Select Solutions to Chapter 7
7-14
East Company, which is highly automated, will have a cost structure dominated
by fixed costs. West Company's cost structure will include a larger proportion of
variable costs than East Company's cost structure.
A firm's operating leverage factor, at a particular sales volume, is defined as
its total contribution margin divided by its net income. Since East Company has
proportionately higher fixed costs, it will have a proportionately higher total
contribution margin. Therefore, East Company's operating leverage factor will be
higher.
7-15
When sales volume increases, Company X will have a higher percentage increase
in profit than Company Y. Company X's higher proportion of fixed costs gives the
firm a higher operating leverage factor. The company's percentage increase in
profit can be found by multiplying the percentage increase in sales volume by the
firm's operating leverage factor.
7-16
The sales mix of a multiproduct organization is the relative proportion of sales of
its products.
The weighted-average unit contribution margin is the average of the unit
contribution margins for a firm's several products, with each product's
contribution margin weighted by the relative proportion of that product's sales.
7-17
The car rental agency's sales mix is the relative proportion of its rental business
associated with each of the three types of automobiles: subcompact, compact,
and full-size. In a multi-product CVP analysis, the sales mix is assumed to be
constant over the relevant range of activity.
7-18
Cost-volume-profit analysis shows the effect on profit of changes in expenses,
sales prices, and sales mix. A change in the hotel's room rate (price) will change
the hotel's unit contribution margin. This contribution-margin change will alter the
relationship between volume and profit.
7-21
The statement makes three assertions, but only two of them are true. Thus the
statement is false. A company with an advanced manufacturing environment
typically will have a larger proportion of fixed costs in its cost structure. This will
result in a higher break-even point and greater operating leverage. However, the
firm's higher break-even point will result in a reduced safety margin.
7-22
Activity-based costing (ABC) results in a richer description of an organization's
cost behavior and CVP relationships. Costs that are fixed with respect to sales
volume may not be fixed with respect to other important cost drivers. An ABC
system recognizes these nonvolume cost drivers, whereas a traditional costing
system does not.
EXERCISE 7-24 (25 MINUTES)
1
Sales
Revenue
$360,000
Variable
Expenses
$120,000
Total
Contribution
Margin
$240,000
Fixed
Expenses
$90,000
Net
Income
$150,000
Break-Even
Sales
Revenue
$135,000 a
2
3
4
55,000
320,000 c
160,000
11,000
80,000
130,000
44,000
240,000
30,000
25,000
60,000
30,000d
19,000
180,000
-0-
31,250b
80,000
160,000
Explanatory notes for selected items:
a$135,000
b$31,250
= $90,000  (2/3), where 2/3 is the contribution-margin ratio.
= $25,000/.80, where .80 is the contribution-margin ratio.
cBreak-even
sales revenue ..............................................................................
Fixed expenses ...............................................................................................
Variable expenses ...........................................................................................
$80,000
60,000
$20,000
Therefore, variable expenses are 25 percent of sales revenue.
When variable expenses amount to $80,000, sales revenue is $320,000.
d$160,000
is the break-even sales revenue, so fixed expenses must be equal to the
contribution margin of $30,000 and profit must be zero.
EXERCISE 7-26 (25 MINUTES)
1.
Profit-volume graph:
Dollars per year
$300,000
$200,000
$100,000
Break-even point:
20,000 tickets
0
$(100,000)
5,000
10,000
15,000
Loss
area
$(200,000)
Annual fixed
expenses
$(300,000)
$(360,000)
Profit
area

20,000
25,000
Tickets sold
per year
EXERCISE 7-26 (CONTINUED)
2.
Safety margin:
Budgeted sales revenue
(10 games  6,000 seats  .45 full  $20)...............................................
Break-even sales revenue
(20,000 tickets  $20) ...............................................................................
Safety margin .................................................................................................
3.
$540,000
400,000
$140,000
Let P denote the break-even ticket price, assuming a 10-game season and 40 percent
attendance:
(10)(6,000)(.40)P – (10)(6,000)(.40)($2) – $360,000 = 0
24,000P = $408,000
P = $17 per ticket
EXERCISE 7-28 (25 MINUTES)
1.
(a) Traditional income statement:
PACIFIC RIM PUBLICATIONS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20XX
Sales ........................................................................
Less: Cost of goods sold ........................................
Gross margin ...............................................................
Less: Operating expenses:
Selling expenses............................................
Administrative expenses...............................
Net income ...................................................................
$1,000,000
750,000
$ 250,000
$75,000
75,000
150,000
$ 100,000
(b) Contribution income statement:
PACIFIC RIM PUBLICATIONS, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20XX
Sales ........................................................................
Less: Variable expenses:
Variable manufacturing .................................
Variable selling ..............................................
Variable administrative .................................
Contribution margin ....................................................
Less: Fixed expenses:
Fixed manufacturing .....................................
Fixed selling ...................................................
Fixed administrative ......................................
Net income ...................................................................
2.
$1,000,000
$500,000
50,000
15,000
$ 250,000
25,000
60,000
contribution margin
net income
$435,000

 4.35
$100,000
Operatingleverage factor (at $1,000,000 sales level) 
565,000
$ 435,000
335,000
$ 100,000
EXERCISE 7-28 (CONTINUED)
3.
 percentage increase  operating 
  

Percentage increase in net income  
in
sales
revenue
leverage
factor

 

= 12%  4.35
= 52.2%
4.
Most operating managers prefer the contribution income statement for answering this
type of question. The contribution format highlights the contribution margin and
separates fixed and variable expenses.
PROBLEM 7-34 (30 MINUTES)
1.
Break-even point in sales dollars, using the contribution-margin ratio:
fixed expenses
contribution - margin ratio
$540,000  $216,000 $756,000


$30  $12  $6
.4
$30
 $1,890,000
Break - even point 
2.
Target net income, using contribution-margin approach:
fixed expenses  target net income
unit contribution margin
$756,000  $540,000 $1,296,000


$30  $12  $6
$12
 108,000 units
Sales units required to earn income of $540,000 
3.
New unit variable manufacturing cost
= $12  110%
= $13.20
Break-even point in sales dollars:
$756,000
$756,000

$30.00  $13.20  $6.00
.36
$30
 $2,100,000
Break - even point 
PROBLEM 7-34 (CONTINUED)
4.
Let P denote the selling price that will yield the same contribution-margin ratio:
$30.00  $12.00  $6.00
P  $13.20  $6.00

$30.00
P
P  $19.20
.4 
P
.4P  P  $19.20
$19.20  .6P
P  $19.20/.6
P  $32.00
Check: New contribution-margin ratio is:
$32.00  $13.20  $6.00
 .4
$32.00
PROBLEM 7-36 (30 MINUTES)
1.
Break-even point in units, using the equation approach:
$24X – ($15 + $3)X – $1,800,000 = 0
$6X = $1,800,000
X =
$1,800,000
$6
= 300,000 units
2.
New projected sales volume = 400,000  110%
= 440,000 units
Net income = (440,000)($24 – $18) – $1,800,000
= (440,000)($6) – $1,800,000
= $2,640,000 – $1,800,000 = $840,000
3.
Target net income = $600,000 (from original problem data)
New disk purchase price = $15  130% = $19.50
Volume of sales dollars required:
fixed expenses  target net profit
contributi on - margin ratio
$1,800,000  $600,000
$2,400,000


$24  $19.50  $3
.0625
$24
 $38,400,00 0
Volume of sales dollars required 
PROBLEM 7-36 (CONTINUED)
4.
Let P denote the selling price that will yield the same contribution-margin ratio:
P  $19.50  $3
$24  $15  $3

