Midterm Exam
Q1. Hernandez Industries manufactures shampoo.
Joints costs incurred total $30,000 for a standard production run.
A standard production run generates 10,000 gallons of Everyday Shampoo and 6,000 gallons of Specialty Shampoo.
Everyday Shampoo sells for $9/gallon and Specialty Shampoo sells for $15/gallon
Currently all Specialty Shampoo is further processed into 7,000 gallons of Top Dollar Shampoo that sells for $21/gallon. (Further processing, at a cost of $37,000, involves adding a top secret, special ingredient and doing some additional refinement.)
a. How should the $30,000 of joint product costs be allocated under the Net Realizable Value Method?
b. Based on profitability only, should Hernandez continue to convert all Specialty Shampoo into Top Dollar Shampoo? Show calculations to support your answer.
Q2. Rey Enterprises has just opened a new division (Weatherly). One of their other divisions (Brinkley) makes a part that could be used in one of Weatherly's products.
You have the following information:
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Brinkly Information:
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Production Capacity
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50,000
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Parts per year
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Currently selling
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40,000
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Parts per year
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Selling price
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$60
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Per part
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Variable costs
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Manufacturing
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$30
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Per part
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Selling
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$2
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Per part
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Fixed costs
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$450,000
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Per year
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Weatherly Division:
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Quantity needed
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20,000
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Parts per year
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Price from outside supplier
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$48
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Per part
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Rey Enterprises is unwilling to increase capacity. All variable selling costs would be avoided on an intra-company transfer.
a. What's the maximum amount, per unit, Weatherly would be willing to pay Brinkly?
b. What's the minimum amount, per unit, Brinkly would be willing to charge Weatherly?
c. What's the overall impact (financially) on Rey Enterprises if the parts are made internally?
Q3. Thomas Company uses a standard costing system.
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STANDARDS PER UNIT
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Quantity
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Price
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Direct material
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3 yards
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$1.80 per yard
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Direct labor
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1.5 hours
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$15 per hour
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ACTUALS
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Quantity
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Dollars spent
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DM purchased
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4,000 yards
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$6,600
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DM used
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3,900 yards
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DL worked
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1,890 Hours
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$27,405
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Units produced
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1,250
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Thomas calculates the material quantity variance when materials are purchased.
SHOW YOUR WORK. INDICATE WHETHER THE VARIANCE IS FAVORABLE OR UNFAVORABLE.
a. What is the materials quantity variance?
b. What is the materials price variance?
c. What is the labor rate variance?
d. What is the labor efficiency variance?