Summary The management of Cotter Company, Inc. realized that its sales were subject to seasonal variations. However, they projected that for the year as a whole the sales volume would equal the production volume, using a stand costing system. They have hired our HKS consulting firm, to analyze their production cost variances to provide p rovide their managers with useful insight in controlling the various organizational elements that affect the performance of the production function. Analysis 1. There are several assumptions that can be made mad e for the $27,000 loss in January compared to the $20,000 profit that was expected. The first thing to consider is that January is the first month that Cotter Company, Inc. started its operations. When starting a new business it can be expected that they will have a large amount of unfavorable variances in the beginning. In the long run, we believe the company will become more stable and will gain a larger sales market as the business is promoted and an d expanding. This variance also could come from the fact they used standard costs and did not calculate the seasonal variances that they have already realized are part of their business. Therefore, they could have a loss in January, but make up for this loss in a more favorable month for their product. 2. Cotter Company has asked to find the point where they earn exactly zero profit, which is also known as the break-even point. We found their break-even point to be 155,556 units. We are to assume the selling price of their product is $1 per unit. The annual annu al budget shows that their prime costs are 40% of their sales and variable v ariable production overhead is equal to 25% of prime costs. Therefore, the variable production overhead is rate is 10% of the sales, and the variable selling and general expenses rate is 5%. To figure out the fixed production overhead and fixed selling and general expenses for the month of January we divided their yearly amounts by b y 12 months, which gives us $50,000 $50, 000 for fixed production overhead and $20,000 for fixed selling and general expenses. If we assume that X is the production volume, the equation would look like: X - 0.4X - 0.1X - 0.05X - 50,000 - 20,000 = 0 X = 155,556 As a result, Cotter needs to sell 155,556 units in order to break even. 3. Based on the information given for budgeted budgeted and actual data, we found that Cotter’s January production volume was 150,000 units. un its. It is stated that the annual production volume is equal to the annual sales volume in units. To find the sales volume in units, we took the sales volume and divided it by the selling price ($2,400,000 / $1), which equals 2,400,000 units. We then divided this by twelve months to find the standard standard monthly sales volume (2,400,000 / 12), which equals 200,000 units. We then had to find the overhead rate by using this equation:| OH rate = Total fixed overhead cost per period + (Variable overhead cost per unit * Standard volume)
Standard volume
Trusted by over 1 million members
Try Scribd FREE for 30 days to access over 125 million titles without ads or interruptions! Start Free Trial Cancel Anytime.
Trusted by over 1 million members
Try Scribd FREE for 30 days to access over 125 million titles without ads or interruptions! Start Free Trial Cancel Anytime.
Using the information given and calculated previously, we found an overhead rate of .35. ($600,000 / 12) + [($240,000 / 2,400,000) * 200,000] = $50,000 + $20,000 = $70,000 = .35 200,000 200,000 200,000
Next, we used the budgeted and absorbed cost equations along with the volume variance to find the actual production volume. To solve for actual volume (x), we found that the volume variance equals absorbed costs minus budgeted bud geted costs for the month: (12,500) = .35x – .35x – (50,000 (50,000 + .1x) x = 150,000 units 4. We found that Cotter has an ending inventory of 10,000 units. Assuming that January was Cotter’s first month of operation there is no beginning inventory. During the month, their production volume was 150,000 units. January sales equaled $140,000, which divided by the selling price of $1 means that they sold 140,000 units. The ending finished good inventory can be calculated by: 150,000 – 150,000 – 140,000 140,000 = 10,000 units 5. We found Cotter Company’s actual production overhead costs for January to be $52,500. We calculated this by using our actual units produced produ ced multiplied by our overhead rate: 150,000 X .35 = $52,500 This shows us that for the month of January their actual overhead costs was less than what they had budgeted. 6. For Cotter Company, their prime costs were direct materials and direct labor. The direct material cost variance can be split up into two components; the material usage variance and material price variance. The material usage variance looks at the difference between the actual quantity of material used and the th e standard quantity of material. The material price variance then looks at the difference between the standard price used and the actual price the materials cost. The direct labor variance is calculated like the direct materials materials variance and is split into an efficiency variance and a rate variance. The efficiency variance is the difference between the standard input inp ut time and the actual input inpu t time. The rate variance is the difference in the standard hourly hourl y rates and the actual hourly hou rly rate. We used each of these formulas in calculating the variances: (Further detail can be seen in Exhibits one and two) Direct Materials Variances: Usag sage:
110,00 ,000 X $.1 $.10 0 = 11,00 ,000 (F) (F) $
Trusted by over 1 million members
Try Scribd FREE for 30 days to access over 125 million titles without ads or interruptions! Start Free Trial Cancel Anytime.
Exhibits: 1. Direct Materials: Direct Materials
Standard
Unit nit Pric Price e Phys Physic ica al Qua Quant ntit ityy Tota otal Cos Costt $ 0.10 500,000* $ 50,000
Actual $ Difference $
0.09 0.01
390,000 110,000
$ $
35,100 14,900
*200,000units x $2.5/lb 2. Direct Labor: Ti me
Direct Labor Labor Hours
Standard $9/hour Actual $11.36/hour Difference $2.36/hour
Total Cost 3,333 2,500 833
$ $ $
30,000 28,400 1,600