P
$24
P  $22.50
.25 
P
.25 P  P  $22.50
$22.50  .75 P
P  $22.50/.75
P  $30
Check: New contribution-margin ratio is:
$30  $22.50
 .25
$30
5.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 7-37 (30 MINUTES)
1.
Unit contribution margin:
Sales
price…………………………………
Less variable costs:
Sales commissions ($32 x 5%)……
System variable costs………………
Unit contribution
margin………………..
$32.00
$ 1.60
8.00
9.60
$22.40
Break-even point = fixed costs ÷ unit contribution margin
= $1,971,200 ÷ $22.40
= 88,000 units
2.
Model A is more profitable when sales and production average 184,000 units.
Sales revenue (184,000 units x $32.00)……...
Less variable costs:
Sales commissions ($5,888,000 x 5%)…
System variable costs:……………………
184,000 units x $8.00………………….
184,000 units x $6.40………………….
Total variable costs………………………..
Model A
Model B
$5,888,000
$5,888,000
$ 294,400
$ 294,400
1,472,000
$1,766,400
1,177,600
$1,472,000
Contribution margin…………………………... $4,121,600
Less: Annual fixed costs……………………..
1,971,200
Net
$2,150,400
income………………………………………
3.
$4,416,000
2,227,200
$2,188,800
Annual fixed costs will increase by $180,000 ($900,000 ÷ 5 years) because of straightline depreciation associated with the new equipment, to $2,407,200 ($2,227,200 +
$180,000). The unit contribution margin is $24 ($4,416,000 ÷ 184,000 units). Thus:
Required sales = (fixed costs + target net profit) ÷ unit contribution margin
= ($2,407,200 + $1,912,800) ÷ $24
= 180,000 units
4.
Let X = volume level at which annual total costs are equal
$8.00X + $1,971,200 = $6.40X + $2,227,200
$1.60X = $256,000
X = 160,000 units
PROBLEM 7-38 (25 MINUTES)
1.
Closing of mall store:
Loss of contribution margin at Mall Store ..................................................... $(108,000)
Savings of fixed cost at Mall Store (75%) ......................................................
90,000
Loss of contribution margin at Downtown Store (10%) ...............................
(14,400)
Total decrease in operating income .............................................................. $ (32,400)
2.
Promotional campaign:
Increase in contribution margin (10%) ..........................................................
Increase in monthly promotional expenses ($180,000/12) ...........................
Decrease in operating income .......................................................................
3.
$10,800
(15,000)
$(4,200)
Elimination of items sold at their variable cost:
We can restate the November 20x4 data for the Mall Store as follows:
Sales ...................................................................................
Less: variable expenses ...................................................
Contribution margin ..........................................................
Mall Store
Items Sold at
Their
Variable Cost Other Items
$180,000*
$180,000*
180,000
72,000
$
-0$108,000
If the items sold at their variable cost are eliminated, we have:
Decrease in contribution margin on other items (20%) ..............................
Decrease in fixed expenses (15%) ...............................................................
Decrease in operating income......................................................................
$(21,600)
18,000
$ (3,600)
*$180,000 is one half of the Mall Store's dollar sales for November 20x4.
4.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 7-39 (40 MINUTES)
1.
Sales mix refers to the relative proportion of each product sold when a company sells
more than one product.
2.
(a)
Yes. Plan A sales are expected to total 65,000 units (19,500 + 45,500), which
compares favorably against current sales of 60,000 units.
(b)
Yes. Sales personnel earn a commission based on gross dollar sales. As the
following figures show, Cold King sales will comprise a greater proportion of
total sales under Plan A. This is not surprising in light of the fact that Cold
King has a higher selling price than Mister Ice Cream ($43 vs. $37).
Current
Mister Ice Cream ..........
Cold King .....................
Total .......................
(c)
Plan A
Units
Sales
Mix
Units
Sales
Mix
21,000
39,000
60,000
35%
65%
100%
19,500
45,500
65,000
30%
70%
100%
Yes. Commissions will total $267,800 ($2,678,000 x 10%), which compares
favorably against the current flat salaries of $200,000.
Mister Ice Cream sales: 19,500 units x $37 ..............
Cold King sales: 45,500 units x $43..........................
Total sales ............................................................
$ 721,500
1,956,500
$2,678,000
PROBLEM 7-39 (CONTINUED)
(d)
No. The company would be less profitable under the new plan.
Sales revenue:
Mister Ice Cream: 21,000 units x $37; 19,500 units x $37 ...............
Cold King: 39,000 units x $43; 45,500 units x $43 ..........................
Total revenue ...............................................................................
Less variable cost:
Mister Ice Cream: 21,000 units x $20.50; 19,500 units x $20.50 .....
Cold King: 39,000 units x $32.50; 45,500 units x $32.50 ................
Sales commissions (10% of sales revenue) .......................................
Total variable cost .......................................................................
Contribution margin ................................................................................
Less fixed cost (salaries) .........................................................................
Net income ..............................................................................................
3.
(a)
Current
Plan A
$ 777,000
1,677,000
$2,454,000
$ 721,500
1,956,500
$2,678,000
$ 430,500
1,267,500
$ 399,750
1,478,750
267,800
$2,146,300
$ 531,700
----___
$ 531,700
$1,698,000
$ 756,000
200,000
$ 556,000
The total units sold under both plans are the same; however, the sales mix has
shifted under Plan B in favor of the more profitable product as judged by the
contribution margin. Cold King has a contribution margin of $10.50 ($43.00 $32.50), and Mister Ice Cream has a contribution margin of $16.50 ($37.00 $20.50).
Plan A
Units
Mister Ice Cream ..............
Cold King .........................
Total ............................
19,500
45,500
65,000
Sales
Mix
30%
70%
100%
Plan B
Units
39,000
26,000
65,000
Sales
Mix
60%
40%
100%
PROBLEM 7-39 (CONTINUED)
(b)
Plan B is more attractive both to the sales force and to the company.
Salespeople earn more money under this arrangement ($274,950 vs. $200,000),
and the company is more profitable ($641,550 vs. $556,000).
Sales revenue:
Mister Ice Cream: 21,000 units x $37; 39,000 units x $37...............
Cold King: 39,000 units x $43; 26,000 units x $43 ..........................
Total revenue ..............................................................................
Less variable cost:
Mister Ice Cream: 21,000 units x $20.50; 39,000 units x $20.50.....
Cold King: 39,000 units x $32.50; 26,000 units x $32.50 ................
Total variable cost .......................................................................
Contribution margin ...............................................................................
Less: Sales force compensation:
Flat salaries .......................................................................................
Commissions ($916,500 x 30%).......................................................
Net income..............................................................................................
Current
Plan B
$ 777,000
1,677,000
$2,454,000
$1,443,000
1,118,000
$2,561,000
$ 430,500
1,267,500
$1,698,000
$ 756,000
$ 799,500
845,000
$1,644,500
$ 916,500
200,000
$ 556,000
274,950
$ 641,550
PROBLEM 7-41 (45 MINUTES)
1.
Break-even sales volume for each model:
Break-even volume 
(a)
(b)
(c)
annual rental cost
unit contribution margin
Standard model:
Break - even volume 
$16,000
 25,000 tubs
$3.50  $2.86
Break - even volume 
$22,000
 27,500 tubs
$3.50  $2.70
Break - even volume 
$40,000
 40,816 tubs (rounded)
$3.50  $2.52
Super model:
Giant model:
PROBLEM 7-41 (CONTINUED)
2. Profit-volume graph:
Dollars per year (in
thousands)
Profit
$40
$20
0
Break-even point:
40,816 tubs
10
20
30

40
Profit
area
50
Loss
Loss
area
($20)
($40)
Fixed rental cost: $40,000 per year
Tubs sold
per year
(in thousands)
PROBLEM 7-41 (CONTINUED)
3.
The sales price per tub is the same regardless of the type of machine selected.
Therefore, the same profit (or loss) will be achieved with the Standard and Super
models at the sales volume, X, where the total costs are the same.
Model
Standard .....................................................
Super ..........................................................
Variable Cost
per Tub
$2.86
2.70
Total
Fixed Cost
$16,000
22,000
This reasoning leads to the following equation: 16,000 + 2.86X = 22,000 + 2.70X
Rearranging terms yields the following:
(2.86 – 2.70)X = 22,000 – 16,000
.16X = 6,000
X = 6,000/.16
X = 37,500
Or, stated slightly differently:
Volume at which both machines
produce the same profit
fixed cost differential
variable cost differential
$6,000

$.16
 37,500 tubs

Check: the total cost is the same with either model if 37,500 tubs are sold.
Standard
Variable cost:
Standard, 37,500  $2.86 ...........................
Super, 37,500  $2.70 ................................
Fixed cost:
Standard, $16,000 ......................................
Super, $22,000............................................
Total cost .........................................................
Super
$107,250
$101,250
16,000
$123,250
22,000
$123,250
Since the sales price for popcorn does not depend on the popper model, the sales
revenue will be the same under either alternative.
PROBLEM 7-43 (35 MINUTES)
1.
Plan A break-even point = fixed costs ÷ unit contribution margin
= $33,000 ÷ $33*
= 1,000 units
Plan B break-even point = fixed costs ÷ unit contribution margin
= $99,000 ÷ $45**
= 2,200 units
* $120 - [($120 x 10%) + $75]
** $120 - $75
2.
Operating leverage refers to the use of fixed costs in an organization’s overall cost
structure. An organization that has a relatively high proportion of fixed costs and
low proportion of variable costs has a high degree of operating leverage.
PROBLEM 7-43 (CONTINUED)
3.
Calculation of contribution margin and profit at 6,000 units of sales:
Sales revenue: 6,000 units x $120……………….
Less variable costs:
Cost of purchasing product:
6,000 units x
$75…………………….……
Sales commissions: $720,000 x 10%……...
Total variable cost………………………..
Contribution
margin………………………………
Fixed
costs………………………………………….
Net
income………………………………………….
Plan A
Plan B
$720,000
$720,000
$450,000
$450,000
72,000
$522,000
$198,000
----__
$450,000
$270,000
33,000
99,000
$165,000
$171,000
Plan A has a higher percentage of variable costs to sales (72.5%) compared to Plan
B (62.5%). Plan B’s fixed costs are 13.75% of sales, compared to Plan A’s 4.58%.
Operating leverage factor = contribution margin ÷ net income
Plan A: $198,000 ÷ $165,000 = 1.2
Plan B: $270,000 ÷ $171,000 = 1.58 (rounded)
Plan B has the higher degree of operating leverage.
4 & 5. Calculation of profit at 5,000 units:
Plan A
Plan B
Sales revenue: 5,000 units x
$120……………….
Less variable costs:
Cost of purchasing product:
5,000 units x
$75…………………………..
Sales commissions: $600,000 x 10%……...
$600,000
$600,000
$375,000
$375,000
Total variable
cost………………………..
Contribution
margin………………………………
Fixed
costs…………………………………………
Net
income………………………………………….
$435,000
__
$375,000
$165,000
$225,000
33,000
99,000
$132,000
$126,000
60,000
----
PROBLEM 7-43 (CONTINUED)
Plan A profitability decrease:
$165,000 - $132,000 = $33,000; $33,000 ÷ $165,000 = 20%
Plan B profitability decrease:
$171,000 - $126,000 = $45,000; $45,000 ÷ $171,000 = 26.3% (rounded)
PneumoTech would experience a larger percentage decrease in income if it adopts
Plan B. This situation arises because Plan B has a higher degree of operating leverage.
Stated differently, Plan B’s cost structure produces a greater percentage decline in
profitability from the drop-off in sales revenue.
Note: The percentage decreases in profitability can be computed by multiplying the
percentage decrease in sales revenue by the operating leverage factor. Sales dropped
from 6,000 units to 5,000 units, or 16.67%. Thus:
Plan A: 16.67% x 1.2 = 20.0%
Plan B: 16.67% x 1.58 = 26.3% (rounded)
6.
Heavily automated manufacturers have sizable investments in plant and equipment,
along with a high percentage of fixed costs in their cost structures. As a result, there is
a high degree of operating leverage.
In a severe economic downturn, these firms typically suffer a significant
decrease in profitability. Such firms would be a more risky investment when
compared with firms that have a low degree of operating leverage. Of course, when
times are good, increases in sales would tend to have a very favorable effect on
earnings in a company with high operating leverage.
CASE 7-55 (50 MINUTES)
1.
Break-even point for 20x4, based on current budget:
$15,000,00 0  $9,000,000  $3,000,000
 .20
$15,000,00 0
fixed expenses
Break - even point 
contributi on - margin ratio
$150,000

