How much will internal failure costs change if the internal product failures are reduced by 1/3 with the new procedures? How much do external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories.
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.
Question 3.3
Sneaky Snacky Squirrel Inc. has a budget of $900,000 in 2021 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,000 in variable costs. The new method will require $40,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000 units.
Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories.
Required
- What is the net change in the budget of prevention costs if the procedures are automated in 2021? Will management agree with the changes?
- How much will internal failure costs change if the internal product failures are reduced by 1/3 with the new procedures?
- How much do external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories.
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