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The Utease Corporation has many production plants across the U.S. A newly opened




Question;THE UTEASE CORPORATION (p.1124)THE UTEASE CORPORATIONThe Utease Corporation has many production plants across the U.S. A newly opened plant, theBellingham plant, produces and sells one product. The plant is treated, for responsibility accounting purposes, asa profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours,are as follows:STANDARD PRODUCTION COSTSManufacturing costs (per unit based on expected activity of 24,000 units or 36,000 direct labor hours):Direct materials (2 pounds at $20)$ 40.00Direct labor (1.5 hours at $90)$135.00Variable overhead (1.5 hours at $20)$ 30.00Fixed overhead (1.5 hours at $30)$ 45.00Standard cost per unit$250.00Budgeted selling and administrative costs:Variable$5 per unitFixed$1,800,000.00Expected sales activity: 20,000 units at $425.00 per unitDesired ending inventories: 10% of salesACTUAL PRODUCTION COSTSAssume this is the first year of operations for the Bellingham plant. During the year, the company had thefollowing activity:Units producedUnits soldUnit selling priceDirect labor hours workedDirect labor costsDirect materials purchasedDirect materials costsDirect materials usedActual fixed overheadActual variable overheadActual selling and administrative costs23,000 units21,500 units (Inventory = 1,500)$420.0034,000hrs$3,094,000.0050,000 pounds$1,000,000.0050,000 pounds$1,080,000.00$620,000.00$2,000,000.00THE UTEASE CORPORATION (p.1124)A. Prepare a production budget for the coming year based on the available standards, expected sales, anddesired ending inventories.Production BudgetExpected (minimum) num. of units to be sold20,000Add: Closing inventory(10% of sales)Less: Beginning Inventory(23,000 - 21,500)2,0001,500Units to be produced20,500? The amount of unit that must be produced is 20,000 (standard) plus 10% inventory (2,000) minusbeginning inventory (1,500)B. Prepare a budgeted responsibility income statement for the Bellingham plant for the coming year.Budgeted Income statement for Responsibility centreNumber of units (to be sold)20,000Selling price / unit425Direct materials (2 pounds at $20)Direct labor (1.5 hours at $90)Variable overhead (1.5 hours at $20)Fixed overhead (1.5 hours at $30)4013530458,500,000800,0002,700,000600,000900,000Cost of goods sold ($250 x 20,000 units)Gross Profit (revenue - COGS)Less: Selling expenses ($5 x 20,000 units)Administrative expensesNet Income5,000,0003,500,0005100,0001,800,0001,900,0001,600,000? Net income is projected based on the available standard figures, buy subtracting Gross Profit(Sales minus COGS) with Other Expenses.THE UTEASE CORPORATION (p.1124)C. Find the direct labor variances. Indicate if they are favorable or unfavorable and why they would beconsidered as such.Labor rate variance= (Actual Rate - Standard Rate) x Actual Hours of Labor Used Variance= (($3,094,000/34,000hrs) - $90) x 34,000hrs= (91-90)*34000= 34,000 (UNFAVORABLE)? The labor rate variance is above allowed standard of 30,000hrsD. Find the direct materials variances (materials price variance and quantity variance)Direct material price variance= (Actual price - Standard price) x Actual quantity= ((1,000,000/50,000 pounds) -20) x 50,000 = 0 x 50,000= (20-20)*50,000= 0 (NO VARIANCE)? The direct material price variance met the standard (has no change)Materials quantity variance= (actual quantity - standard quantity) x standard price per unit= (50,000 - (20,000 x 2 pounds) x $20= (50,000 ? 40,000) * $20= $200,000 (UNFAVORABLE)? The materials quantity variance is unfavorable because it?s higher than standard of 40,000 poundsof allowed material.E. Find the total over- or under applied (both fixed and variable) overhead. Would cost of goods sold be alarger or smaller expense item after the adjustment for over- or under applied overhead?VARIABLE OVERHEAD VARIANCE1. Variable overhead efficiency variance= (actual labor-hours - standard labor-hours allowed for actualproduction) x standard var. overhead rate= (34,000 hrs - (23,000 units x 1.5hrs)) x $20= (34,000-34,500)*$20= 10,000 (FAVORABLE)? The labor force works more productive (more efficient) than standard rate.2. Variable overhead spending variance= actual var. overhead costs - (standard rate x actual hours of laborused)= 620,000 - ($20 x 34,000hrs)= -60,000 (FAVORABLE)? The Variable Overhead Spending Variance is favorable because the Actual overhead spent is lowerthan the budgeted amount.FIXED OVERHEAD VARIANCE1. Fixed Overhead Spending VarianceTHE UTEASE CORPORATION (p.1124)= Actual Fixed Overhead - (Fixed Overhead Standard Rate xBudgeted Hours)=1,080,000 - ($30 x (1.5*20,000))= 1,080,000 - (30*30,000)= 180,000 (UNFAVORABLE)? The actual fixed overhead cost is higher than standard. The common cause can be events such asunexpected changes in rents, insurance, and property taxes.2. Volume variance= Budgeted ovrhd - (Standard input hrs * predetermined rate)= 90,000 - (34,500*30)= 135,000 (FAVORABLE)? The actual production volume is higher than standard.F. Calculate the actual plant operating profit for the yearACTUAL OPERATING INCOMESales (21,500 unit sold x $420)Cost of Goods SoldDirect labor3,094,000Direct materials1,000,000Actual Fixed Overhead1,080,000Actual Variable Overhead620,000Actual selling & adm.cost2,000,000TotalOperating profit9,030,0007,794,0001,236,000? The operating profit is calculated by subtracting the total sales revenue with COGS.THE UTEASE CORPORATION (p.1124)G. Use a flexible budget to explain the difference between the budgeted operating profit and the actualoperating profit for the Bellingham plant for its first year of operation. What part of the difference doyou believe is the plant manager?s responsibility?