 $750,000
.20
Contributi on - margin ratio 
2.
Break-even point given employment of sales personnel:
New fixed expenses:
Previous fixed expenses .......................................................................
Sales personnel salaries (3 x $45,000) .................................................
Sales managers’ salaries (2  $120,000) ..............................................
Total ........................................................................................................
$
$
150,000
135,000
240,000
525,000
New contribution-margin ratio:
Sales ........................................................................................................
Cost of goods sold .................................................................................
Gross margin ..........................................................................................
6,000,000
Commissions (at 5%) .............................................................................
Contribution margin ...............................................................................
Contribution - margin ratio 
$5,250,000
 .35
$15,000,000
fixed expenses
contribution - margin ratio
$525,000

 $1,500,000
.35
Estimated break - even point 
$15,000,000
9,000,000
$
750,000
$ 5,250,000
CASE 7-55 (CONTINUED)
1.
Assuming a 25% sales commission:
New contribution-margin ratio:
Sales ........................................................................................................
Cost of goods sold .................................................................................
Gross margin ..........................................................................................
Commissions (at 25%) ...........................................................................
Contribution margin ...............................................................................
Contribution - margin ratio 
Sales volume in dollars
required to earn after-tax
net income
$15,000,000
9,000,000
$ 6,000,000
3,750,000
$ 2,250,000
$2,250,000
 .15
$15,000,000
target after - tax net income
(1  t )
contributi on - margin ratio
fixed expenses 

$1,995,000
$3,000,000
(1  .3)


.15
.15
 $20,000,00 0
$150,000 
Check:
Sales ....................................................................
20,000,000
Cost of goods sold (60% of sales) ....................
Gross margin ......................................................
Selling and administrative expenses:
Commissions ................................................
All other expenses (fixed) ............................
Income before taxes...........................................
Income tax expense (30%) .................................
Net income ..........................................................
$
12,000,000
$ 8,000,000
$ 5,000,000
150,000
5,150,000
$ 2,850,000
855,000
$ 1,995,000
CASE 7-55 (CONTINUED)
2.
Sales dollar volume at which Lake Champlain Sporting Goods Company is
indifferent:
Let X denote the desired volume of sales.
Since the tax rate is the same regardless of which approach management
chooses, we can find X so that the company’s before-tax income is the same
under the two alternatives. (In the following equations, the contribution-margin
ratios of .35 and .15, respectively, were computed in the preceding two
requirements.)
.35X – $525,000 = .15X – $150,000
.20X = $375,000
X = $375,000/.20
X = $1,875,000
Thus, the company will have the same before-tax income under the two
alternatives if the sales volume is $1,875,000.
Check:
Sales .............................................................................
Cost of goods sold (60% of sales) .............................
Gross margin ...............................................................
Selling and administrative expenses:
Commissions ...........................................................
All other expenses (fixed) .......................................
Income before taxes ....................................................
Income tax expense (30%) ..........................................
Net income ...................................................................
*$1,875,000  5% = $93,750
†$1,875,000  25% = $468,750
Alternatives
Employ
Sales
Pay 25%
Personnel
Commission
$1,875,000
$1,875,000
1,125,000
1,125,000
$ 750,000
$ 750,000
93,750*
525,000
$ 131,250
39,375
$ 91,875
468,750†
150,000
$ 131,250
39,375
$ 91,875
SOLUTIONS TO PROBLEMS
PROBLEM 8-21 (45 MINUTES)
1.
a. Absorption-costing income statements:
Year 1
Year 2
Sales revenue (at $25 per case) ...........................................................
$2,000,000 $1,500,000
Less: Cost of goods sold (at
absorption cost of $21 per case) * ......................................................
1,680,000
1,260,000
Gross margin .........................................................................................
$ 320,000 $ 240,000
Less: Selling and administrative expenses:
Variable (at $ .50 per case) .......................................................
40,000
30,000
Fixed ...........................................................................................
37,500
37,500
Operating income ..................................................................................
$ 242,500 $ 172,500
*The absorption cost per case is $21, calculated as follows:
Budgeted fixed manufacturing overhead
Planned production
+
variable manufacturing
cost per case
$400,000
80,000
+
$16
$5
+
$16
=
$21
Year 3
$2,250,000
1,890,000
$ 360,000
45,000
37,500
$ 277,500
PROBLEM 8-21 (CONTINUED)
b. Variable-costing income statements:
Year 1
Year 2
Sales revenue (at $25 per case) ...........................................................
$2,000,000 $1,500,000
Less: Variable expenses:
Variable manufacturing costs (at
variable cost of $16 per case)
1,280,000
960,000
Variable selling and administrative
costs (at $ .50 per case) ..........................................................
40,000
30,000
Contribution margin ..............................................................................
$ 680,000 $ 510,000
Less: Fixed expenses:
Fixed manufacturing overhead ................................................
400,000
400,000
Fixed selling and administrative
expenses ..................................................................................
37,500
37,500
Operating income ..................................................................................
$ 242,500 $ 72,500
2.
Year 3
$2,250,000
1,440,000
45,000
$ 765,000
400,000
37,500
$ 327,500
Reconciliation:
Reported Income
Year
1
2
3
Absorption Variable
Costing
Costing
$242,500
$242,500
172,500
72,500
277,500
327,500
Difference In
Difference
Predetermined Fixed Overhead
in
Change in
Fixed
Expensed Under

Reported Inventory
Overhead Absorption and
Income
(in units)
Rate*
Variable Costing
-0-0$5
0
$100,000
20,000
5
$100,000
(50,000) (10,000)
5
(50,000)
*Predetermined fixed manufacturing overhead rate =
$400,000
80,000
PROBLEM 8-21 (CONTINUED)
3.
a. In year 4, the difference in reported operating income will be $50,000,
calculated as follows:
Change in
inventory
(in units)

Predetermined
fixed overhead
rate
(10,000)

