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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Variable costs and activity bases in decision making

The owner of Warwick Printing, a printing company, is planning direct labor needs for the upcoming year. The owner has provided you with the following information for next year's plans:

  One Color Two Color Three Color Four Color Total
Number of banners 212 274 616 698 1,800

Each color on the banner must be printed one at a time. Thus, for example, a four color banner will need to be run through the printing operation four separate times. The total production volume last year was 800 banners, as follows:

  One Color Two Color Three Color Total
Number of banners 180 240 380 800

As you can see, the four-color banner is a new product offering for the upcoming year. The owner believes that the expected 1,000-unit increase in volume from last year means that direct labor expenses should increase by 125% (1,000 ÷ 800). What do you think?

To determine

Variable costs: These are the costs that proportionately change with the changes in the activity base such as units of production Common examples of variable costs are direct materials and direct labor costs.

Activity Base: The activities that cause the cost to vary accordingly are known as activity base.

To explain: whether the expected 1,000 units increase in volume from last year implies the increase in the direct labor expenses by 125%.

Explanation

The cost of the direct labor does not change with the increase in number of units produced. The activity base for the direct labor costs should be the number of impressions not the number of units produced. This is because, an impression is a separate printing color application on the banners that causes changes in the direct labor cost.

Thus, the proper analysis of the direct labor cost is shown below:

Particulars One color Two color Three color Four Color Total
Current year:
Number of banners 212 274 616 698 1,800
Number of colors ×1 ×2 ×3 ×4
Number of impressions 212 548 1,848 2,792 5,400
Last year:
Number of banners 180 240 380
Number of colors ×1 ×2 ×3
Last year’s impressions 180 480 1,410 1,800

Table (1)

Determine the total increase in the d...

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