if the processing times of molding, welding, and assembly are all reduced to six minutes each? What is the production rate now, and how long will it take to produce a batch of 20 units?Jolene Askew, manager of Feagan Company, has committed her company to a strategically sound cost reduction program. Emphasizing life-cycle cost management is a major part of this effort. Jolene is convinced that production costs can be reduced by paying more attention to the relationships between design and manufacturing. Design engineers need to know what causes manufacturing costs. She instructed her controller to develop a manufacturing cost formula for a newly proposed product. Marketing had already projected sales of 25,000 units for the new product. (The life cycle was estimated to be 18 months. The company expected to have 50 percent of the market and priced its product to achieve this goal.) The projected selling price was 20 per unit. The following cost formula was developed: Y=200,000+10X1 where X1=Machinehours(Theproductisexpectedtouseonemachinehourforeveryunitproduced.) Upon seeing the cost formula, Jolene quickly calculated the projected gross profit to be 50,000. This produced a gross profit of 2 per unit, well below the targeted gross profit of 4 per unit. Jolene then sent a memo to the Engineering Department, instructing them to search for a new design that would lower the costs of production by at least 50,000 so that the target profit could be met. Within two days, the Engineering Department proposed a new design that would reduce unit-variable cost from 10 per machine hour to 8 per machine hour (Design Z). The chief engineer, upon reviewing the design, questioned the validity of the controllers cost formula. He suggested a more careful assessment of the proposed designs effect on activities other than machining. Based on this suggestion, the following revised cost formula was developed. This cost formula reflected the cost relationships of the most recent design (Design Z). Y=140,000+8X1+5,000X2+2,000X3 where X1=MachinehoursX2=NumberofbatchesX3=Numberofengineeringchangeorders Based on scheduling and inventory considerations, the product would be produced in batches of 1,000; thus, 25 batches would be needed over the products life cycle. Furthermore, based on past experience, the product would likely generate about 20 engineering change orders. This new insight into the linkage of the product with its underlying activities led to a different design (Design W). This second design also lowered the unit-level cost by 2 per unit but decreased the number of design support requirements from 20 orders to 10 orders. Attention was also given to the setup activity, and the design engineer assigned to the product created a design that reduced setup time and lowered variable setup costs from 5,000 to 3,000 per setup. Furthermore, Design W also creates excess activity capacity for the setup activity, and resource spending for setup activity capacity can be decreased by 40,000, reducing the fixed cost component in the equation by this amount. Design W was recommended and accepted. As prototypes of the design were tested, an additional benefit emerged. Based on test results, the post-purchase costs dropped from an estimated 0.70 per unit sold to 0.40 per unit sold. Using this information, the Marketing Department revised the projected market share upward from 50 percent to 60 percent (with no price decrease). Required: 1. Calculate the expected gross profit per unit for Design Z using the controllers original cost formula. According to this outcome, does Design Z reach the targeted unit profit? Repeat, using the engineers revised cost formula. Explain why Design Z failed to meet the targeted profit. What does this say about the use of unit-based costing for life-cycle cost management? 2. Calculate the expected profit per unit using Design W. Comment on the value of activity information for life-cycle cost management. 3. The benefit of the post-purchase cost reduction of Design W was discovered in testing. What direct benefit did it create for Feagan Company (in dollars)? Reducing post-purchase costs was not a specific design objective. Should it have been? Are there any other design objectives that should have been considered?Kelly Gray, production manager, was upset with the latest performance report, which indicated that she was 100,000 over budget. Given the efforts that she and her workers had made, she was confident that they had met or beat the budget. Now, she was not only upset but also genuinely puzzled over the results. Three itemsdirect labor, power, and setupswere over budget. The actual costs for these three items follow: Kelly knew that her operation had produced more units than originally had been budgeted, so more power and labor had naturally been used. She also knew that the uncertainty in scheduling had led to more setups than planned. When she pointed this out to John Huang, the controller, he assured her that the budgeted costs had been adjusted for the increase in productive activity. Curious, Kelly questioned John about the methods used to make the adjustment. JOHN: If the actual level of activity differs from the original planned level, we adjust the budget by using budget formulasformulas that allow us to predict what the costs will be for different levels of activity. KELLY: The approach sounds reasonable. However, Im sure something is wrong here. Tell me exactly how you adjusted the costs of labor, power, and setups. JOHN: First, we obtain formulas for the individual items in the budget by using the method of least squares. We assume that cost variations can be explained by variations in productive activity where activity is measured by direct labor hours. Here is a list of the cost formulas for the three items you mentioned. The variable X is the number of direct labor hours: Labor cost = 10X Power cost = 5,000 + 4X Setup cost = 100,000 KELLY: I think I see the problem. Power costs dont have a lot to do with direct labor hours. They have more to do with machine hours. As production increases, machine hours increase more rapidly than direct labor hours. Also, ... JOHN: You know, you have a point. The coefficient of determination for power cost is only about 50 percent. That leaves a lot of unexplained cost variation. The coefficient for labor, however, is much betterit explains about 96 percent