Description
The Utease Corporation has many
production plants across the U.S. A newly opened plant, the Bellingham plant,
produces and sells one product. The plant is treated, for responsibility
accounting purposes, as a profit center. The unit standard costs for a
production unit, with overhead applied based on direct labor hours, are as
follows:
|
STANDARD Manufacturing costs (per unit based on expected activity of 24,000 |
|
|
Direct |
$ 40.00 |
|
Direct labor |
$135.00 |
|
Variable |
$ 30.00 |
|
Fixed overhead |
$ 45.00 |
|
Standard cost per unit |
$250.00 |
|
Budgeted |
|
|
Variable |
$5 per unit |
|
Fixed |
$1,800,000.00 |
|
Expected sales |
|
|
Desired ending |
|
|
ACTUAL Assume this is the first year of operations for the Bellingham |
|
|
Units produced |
23,000 units |
|
Units sold |
21,500 units |
|
Unit selling |
$420.00 |
|
Direct labor |
34,000hrs |
|
Direct labor |
$3,094,000.00 |
|
Direct |
50,000 pounds |
|
Direct |
$1,000,000.00 |
|
Direct |
50,000 pounds |
|
Actual fixed |
$1,080,000.00 |
|
Actual |
$620,000.00 |
|
Actual selling |
$2,000,000.00 |
A. Prepare a production budget for the
coming year based on the available standards, expected sales, and desired
ending inventories.
B. Prepare a budgeted responsibility
income statement for the Bellingham plant for the coming year.
C. Find the direct labor variances.
Indicate if they are favorable or unfavorable and why they would be considered
as such.
D. Find the direct materials variances
(materials price variance and quantity variance)
E.
Find
the total over- or under applied (both fixed and variable) overhead. Would cost
of goods sold be a larger or smaller expense item after the adjustment for
over- or under applied overhead?
F.
Calculate
the actual plant operating profit for the year
G. Use a flexible budget to explain the
difference between the budgeted operating profit and the actual operating profit
for the Bellingham plant for its first year of operation. What part of the
difference do you believe is the plant manager’s responsibility?
H. Assume Utease Corporation is planning
to change its evaluation of business operations in all plants from the profit
center format to the investment center format. If the average invested capital
at the Bellingham 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.
I.
Assume
that under the investment center evaluation plan the plant manager will be
awarded a bonus based 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 the project? Why or why
not? What other evaluation tools could Utease use for their plants that might
be better?
J.
The
chief financial officer of Utease Corporation wants to include a charge in each
investment center’s income statement for corporate-wide administrative
expenses. Should the Bellingham plant manager’s annual bonus be based on plant
ROI after deducting the corporatewide administrative fee? Why or why not?
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