Utease Corporation has several production plants nationwide. A newly opened plant in Dubuque produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows. Manufacturing costs (per unit based on expected activity of 20,000 units or 44,000 direct labor hours): Direct materials (2.7 pounds at $20) $ 54.00 Direct labor (2.2 hours at $80) 176.00 Variable overhead (2.2 hours at $30) 66.00 Fixed overhead (2.2 hours at $40) 88.00 Standard cost per unit $ 384.00 Budgeted selling and administrative costs: Variable $ 4 per unit Fixed $ 1,800,000 Expected sales activity: 18,000 units at $500 per unit Desired ending inventories: 12% of sales Assume this is the first year of operations for the Dubuque plant. During the year, the company had the following activity. Units produced 19,000 Units sold 17,500 Unit selling price $ 495 Direct labor hours worked 41,300 Direct labor costs $ 3,345,300 Direct materials purchased 55,300 pounds Direct materials costs $ 1,106,000 Direct materials used 55,300 pounds Actual fixed overhead $ 1,300,000 Actual variable overhead $ 1,220,000 Actual selling and administrative costs $ 2,172,000 In addition, all over- or underapplied overhead and all product cost variances are adjusted to cost of goods sold. i. Assume that under the investment center evaluation plan the plant manager will be awarded a bonus based on ROI. If the manager has the opportunity in the coming year to invest in new equipment for $600,000 that will generate incremental earnings of $55,000 per year, would the manager undertake the project?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Utease Corporation has several production plants nationwide. A newly opened plant in Dubuque produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows.

Manufacturing costs (per unit based on expected activity of 20,000 units or 44,000 direct labor hours):


Direct materials (2.7 pounds at $20)	$	54.00
Direct labor (2.2 hours at $80)		176.00
Variable overhead (2.2 hours at $30)		66.00
Fixed overhead (2.2 hours at $40)		88.00
Standard cost per unit	$	384.00
Budgeted selling and administrative costs:
Variable	$	4	per unit
Fixed	$	1,800,000

Expected sales activity: 18,000 units at $500 per unit

Desired ending inventories: 12% of sales

Assume this is the first year of operations for the Dubuque plant. During the year, the company had the following activity.


Units produced		19,000
Units sold		17,500
Unit selling price	$	495
Direct labor hours worked		41,300
Direct labor costs	$	3,345,300
Direct materials purchased		55,300	pounds
Direct materials costs	$	1,106,000
Direct materials used		55,300	pounds
Actual fixed overhead	$	1,300,000
Actual variable overhead	$	1,220,000
Actual selling and administrative costs	$	2,172,000

In addition, all over- or underapplied overhead and all product cost variances are adjusted to cost of goods sold.

i. Assume that under the investment center evaluation plan the plant manager will be awarded a bonus based on ROI. If the manager has the opportunity in the coming year to invest in new equipment for $600,000 that will generate incremental earnings of $55,000 per year, would the manager undertake the project?

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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