ACCT2102 Lecture Notes - Lecture 9: Controllability

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bluekoala643

27 Jun 2018

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Accounting

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ACCT2102

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All

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ACCT2102: Tutorial Notes for responsibility accounting

1) in the manufacturing plant, the production manager is not happy with the motors that the

purchasing manger has been purchasing. In May, the production manager stops requesting motors

from the supply warehouse and starts purchasing them directly from a different manufacturer.

Actual materials costs in May are higher than budgeted.

Responsibility lies on: Production Manager

Controllability (of the cost) lies on: Purchasing Manager

The purchasing manager has control of the cost to the extent that he/she is doing the purchasing and can seek

or contract for the best price. The production manager should work with the purchasing manager. They can,

together, possibly ﬁnd a combination of better motor and better price for the motor than the production

manager has found.

2. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation

reveals a utility rate hike in effect that was not ﬁgured into the budget.

Responsibility: Production Manger

Controllability: External Forces

In the case of the utility rate hike, the production manager would be responsible for the costs, but they are

hard to control. The rates are ﬁxed by the utility company, and there is usually no choice of which utility

company to use. The production manager can try to reduce waste (turn off lights when not in use, turn of

machines when not running, don’t leave water running, etc.) but other than conservation measures, the

manager has no say in the utility rates. The production manager might consider purchasing more energy-

efﬁcient machines.

3. Gasoline costs for each van are budgeted based on the service area of the van and the amount of

driving expected for the month. The driver of van 3 routinely has mostly gasoline costs exceeding the

budget for van 3. After investigating, the service manager ﬁnds that the driver has been driving the

van for personal use.

Responsibility: Van 3 driver

Controllability: Service Manager

The driver of each van has the responsibility to stay within budget for the costs of the service vehicle. The

service manager should set policies to which the drivers must adhere, including not using the van for

personal use. The service manager could install GPS in the vans to make sure they are where they are

supposed to be, and can also ﬁre the driver of Van 3 for misusing company property. (Using the van for

personal driving affects the tax deductibility of the van for the ﬁrm as well).

4. Regency Mall, one of the Prestige’s fountain service customers, calls the service people only for

emergencies and not for routine maintenance. Thus, the materials and labor costs for these service

calls exceeds the monthly budgeted costs for a contract customer.

Responsibility: Prestige’s service manager

Controllability: Regency manager

Because Regency has a maintenance contract with Prestige, both the mall manager and Prestige’s service

manager should work together to make sure routine maintenance is scheduled for the mall’s fountains. This

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Document Summary

1) in the manufacturing plant, the production manager is not happy with the motors that the purchasing manger has been purchasing. In may, the production manager stops requesting motors from the supply warehouse and starts purchasing them directly from a different manufacturer. Actual materials costs in may are higher than budgeted. Controllability (of the cost) lies on: purchasing manager. The purchasing manager has control of the cost to the extent that he/she is doing the purchasing and can seek or contract for the best price. The production manager should work with the purchasing manager. They can, together, possibly nd a combination of better motor and better price for the motor than the production manager has found: overhead costs in the manufacturing plant for june are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not gured into the budget.

Related Questions

INSOURCING/OUTSOURCING

Rentex Motor Drives is a division of a large U.S. manufacturer of industrial machinery and equipment. The parent company makes circulating pumps, high-capacity cooling fans, and compressors. Rentex Motor Dnves manufactures the electric motors that power much of this machinery and equipment. Rentex has a world-wide customer base and sells motors not only to its parent company, but also to other customers across the globe â some of whom are direct competitors of Rentex's parent company.

Recently the company developed an electric motor assembly that will be a key component in a new circulating pump being manufactured and sold by one of Rentex's sister companies. The circulating pump will be sold to the manufacturers of oil-fired burners used for home heating. Each circulating pump will require a single electric motor assembly.

Rentex must now decide whether or not it should outsource or internally manufacture the motor assembly. To help with the analysis, a cross-functional team has been formed. Members of the team have been assigned the responsibility of analyzing from a total cost perspective whether or not Rentex should outsource or internally manufacture the electric motor assembly.

A European supplier that produces motors for a number of Fortune 500 companies has submitted a detailed proposal to Rentex for building the subassembly. However, confounding this analysis is an internal bias against outsourcing the motor, particularly since there is a strong union presence within Rentex's facilities. Furthermore, management at Rentex believes that the electric motor assembly design might be adapted in the future to enable its use in new applications in the chemical processing industry, thereby representing a future growth opportunity.