$5
=
$(50,000)
Income reported under absorption costing will be lower, because inventory
will decline during year 4.
b. Over the four-year period, the total of all reported operating income will be the
same under absorption and variable costing. This result will occur because
inventory does not change over the four-year period. It starts out at zero on
January 1 of year 1, and it ends up at zero on December 31 of year 4.
PROBLEM 8-22 (40 MINUTES)
Throughput-costing income statements:
Year 1
$2,000,000
Year 2
$1,500,000
Year 3
$2,250,000
Sales revenue (at $25 per case) .............................
Less: Cost of goods sold (at throughput cost,
equal to direct-material cost of $7.50 per
case) ..............................................................
600,000
450,000
675,000
Gross margin ........................................................... $1,400,000 $1,050,000 $1,575,000
Less: Operating costs:
Direct labora ............................................
200,000
200,000
200,000
b
Variable overhead .................................
480,000
480,000
480,000
Variable selling and administrative
costs (at $ .50 per unitc) ...................
40,000
30,000
45,000
Fixed manufacturing overhead .............
400,000
400,000
400,000
Fixed selling and administrative costs ..............................
37,500
37,500
37,500
Net income ............................................................................................
$ 242,500
$ (97,500 ) $ 412,500
Assumes that management has committed to direct labor sufficient
to produce the planned production volume of 80,000 units; direct
labor is used at the rate of $2.50 per unit produced.
a
Assumes that management has committed to support resources
sufficient to produce the planned production volume of 80,000 units;
variable-overhead cost is used at the rate of $6 per unit produced.
b
c Variable
selling and administrative costs amount to $ .50 per unit
sold.
PROBLEM 8-27 (35 MINUTES)
1.
Total cost:
Direct material (10,000 units x
$36)…………...
Direct
labor………………………………………..
Variable manufacturing overhead…………….
Fixed manufacturing overhead………………..
Variable selling and administrative costs
(9,600 units x
$24)……………………………
Fixed selling and administrative costs………
Total………………………………………
…….
2.
$ 360,000
135,000
195,000
660,000
230,400
354,000
$1,934,400
The cost of the year-end inventory of 400 units (10,000 units produced – 9,600 units
sold) is computed as follows:
Absorption
Costing
Direct
material…………………………..
Direct
labor………………………………
Variable manufacturing overhead…..
Fixed manufacturing overhead………
Total product
cost…………………
Cost per unit (total ÷ 10,000 units)…
Year-end inventory (400 units x cost
per
unit)……………………………...
3.
Variable
Costing
$ 360,000
$360,000
135,000
135,000
195,000
660,000
$1,350,000
$
Throughput
Costing
$360,000
195,000
________ ________
$690,000 $360,000
$135
$69
$36
54,000
$ 27,600
$ 14,400
The total costs would be allocated between the current period’s income statement and
the year-end inventory on the balance sheet. Thus:
Absorption costing: $1,934,400 - $54,000 = $1,880,400
Variable costing: $1,934,400 - $27,600 = $1,906,800
Throughput costing: $1,934,400 - $14,400 = $1,920,000
PROBLEM 8-27 (CONTINUED
Alternatively, these amounts can be derived as follows:
Absorption
Costing
Cost of goods sold:
9,600 units x $135...............................
9,600 units x $69.................................
9,600 units x $36.................................
Direct labor ...............................................
Variable manufacturing overhead ............
Fixed manufacturing overhead .................
Variable selling and administrative costs .
Fixed selling and administrative costs ......
Total ....................................................
1.
Variable
Costing
Throughput
Costing
$1,296,000
$662,400
230,400
354,000
$1,880,400
660,000
$345,600
135,000
195,000
660,000
230,400
354,000
$1,906,800
230,400
354,000
$1,920,000
Throughput-costing income statement:
Sales revenue (9,600 units x $216).......................
Less: Cost of goods sold .......................................
Gross margin ........................................................
Less: Operating costs:
Direct labor .....................................................
Variable manufacturing overhead ...................
Fixed manufacturing overhead .......................
Variable selling and administrative costs .......
Fixed selling and administrative costs ............
Total operating costs .................................
Net income............................................................
$2,073,600
345,600
$1,728,000
$ 135,000
195,000
660,000
230,400
_ 354,000
$1,574,400
$ 153,600*
*As a check: Net income = sales revenue - all costs expensed
= $2,073,600
- $1,920,000 (from req. 3)
= $153,600
5.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 8-28 (45 MINUTES)
1.
Reported income will be higher under absorption costing, because inventory is
expected to increase by 1,000 units during the year. (Twenty thousand units will
be produced in the last two months, but 19,000 units will be sold.)
2.
a. Variable costing: Total contribution during first 10 months is equal to the fixed
costs plus profit for that period.
Fixed costs during first 10 months ......................................................
Profit during first 10 months ................................................................
Total contribution margin .....................................................................
Contribution margin per unit =
$3,300,000
100,000
$3,000,000
300,000
$3,300,000
= $33 per unit
Projected total sales for the year are 119,000 units (100,000 in first 10 months
plus 19,000 units in last 2 months). We can compute projected income for the
year as follows. (There are no variances or selling and administrative costs.)
Projected total contribution margin ($33  119,000) ..........................
Less: Projected fixed costs ($300,000  12) .......................................
Projected income ...................................................................................
$3,927,000
3,600,000
$ 327,000
The net income projected for the year under variable costing is $327,000.
Note: The problem states that the prior period’s cost rates are the same as
those of the current period. There are 10,000 units on hand at October 31, and
production equals sales in the first 10 months. Thus, 10,000 units were on
hand at January 1.
b. Absorption costing: The gross margin for the first 10 months is $300,000.
Notice that income and gross margin are the same, since there are no selling
or administrative expenses. Therefore, during the first 10 months:
Gross margin per unit =
$300,000
= $3 per unit
100,000 units
PROBLEM 8-28 (CONTINUED)
Projected sales for the year are 119,000 units, so we can compute the projected
gross margin for the year as follows:
Projected gross margin ($3  119,000) ...............................................
$357,000
There were no selling and administrative expenses.
Therefore, the projected gross margin and projected income are the same.
So projected net income for the year under absorption costing is $357,000.
Check: Our conclusions can be checked by noting the following relationship:
Reported income under reported income under
–
absorption costing
variable costing
= increase in inventory  fixed-overhead rate
= 1,000 units  $30 per unit = $30,000
Therefore, reported income will be $30,000 higher under absorption costing than
under variable costing.
3.
The advantages and disadvantages of variable and absorption costing are
summarized as follows:
(a) Pricing decisions: Many managers prefer to use absorption-costing data in
cost-based pricing decisions. They argue that fixed manufacturing overhead is a
necessary cost incurred in the production process. To exclude this fixed cost
from the inventoried cost of a product, as is done under variable costing, is to
understate the cost of the product. For this reason, most companies that use
cost-based pricing base their prices on absorption-costing data.
Proponents of variable costing argue that a product’s variable cost provides a
better basis for pricing decisions. They point out that any price above a product’s
variable cost makes a positive contribution to covering fixed cost and profit.
(b) Definition of an asset: Another controversy about absorption and variable
costing hinges on the definition of an asset. An asset is a thing of value owned by
the organization with future service potential. By accounting convention, assets
are valued at their cost. Since fixed costs comprise part of the cost of production,
advocates of absorption costing argue that inventory (an asset) should be valued
at its full (absorption) cost of production. Moreover, they argue that these costs
have future service potential since the inventory can be sold in the future to
generate sales revenue.
Proponents of variable costing argue that the fixed-cost component of a
product’s absorption-costing value has no future service potential. Their
reasoning is that the fixed manufacturing-overhead costs during the current
period will not prevent these costs from having to be incurred again next period.
Fixed-overhead costs will be incurred every period, regardless of production
levels. In contrast, the incurrence of variable costs in manufacturing a product
does allow the firm to avoid incurring these costs again.
(c) Cost-volume-profit analysis: Some managers find the inconsistency between
absorption costing and CVP analysis troubling enough to warrant using variable
costing for internal income reporting. Variable costing dovetails much more
closely than absorption costing with any operational analyses that require a
separation between fixed and variable costs.
(d) External reporting: For external reporting purposes, generally accepted
accounting principles require that income reporting be based on absorption
costing. Federal tax laws also require the use of absorption costing in reporting
income for tax purposes.
CH. 9 solutions
This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge
in their minds about running their business. They feel that they do not need to
spend a great deal of time on the budgeting process, because they can essentially
run the business by feel. This approach can result in several problems. First, if
the person who is running the business is sick or traveling, he or she is not
available to make decisions and implement plans that could have been clarified
by a budget. Second, the purposes of budgeting are important to the effective
running of an organization. Budgets facilitate communication and coordination,
are useful in resource allocation, and help in evaluating performance and
providing incentives to employees. It is difficult to achieve these benefits without
a budgeting process.
9-18
In developing a budget to meet your college expenses, the primary steps would
be to project your cash receipts and your cash disbursements. Your cash receipts
could come from such sources as summer jobs, jobs held during the academic
year, college funds saved by relatives or friends for your benefit, scholarships,
and financial aid from your college or university. You would also need to carefully
project your college expenses. Your expenses would include tuition, room and
board, books and other academic supplies, transportation, clothing and other
personal needs, and money for entertainment and miscellaneous expenses.
9-19
Firms with international operations face a variety of additional challenges in
preparing their budgets.
 A multinational firm's budget must reflect the translation of foreign currencies into
U.S. dollars. Almost all the world's currencies fluctuate in their values relative to
the dollar, and this fluctuation makes budgeting for those translations difficult.
 It is difficult to prepare budgets when inflation is high or unpredictable. Some
foreign countries have experienced hyperinflation, sometimes with annual inflation
rates well over 100 percent. Predicting such high inflation rates is difficult and
complicates a multinational's budgeting process.
 The economies of all countries fluctuate in terms of consumer demand, availability
of skilled labor, laws affecting commerce, and so forth. Companies with foreign
operations face the task of anticipating such changing conditions in their budgeting
processes.
9-20
The five phases in a product's life cycle are as follows:
(a) Product planning and concept design
(b) Preliminary design
(c) Detailed design and testing
(d) Production
(e) Distribution and customer service
It is important to budget these costs as early as possible in order to ensure that
the revenue a product generates over its life cycle will cover all of the costs to be
incurred. A large portion of a product's life-cycle costs will be committed well
before they are actually incurred.
EXERCISE 9-22 (25 MINUTES)
1.
Cash collections in October:
Month of Sale
July ..............................................................
August .........................................................
September ...................................................
October ........................................................
Amount Collected in October
$ 6,000
$150,000  4%
17,500
175,000  10%
30,000
200,000  15%
157,500
225,000  70%
Total .............................................................
$211,000
Notice that the amount of sales on account in June, $122,500 was not needed to
solve the exercise.
2.
Cash collections in fourth quarter from credit sales in fourth quarter.
Amount Collected
Month of Sale
October ............................................
November ........................................
December ........................................
Total .................................................
Total collections in fourth quarter
from credit sales in fourth
quarter .........................................
Credit
Sales
$225,000
250,000
212,500
October
$157,500
–
–
$157,500
November
$ 33,750
175,000
–
208,750
December
$ 22,500
37,500
148,750
$208,750
$575,000
3.
THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A
SPREADSHEET SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND
ON THE HILTON, 8E WEBSITE: www.mhhe.com/hilton8e.
EXERCISE 9-27 (30 MINUTES)
1.
Budgeted cash collections for December:
Month of Sale
November .............................................................
December .............................................................
Total cash collections .........................................
2.
Collections in December
$152,000
$400,000  38%
264,000
440,000  60%
$416,000
Budgeted income (loss) for December:
Sales revenue .......................................................................
Less: Cost of goods sold (75% of sales) ............................
Gross margin (25% of sales) ...............................................
Less: Operating expenses: ..................................................
Bad debts expense (2% of sales) ..............................
Depreciation ($432,000/12) ........................................
Other expenses ..........................................................
Total operating expenses ..........................................
Income before taxes .............................................................
$440,000
330,000
$110,000
$ 8,800
36,000
45,200
90,000
$ 20,000
EXERCISE 9-27 (CONTINUED)
3.
Projected balance in accounts payable on December 31:
The December 31 balance in accounts payable will be equal to December's purchases of
merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.
Month
December ...................
January ......................
Total December
purchases ................
Sales
$440,000
400,000
Cost of
Goods
Sold
$330,000
300,000
Amount Purchased in December
$ 66,000
$330,000  20%
240,000
300,000  80%
Therefore, the December 31 balance in accounts payable will be $306,000.
$306,000
EXERCISE 9-28 (20 MINUTES)
Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From:
I.M. Student and Associates
Subject:
Budgetary slack
Budgetary slack is the difference between a budget estimate that a person provides and a
realistic estimate. The practice of creating budgetary slack is called padding the budget. The
primary negative consequence of slack is that it undermines the credibility and usefulness of
the budget as a planning and control tool. When a budget includes slack, the amounts in the
budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new accounts
generated over the budgeted number, the manager has an incentive to understate her
projection of the number of new accounts. The description of the new accounts manager's
behavior shows evidence of such understatement. A 10 percent increase over the bank's
current 10,000 accounts would mean 1,000 new accounts in 20x5. Yet the new accounts
manager's projection is only 800 new accounts. This projection will make it more likely that
the actual number of new accounts will exceed the budgeted number.
PROBLEM 9-32 (40 MINUTES)
1.
Production and direct-labor budgets
SHADY SHADES, INC.
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Sales (units) .....................................................
Add: Ending inventory* ...................................
Total needs.......................................................
Deduct: Beginning inventory ..........................
Units to be produced .......................................
Direct-labor hours per unit .............................
Total hours of direct labor
time needed .................................................
Direct-labor costs:
Wages ($16.00 per DLH)† ............................
Pension contributions
($.50 per DLH) .........................................
Workers' compensation
insurance ($.20 per DLH) .......................
Employee medical insurance
($.80 per DLH) .........................................
Employer's social security
(at 7%) ......................................................
Total direct-labor cost .....................................
January
20,000
32,000
52,000
32,000
20,000

