Question

The El Paso Division of the Tejas Fence Co. is currently operated as a cost center. The following standard costs have been determined for the production of one metal gate at the El Paso Division.
These costs have been determined using a normal production quantity of 55,000 gates per month. All gates are transferred to the Amarillo Division, where they are hung on posts, painted with rustproof paint, and sold to distributors.
During October 2009, ElP a so Division produced 50,000 gates and incurred the following costs.
Pipe (2,590,000 feet purchased and used)............................... $1,813,000
Direct labor (120,000 hours) ................................................. 1,086,000
Indirect material........................................................................ 40,000
Indirect labor............................................................................ 25,000
Depreciation............................................................................ 155,000
Utilities...................................................................................... 52,500
Maintenance............................................................................... 17,500
Other........................................................................................... 55,000
Required:
(a) What is the standard total cost for October’s production? What was the total actual cost of production for October? Based on these figures, did the manager of the division do a good job in controlling costs?
(b) Prepare a line-by-line comparison of standard and actual costs for October. Based on these figures, what concerns might be expressed about the manager’s ability to control costs?
(c) Assume that top management of Tejas Fence Co. has decided to establish a ‘‘selling price’’ of $85 for the gates from ElP a so Division to the Amarillo Division. One of the reasons for the increased usage of pipe during October was that the pipe purchased was of slightly inferior quality than the pipe normally used. Because of this, Amarillo Division refused to ‘‘pay’’ $85 for the gates and established a price of $80 per gate. Calculate the revenue variances for El Paso Division.
(d) A ‘‘selling price’’ between divisions is referred to as a transfer price. Use logic and library or Internet resources to discuss how and why such a price might be set.


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  • CreatedMarch 27, 2015
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