Question

1) The standards for a product call for 2.5 pounds of a raw material that costs $6.10 per pound. Last month, 30,000 pounds of the raw material were purchased for $187,500. The actual output of the month was 9,000 units of the product. A total of 22,200 pounds of the raw material were used to produce this output.

Required:

a. What is the materials price variance for the month?

b. What is the materials quantity variance for the month?

2) The following labor standards have been established for a product:

Standard hours per unit          1.7 hours

Standard labor rate                 $11.50 per hour.


By the end of the period 37,300 units of product had been produced. To produce this output 65,000 hours had been worked at an actual cost of $780,000.

Required:

a. What is the labor rate variance for the month?

b. What is the labor efficiency variance for the month?

3) A corporation has three investment centers with the following data:                     Division                      A                                 B                                 C                          Sales                           $3,000,000                  2,500,000                    5,750,00             Assets                         1,500,000                       500,000                    2,300,000            Profit                              300,000                        25,000                     168,000        Required return                 14%                            7%                              10%

Compute the ROI in two parts for each division.   Compute the residual income for each division.

Assume each division is presented with an investment opportunity that yields a return on investment of 8%.

1. If performance is measured by ROI, which division(s) would probably accept the offer? Reject?
2. If performance is measured by residual income, which division(s) would probably accept the offer? Reject?

4) A corporation has a segment, Division A that sells a part on the outside market for $120. Its costs, based on a unit capacity of 200,000 units, are $25 variable and $45 fixed. The company has a related segment, Division B that could use the part in its own assembly operations. Division B buys the part from another supplier for $112, and it will need 40,000 units.

Required: 1) Assume division A is selling 140,000 units to outside customers.

1. From the standpoint of Division A, what is the lowest acceptable transfer price for units sold to Division B?
2. From the standpoint of Division B, what is the highest acceptable transfer price for units purchased from Division A.
3. If left to bargain freely, would you expect the division managers to voluntarily agree on a transfer of units from Division A to Division B? Give reasons.
4. From the standpoint of the entire company, should the transfer take place? Give reasons.

2) Now assume Division A is selling all its capacity to outside customers. Answer a through d under this new condition.

Answer 1

(1)

(A)

Material price variance = actual quantity purchased x (standard price - actual price)

= 30000 x ($6.10 - $6.25)

= $4500 Unfavorable

Where,

Actual price = material cost paid/units of material purchased

= $187500/30000 = $6.25

(B)

Material quantity variance = standard price x (standard quantity - actual quantity used)

= $6.10 x (22500 - 22200)

= $1830 Favorable

Where,

Standard quantity = actual output x standard quantity per unit of output

= 9000 x 2.5 = 22500 pounds