1
Month
February
24,000
25,000
49,000
32,000
17,000

1
March
16,000
27,000
43,000
25,000
18,000

.75
Quarter
60,000
27,000
87,000
32,000
55,000
20,000
17,000
13,500
50,500
$320,000
$272,000
$216,000
$808,000
10,000
8,500
6,750
25,250
4,000
3,400
2,700
10,100
16,000
13,600
10,800
40,400
22,400
$372,400
19,040
$316,540
15,120
$251,370
56,560
$940,310
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
†DLH denotes direct-labor hour.
PROBLEM 9-32 (CONTINUED)
2.
Use of data throughout the master budget:
Components of the master budget, other than the production budget and the
direct-labor budget, that would also use the sales data include the following:
 Sales budget
 Cost-of-goods-sold budget
 Selling and administrative expense budget
Components of the master budget, other than the production budget and the
direct-labor budget, that would also use the production data include the
following:
PROBLEM 9-42 (120 MINUTES)
1.
Sales budget:
20x0
Total sales ........................
Cash sales* ......................
Sales on account† ............
December
$800,000
200,000
600,000
20x1
January February
$880,000 $968,000
220,000
242,000
660,000
726,000
March
$1,064,800
266,200
798,600
First
Quarter
$2,912,800
728,200
2,184,600
*25% of total sales.
†75% of total sales.
2.
Cash receipts budget:
20x1
Cash sales .............................................
Cash collections from credit
sales made during current
month* ...............................................
Cash collections from credit
sales made during preceding
month† ...............................................
Total cash receipts ...............................
*10% of current month's credit sales.
†90% of previous month's credit sales.
January
$220,000
February
$242,000
March
$266,200
First
Quarter
$ 728,200
66,000
72,600
79,860
218,460
540,000
$826,000
594,000
$908,600
653,400
$999,460
1,787,400
$2,734,060
PROBLEM 9-42 (CONTINUED)
3.
Purchases budget:
20x0
December
Budgeted cost of
goods sold .................. $560,000
Add: Desired
ending inventory ........ 308,000
Total goods
needed ........................ $868,000
Less: Expected
beginning
inventory ..................... ††280,000
Purchases ........................ $588,000
20x1
January
February
March
First
Quarter
$2,038,960
$616,000
$677,600
$745,360
338,800
372,680
372,680*
$954,800
308,000
$646,800
$1,050,280 $1,118,040
338,800
$711,480
372,680
$745,360
372,680†
$2,411,640
308,000**
$2,103,640
*Since April's expected sales and cost of goods sold are the same as the projections
for March, the desired ending inventory for March is the same as that for February.
†The
desired ending inventory for the quarter is equal to the desired ending inventory
on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
††50%
x $560,000 (where $560,000 = December cost of goods sold = December sales of
$800,000 x 70%)
PROBLEM 9-42 (CONTINUED)
4.
Cash disbursements budget:
20x1
January
February
$258,720
$284,592
$298,144
$ 841,456
352,800
388,080
426,888
1,167,768
$611,520
$672,672
$725,032
$2,009,224
Other expenses:
Sales salaries ..................................
Advertising and promotion.............
Administrative salaries ...................
Interest on bonds** .........................
Property taxes** ..............................
Sales commissions .........................
$ 42,000
32,000
42,000
30,000
-08,800
$ 42,000
32,000
42,000
-010,800
9,680
$ 42,000
32,000
42,000
-0-010,648
$ 126,000
96,000
126,000
30,000
10,800
29,128
Total cash payments for other
expenses ..........................................
Total cash disbursements ...................
$154,800
$766,320
$136,480
$809,152
$126,648
$851,680
$ 417,928
$2,427,152
Inventory purchases:
Cash payments for purchases
during the current month* ........
Cash payments for purchases
during the preceding
month† ........................................
Total cash payments for
inventory purchases .......................
March
First
Quarter
*40% of current month's purchases [see requirement (3)].
†60%
of the prior month's purchases [see requirement (3)].
**Bond interest is paid every six months, on January 31 and July 31. Property taxes also
are paid every six months, on February 28 and August 31.
PROBLEM 9-42 (CONTINUED)
5.
Summary cash budget:
20x1
January
Cash receipts [from req. (2)] ................ $ 826,000
Cash disbursements
[from req. (4)] ................................... (766,320)
Change in cash balance
during period due to operations .... $ 59,680
Sale of marketable securities
(1/2/x1) ..............................................
30,000
Proceeds from bank loan
(1/2/x1) .............................................. 200,000
Purchase of equipment ........................ (250,000)
Repayment of bank loan
(3/31/x1) ............................................
Interest on bank loan* ..........................
Payment of dividends ...........................
First
Quarter
$2,734,060
February
$ 908,600
March
$ 999,460
(809,152)
(851,680)
(2,427,152)
$ 99,448
$147,780
$ 306,908
30,000
200,000
(250,000)
(200,000)
(5,000)
(100,000)
Change in cash balance during
first quarter ......................................
Cash balance, 1/1/x1.............................
Cash balance, 3/31/x1...........................
(200,000)
(5,000)
(100,000)
$ (18,092)
70,000
$ 51,908
*$200,000  10% per year  1/4 year = $5,000
6.
Analysis of short-term financing needs:
Projected cash balance as of December 31, 20x0.......................................
Less: Minimum cash balance .......................................................................
Cash available for equipment purchases ....................................................
Projected proceeds from sale of marketable securities .............................
Cash available ................................................................................................
Less: Cost of investment in equipment .......................................................
Required short-term borrowing ....................................................................
$ 70,000
50,000
$ 20,000
30,000
$ 50,000
250,000
$(200,000)
PROBLEM 9-42 (CONTINUED)
7.
GLOBAL ELECTRONICS COMPANY
BUDGETED INCOME STATEMENT
FOR THE FIRST QUARTER OF 20X1
Sales revenue ........................................................................
Less: Cost of goods sold ......................................................
Gross margin .........................................................................
Selling and administrative expenses:
Sales salaries ...................................................................
Sales commissions ..........................................................
Advertising and promotion..............................................
Administrative salaries ....................................................
Depreciation .....................................................................
Interest on bonds .............................................................
Interest on short-term bank loan ....................................
Property taxes ..................................................................
Total selling and administrative expenses ..........................
Net income .............................................................................
8.
$2,912,800
2,038,960
$ 873,840
$126,000
29,128
96,000
126,000
150,000
15,000
5,000
5,400
552,528
$ 321,312
GLOBAL ELECTRONICS COMPANY
BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE FIRST QUARTER OF 20X1
Retained earnings, 12/31/x0 ........................................................................
Add: Net income ..........................................................................................
Deduct: Dividends .......................................................................................
Retained earnings, 3/31/x1 ..........................................................................
$ 215,000
321,312
100,000
$ 436,312
PROBLEM 9-42 (CONTINUED)
9.
GLOBAL ELECTRONICS COMPANY
BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash ...............................................................................................................
Accounts receivable* ....................................................................................
Inventory........................................................................................................
Buildings and equipment (net of accumulated depreciation)† ..................
Total assets ...................................................................................................
$
Accounts payable** ......................................................................................
Bond interest payable ..................................................................................
Property taxes payable .................................................................................
Bonds payable (10%; due in 20x6) ..............................................................
Common Stock..............................................................................................
Retained earnings .........................................................................................
Total liabilities and stockholders' equity ....................................................
$ 447,216
10,000
1,800
600,000
1,000,000
436,312
$2,495,328
*Accounts receivable, 12/31/x0 ....................................................................
Sales on account [req. (1)] ...........................................................................
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400) ............................................................
Accounts receivable, 3/31/x1 .......................................................................
$ 540,000
2,184,600
†Buildings
and equipment (net), 12/31/x0 ...................................................
Cost of equipment acquired .........................................................................
Depreciation expense for first quarter ........................................................
Buildings and equipment (net), 3/31/x1 .......................................................
$1,252,000
250,000
(150,000)
$1,352,000
**Accounts payable, 12/31/x0 .......................................................................
Purchases [req. (3)] ......................................................................................
Cash payments for purchases [req. (4)] ......................................................
Accounts payable, 3/31/x1 ...........................................................................
$ 352,800
2,103,640
(2,009,224)
$ 447,216
PROBLEM 9-34 (25 MINUTES)
1.
Tuition revenue budget:
Current student
enrollment…………………….
Add: 5% increase in student body……………
Total student
body……………………………….
Less: Tuition-free scholarships……………….
Tuition-paying
students…………………………
Credit hours per student per year…………….
12,000
600
12,600
180
12,420
x 30
51,908
718,740
372,680
1,352,000
$2,495,328
(2,005,860)
$ 718,740
Total credit
hours………………………………..
Tuition rate per
hour…………………………….
Forecasted tuition revenue…………………….
2.
372,600
x $75
$27,945,000
Faculty needed to cover classes:
Total student
body…………………………………….
Classes per student per year [(15 credit hours ÷ 3
credit hours) x 2 semesters]………………….
Total student class enrollments to be covered….
Students per
class…………………………………….
Classes to be
taught………………………………….
Classes taught per professor……………………….
Faculty
needed…………………………………………
12,600
x 10
126,00
0
÷ 25
5,040
÷ 5
1,008
3.
Possible actions might include:
 Hire part-time instructors
 Use graduate teaching assistants
 Increase the teaching load for each professor
 Increase class size and reduce the number of sections to be offered
 Have students take an Internet-based course offered by another university
 Shift courses to a summer session
4.
No. While the number of faculty may be a key driver, the number of faculty is highly
dependent on the number of students. Students (and tuition revenue) are akin to
sales—the starting point in the budgeting process.
PROBLEM 9-35 (25 MINUTES)
1.
Sales budget
Sales (in sets) ..............................................
Sales price per set ......................................
Sales revenue ..............................................
2.
August
6,000

