Princeton Manufacturing Company summarizes the following total cost data for the month of March. Princeton has a normal capacity per month of 25,000 units of product that sell for $40 each. For the foreseeable future, sales volume should equal normal capacity of production. Direct material $295,000 Direct labor 165,000 Variable overhead 85,000 Fixed overhead (Note 1) 140,000 Selling expense (Note 2) 80,000 Administrative expense (fixed) 56,000 $821,000 Notes: 1. Beyond normal capacity, fixed overhead cost increases $6,350 for each 1,000 units or fraction thereof until a maximum capacity of 30,000 units is reached. 2. Selling expenses are a 5% sales commission plus shipping costs of $1.20 per unit. a. Using the information available, prepare a formula to estimate Princeton's total cost at various production volumes up to normal capacity. b. Prove your answer in requirement (a) relative to the total cost figure for 25,000 units. c. Calculate the planned total cost at 20,000 units. d. If Princeton were operating at normal capacity and accepted an order for 500 more units, what would it have to charge for the order to earn a net income before income tax of $8 per unit on the new sale?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Princeton Manufacturing Company summarizes the following total cost data for the month of March. Princeton has a normal capacity per month of 25,000 units of product that sell for $40 each. For the foreseeable future, sales volume should equal normal capacity of production.
| Direct material | $295,000 |
| Direct labor | 165,000 |
| Variable overhead | 85,000 |
| Fixed overhead (Note 1) | 140,000 |
| Selling expense (Note 2) | 80,000 |
| Administrative expense (fixed) |
56,000 |
| $821,000 |
Notes:
1. Beyond normal capacity, fixed overhead cost increases $6,350 for each 1,000 units or fraction thereof until a maximum capacity of 30,000 units is reached.
2. Selling expenses are a 5% sales commission plus shipping costs of $1.20 per unit.
a. Using the information available, prepare a formula to estimate Princeton's total cost at various production volumes up to normal capacity.
b. Prove your answer in requirement (a) relative to the total cost figure for 25,000 units.
c. Calculate the planned total cost at 20,000 units.
d. If Princeton were operating at normal capacity and accepted an order for 500 more units, what would it have to charge for the order to earn a net income before income tax of $8 per unit on the new sale?
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