Question 1 - Flexible budget planning
Like Chou, the president of Digitech Computer Service, needs your help. He wonders about the potential effects on the firm's net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2012.
Required
a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 30,000 hours of services in 2012.
b. A marketing consultant suggests to Mr. Chou that the service rate may affect the number of services hours that the firm can achieve. According to the consultant's analysis, if Digitech charges customers $75 per hour, the firm can achieve 38,000 hours of services. Prepare a flexible budget using the consultant's assumption.
c. The same consultant also suggests that if the firm raises it rate to $85 per hour, the number of service hours will decline to $25,000. Prepare a flexible budget using the new assumption.
d. Evaluate the three possible outcomes you determined in Requirements a, b, and c and recommend a pricing strategy.
Question 2 - Computing standard cost and analyzing variances
Quilter Company manufactures molded candles that are finished by hand. The company developed the following standards for a new line of drip candles:
During 2010, Quilter planned to produce 30,000 drip candles. Production lagged behind expectations, and it actually produced only 24,000 drip candles. At year-end, direct materials purchased and used amounted to 40,000 pounds at a unit price of $.54 per pound. Direct labor costs were actually $7.50 per hour and 26,400 actual hours were worked to produce the drip candles. Overhead for the year actually amounted to $132,000. Overhead is applied to products using a predetermined overhead rate based on estimated units.
Required - (Round all computations to two decimal places)
a. Compute the standard cost per candle for direct materials, direct labor, and overhead.
b. Determine the total standard cost for one drip candle.
c. Compute the actual cost per candle for direct materials, direct labor, and overhead.
d. Compute the total actual cost per candle.
e. Compute the price and usage variances for direct materials and direct labor. Identify any variances that Quilter should investigate. Offer possible cause(s) for the variances.
f. Compute the fixed cost spending and volume variance. Explain your findings?
g. Although the individual variances (prices, usage, and overhead) were large, the standard cost per unit and the actual cost per unit differed by only a few cents. Explain why?