Reference no: EM131760748
Problem - The board of directors recently evaluated the performance of Raj, the manager of the Rolf Wheel division that assembles Rolf Wheels. The assessment of his performance was negative based on an unfavorable deviation from predicted costs in his division. Upon hearing of his negative evaluation, Raj called a meeting with the board to plead his case that the unfavorable deviation in performance was a result of an increase in the cost of the hub, spoke and rim kit purchased from a third party (a direct material).
Variable overhead (machine maintenance and operating costs) is allocated on the basis of machine hours. Fixed overhead (rent) is allocated on the bases of estimated production units. Rolf Wheels uses the following per unit standards based on historical data from previous years:
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Cost
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Standard Rate
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Direct materials (hub, spoke, and rim kit)
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$50 per wheel
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Direct Labor
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4 hours per wheel at $10 per hour
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Machine Hours
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3 machine hours per wheel
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Fixed Overhead (Rent)
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$6 per wheel
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Variable Overhead (Machine Maint.)
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$1.5 per machine hour
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Note that all wheels are the same, on average.
Raj expected to produce 4,000 wheels in 2012, but actually produced 3,000 wheels. Rolf sold 2,500 of the wheels produced in Raj's division for $350 each. Net income is based on Full absorption costing. The standard cost of a hub, spoke and rim kit is $50, but the actual cost of a hub, spoke and rim kit was $65. Raj's division actually incurred the following costs in 2012:
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Actual Cost
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Direct Materials (hub, spoke and rim kit )
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$195,000
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Variable overhead (Machine maintenance)
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$13,000
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Fixed Overhead (Rent)
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$24,000
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Variable Selling and Administrative
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$77,500
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Direct Labor
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$115,000
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The machines actually operated for 10,000 hours.
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