of the cost variation. Setup costs, of course, are fixed. KELLY: Well, as I was about to say, setup costs also have very little to do with direct labor hours. And I might add that they certainly are not fixedat least not all of them. We had to do more setups than our original plan called for because of the scheduling changes. And we have to pay our people when they work extra hours. It seems as if we are always paying overtime. I wonder if we simply do not have enough people for the setup activity. Supplies are used for each setup, and these are not cheap. Did you build these extra costs of increased setup activity into your budget? JOHN: No, we assumed that setup costs were fixed. I see now that some of them could vary as the number of setups increases. Kelly, let me see if I can develop some cost formulas based on better explanatory variables. Ill get back with you in a few days. Assume that after a few days work, John developed the following cost formulas, all with a coefficient of determination greater than 90 percent: Labor cost = 10X; where X = Direct labor hours Power cost = 68,000 + 0.9Y; where Y = Machine hours Setup cost = 98,000 + 400Z; where Z = Number of setups The actual measures of each of the activity drivers are as follows: Required: 1. Prepare a performance report for direct labor, power, and setups using the direct-labor-based formulas. 2. Prepare a performance report for direct labor, power, and setups using the multiple cost driver formulas that John developed. 3. Of the two approaches, which provides the most accurate picture of Kellys performance? Why? 4. After reviewing the approach to performance measurement, a consultant remarked that non-value-added cost trend reports would be a much better performance measurement approach than comparing actual costs with budgeted costseven if activity flexible budgets were used. Do you agree or disagree? Explain.
- Firenza Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is: Previously, Sanjay Bhatt, Firenza Companys controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 50,000. Sanjay has been reading about activity-based costing, and he wonders whether or not it might offer some advantages to his company. He decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 500 setups, and 2,500 engineering hours. Sanjay has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 40 percent markup over full manufacturing cost. Required: 1. Calculate a plantwide rate for Firenza Company based on machine hours. What is the bid price of each job using this rate? 2. Calculate activity rates for the four overhead activities. What is the bid price of each job using these rates? 3. Which bids are more accurate? Why?Young Company is beginning operations and is considering three alternatives to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity-based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected? a. All production costs approach those costs that were budgeted. b. The sales mix does not vary from the mix that was budgeted. c. All manufacturing overhead is a fixed cost. d. All ending inventory balances are zero.Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for the next year: If Adam uses the step-down (sequential) method, beginning with the Maintenance Department, to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be: a. 407,500. b. 422,750. c. 442,053. d. 445,000.
- Carlo Lee Corp. has established the following standard cost per unit: Although 10,000 units were budgeted, only 8,800 units were produced. The purchasing department bought 55,000 lb of materials at a cost of $123,750. Actual pounds of materials used were 54,305. Direct labor cost was $186,550 for 18,200 hours worked. Required: Make journal entries to record the materials transactions, assuming that the materials price variance was recorded at the time of purchase. Make journal entries to record the labor variances.Jane Erickson, manager of an electronics division, was not pleased with the results that had recently been reported concerning the divisions activity-based management implementation project. For one thing, the project had taken eight months longer than projected and had exceeded the budget by nearly 35 percent. But even more vexatious was the fact that after all was said and done, about three-fourths of the plants were reporting that the activity-based product costs were not much different for most of the products than those of the old costing system. Plant managers were indicating that they were continuing to use the old costs as they were easier to compute and understand. Yet, at the same time, they were complaining that they were having a hard time meeting the bids of competitors. Reliable sources were also revealing that the divisions product costs were higher than many competitors. This outcome perplexed plant managers because their control system still continued to report favorable materials and labor efficiency variances. They complained that ABM had failed to produce any significant improvement in cost performance. Jane decided to tour several of the plants and talk with the plant managers. After the tour, she realized that her managers did not understand the concept of non-value-added costs nor did they have a good grasp of the concept of kaizen costing. No efforts were being made to carefully consider the activity information that had been produced. One typical plant manager threw up his hands and said: This is too much data. Why should I care about all this detail? I do not see how this can help me improve my plants performance. They tell me that inspection is not a necessary activity and does not add value. I simply cant believe that inspecting isnt value-added and necessary. If we did not inspect, we would be making and sending more bad products to customers. Required: Explain why Janes division is having problems with its ABM implementation.USD Inc. has established the following standard cost per unit: Although 10,000 units were budgeted, 12,000 units were produced. The Purchasing department bought 50,000 lb of materials at a cost of $237,500. Actual pounds of materials used were 46,000. Direct labor cost was $287,500 for 25,000 hours worked. Required: Make journal entries to record the materials transactions, assuming that the materials price variance was recorded at the time of purchase. Make journal entries to record the labor variances.