$60
$360,000
September
7,500

$60
$450,000
July
5,000
1,200
6,200
1,000
5,200
August
6,000
1,500
7,500
1,200
6,300
September
7,500
1,500
9,000
1,500
7,500
Production budget (in sets)
Sales ............................................................
Add: Desired ending inventory ..................
Total requirements ......................................
Less: Projected beginning inventory ........
Planned production ....................................
3.
July
5,000

$60
$300,000
Raw-material purchases
Planned production (sets) .............................
Raw material required per set
(board feet) .................................................
Raw material required for production
(board feet) .................................................
Add: Desired ending inventory of raw
material (board feet) ..................................
Total requirements .........................................
Less: Projected beginning inventory of
raw material (board feet) ...........................
Planned purchases of raw material
(board feet) .................................................
Cost per board foot ........................................
Planned purchases of raw material
(dollars) ......................................................
July
5,200

10
August
6,300

10
September
7,500

10
52,000
63,000
75,000
6,300
58,300
7,500
70,500
8,000
83,000
5,200
6,300
7,500
53,100
 $.60
64,200
 $.60
75,500
 $.60
$ 31,860
$ 38,520
$ 45,300
PROBLEM 9-35 (CONTINUED)
4.
Direct-labor budget
Planned production (sets) .............................
Direct-labor hours per set .............................
Direct-labor hours required...........................
Cost per hour .................................................
Planned direct-labor cost ..............................
5.
July
5,200

1.5
7,800

$21
$163,800
August
6,300

1.5
9,450

$21
$198,450
September
7,500

1.5
11,250

$21
$236,250
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 9-36 (30 MINUTES)
1.
Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $108,000 equal 60% of December’s sales;
thus, December sales total $180,000 ($108,000 ÷ .6). Since the selling price is $20 per
unit, Dakota Fan sold 9,000 units ($180,000 ÷ $20).
2.
Since the company expects to sell 10,000 units, sales revenue will total $200,000
(10,000 units x $20).
3.
Dakota Fan collected 40% of February’s sales during February, or $78,400. Thus,
February’s sales total $196,000 ($78,400 ÷ .4). Combining January sales ($76,000 +
$114,000), February sales ($196,000), and March sales ($200,000), the company will
report revenue of $586,000.
4.
Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x 60%).
5.
Finished-goods inventories are maintained at 20% of the following month’s sales.
January sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 ÷ $20).
Thus, the December 31 inventory is 1,900 units (9,500 x 20%).
6.
February sales will total 9,800 units ($196,000 ÷ $20), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:
12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory
1,900 + X - 9,500 = 1,960
X – 7,600 = 1,960
X = 9,560
7.
Financing required is $3,500 ($15,000 minimum balance less ending cash balance of
$11,500):
Cash balance, January
1…………………………
Add: January receipts ($108,000 + $76,000)..
Subtotal……………………………………
……
Less: January
payments…………………………
Cash balance before
financing………………….
$ 22,500
184,000
$206,500
195,000
$ 11,500
PROBLEM 9-37 (45 MINUTES)
1.
The benefits that can be derived from implementing a budgeting system include the
following:
 The preparation of budgets forces management to plan ahead and to establish goals and
objectives that can be quantified.
 Budgeting compels departmental managers to make plans that are in congruence with
the plans of other departments as well as the objectives of the entire firm.
 The budgeting process promotes internal communication and coordination.
 Budgets provide directions for day-to-day control of operations, clarify duties to be
performed, and assign responsibility for these duties.
 Budgets help in measuring performance and providing incentives.
 Budgets provide a vehicle for resource allocation.
PROBLEM 9-37 (CONTINUED)
2.
a. Schedule
Sales Budget
b. Subsequent Schedule
Production Budget
Selling Expense Budget
Budgeted Income Statement
Ending Inventory Budget (units)
Production Budget
Production Budget (units)
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Direct-Material Budget
Cost-of-Goods-Manufactured Budget
Direct-Labor Budget
Cost-of-Goods-Manufactured Budget
Manufacturing-Overhead Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Sold Budget
Cost-of-Goods-Sold Budget (includes
ending inventory in dollars)
Budgeted Income Statement
Budgeted Balance Sheet
Selling Expense Budget
Budgeted Income Statement
Research and Development Budget
Budgeted Income Statement
Administrative Expense Budget
Budgeted Income Statement
Budgeted Income Statement
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Capital Expenditures Budget
Cash Receipts and Disbursements Budget
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Cash Receipts and Disbursements
Budget
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Budgeted Statement of Cash Flows
Select Solutions to Ch 10
10-26 Responses will vary widely on this question. Here are some possibilities for a
bank:
•
Financial: (a) profit; (b) cost of back-office (i.e., administrative) operations.
•
Internal operations: (a) number of transaction errors; (b) employee retention
and advancement.
•
Customer: (a) local market share; (b) number of repeat customers.
•
Innovation and learning: (a) new financial products; (b) employee suggestions
received and implemented.
Lead measures, such as market share or new financial products, show how well
the bank is doing now in areas that will affect financial performance in the future.
Lag measures, such as the bank’s profits, measure the bank’s financial
performance. Lag measures are the result of previous efforts in the bank’s
customer, internal operations, and learning and innovation perspectives.
EXERCISE 10-32 (30 MINUTES)
DIRECT-MATERIAL PRICE AND QUANTITY VARIANCES
ACTUAL MATERIAL COST
Actual
Actual
Quantity 
Price
240,000
$.62
kilograms 
per
purchased
kilogram
Actual
Standard
Quantity  Price
240,000
$.60
kilograms 
per
purchased
kilogram
STANDARD MATERIAL COST
Standard
Standard
Quantity
Price

200,000
$.60
kilograms
per

allowed
kilogram
$148,800
$144,000
$120,000
$4,800 Unfavorable
Direct-material
price variance
210,000
kilograms
used

$.60
per
kilogram
$126,000
$6,000
Unfavorable
Direct-material
quantity variance
EXERCISE 10-32 (CONTINUED)
DIRECT-LABOR RATE AND EFFICIENCY VARIANCES
ACTUAL LABOR COST
Actual
Actual
Hours
Rate