@unitDirect materialsDirect laborVariable overheadFixed overheadTotal manufacturing cost401353045250Budgeted20,000units800,0002,700,000600,000900,0005,000,000Flexible23,000units920,0003,105,000690,000900,0005,615,000Actual23,000units1,000,0003,094,000620,0001,080,0005,794,000Actual cost Over(under) FlexibleBudget80,000.00(11,000.00)(70,000.00)180,000.00179,000.00? From the table above, we can see that the Direct Labor and Actual Variable Overhead cost areunder (less than) Flexible Budget.? We also see that the cost for Direct Materials and Fixed Overhead is above (more than) FlexibleBudget. The plant manager?s should lower them as they?re considered over budget.? The Plant Manager has to find a cheaper material (without sacrificing the quality) to meet theallowed standard costs. Usually, bigger raw material (bulk) order costs less.THE UTEASE CORPORATION (p.1124)H. Assume Utease Corporation is planning to change its evaluation of business operations in all plantsfrom the profit center format to the investment center format. If the average invested capital at theBellingham plant is $8,950,000, compute the return on investment (ROI) for the first year of operation.Use the DuPont method of evaluation to compute the return on sales (ROS) and Capital turnover (CT)for the plant.ACTUAL OPERATING INCOMESalesCOGSDirect laborDirect materialsActual FOActual variableActual selling & adm.cost21,500 x 4209,030,0003,094,0001,000,0001,080,000620,0002,000,0007,794,000Op. Income1,236,000Avg. Invested Capital8,950,000FINANCIAL RATIOSReturn on InvestmentReturn on SalesCapital Turnover(Opr. Income / Avg. Inv. Capital))(Opr. Income / Sales)(Sales/Avg. Inv. Cap)13.81%13.69%100.89%? Return of Investment (ROI) is a performance measure used to evaluate the efficiency of aninvestment or to compare the efficiency of a number of different investments. To calculate ROI, thebenefit (return) of an investment is divided by the cost of the investment, the result is expressed asa percentage or a ratio. Since Utease Corp. has positive ROI, it tells us that this company?s assetare generating positive return to its owners/stock holders.? Return of Sales (ROS) provides insight into how much profit is being produced per dollar of sales.As with many ratios, it is best to compare a company's ROS over time to look for trends, andcompare it to other companies in the industry. An increasing ROS indicates the company isgrowing more efficient, while a decreasing ROS could signal looming financial troubles.? the Capital Turnover (CT) is good because it the company is generating a lot of sales compared tothe money it uses to fund the sales, thus the utilization of every Invested Capital is consideredeffective.? Note that the ROI, ROS, and CT cannot be judged alone, they must be compared in Year-on-Yearbasis to be fully understood.THE UTEASE CORPORATION (p.1124)I. Assume that under the investment center evaluation plan the plant manager will be awarded a bonusbased on ROI. If the manager has the opportunity in the coming year to invest in new equipment for$500,000 that will generate incremental earnings of $75,000 per year, would the manager undertake theproject? Why or why not? What other evaluation tools could Utease use for their plants that might bebetter?ACTUALOPERATINGINCOMESalesCOGS21,500 x 420BUDGETED + NEW INVESTMENT9,030,00020,000 x 4258,500,000Direct laborDirectmaterials3,094,0002,700,0001,000,000800,000Actual FO1,080,000900,000620,000600,000Actual variableActual selling& adm.cost2,000,0007,794,00019000006,900,0005 x 20,000Op. Income1,236,000Avg. InvestedCapitalOp. IncomeAdditionalIncomeAvg. Inv.CapitalAdditionalInvestment8,950,0001,600,00075,0001,675,0008,950,000500,0009,450,000FINANCIAL RATIOSReturn onInvestment13.81%>17.72%? The Plant Manager should accept the opportunity to invest new equipment since it will actuallyincrease the ROI (note that only if the next production year matches the standard cost)? Other evaluation tools Utease could use is by calculating the Residual Income which is theamount by which operating earnings exceed a minimum acceptable return on average investedcapital. Let?s say the minimum Acceptable Return is the current year ROI = 13.81%WITHOUT THE ADDITIONAL INVESTMENTResidual Income= Operating Earnings ? (Minimum Acceptable Returns x Invested Capital)= 1,600,000 ? (13.81% x 8,950,000)= 365,005WITH ADDITIONAL INVESTMENTResidual Income= Operating Earnings ? (Minimum Acceptable Returns x Invested Capital)= 1,675,000 ? (13.81% x 9,450,000)= 369,955? An additional residual income of 5,950 with the new investment (favorable)? Other methods are by using Economic Value Added (EVA) and Balance Scorecard.J. The chief financial officer of Utease Corporation wants to include a charge in each investment center?sincome statement for corporate-wide administrative expenses. Should the Bellingham plant manager?sTHE UTEASE CORPORATION (p.1124)annual bonus be based on plant ROI after deducting the corporate wide administrative fee? Why orwhy not?? The Plant Manager should accept the annual bonus to be based on Plant?s ROI only if theCorporate wide administrative fee is below the residual income.? Other method is by requesting to have Stock Options, since the Plant is generating positive ROI,the stock?s valuation is expected to rise in the future.


Paper#50948 | Written in 18-Jul-2015

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