Overhead Variances, Four-Variance Analysis

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 127,000 units requiring 508,000 direct labor hours. (Practical capacity is 528,000 hours.) Annual budgeted overhead costs total $833,120, of which $604,520 is fixed overhead. A total of 119,400 units using 506,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,300, and actual fixed overhead costs were $556,050.

Required:

1. Compute the fixed overhead spending and volume variances. determine if favorable or unfavorable

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations. determine if favorable or unfavorable

Overhead Variances, Four-Variance Analysis

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 130,000 units requiring 520,000 direct labor hours. (Practical capacity is 540,000 hours.) Annual budgeted overhead costs total $837,200, of which $603,200 is fixed overhead. A total of 119,400 units using 518,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,200, and actual fixed overhead costs were $555,550.

Required:

1. Compute the fixed overhead spending and volume variances.

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 121,000 units requiring 484,000 direct labor hours. (Practical capacity is 504,000 hours.) Annual budgeted overhead costs total $813,120, of which $575,960 is fixed overhead. A total of 119,500 units using 482,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,800, and actual fixed overhead costs were $555,950.

Required:

1. Compute the fixed overhead spending and volume variances.

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Overhead Variances, Four-Variance Analysis

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 123,000 units requiring 492,000 direct labor hours. (Practical capacity is 512,000 hours.) Annual budgeted overhead costs total $811,800, of which $580,560 is fixed overhead. A total of 119,100 units using 490,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $261,900, and actual fixed overhead costs were $555,350.

Required:

1. Compute the fixed overhead spending and volume variances.

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Overhead Variances, Four-Variance Analysis

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500,000 hours.) Annual budgeted overhead costs total $787,200, of which $561,600 is fixed overhead. A total of 119,100 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $260,100, and actual fixed overhead costs were $555,750.

Required:

1. Compute the fixed overhead spending and volume variances.

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Using 500 words roughly answer the following:

The Centers for Medicare and Medicaid Services have recently projected that in 2020, national health care expenditures will approximate a fifth of US gross national product. In response, an editorial in the NY Times has asserted that “addressing the rise in health care spending has now become a national priority of the highest order” and advocated increasing the age that individuals qualify for Medicare to 70 and the rationing of health care services in Medicaid to reduce the growth of spending. Address the following: As a leading health economist, you have been asked to respond to this editorial. Do you agree with the Times’ position (State and defend your position)? Will it address the drivers behind the growth in health care costs (What are some of the drivers behind the growth in healthcare spending and how do they work to increase costs)? What unintended consequences might the plan have? Explain in what ways the increased spending on healthcare might not be a bad thing.

Overhead Variances, Four-Variance Analysis

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 128,000 units requiring 512,000 direct labor hours. (Practical capacity is 532,000 hours.) Annual budgeted overhead costs total $844,800, of which $604,160 is fixed overhead. A total of 119,500 units using 510,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $262,000, and actual fixed overhead costs were $555,550.

Required:

1. Compute the fixed overhead spending and volume variances.

2. Compute the variable overhead spending and efficiency variances. Do not round intermediate calculations

Suppose a student who has not taken economics asks you why economists are arguing

that we need a “fiscal stimulus package.” How would you answer this question? (better if typed please)

Specifically,

a) Why are economists arguing that government spending is the solution to this

problem? Use Y=C+I+G to answer this question. Why can’t we increase C or I

instead of G?

b) Why might an economist recommend infrastructure spending over tax cutes?

c) Suppose the spending package is 500 billion dollars. Graphically illustrate

using AD/AS curves the initial impact of an increase of spending of 500 billion.

Also, assume that the MPC is .5. Calculate the multiplier, and the total impact on

the economy. Make sure to graphically illustrate the full multiplier effects on your

AD/AS graph.

d) Explain the lags of fiscal policy. Why might these lags prevent fiscal policy

from being effective?