13,000
$12.20
hours
per

used
hour
Actual
Hours
13,000
hours
used
$158,600
Standard
Rate

$12.00
per

hour
STANDARD LABOR COST
Standard
Standard
Hours
Rate

12,500
$12.00
hours
per

allowed
hour
$156,000
$2,600 Unfavorable
Direct-labor
rate variance
$150,000
$6,000 Unfavorable
Direct-labor
efficiency variance
$8,600 Unfavorable
Direct-labor variance
PROBLEM 10-43 (25 MINUTES)
1.
Direct-material price variance = (PQ  AP) – (PQ  SP)
= (36,000  $1.38) – (36,000  $1.35)
= $49,680 – $48,600
= $1,080 Unfavorable
2.
Direct-material quantity variance
= (AQ  SP) – (SQ  SP)
= (19,000  $1.35) – (20,000*  $1.35)
= $25,650 - $27,000
= $1,350 Favorable
*1,000 units  20 yards per unit = 20,000 yards
3.
Direct-labor rate variance
= (AH  AR) – (AH  SR)
= (4,200  $9.15) – (4,200  $9.00)
= $38,430 – $37,800
= $630 Unfavorable
4.
Direct-labor efficiency variance = (AH  SR) – (SH  SR)
= (4,200  $9.00) – (4,000*  $9.00)
= $37,800 – $36,000
= $1,800 Unfavorable
*1,000 units  4 hours per unit = 4,000 hours
PROBLEM 10-45 (15 MINUTES)
Direct
Material
Nyclyn ....................................................................
Salex .......................................................................
Protet ......................................................................
Initial
Mix
12 kg
9.6 ltr
5 kg
Unit
Cost
4.35real
5.40real
7.20real
Standard material cost
for each 10-liter container .................................
Standard
Material
Cost
52.20real
51.84real
36.00real
140.04real
The real is Brazil’s national currency.
PROBLEM 10-46 (35 MINUTES)
1.
Type I fertilizer:
Price variance:
Actual quantity purchased x actual price
5,000 pounds x $
.53………………………………
Actual quantity purchased x standard price
5,000 pounds x $
.50………………………………
Direct-material price
variance……………………….
Quantity variance:
Actual quantity used x standard price
3,700 pounds x $
.50………………………………
Standard quantity allowed x standard price
4,400 pounds* x $
.50……………………………..
Direct-material quantity
variance……………………
$2,650
2,500
$ 150 Unfavorable
$1,850
2,200
$ 350 Favorable
* 40 pounds x 55 clients x 2 applications
Type II fertilizer:
Price variance:
Actual quantity purchased x actual price
10,000 pounds x $
.40…………………………….
$4,000
Actual quantity purchased x standard price
10,000 pounds x $
.42…………………………….
Direct-material price
variance……………………….
4,200
$ 200 Favorable
PROBLEM 10-46 (CONTINUED)
Quantity variance:
Actual quantity used x standard price
7,800 pounds x $
.42………………………………
Standard quantity allowed x standard price
8,800 pounds* x $
.42……………………………..
Direct-material quantity
variance……………………
$3,276
3,696
$ 420 Favorable
* 40 pounds x 55 clients x 4 applications
2.
Direct-labor variances:
Rate variance:
Actual hours used x actual rate
165 hours x
$11.50……………………..
Actual hours used x standard rate
165 hours x
$9.00………………………
Direct-labor rate
variance…………………
Efficiency variance:
Actual hours used x standard rate
165 hours x
$9.00……………………….
Standard hours allowed x standard rate
220 hours* x
$9.00……………………...
Direct-labor efficiency variance………….
$1,897.50
1,485.00
$ 412.50 Unfavorable
$1,485.00
1,980.00
$ 495.00 Favorable
* 2/3 hours x 55 clients x 6 applications
3.
Actual cost of applications:
Type I fertilizer:
Actual quantity used x actual price (3,700 pounds x $ .53)….
$1,961.0
0
Type II fertilizer:
Actual quantity used x actual price (7,800 pounds x $ .40)….
3,120.00
Direct labor:
Actual hours used x actual rate (165 hours x $11.50)………...
Total actual
cost………………………………………………………….
1,897.50
$6,978.5
0
Yes, the service was a financial success. Wolfe charged clients $40 per application,
generating revenue of $13,200 (55 clients x 6 applications x $40). With costs of
$6,978.50, the fertilization service produced a profit of $6,221.50.
PROBLEM 10-46 (CONTINUED)
4.
(a)
Yes, the service was a success. Overall costs were controlled as indicated by
a total favorable variance of $902.50. In addition, each of the three cost
components (Type I fertilizer, Type II fertilizer, and direct labor) produced a
net favorable variance. Wolfe did have a sizable unfavorable labor-rate
variance as a result of his having to pay $11.50 per hour when a more typical
wage rate would have been $9.00 per hour. This inflated rate is attributable to
the tight labor market, which is beyond his control. Note: Part of the variance
may have been caused by a standard rate that was set too low, especially given
the fact that this is a new service.
Type I fertilizer:
Price
variance…………………………………..
Quantity
variance………………………………
Type II fertilizer:
Price
variance…………………………………..
Quantity
variance………………………………
Direct labor:
Rate
variance……………………………………
Efficiency
variance……………………………
Total material and labor variances
(b)
5.
$150.00 Unfavorable
350.00 Favorable
200.00 Favorable
420.00 Favorable
412.50 Unfavorable
495.00 Favorable
$902.50 Favorable
In this case, several of the favorable variances may have come back to haunt
Wolfe. The favorable labor efficiency variance means that less time is being
spent on the job than originally anticipated. This may indicate that the parttime employee is rushing and doing sloppy work. Also, less fertilizer used
than budgeted (i.e., favorable quantity variances for both Type I and Type II)
would likely give rise to an increased occurrence of weeds as well as a lack of
greening in the lawn.
This is a management judgment for Wolfe to make. If the service is continued, Wolfe
should consider hiring a full-time employee and insisting on the standard amount of
fertilizer being applied to each lawn.
PROBLEM 10-47 (35 MINUTES)
1.
a. Machine hours x 4 = standard direct-labor hours
165.5 x 4 = 662
b. Direct-labor efficiency variance = (AHSH)SR
= (374662)$15.08
= $4,343 F
2.
a. Standard
Direct-Labor
Cost*
January ............................................................
February ...........................................................
March ...............................................................
April ..................................................................
May ...................................................................
June ..................................................................
July ...................................................................
August ..............................................................
September........................................................
October ............................................................
$ 9,983
6,050
33,297
43,056
9,651
13,994
6,273
5,791
5,791
4,343
b. 20% of the
Standard DirectLabor Cost*
$1,997
1,210
6,659
8,611
1,930
2,799
1,255
1,158
1,158
869
*Rounded.
3.
The variances for all of the months except August and September exceed 20% of
the standard direct-labor cost and would therefore be investigated.
PROBLEM 10-47 (CONTINUED)
4.
Statistical control chart for direct-labor efficiency variances:
Favorable variances
(in thousands)
$25
$20
$15
$10
1 standard deviation
$5
$0
J
F
$5
$10
$15
$20
$25
Unfavorable variances
(in thousands)
M
A
M
J
J
A
S
O
1 standard deviation
PROBLEM 10-47 (CONTINUED)
5.
The variances for March, April, and June will be investigated, since they exceed
one standard deviation.
6.
The production volume was much greater in March, April, and June.
PROBLEM 10-48 (35 MINUTES)
1.
Schedule of standard production costs:
VALPORT VALVE COMPANY: SHREVEPORT PLANT
SCHEDULE OF STANDARD PRODUCTION COSTS: BASED ON 15,600 UNITS
FOR THE MONTH OF MARCH
Direct material ..................................................... 15,600 units  3 lbs.  $5.00
Direct labor .......................................................... 15,600 units  5 hrs.  $11.25
Total standard production costs ........................
2.
Standard
Costs
$ 234,000
877,500
$1,111,500
Variances:
a.
Direct-material price variance
= (PQ  AP) – (PQ  SP)
= (50,000  $5.20) – (50,000  $5.00)
= $10,000 Unfavorable
b.
Direct-material quantity variance = (AQ  SP) – (SQ  SP)
= (46,200  $5.00) – (46,800*  $5.00)
= $3,000 Favorable
*15,600 units  3 lbs. per unit = 46,800 lb.
c.
Direct-labor rate variance
= (AH  AR) – (AH  SR)
= (80,200  $10.95) – (80,200  $11.25)
= $24,060 Favorable
d.
Direct-labor efficiency variance
= (AH  SR) – (SH  SR)
= (80,200  $11.25) – (78,000*  $11.25)
= $24,750 Unfavorable
*15,600 units  5 hours per unit = 78,000 hr.
PROBLEM 10-48 (CONTINUED)
3.
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 10-49 (30 MINUTES)
1.
No. The variances are favorable and small, with each being less than 2% of budgeted
cost amounts ($350,000). However, by simply reporting total variances for material
and labor, one cannot get a totally clear picture of performance. Price, quantity, rate,
and efficiency variances should be calculated for further insight.
2.
Direct-material variances:
Price variance:
Actual quantity purchased x actual price
45,000 pounds x
$7.70…………………………….
Actual quantity purchased x standard price
45,000 pounds x
$8.80…………………………….
Direct-material price
variance……………………….
Quantity variance:
Actual quantity used x standard price
45,000 pounds x
$8.80……………………………
Standard quantity allowed x standard price
39,900 pounds* x
$8.80…………………………..
Direct-material quantity
variance……………………
* 9,500 units x 4.2 pounds
Total direct-material variance:
$49,500F + $44,880U = $4,620F
$346,500
396,000
$ 49,500 Favorable
$396,000
351,120
$ 44,880 Unfavorable
PROBLEM 10-49 (CONTINUED)
Direct-labor variances:
Rate variance:
Actual hours used x actual rate
20,900 hours x
$16.25………………….
Actual hours used x standard rate
20,900 hours x
$14.00………………….
Direct-labor rate
variance…………………
Efficiency variance:
Actual hours used x standard rate
20,900 hours x
$14.00………………….
Standard hours allowed x standard rate
24,700 hours* x
$14.00………………...
Direct-labor efficiency variance………….
$339,625
292,600
$ 47,025 Unfavorable
$292,600
345,800
$ 53,200 Favorable
* 9,500 units x 2.6 hours
Total direct-labor variance:
$47,025U + $53,200F = $6,175F
3.
Yes. Although the combined variances are small, a more detailed analysis reveals the
presence of sizable, offsetting variances (all in excess of 12% of budgeted cost
amounts). A variance investigation should be undertaken if the likely benefits of the
investigation appear to exceed the costs.
4.
No, things are not going as smoothly as the vice president believes. With regard to the
new supplier, SolarPrime is paying less than expected for direct materials. However,
the quality may be poor, as indicated by the unfavorable quantity variance and
increased usage.
Turning to direct labor, the favorable efficiency variance means that the company is
producing units by consuming fewer hours than expected. This may be the result of
the team-building/morale-boosting exercises, as a contented, well-trained work force
tends to be more efficient. However, another plausible explanation could be that Solar
Prime is paying premium wages (as indicated by the unfavorable rate variance) to hire
laborers with above-average skill levels.
PROBLEM 10-49 (CONTINUED)
As a side note, the favorable direct-labor efficiency variance may partially explain the
unfavorable material quantity variance. That is, laborers may be rushing through their
jobs and using more material than the standards allow.
5.
Yes. Hoctor is the production supervisor. The prices paid for materials and the
quality of material acquired are normally the responsibility of the purchasing manager.
The change to the new supplier may introduce problems of dealing with the
unknown—the supplier’s reliability, ability to deliver quality goods, etc. Finally,
direct-labor wage rates are often a function of market conditions, which would likely
be uncontrollable from Hoctor’s perspective.
PROBLEM 10-51 (30 MINUTES)
1.
a.
Responsibility for setting standards:
Materials:
The development of standard prices for material is primarily the responsibility of the
materials manager.
Operating departmental managers and engineers should be involved in setting
standards for material quantities.
Labor:
The personnel manager or payroll manager would be involved in setting standard
labor rates.
Operating department managers with input from production supervisors and
