Académique Documents
Professionnel Documents
Culture Documents
Establishing the
Target Price
Production
design and
value
engineering
Concept
development
Planning
and market
analysis
Target
price
Profit
margin
Target
cost
Production
and
continuous
improvement
Organizational Impact
Positives
Customer focus
Cross-functional
integration
Open sharing of
information
Better process
understanding
Negatives
Too much customer
focus
Potential
organizational conflict
Too much pressure to
attain targets
Longer development
times
Activity Area
Cost-Allocation Base
Cost-Allocation Rate
Material handling
Parts
Rs. 0.80
Lathe work
Lathe turns
Rs. 0.40
Milling
Machine-hours
Rs. 40.00
Grinding
Parts
Rs. 1.60
Testing
Units tested
Rs. 30.00
Information gathering technology has advanced to the point at which the data necessary
For budgeting in these five activity areas collected automatically.
Two representative jobs processed under the ABC system at the facility in the most recent
Period had the following characteristics.
Particulars
Job 410
Job 411
Rs. 9700
Rs. 59,900
Rs. 750
25
375
500
2,000
20,000
60,000
150
1050
10
200
Concept Check-Variance
Pharout company uses a standard cost system. Job 822 is for the
manufacturing of 500 units of the product P521. The companys
standards for one unit of product P521 are as follows:
Quantity
Price ($)
Direct material
5 ounces
2 per ounce
Direct labour
2 hours
10 per hour
The job required 2,800 ounces of raw material costing $ 5880. An unfavorable
labour rate variance of $ 250 and a favorable labour efficiency variance of $100
also were determined for this job.
Determine the direct material price variance for job 822 based on actual
quantity.
Determine the direct material quantity variance for job 822.
Determine the actual quantity of direct labour hours used in job 822 based on
the actual quantity of materials used.
Determine the actual labour costs incurred for job 822.
Concept Check-Variance
Each unit of job Y703 has standard requirements of 5 pounds of raw
material at a price of $ 100 per pound and 0.5 hour of direct labour at
$12 per hour. To produce 9,000 units of this product, Job Y703
actually required 40,000 pounds of the raw material costing $97 per
pound. The job used a total of 5,000 direct labour hours costing total
of $60,000.
Determine the material price and material quantity variance for job
Y703.
Assume that the material used on this job were purchased from a
new supplier. Would you recommend continuing with this new
supplier? Why or why not?
Determine the direct labor rate and direct labor efficiency
variance.
Concept Check-Variance
Assembly of product P13 requires one unit component X, two units of
component Y, and three units of component Z. Job J372 produced 220
units of P13. The following information pertains to material variances
for this job, analyzed by component:
X
Price Variance
160 U
120 F
192 U
Quantity Variance
168 U
100 U
84 F
The actual material price were $0.30 more, $0.20 less, and $0.50 more
per unit of components X,Y and Z respectively than their standard
material price per unit.
Determine the number of material units consumed of each type of
component.
Determine the standard materials price per unit of each type of
component.
XL1
200,000
10.00
4.00
2.00
2.00
0.20
XL2
200,000
14.00
4.50
3.00
3.00
0.35
Given the capacity constraint, determine the production levels for the
XL3
200,000
12.00
5.00
2.50
2.50
0.25
Three products that will maximise profits.
If the company authorizes overtime in order to produce more units of XL3, direct
labour costs per unit will be higher by 50% because of the Overtime premium.
Variable support costs and material costs per unit will be same for over time
production as regular production. Is it orthwhile to go for operating overtime.
(a).
Sales price
Direct materials
Direct labor
Variable support
Unit contribution margin
Machine hours per unit
Contribution margin per machine hour
XLl
XL2
XL3
$10.00
(4.00)
(2.00)
(2.00)
$2.00
0.20
$10.00
$14.00
(4.50)
(3.00)
(3.00)
$3.50
0.35
$10.00
$12.00
(5.00)
(2.50)
(2.50)
$2.00
0.25
$8.00
Products XLl and XL2 should be produced first because they have a higher
contribution margin per machine hour. Maximum production of these two products
requires 110,000 machine hours:
XL1: 200,000 units
hours
Therefore, a balance of 10,000 120,000 110,000 machine hours are available for
XL3 production, which is sufficient for 40,000 units of XL3 (10,000 machine hours
0.25 machine hours).
Optimal Production Levels:
XL1: 200,000 units; XL2: 200,000 units, XL3: 40,000 units
(b) Under the current capacity constraint, Excel Corporation cannot meet all of XL3s demand. If
additional capacity becomes available, it can produce more units of XL3. To determine whether it is
worthwhile operating overtime, Excel needs to analyze the contribution margin of XL3 when operating
overtime.
XL3
$12.00
Sales price
Direct materials
$5.00
Direct labor
3.75*
Variable support
2.50
Unit
contribution
* 3.75 margin
2.50 150%
11.25
$0.75
Because the unit contribution margin of XL3 using overtime is positive, it is worthwhile operating overtime.
Degree of Operating
Leverage = Contribution
Margin/ Operating
Income