GoodHealth Inc. manufactures two types of medical devices, A and B, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $710,000 and 20,000 hours respectively. Information about the company's product is as follows: Product A Estimated production volume, 2500 units Direct material cost, $30 per unit Direct labor per unit, 3 hours at $15 per hour Product B Estimated production volume, 3125 units Direct material cost, $45 per unit Direct labor per unit, 4 hours at $15 per hour GoodHealth's overhead of $710000 can be identified with 3 major activities: order processing ($120000), machine processing ($500000) and product inspection ($90000) These activities are driven by the number of orders processed, machine hours worked and inspection hours, respectively. Relevant data for these activities is as follows: ORDERS PROCESSED MACHINE HOURS WORKED INSPECTION HOURS A 350 23000 4000 B 250 27000 11000 Total 600 50000 15000 Management is very concerned about declining profitability, despite a healthy increase in sales volume. The decrease in income is especially puzzling because teh company recently a large renovation during which new, highly automated machines were installed; this machinery was expected to produce significant operating efficiencies. 1. GoodHealth's selling prices are based heavily on cost, a. By using direct application hours as an application base, which product is over costed and which product is under costed? Calculate the amount of cost distortion for each product. b. Is it possible that overcosting and undercosting (the cost distortion) and teh subsequent determination of selling prices are contributing the the company's financial difficulties? Explain.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
GoodHealth Inc. manufactures two types of medical devices, A and B, and applies
Product A
Estimated production volume, 2500 units
Direct material cost, $30 per unit
Direct labor per unit, 3 hours at $15 per hour
Product B
Estimated production volume, 3125 units
Direct material cost, $45 per unit
Direct labor per unit, 4 hours at $15 per hour
GoodHealth's overhead of $710000 can be identified with 3 major activities: order processing ($120000), machine processing ($500000) and product inspection ($90000) These activities are driven by the number of orders processed, machine hours worked and inspection hours, respectively. Relevant data for these activities is as follows:
| ORDERS PROCESSED | MACHINE HOURS WORKED | INSPECTION HOURS | |
| A | 350 | 23000 | 4000 |
| B | 250 | 27000 | 11000 |
| Total | 600 | 50000 | 15000 |
Management is very concerned about declining profitability, despite a healthy increase in sales volume. The decrease in income is especially puzzling because teh company recently a large renovation during which new, highly automated machines were installed; this machinery was expected to produce significant operating efficiencies.
1. GoodHealth's selling prices are based heavily on cost,
a. By using direct application hours as an application base, which product is over costed and which product is under costed? Calculate the amount of cost distortion for each product.
b. Is it possible that overcosting and undercosting (the cost distortion) and teh subsequent determination of selling prices are contributing the the company's financial difficulties? Explain.
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