Question

1. Compute the cost of a single preschool class and a single birthday party using the current cost system.

Introduction Tots R Us (TRU) had been running a small, for-profit preschool program for young children between the ages of two and four for several decades. TRU was one of several privately run programs in the suburban Boston area. For each of the three age groups i.e., two-, three- and four-year olds), there were two classes per day for a total of six classes in the facility each day. The classes were held both in the morning and in the afternoon, five days a week between September and June; there were approximately 200 days (40 weeks), or 1,200 class meetings, per year. Only about one-third of TRU's local competitors offered classes during the summer months. The morning classes ran from 9:00 a.m. to noon, and the afternoon meetings ran from 1:00 p.m. to 4:00 p.m. Lunch was not served in either class. However, each class served a snack to the children. Class size varied from nine to 15 students per class. Although there was a lot of pressure from parents to reduce class sizes, a recent article in an industry newsletter showed that, given current demographics, the market for such programs could increase by 10% a year for the next five years. The year before, a parent suggested that the school begin hosting birthday parties on the weekend. Since TRU's three classrooms were empty during this time, it seemed like a good use of the space and could generate additional revenue. Over the past year, the school had managed to quickly build a sizable side business hosting birthday parties. Approximately 150 parties were held in the school's three classrooms on Saturdays and Sundays throughout the year. The parties were typically attended by 10-20 children and ran for approximately four hours. The four-hour running time included the time necessary to set up and clean up the facility. For this service, the school's main competitors consisted of children's gyms, arts and crafts stores, and museums. Each had been offering specialized birthday parties for many years and charged very high prices. As a result, TRU was able to significantly underprice these other firms while maintaining a very high profit margin. In fact, due to the success of the birthday parties over the past year, TRU wanted to expand this business. TRU was considering switching the bulk of its advertising campaign from one that was designed to build general awareness of the school to one that was specifically directed at promoting the birthday party business.

Answer 1

Requirement 1
Product Finished :
Units of Finished products Manfactured		1175	Units
Requirement 2
Standard Finished product for direct material used :
Quantity of Direct materials used (A)	4900	lbs
Standard direct materials per unit of finished product (B)	4	lbs
Standard Finished product for direct material used(A/B)		1225	Units
Requirement 3
Deficiency of Finished products for materials used :
Units of Finished products Manfactured		1175
Standard Finished product for direct material used		1225
Deficiency of Finished products for materials used		50	Units
Requirement 4
Standard cost for Direct Materials :
Direct materials quantity variance—unfavorable (A)		$   1,140.00
Deficiency of Finished products for materials used (B)		50	Units
Standard cost for Direct Materials (A/B)		$        22.80