PROJECT #2

MGMT-027

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REST IN PEACE CLIPPY.

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CASE 1:

Assumptions:

a. $0.16 per mile for gasoline.

b. $0.05 per mile for oil, minor repairs, and parts.

c. $480 per automobile per year for outside repairs.

d. $900 per automobile per year for insurance.

e. $8,610 per month for salaries and benefits.

f. $2,400 per automobile per year for depreciation.

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Required:

1. Prepare a new performance report for March based on a flexible budget that shows

spending variances.

Flexible Budget Performance Report

Planning

Budget

Activity

Variances

Flexible

Budget

Spending

Variances

Actual

Results

Miles 50000 58000 58000

Autos 20 21 21

GASOLINE 8000 1280 U 9280 310 F 8970

OIL, MINOR

REPAIRS, PARTS 2500 400 U 2900 60 F 2840

Outside repairs 800 40 U 840 140 U 980

Insurance 1500 75 U 1575 50 U 1625

Salaries and

benefits 8610 0 8610 0 8610

Vehicle

depreciation 4000 200 U 4200 0 4200

Total 25410 1995 U 27405 180 F 27225

2. What are the deficiencies in the original cost control report? How does the report that

you prepared in part (1) above overcome these deficiencies?

The original cost report shows deficiencies in the activity variances and therefore the

spending variances later are inaccurate. Our flexible budget overcomes the original

deficiencies in the original cost control report by adjusting the calculations for the costs by

replacing the planned level of activity with the actual level of activity and thus later

reflecting the actual costs incurred.

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CASE #2:

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Required:

1. How many units were produced during the period?

Actual Quantity = Total Standard Cost / Standard Cost Per Unit

Actual Quantity = $608,000/$32= 19,000 units

2. How many meters of direct materials were purchased and used in production?

Direct Materials Quantity Variance = Standard Price (Standard Quantity - Actual Quantity)

Actual Quantity = Direct Materials Quantity Variance / Standard Price + Standard Quantity

Actual Quantity = 32,000/16 + 608,000/16 = 40,000 meters

3. What was the actual cost per meter of material?

Direct Materials Price Variance = Actual Quantity (Standard Price - Actual Price)

Actual cost per meter = - Direct materials price variance / Actual quantity + Standard Price

Actual cost per meter = $640,000-$11,600=$628,400

Actual cost per meter = $628,400/$40,000=$15.71 per meter

4. How many actual direct labor-hours were worked during the period?

Efficiency variance = Standard direct labor rate (Standard direct labor hours - Actual direct

labor hours)

Actual direct labor hours = - Efficiency variance/Standard direct labor rate + Standard

direct labor hours

$285,000+$15,000=$300,000

$300,000/$15=$20,000

20,000 Direct labor hours

5. What was the actual rate per direct labor-hour?

Labor price variance = Actual labor hours ( Standard Labor rate - Actual labor rate)

$300,000+$4,000=$304,000

$304,000/20,000=$15.2

6. How much actual variable manufacturing overhead cost was incurred during the period?

Variable manufacturing overhead variance = Standard rate - Actual rate

AQ*SP = 20,000*$9=$180,000

$180,000-$4,000=$176,000

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CASE #3:

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Required:

1. Without regard to costs, identify the advantages to Mobile Seating Corporation of

continuing to obtain covers from its own Greenville Cover Plant.

One benefit of continuing to obtain covers from its own Greenville Cover Plant would be to

avoid the obligatory $800,000 cost to assist employees who lost their jobs in recovering

and/or securing new jobs. Mobile Seating Corporation may also avoid costs related to the

$700,000 figure associated with employee pension plans if they choose to retire after the

plant closes. The corporation would also be able to continue reaping the financial rewards

of providing the seat covers instead of settling for the $2 million salvage value of the

equipment in the plant, assuming the profit gained by operating is more than the money

gained by salvaging equipment due to closing the plant.

2. Mobile Seating Corporation plans to prepare a financial analysis that will be used in

deciding whether or not to close the Greenville Cover Plant. Management has asked you to

identify:

a The annual budgeted costs that are relevant to the decision regarding closing the plant

(show the dollar amounts).

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Relevant Costs

Materials: $8,000,000

Direct Labor: $670,000

Supervision $400,000

Indirect Plant $1,900,000 9,000,000

Differential pensions expense ($1,600,000 - $700,000)

$900,000

Total annual relevant costs $17,900,000

b The annual budgeted costs that are not relevant to the decision regarding closing the

plant and explain why they are not relevant (again show the dollar amounts).

Depreciation---Equipment cost: $1,300,000

Depreciation---Building cost: $2,100,000

Continuing pension cost: $700,000

Plant manager and staff: $600,000

Corporate expenses: $1,700,000

Total annual continuing costs: $6,400,000

Depreciation costs are irrelevant because even if the plant closes or remains in operation

the equipment and the building are naturally getting older (sunk costs). Annual pension

continues whether the plant continues to operate or not. Plant manager and staff are not

relevant because they would continue to work with other plants that are remaining. The

corporate expenses are fixed costs outside of the plant that remain regardless of whether

the plant is closed or not.

c Any non recurring costs that would arise due to the closing of the plant and explain how

they would affect the decision (again show any dollar amounts).

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Orders termination charges on canceled material orders of $8,000,000 * 25% = $2,000,000

Employment assistance = $800,000

Total nonrecurring costs = $2,000,000 + $800,000 = $2,800,000

The two costs that were non-recurring that arose from closing the plant included

termination charges on canceled material orders and employment assistance. If they closed

the plant, then they would have to incur a total cost of $2,800,000, but there are also

benefits to this decision, as they are now able to salvage their equipment and buildings for

$2,000,000.

3. Looking at the data you have prepared in (2) above, should the plant be closed? Show

computations and explain your answer.

First Year Other Years

Cost of purchasing the covers outside

-$21,000,000 -$21,000,000

Annual costs avoided by closing the plant

$17,900,000 $17,900,000

Cost of closing the plant -$2,800,000

Salvage value of buildings and equipment

2,000,000

Net advantage (disadvantage) of closing the plant

-$3,900,000 -$3,100,000

No, the plant should not be closed. The corporation would incur a loss of $3,900,000 for the

first year, and $3,100,000 over many years to come. The money that they gain from salvage

does not fully cover the amount of money they lose from closing the plant.

4. Identify any revenues or costs not specifically mentioned in the problem that Mobile

Seating Corporation should consider before making a decision.

There are multiple revenues and costs that should be considered that may include: supplier

prices in the future, employees that may be affected by closing a plant, tax implications, and

other costs of closing the plant, and lost production and revenue.

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