As an initial step the cross-functional team has gathered the required information to guide the firm's decision process.

Outsourcing Costs

Unit Costs: Rentex's marketing group estimates that volumes for the motor assembly are:

Year 1	5,500 units
Year 2	6,250 units
Year 3	7,000 units

The European supplier of electric motors has quoted a price of $105 per unit, FOB ex-works, ^1&2 with 5% price decreases per year for Year 2, and again for Year 3. Remember â the Year 3 price decrease is based off the Year 2 figure). The team assumes these price decreases are due to productivity improvements from higher volumes, the positive effects of learning at the supplier, and greater operating efficiencies. These prices have not been negotiated and the purchasing team believes that negotiation may lead to a lower unit price. If the new line of circulating pumps is successful, it is estimated that the life of the product cycle will be six years, reaching a peak of 8,000 units in Year 4, with a 10% reduction per year in volume after that as the product reaches the end of its life. It is estimated that the product will be completely phased out at the end of Year 6.

Shipping, handling, and receiving: Shipping, handling, and receiving costs at the buyer are estimated to be $15 per unit and should remain constant.

Tooling: The supplier has stated that it will cost $30,000 to fabricate the tooling and fixtures required to produce the electric motor. Rentex's policy is to assume ownership of tooling, so Rentex is responsible for the tooling costs. It's estimated that the tooling will have a usable life span of at least 6 years, with proper preventive maintenance (which the supplier has agreed to perform at no additional cost). The purchasing team plans to allocate the tooling costs evenly over the first three years.

Quality-related costs: The team has decided to include quality-related costs in its outsourcing calculations. During the investigation of the supplier, a team member collected data on the process that would likely produce the motors. The team estimates that the supplier's defect level, based on process measurement data, is 1,000 parts per million (ppm). Rentex's quality assurance department estimates that each supplier defect will cost Rentex $1,750 in direct nonconformance costs. Unfortunately, with quality problems there are always hidden costs that are difficult, if not impossible, to model.

Supplier capacity/safety stock: The team has concluded the supplier has available capacity to satisfy Rentex's current and near-term requirements for the motor. To mitigate supply chain risk, Rentex plans to hold one month's worth of the assembly as safety stock. The team assumes that this is a new cost each year.

Insourcing Costs

Rentex's cost engineering department has provided the following per unit cost estimates for internally manufacturing and assembling the motors during Year 1 of a three-year planning cycle:

Direct labor	$19.75	Cost of receiving components	$4.25
Direct materials	$35.25	Supplemental factory supplies	$2.15
Transfer profit ³	$21.75

Initial tooling and line modification costs: The start-up costs (including tooling) to modify existing production lines and equipment to accommodate production of the new motor will be $42,000, which will be spread out evenly over the first three years.

Depreciation expense: Depreciation expense on production equipment and tooling is considered a noncash item and is not included in the insourcing analysis.

Engineering design costs: Engineering costs to design, develop, and improve the production process will be $75,000 and will be spread evenly across the first three years of production.

Factory and corporate overhead: Overhead is allocated at 180% of direct labor costs.

Cost increases: In Years 2 and 3, management expects a 2% annual increase in direct material costs and a 3% increase in direct labor rates. (This increase is compounded so the increase in Year 3 costs is based off Year 2 cost figures).

Quality-related costs: The team estimates that Rentex's finished electric motor quality defects to be 2,500 ppm. Rentex's quality assurance department estimates that each defect costs the company $1,500 in nonconformance costs.

Preventive maintenance costs: Rentex's maintenance manager estimates that preventive maintenance of the production equipment required to produce the motors will cost $15,000 in Year 1, and will increase at the rate of 3% per year thereafter.

NOTES:

1. FOB (free on board) vessel means the supplier is responsible for transportation charges to the port in China.

2. Buyer is responsible for the cost and delivery of goods from the seller's location.

3. Transfer profit is the internal profit from selling to another unit in the company. This company views its units as profit centers, so profit must be included. Furthermore, the supplier has included profits in its quoted price.

Calculate the total cost per year for insourcing and outsourcing. Also calculate the cost per unit.

lilacclam743

INSOURCING/OUTSOURCING

As an initial step the cross-functional team has gathered the required information to guide the firm's decision process.

