ACCT303Chapter9

# Per meal profitable in the long run smith will have

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per meal profitable in the long run, Smith will have to find ways to either use the extra capacity or reduce Deliman’s practical capacity and the related fixed costs. 9-43

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9-40 (20 min.) Cost allocation, responsibility accounting, ethics (continuation of 9-39). 1. (See Solution Exhibit 9-39). If Deliman uses its master budget capacity utilization to allocate fixed costs in 2010, it would allocate 806,840 × \$1.75 = \$1,411,970. Budgeted fixed costs are \$1,533,000. Therefore, the production volume variance = \$1,533,000 – \$1,411,970 = \$121,030 U. An unfavorable production volume variance will reduce operating income by this amount. (Note: in this business, there are no inventories. All variances are written off to cost of goods sold). 2. Hospitals are charged a budgeted variable cost rate and allocated budgeted fixed costs. By overestimating budgeted meal counts, the denominator-level is larger, hence the amount charged to individual hospitals is lower. Consider 2010 where the budgeted fixed cost rate is computed as follows: \$1,533,000/876,000 meals = \$1.75 per meal If in fact, the hospital administrators had better estimated and revealed their true demand (say, 806,800 meals), the allocated fixed cost per meal would have been \$1,533,000/806,800 meals = \$1.90 per meal, 8.6% higher than the \$1.75 per meal. Hence, by deliberately overstating budgeted meal count, hospitals are able to reduce the price charged by Deliman for each meal. In this scheme, Deliman bears the downside risk of demand overestimates. 3. Evidence that could be collected include: (a) Budgeted meal-count estimates and actual meal-count figures each year for each hospital controller. Over an extended time period, there should be a sizable number of both underestimates and overestimates. Controllers could be ranked on both their percentage of overestimation and the frequency of their overestimation. (b) Look at the underlying demand estimates by patients at individual hospitals. Each hospital controller has other factors (such as hiring of nurses) that give insight into their expectations of future meal-count demands. If these factors are inconsistent with the meal-count demand figures provided to the central food-catering facility, explanations should be sought. 4. (a) Highlight the importance of a corporate culture of honesty and openness. Deli One could institute a Code of Ethics that highlights the upside of individual hospitals providing honest estimates of demand (and the penalties for those who do not). (b) Have individual hospitals contract in advance for their budgeted meal count. Unused amounts would be charged to each hospital at the end of the accounting period. This approach puts a penalty on hospital administrators who overestimate demand. (c) Use an incentive scheme that has an explicit component for meal-count forecasting accuracy. Each meal-count “forecasting error” would reduce the bonus by \$0.05. Thus, if a hospital bids for 292,000 meals and actually uses 200,000 meals, its bonus would be reduced by \$0.05 × (292,000 – 200,000) = \$4,600. 9-44
Collaborative Learning Problem 9-41 (50 min.) Absorption, variable, and throughput costing (1) Variable Costing April 2008 May 2008 June 2008 Revenues a \$300,000 \$300,000 \$300,000 Variable costs Beginning inventory b \$ 0 \$ 0 \$ 31,000 Variable manufacturing costs c 77,500 108,500 46,500 Cost of goods available for sale Deduct ending inventory d 77,500 0 108,500 (31,000 ) 77,500 0 Variable cost of goods sold Variable selling costs e Total variable costs 77,500 7,500 85,000 77,500 7,500 85,000 77,500 7,500 85,000 Contribution margin Fixed costs Fixed manufacturing costs

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