THE UTEASE CORPORATION

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Description

THE UTEASE CORPORATION

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
PRODUCTION COSTS

Manufacturing costs (per unit based on expected activity of 24,000
units or 36,000 direct labor hours):

Direct
materials (2 pounds at $20)

$ 40.00

Direct labor
(1.5 hours at $90)

$135.00

Variable
overhead (1.5 hours at $20)

$ 30.00

Fixed overhead
(1.5 hours at $30)

$ 45.00

Standard cost per unit

$250.00

Budgeted
selling and administrative costs:

Variable

$5 per unit

Fixed

$1,800,000.00

Expected sales
activity: 20,000 units at $425.00 per unit

Desired ending
inventories: 10% of sales

ACTUAL
PRODUCTION COSTS

Assume this is the first year of operations for the Bellingham
plant. During the year, the company
had the following activity:

Units produced

23,000 units

Units sold

21,500 units
(Inventory = 1,500)

Unit selling
price

$420.00

Direct labor
hours worked

34,000hrs

Direct labor
costs

$3,094,000.00

Direct
materials purchased

50,000 pounds

Direct
materials costs

$1,000,000.00

Direct
materials used

50,000 pounds

Actual fixed
overhead

$1,080,000.00

Actual
variable overhead

$620,000.00

Actual selling
and administrative costs

$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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