Outsourcing Costs

Unit Costs: Rentex's marketing group estimates that volumes for the motor assembly are:

Year 1	5,500 units
Year 2	6,250 units
Year 3	7,000 units

Shipping, handling, and receiving: Shipping, handling, and receiving costs at the buyer are estimated to be $15 per unit and should remain constant.

Insourcing Costs

Rentex's cost engineering department has provided the following per unit cost estimates for internally manufacturing and assembling the motors during Year 1 of a three-year planning cycle:

Direct labor	$19.75	Cost of receiving components	$4.25
Direct materials	$35.25	Supplemental factory supplies	$2.15
Transfer profit ³	$21.75

Depreciation expense: Depreciation expense on production equipment and tooling is considered a noncash item and is not included in the insourcing analysis.

Engineering design costs: Engineering costs to design, develop, and improve the production process will be $75,000 and will be spread evenly across the first three years of production.

Factory and corporate overhead: Overhead is allocated at 180% of direct labor costs.

NOTES:

1. FOB (free on board) vessel means the supplier is responsible for transportation charges to the port in China.

2. Buyer is responsible for the cost and delivery of goods from the seller's location.

Calculate the total cost per year for insourcing and outsourcing. Also calculate the cost per unit.

goldcat206

Miller Toy Company manufactures a plastic swimming pool at itsWestwood Plant. The plant has been experiencing problems as shownby its June contribution format income statement below:

	Budgeted		Actual
Sales (4,000pools)	$	250,000	$	250,000

Variableexpenses:
Variable cost of goods sold*		66,760		81,190
Variable selling expenses		22,000		22,000

Total variableexpenses		88,760		103,190

Contributionmargin		161,240		146,810

Fixed expenses:
Manufacturing overhead		63,000		63,000
Selling and administrative		88,000		88,000

Total fixedexpenses		151,000		151,000

Net operating income(loss)	$	10,240	$	(4,190)

*Contains direct materials,direct labor, and variable manufacturing overhead.

Janet Dunn, who has just been appointed general manager of theWestwood Plant, has been given instructions to âget things undercontrol.â Upon reviewing the plantâs income statement, Ms. Dunn hasconcluded that the major problem lies in the variable cost of goodssold. She has been provided with the following standard cost perswimming pool:

	StandardQuantity or Hours	Standard Price or Rate		Standard Cost
Directmaterials	3.8pounds	$	2.40 per pound	$	9.12
Direct labor	0.7 hours	$	7.90 per hour		5.53
Variablemanufacturing overhead	0.6hours*	$	3.40 per hour		2.04

Total standardcost				$	16.69

*Based on machine-hours.

During June the plant produced 4,000pools and incurred the following costs:

a.	Purchased 20,200 pounds of materials at a cost of $2.85 perpound.
b.	Used 15,000 pounds of materials in production. (Finished goodsand work in process inventories are insignificant and can beignored.)
c.	Worked 3,400 direct labor-hoursat a cost of $7.60 per hour.
d.	Incurred variable manufacturing overhead cost totaling $10,260for the month. A total of 2,700 machine-hours was recorded.

It is the companyâs policy toclose all variances to cost of goods sold on a monthly basis.

Required:

1.	Compute the following variancesfor June:

a.	Materials price and quantity variances. (Indicate theeffect of each variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zerovariance).)

b.	Labor rate and efficiency variances. (Indicate theeffect of each variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zerovariance).)

c.	Variable overhead rate and efficiency variances. (Do notround your intermediate calculations. Indicate the effect of eachvariance by selecting "F" for favorable, "U" for unfavorable, and"None" for no effect (i.e., zero variance).)

2.	Summarize the variances that you computed in (1) above byshowing the net overall favorable or unfavorable variance for themonth. (Input all values as positive amounts. Indicate theeffect of each variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zerovariance).)

Pick out the two most significant variances that you computed in(1) above. (You may select more than one answer. Singleclick the box with a check mark for correct answers and doubleclick to empty the box for the wrong answers.)

	Materials price variance
	Labor efficiency variance
	Variable overhead efficiencyvariance
	Labor rate variance
	Variable overhead ratevariance
	Materials quantity variance

ultramarinecoyote15

ACCT2102 Lecture Notes - Lecture 9: Controllability

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