Question

In: Accounting

Your supervisor has asked you to prepare some calculations based on the company’s data and then...

Your supervisor has asked you to prepare some calculations based on the company’s data and then research publicly available similar competitor information to see how your company is performing within the industry. Your company, CarryIt Inc., produces mass quantity, inexpensive tote bags for promotional marketing purposes, which is a very competitive business.

Here is the available data for your company:

  • Labor hours .25;
  • Labor rate $11.75/hour;
  • Materials input .5 yds. fabric;
  • Materials price $1.50/yd.; and
  • Variable overhead rate of $5.00 per direct labor hour.

You are also able to find an industry profile report via a Dun & Bradstreet database that has selected data from a few other companies in similar businesses as well as some industry statistics.

Here’s the data available:

Unit Variable Cost Item Star Company GoldBag Corporation PromoTotes LLC Industry Data
Labor hours .35 .20 .30 .30
Labor rate $11.25 $11.95 $12.50 $11.65
Materials input .45 yds. .675 yds. .50 yds. .55 yds.
Materials price $1.65/yd. $1.35/yd. $1.55/yd. $1.50/yd.
Variable OH rate $6.00 per direct labor hour $5.25 per direct labor hour $4.70 per direct labor hour $5.45 per direct labor hour

In Microsoft Excel, compute the following measures:

  1. Total variable cost per unit for CarryIt, the competitors, and the industry average.
  2. What is the percentage of the total for each component (materials, labor, and variable overhead)?
  3. Assume industry data is your benchmark. What are the price and efficiency variances for direct materials and direct labor for each company?
  4. What is the percentage over standard by company and by variance?

Write your observations about how CarryIt’s performance stacks up to its competition from the benchmarking exercise, Include suggestions for areas of improvement and comments on areas where the company does well.

Solutions

Expert Solution

1. The below information is provided per company and for the industry

Information
Item Carryit Inc Star Comp Gold Bag Promotes Industry
Labour hours reqd per unit       0.2500        0.3500     0.2000      0.3000     0.3000
Labour rate per hour    11.7500      11.2500 11.9500    12.5000 11.6500
Material input required per unit - yards       0.5000        0.4500     0.6750      0.5000     0.5500
Material Price per yard       1.5000        1.6500     1.3500      1.5500     1.5000
Variable overhead rate per labour hour       5.0000        6.0000     5.2500      4.7000     5.4500

2. Basis the above, variable cost per unit is derive as per the formula mentioned

Variable cost per unit
Particulars Carryit Inc Star Comp Gold Bag Promotes Industry
Labour cost for 1 unit = labour hours/unit x rate per hour       2.9375        3.9375     2.3900      3.7500     3.4950
Material cost for 1 unit = Yards per unit x cost per yard       0.7500        0.7425     0.9113      0.7750     0.8250
Variable OH cost = variable OH rate hour hour x labour hours required for 1 unit       1.2500        2.1000     1.0500      1.4100     1.6350
Total Variable Cost       4.9375        6.7800     4.3513      5.9350     5.9550

3. Percentage of the total for each component (materials, labor, and variable overhead)

% on Variable Cost

Particulars

Carryit Inc

Star Comp

Gold Bag

Promotes

Industry

Labour Cost = Labour cost/ Total Variable Cost

59%

58%

55%

63%

59%

Material Cost = Material cost/ Total Variable Cost

15%

11%

21%

13%

14%

Variable OH Cost = Variable cost/ Total Variable Cost

25%

31%

24%

24%

27%

4. What are the price and efficiency variances for direct materials and direct labor for each company compared to Industry

Variance - negative = favourable, positive= unfavourtable
Particulars Carryit Inc Star Comp Gold Bag Promotes
Labour Price Variance => Actual hours reqd x (Actual rate /hour - Industry rate/hour)       0.0250      (0.1400)     0.0600      0.2550
Labour Effeciency Variance => (Actual labour hours reqd per unit - Industry labour hour reqd per unit ) x industry labour rate / hour     (0.5825)        0.5825 (1.1650)               -  
Labour Cost Variance     (0.5575)        0.4425 (1.1050)      0.2550
Material Price Variance => Actual yards reqd x (Actual rate /yd - Industry rate/yd)               -          0.0675 (0.1013)      0.0250
Material Effeciency Variance => (Actual yards reqd per unit - Industry yards reqd per unit ) x industry rate per yard     (0.0750)      (0.1500)     0.1875    (0.0750)
Material Cost Variance     (0.0750)      (0.0825)     0.0863    (0.0500)

5. Percentage over standard by company and by variance?

Particulars Carryit Inc Star Comp Gold Bag Promotes
Labour Cost = (Actual Lab cost- Industry Labour cost)/ Ind Labour Cost -15.95% 12.66% -31.62% 7.30%
Material Cost (Actual Mat cost- Industry Mat cost)/ Ind Mat Cost -9.09% -10.00% 10.45% -6.06%
Variable OH Cost=  (Actual Var OH cost- Industry Var OH cost)/ Ind Var OH Cost -23.55% 28.44% -35.78% -13.76%
Total Variable Cost -17.09% 13.85% -26.93% -0.34%

6. Observations

a. The variable cost per unit for Carryis lesser than industry benchmark across each Labour, Material and Variable Overhead which is good.

b. However on overall basis, Goldbag has the least variable cost with lesser labour cost and variable overhead cost.

c. Basis Goldbag benchmark, company can identify areas for improvement in labour cost and variable over head cost and aim for making the varibale cost per unit the least in the sector.

d. The material cost is also lesser per unit for Star Comp. This can also be taken as a benchmark to reduce Carryit material cost.


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