Cost-plus and market-based pricing. (CMA, adapted) Precision Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company’s early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at Precision are Heat Testing (HTT) and Arctic-Condition Testing (ACT). Currently, all of the budgeted operating costs are collected in a single overhead pool. All of the estimated testing-hours are also collected in a single pool. One rate per test-hour is used for both types of testing. This hourly rate is marked up by 40% to recover administrative costs and taxes and to earn a profit.
Jeff Boone, Precision’s controller, believes that there is enough variation in the test procedures and cost structure to establish separate costing rates and billing rates at a 40% markup. He also believes that the inflexible rate structure the company is currently using is inadequate in today’s competitive environment. After analyzing the company data, he has divided operating costs into the following three cost pools:
Labor and supervision | $ 500,000 |
Setup and facility costs | 300,000 |
Utilities | 360,000 |
Total budgeted costs for the period | $1,160,000 |
Jeff Boone budgets 100,000 total test-hours for the coming period. Test-hours is also the cost driver for labor and supervision. The budgeted quantity of cost driver for setup and facility costs is 600 setup hours. The budgeted quantity of cost driver for utilities is 9,000 machine-hours.
Jeff has estimated that HTT uses 60% of the test-hours, 20% of the setup-hours, and half the machine-hours.
- 1. Find the single rate for operating costs based on test-hours, and the hourly billing rate for HTT and ACT. Required
- 2. Find the three activity-based rates for operating costs.
- 3. What will the billing rate for HTT and ACT be based on the activity-based costing structure? State the rates in terms of test-hours. Referring to both requirements 1 and 2, which rates make more sense for Precision?
- 4. If Precision’s competition all charge $19.50 per hour for arctic testing, what can Precision do to stay competitive?
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HORNGRENS COST ACCOUNTING CUSTOM FOR UC
- Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?arrow_forwardYoung 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.arrow_forwardZarson’s Netballs is a manufacturer of high-quality basketballs and volleyballs. Setup costs are driven by the number of setups. Equipment and maintenance costs increase with the number of machine-hours, and lease rent is paid per square foot. Capacity of the facility is 14,000 square feet, and Zarson is using only 80% of this capacity. Required. Zarson records the cost of unused capacity as a separate line item and not as a product cost. The following is the budgeted information for Zarson:(RESOURCE IN PICTURE ATTATCHED) Q. What is the budgeted total cost and the cost per unit of resources used to produce (a) basketballs and (b) volleyballs?arrow_forward
- Zarson’s Netballs is a manufacturer of high-quality basketballs and volleyballs. Setup costs are driven by the number of setups. Equipment and maintenance costs increase with the number of machine-hours, and lease rent is paid per square foot. Capacity of the facility is 14,000 square feet, and Zarson is using only 80% of this capacity. Required. Zarson records the cost of unused capacity as a separate line item and not as a product cost. The following is the budgeted information for Zarson:(RESOURCE IN PICTURE ATTATCHED) Q. Calculate the budgeted cost per unit of cost driver for each indirect cost pool.arrow_forwardBiotechtron, Inc., has two research laboratories in the Southwest, one in Yuma, Arizona, and theother in Bernalillo, New Mexico. The owner of Biotechtron centralized the legal services functionin the Yuma office and had both laboratories send any legal questions or issues to the Yuma office. The legal services support center has budgeted fixed costs of $160,000 per year and a budg-eted variable rate of $65 per hour of professional time. The normal usage of the legal services cen-ter is 2,600 hours per year for the Yuma office and 1,400 hours per year for the Bernalillo office. This corresponds to the expected usage for the coming year.Required:1. Determine the amount of legal services support center costs that should be assigned to eachoffice. 2. Since the offices produce services, not tangible products, what purpose is served by allocat-ing the budgeted costs? 3. Now, assume that during the year, the legal services center incurred actual fixed costs of$163,000 and actual variable…arrow_forwardMaterials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of 1,350 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of 900 per unit. a. If a transfer price of 1,000 per unit is established and 75,000 units of materials are transferred, with no reduction in the Components Divisions current sales, how much would Ziegler Inc.s total operating income increase? b. How much would the Instrument Divisions operating income increase? c. How much would the Components Divisions operating income increase?arrow_forward
