Week 11 Flashcards
A chair’s variable cost is $52 and its market value as a piece of unfinished furniture is $65 at a transfer point from the assembly division to the finishing division. The finishing division’s variable cost of sanding and finishing the chair is $26, and the selling price of the chair after sanding and finishing is $83.
Prepare a tabulation of the contribution margin per unit for the finishing division’s performance and overall company performance under the two alternatives of (a) selling to outsiders at the transfer point and (b) sanding and finishing the chair and then selling to outsiders.
A chair’s variable cost is $52 and its market value as a piece of unfinished furniture is $65 at a transfer point from the assembly division to the finishing division. The finishing division’s variable cost of sanding and finishing the chair is $26, and the selling price of the chair after sanding and finishing is $83.
As finishing division manager, which alternative would you choose? Explain.
If the transfer price is based on variable cost of $52, the manager of the finishing division would want the product processed further. But this would hurt overall company performance. The incremental revenue from finishing the chair ($83–$65=$18) is less than the incremental cost of $26 incurred to finish the chair. Thus, finishing a chair decreases firm profit by $26-$18 = $8.
If the transfer price is instead based on outlay cost plus opportunity cost ($52 + $13 = $65), the manager of the finishing division will not want to process the product further, because the cost of the product ($65 + $26 = $91) will exceed the selling price of $83.
Conduct a variance analysis of direct materials costs (price, quantity, and total) and direct labour costs (rate, efficiency, and total) given the following information.
The company has budgeted the following amounts:
Materials
Standard quantity = 1 liter per unit
Standard price = $30 per liter
Labour
Standard hours = 2 hours per unit
Standard wage = $15 per hour
The company produced and sold 50 units using 45 liters of direct materials at a price of $32 per liter and 110 direct labour hours at a wage of $10 per hour.
SQ = 1 liter * 50 units = 50 liters
SP = $30 per liter
SH = 2 hours per unit * 50 units = 100 hours
SW = $15 per hour
AQ = 45 liters
AP = $32 per liter
AH = 110 hours
AW = $10 per hour
Direct Material Cost Variance = AQ*AP – SQ*SP = 45*32 – 50*30
= $1440 – $1500
= $60 Favorable
Direct Material Quantity Variance = (AQ – SQ) * SP = (45 – 50) * $30
= $150 Favorable
Direct Material Price Variance = (AP – SP) * AQ = ($32 - $30) * 45
= $90 Unfavorable
Direct Labour Cost Variance = AH*AW – SH*SW = 110*10 – 100*15
= 1100 – 1500
= $400 Favorable
Direct Labour Efficiency Variance = (AH – SH) * SP = (110 – 100) * $15
= $150 Unfavorable
Direct Labour Rate Variance = (AP – SP) * AH = ($10 - $15) * 110
= $550 Favorable
A pillow and mattress company is using silica and memory foam in its products to provide a more comfortable night’s rest to its customers. It had traditionally only used springs, cotton, regular foam, and other common materials in its products. As it moves in this new strategic direction to respond to competitors that are also using innovative materials, the company wants to set up a balanced scorecard to track how well it is implementing its strategy. What categories and measures would you recommend including in the balanced scorecard?
There is no single correct answer. Here are some possible categories and measures to include:
- Maintain strong financial health
Daily cash balance
Percentage increase in sales and income
Return on investment
- Provide excellent service to customer
Customer satisfaction surveys
Average time from receipt of order to shipping
Percent of products returned by customers, or amount of allowances for quality defects
Number and dollar amount of exclusive supplier agreements
- Be among the industry leaders in product and process innovations
Percent of sales from products less than 2 years old
Dollars (or percent of sales) spent on process improvements
- Develop and maintain efficient, state-of-the-art production processes
Cost per unit
Average delay from projected date of availability to actual delivery