engineers would be involved in setting standards for labor usage.
PROBLEM 10-51 (CONTINUED)
b.
The factors that should be considered in establishing material standards include the
following:
 Price studies, including expected general economic conditions, industry
prospects, demand for the materials, and market conditions.
 Product specifications from descriptions, drawings, and blueprints.
 Past records on raw-material cost, usage, waste, and scrap.
Factors in establishing labor standards:
 Engineering studies of the time required to complete various tasks.
 Learning.
 Expected wage rates.
 Expected labor mix (e.g., skilled versus unskilled).
2.
The basis for assignment of responsibility under a standard-costing system is
controllability. Judgments about whether departments or department managers are
performing efficiently should not be affected by items over which they have no
control.
The responsibility for a variance should be assigned to the department or
individual that has the greatest responsibility for deciding whether a specific cost
should be incurred. Some variances, however, are interdependent and responsibility
must be shared.
PROBLEM 10-52 (40 MINUTES)
1.
The standard cost per 10-gallon batch of strawberry jam is determined as follows:
Strawberries (7.5 qts.*  $1.60)...........................................
Other ingredients (10 gal.  $.90) .......................................
Sorting labor (3/60 hr.  6 qt.  $18.00)..............................
Blending labor (12/60 hr.  $18.00) ....................................
Packaging (40 qt.†  $.76) ...................................................
Total standard cost per 10-gallon batch ............................
$12.00
9.00
5.40
3.60
30.40
$60.40
*6 quarts  5/4 = 7.5 qt., needed to produce 6 good quarts.
†4
2.
qt. per gal.  10 gal. = 40 qt.
Joe Adams’ behavior regarding the cost information is unethical because it
violates the following ethical standards:
Competence. Prepare complete and clear reports and recommendations after
appropriate analyses of relevant and reliable information.
Integrity. Avoid actual or apparent conflicts of interest and advise all appropriate
parties of any potential conflicts. Refrain from either actively or passively
subverting the attainment of the organization’s legitimate and ethical objectives.
Refrain from engaging in or supporting any activity that would discredit the
profession.
Objectivity. Communicate information fairly and objectively.
3.
a.
In general, the purchasing manager is held responsible for unfavorable material
price variances. Causes of these variances include the following:
 Failure to forecast price increases correctly.
 Purchasing nonstandard or uneconomical lots.
 Purchasing from suppliers other than those offering the most favorable terms.
PROBLEM 10-52 (CONTINUED)
b.
In general, the production manager is held responsible for unfavorable labor
efficiency variances. Causes of these variances include the following:
 Poorly trained labor.
 Substandard or inefficient equipment.
 Substandard material.
PROBLEM 10-54 (35 MINUTES)
1.
At California Housewares’ Merced Division, the standard cost per cutting board is
calculated as follows:
Direct material:
Lumber (1.5 board ft.*  $4.00 per board ft.)...............
Footpads (4 pads  $.10 per pad) ................................
$6.00
.40
$6.40
Direct labor:
Prepare and cut (14.4†/60 hr.  $8.00 per hr.) .............
Assemble and finish (15/60 hr.  $8.00 per hr.) ..........
$1.92
2.00
3.92
Total standard unit cost ......................................................
*1.25 board ft. 
†
2.
$10.32
(5  1)
 1.5 board ft.
5
12 min. per board 
(5  1)
 14.4 min.
5
a.
The role of the purchasing manager in the development of standards includes
establishing the standard cost for material required by the bill of materials,
determining if the company should take advantage of price reductions available
through economic order size, and obtaining data regarding the availability of
materials.
b.
The role of the industrial engineer in the development of standards includes
preparing the bill of materials that specifies the types and quantities of material
required; establishing, in conjunction with the production supervisor, any
allowances for scrap, shrinkage, and waste; and participating in time studies and
test runs to facilitate the establishment of time standards.
c.
The role of the managerial accountant in the development of standards includes
reviewing all information regarding material and labor standards received from
other departments, establishing the labor rate standards based on the type of
labor required, determining application rates for indirect costs such as material
handling and manufacturing overhead, and converting physical standards such
as hours and quantities to monetary equivalents.
PROBLEM 10-54 (CONTINUED)
3.
a.
Standard costing allows for management by exception. Timely reporting of
variances allows management to take corrective action before costs get out of
hand. The breakdown of variances into various components helps management
trace the source of potential cost problems. Standard costing may also motivate
employees to operate more efficiently if they are allowed to participate in setting
the standards.
b.
The standard costing system can have a negative impact on the motivation of
employees if the standards are too easily attainable or too difficult to reach. If the
standards are too easy, employees may tend to reduce productivity. If they are too
difficult, production workers may become frustrated and ignore the standards. Also,
standards that are set without production employee input may not be accepted as
realistic by those employees.
PROBLEM 10-55 (45 MINUTES)
1.
Categories of measures:
Cycle time (days) .......................................................................
Number of defective finished products ...................................
Manufacturing-cycle efficiency ................................................
Customer complaints ................................................................
Unresolved complaints .............................................................
Products returned......................................................................
Warranty claims .........................................................................
In-process products rejected....................................................
Aggregate productivity .............................................................
Number of units produced per day per employee ..................
Percentage of on-time deliveries ..............................................
Percentage of orders filled .......................................................
Inventory value/sales revenue ..................................................
Machine downtime (minutes)....................................................
Bottleneck machine downtime (minutes) ................................
Overtime (minutes) per employee ............................................
Average setup time (minutes)...................................................
Area of Manufacturing
Performance
a
b
a
b,c
c
b,c
b,c
d
a,e
a,e
f
f
g,h
i
i
a,e
a
PROBLEM 10-55 (CONTINUED)
2.
Memorandum
Date:
Today
To:
Management, Diagnostic Technology, Inc.
From:
I. M. Student
Subject:
Performance of Albany plant during 1st quarter
The performance of the Albany plant is evaluated in nine key areas:
a.
Production processing:
Cycle time, manufacturing-cycle efficiency, and productivity measures all
point to consistency and high-level performance throughout the measurement
period. Both cycle time and manufacturing-cycle efficiency exhibit slight,
favorable trends.
b.
Product quality:
The number of defective finished products, number of products returned, and
warranty claims all show improvement over the period. All three measures
suggest excellent performance in quality control.
c.
Customer acceptance:
Customer complaints are steady with an average of 5.5 complaints during a
two-week period. The number of unresolved complaints improved during the
period from 2 to 0. Performance in this area is very high, but there is a little
room for improvement.
d.
In-process quality control:
The number of products rejected in process has increased. This speaks well
for the in-process inspection effort. The cause of these defective in-process
units should be investigated and corrected.
PROBLEM 10-55 (CONTINUED)
e.
Productivity:
Both the aggregate productivity measure and the number of units produced
per day per employee remained relatively steady throughout the period. The
latter of these two measures exhibited a slight, favorable trend.
f.
Delivery performance:
Both performance measures (percentages of on-time deliveries and orders
filled) were very high through the period, finishing at 100 percent in period 6.
g. & h. Raw material and scrap; inventory:
Inventory value/sales revenue remained consistently low through the period
(average of 1.83 percent).
i.
Machine maintenance:
Machine downtime was low through the period (average of 84 minutes each
two-week period). Bottleneck machine downtime was low except in period 5.
The cause of that incident should be investigated.
Overall evaluation:
The Albany plant has performed at a very high level of efficiency in virtually every
phase of its operations during the 1st quarter.
PROBLEM 10-56 (40 MINUTES)
Memorandum
Date:
Today
To:
President, Southern Plastics Corporation
From:
I. M. Student
Subject:
Performance of Baton Rouge Plant
1.
The Baton Rouge Plant's performance for the period January through June is
summarized as follows:
a.
Production processing and productivity:
The plant's cycle time (or throughput time) has improved over the period
from 19 hours to 16 hours (average of 17.8 hours). This indicates that the
efficiency of the actual processing of products has improved. Consistent
with this observation is the reduction in setup time from 69 to 61 hours
(average of 64.5). However, the plant's manufacturing cycle efficiency has
declined through the period, indicating that too much time is being spent
on inspection time, waiting time, and move time, relative to actual
processing time. Overtime hours have increased, possibly due to higher
demand late in the period. Power consumption has remained stable.
b.
Product quality and customer acceptance:
The plant's quality control program appears to be paying off. The number
of defective units in finished goods declined dramatically, and no products
were returned. This is the result of the plant's inspectors more effectively
identifying defective units while still in process. Effort should be devoted
in the future to the reduction of the in-process defective rate.
c.
Delivery performance:
Delivery performance is good, but could be improved. All orders were
filled, but only an average of 95 percent of the orders were filled on time in
May and June. This might reflect increased demand, as evidenced by the
increase in overtime hours.
PROBLEM 10-56 (CONTINUED)
d.
Raw material, scrap and inventory:
The rate of defective raw materials has declined to zero. The purchasing
team is doing a good job by ensuring delivery of high-quality raw
materials. Inventory value has been steady through the period with an
average of 4.8 percent of sales. This is probably as low as can reasonably
be expected in this industry.
e.
Machine maintenance:
Machine downtime improved during the period from 30 hours to 10 hours
(average of 21.7 hours), but bottleneck machine downtime was too high,
particularly in May. Also, unscheduled machine maintenance calls were up
in May and June.
2.
Recommended actions:
a.
Investigate the reasons behind the decline in manufacturing-cycle
efficiency. Concentrate on the elimination of non-value-added activities,
such as move time and wait time.
b.
Maintain inspections in process. Try to reduce the in-process defective
rate by emphasizing the importance of quality to the work force.
c.
Investigate causes of bottleneck machine downtime and correct the
situation.