- Kagle design engineers are in the process of developing a new green product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed 550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit-and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system: Variable conversion activity rate: 100 per direct labor hour Material usage rate: 20 per part ABC system: Labor usage: 15 per direct labor hour Material usage (direct materials): 20 per part Machining: 75 per machine hour Purchasing activity: 150 per purchase order Setup activity: 3,000 per setup hour Warranty activity: 500 per returned unit (usually requires extensive rework) Customer repair cost: 25 per repair hour (average) Required: 1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis? 2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis. 3. What if the post-purchase cost was an environmental contaminant and amounted to 10 per unit for Design A and 40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design?arrow_forwardIliff, Inc., produces and sells two types of countertop ovensthe toaster oven and the convection oven. Budgeted and actual data for the two models are shown below. Budgeted Amounts: Actual Amounts: Required: 1. Calculate the budgeted average unit contribution margin. 2. Calculate the contribution margin variance. 3. What if actual units sold of the convection oven decreased? How would that affect the contribution margin variance? What if actual units sold of the convection oven increased? How would that affect the contribution margin variance?arrow_forwardThe Lockit Company manufactures door knobs for residential homes and apartments. Lockit is considering the use of simple (single-driver) and multiple regression analyses to forecast annual sales because previous forecasts have been inaccurate. The new sales forecast will be used to initiate the budgeting process and to identify more completely the underlying process that generates sales. Larry Husky, the controller of Lockit, has considered many possible independent variables and equations to predict sales and has narrowed his choices to four equations. Husky used annual observations from 20 prior years to estimate each of the four equations. Following are definitions of the variables used in the four equations and a statistical summary of these equations: St=ForecastedsalesindollarsforLockitinperiodtSt1=ActualsalesindollarsforLockitinperiodt1Gt=ForecastedU.S.grossdomesticproductinperiodtGt1=ActualU.S.grossdomesticproductinperiodt1Nt1=Lockitsnetincomeinperiodt1 Required: 1. Write Equations 2 and 4 in the form Y = a + bx. 2. If actual sales are 1,500,000 in the current year, what would be the forecasted sales for Lockit in the coming year? 3. Explain why Larry Husky might prefer Equation 3 to Equation 2. 4. Explain the advantages and disadvantages of using Equation 4 to forecast sales.arrow_forward
- Iliff, Inc., produces and sells two types of countertop ovensthe toaster oven and the convection oven. Budgeted and actual data for the two models are shown below. Budgeted Amounts: Actual Amounts: Required: 1. Calculate the contribution margin variance. 2. What if actual units sold of the convection oven decreased? How would that affect the contribution margin variance? What if actual units sold of the convection oven increased? How would that affect the contribution margin variance?arrow_forwardAirBorne is a small airline operating out of Boise, Idaho. Its three flights travel to Salt Lake City, Reno, and Portland. The owner of the airline wants to assess the full cost of operating each flight. As part of this assessment, the costs of two support departments (maintenance and baggage) must be allocated to the three flights. The two support departments that support all three flights are located in Boise (any maintenance or baggage costs at the destination airports are directly traceable to the individual flights). Budgeted and actual data for the year are as follows for the support departments and the three flights: Round all allocation ratios and variable rates to four significant digits. Round all allocated amounts to the nearest dollar. Required: 1. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to determine the cost of operating each flight. 2. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to evaluate performance. Do any costs remain in the two support departments after the allocation? If so, how much? Explain.arrow_forwardCassara, Inc., had the following quality costs for the years ended December 31, 20X1 and 20X2: At the end of 20X1, management decided to increase its investment in control costs by 40% for each categorys items, with the expectation that failure costs would decrease by 25% for each item of the failure categories. Sales were 12,000,000 for both 20X1 and 20X2. Required: 1. Calculate the budgeted costs for 20X2, and prepare an interim quality performance report. 2. Comment on the significance of the report. How much progress has Cassara made?arrow_forward
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