Case Study- Microsoft Solving a Good Problem for a Company to Have (2004)

Strategic Overview:

Microsoft announced at the annual shareholders meeting in November 2002 that, despite having $40 billion in cash on its balance sheet, the company would be taking any substantive measures to distribute the cash to its roughly 4.2 billion shareholders. Microsoft state that the cash was needed to satisfy judgements that could arise from ongoing corporate and private antitrust lawsuits. While the company had a history of buying back its stock, Microsoft had never paid a dividend since going public in 1986. The no dividend policy made sense historically as high-tech, growth companies with high P/E’s, typically don’t issue dividends, but instead elect to plow their profits back into the business. But as of the shareholder meeting, Microsoft’s growth had slowed to about 10 percent annually, from 30 percent or more in the company’s early years, and the stock, as evidenced by its inclusion in the Dow Jones Industrial Average, had begun to look more like a stable blue chip that a high-flying tech issue. The announcement made at the 2002 meeting angered many shareholders. Growth had stagnated and the company was sitting on a pot of cash. It was an efficient business that was generating $1 billion a month in free cash. In a shrinking interest rate environment, Microsoft’s returns on short term investments were insignificant and reduced the firm’s return on equity. The state of affairs led one investor at the meeting to comment, “We need a reason to hold the stock. We need a dividend. We need something.”

Options:

Management was under pressure to act. They could choose between a myriad of options including: 1) Doing nothing, 2) Using the cash to finance acquisitions and expansion, 3) Returning the cash to shareholders by beefing-up the ongoing stock repurchase program, a program that had the company buying back shares at the rate of up to $ 6 billion a quarter, or 4) Returning cash to shareholders by issuing dividends. Given the company had virtually no debt (see below), share repurchase appeared to be an efficient way to solve the problem. Buybacks are tax efficient to individua investors and protect shares from dilution due to option exercise. Unlike repurchases, investors assume that dividends payments, once begun, will continue indefinitely.

Decision:

In mid-January of 2003, three months after the November 2002 shareholder meeting, the company surprised the investment community by announcing its first-ever annual cash dividend of 8 cents per share (2 cents per quarter). The dividend represented a total outlay of more than $850 million which translated into just over a quarter of 1 percent of the share price. While the dividend made big news, it was met with criticism that the dollar amount was insignificant. Following the announcement speculation immediately rose over Microsoft’s change in philosophy. One suggested reason for the dividend was President Bush proposed tax reform plan which would exempt shareholders from income tax on dividends (later changed to a 0.15 tax rate). Another possible reason, and the one that Microsoft stated publicly, is that many of the company’s legal risks are largely behind them. The company settled with the Justice Department and many private antitrust claimants and has made progress with the European Union.

Shareholder Reaction and Company Update:

Microsoft’s stock price dropped about $4 or 7% the day following the dividend announcement. This was partially attributable to the relatively weak outlook for the current quarters, but the falling price was likely an indication that some investors concluded that Microsoft had exhausted its growth options and the future looked uncertain. Despite the dividend payments and despite the stock buy back, Microsoft continued to increase its cash balance. In July of 2004, the company announced it would issue a special cash dividend of $3 per share payable on December 2, 2004. With almost 11 billion shares outstanding, the special dividend would return almost $33 billion in cash to shareholders. In July of 2004, the company also announced that it would begin to pay a regular quarterly dividend of $0.08 per quarter. The move represented a doubling of the dividend – the second time the dividend had doubled since the initial dividend issuance. But even with the latest doubling, Microsoft’s yield will still be below the 1.7% average yield for the S&P 500.

Questions:

1. Was the decision to start paying a cash dividend of $0.02 per share per quarter a good decision?

2. Was the $3 per share special dividend desirable?

3. What, if anything, should Microsoft have done with its $64 billion of cash and short term investments?

Using the Internet, locate the most recent financial report of a company of your choosing. The company you select to research must be in the business of manufacturing a product. If the required information is not available, then you will need to select a different company. Write an initial post by responding to the following: Do not research the company listed in the text. What categories of inventory does the company show in its inventories footnote under “Notes to Consolidated Financial Statements”? Using the income statement and inventory information from the footnote, calculate the cost of finished goods manufactured for the most recent year. What elements of manufacturing overhead can you identify using the annual report?