Exercise 16-44 Comprehensive Cost Variance Analysis (LO 16-5, 6)

NSF Lube is a fast-growing chain of oil-change stores. The following data are available for last year’s services:
  

NSF Lube performed 474,700 oil changes last year. It had budgeted 432,200 oil changes, averaging 15 minutes each.

Standard variable labor and support costs per oil change were as follows:

Fixed overhead costs:

Annual budget $1,036,200

Fixed overhead is applied at the rate of $2.50 per oil change.

Actual oil change costs:

Required:

a. Prepare a cost variance analysis for each variable cost for last year. (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

b. Prepare a fixed overhead cost variance analysis. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect.)

Calculating the Direct Materials Price Variance and the Direct Materials Usage Variance

Guillermo's Oil and Lube Company is a service company that offers oil changes and lubrication for automobiles and light trucks. On average, Guillermo has found that a typical oil change takes 30 minutes and 6.4 quarts of oil are used. In June, Guillermo's Oil and Lube had 920 oil changes.

Guillermo's Oil and Lube Company provided the following information for the production of oil changes during the month of June:

Actual number of oil changes performed: 920

Actual number of quarts of oil used: 6,600 quarts

Actual price paid per quart of oil: $5.10

Standard price per quart of oil: $5.05

Required: 1. Calculate the direct materials price variance (MPV) and the direct materials usage variance (MUV) for June using the formula approach. If required, round your answers to the nearest cent.

MPV $__________ Unfavorable

MUV $__________ Unfavorable

2. Calculate the total direct materials variance for oil for June. If required, round your answer to the nearest cent.

$__________ Favorable

3. What if the actual number of quarts of oil purchased in June had been 6530 quarts, and the materials price variance was calculated at the time of purchase? If required, round your answers to the nearest cent.

What would be the materials price variance (MPV)?

$ ___________Unfavorable

What would be the materials usage variance (MUV)?

$ ___________Unfavorable

An Illinois state program evaluator is tasked with studying the intelligence of soon-to-graduate high school students in a number of Chicago-area high schools.

One of the specific questions that needs to be answered is, “How do the students of Collins High School, one of Chicago’s lowest-rated high schools in terms of academic achievement, fare in intelligence compared to students of Lincoln Park High School, one of Chicago’s highest-rated high schools in terms of academic achievement?”.

To conduct this study, the program evaluator administers the Wechsler Adult Intelligence Scale, 4th Edition (WAIS-IV) to one 12th grade class from each high school in the Chicago area (if you are interested in learning more about the WAIS-IV, click here).

The following table shows the WAIS-IV scores for student from Collins HS and Lincoln Park HS (note: data were fabricated for purposes of this excersize):

First, complete the below grouped frequency table of WAIS-IV scores for each HS:

Compute the appropriate calculations to complete the following table :

What is the shape of the distribution of intelligence scores (normal, negatively skewed, positively skewed) for Collins HS? Explain how you arrived at your answer.

What is the shape of the distribution of intelligence scores (normal, negatively skewed, positively skewed) for Lincoln Park HS? Explain how you arrived at your answer.

Your Task

You will engage in a negotiation for the sale and purchase of a commercial asset such as a business or a piece of real estate.

Assessment Description

You may be nominated to represent the vendor and will receive email instructions from the vendor company CEO including:

1. Appointment to represent the company as their agent for the sale of the commercial asset;

2. Specific details about the commercial asset;

3. Information about the status of current negotiations with an alternative potential purchaser;

4. Information about a new potential purchaser;

5. Contact details of the agent appointed to represent the purchaser.

Alternatively, you may be nominated to represent the purchaser and will receive email instructions from the purchaser company CEO including:

1. Appointment to represent the company as their agent for the purchase of the commercial asset;

2. Specific details about the commercial asset;

3. Information about alternative assets the company is considering purchasing instead;

4. Information about the vendor;

5. Contact details of the agent appointed to represent the vendor.

Stage 1: Pre-negotiation (1,000 words)

You must answer the following questions:

1. What is your thinking style preference form – monarchic, hierarchic, oligarchic, anarchic – and what is your thinking style scope – internal, external? Attach copies of completed Sternberg-Wagner Thinking Style Inventories.

2. Are your thinking style preferences – form and scope – optimal for conducting this negotiation? Explain your answer.

3. What adjustments (if any) could you make to adapt to a more optimal thinking style for this negotiation?

Stage 2: Negotiation (300 words) You must:

1. Enter negotiations with your counterpart for the sale and purchase of the commercial asset;

2. Maintain a communications log that captures the date, method, items discussed, and outcomes of each communication. Attach copies of any communications that confirm agreed price

Stage 3: Post negotiation (400 words)

You must prepare a 1 page letter to your client advising the outcome of the negotiation.

4. What is your client’s BATNA? What is your client’s reservation value?

5. What is the other party’s BATNA? What is the other party’s reservation value?

6. What is the ZOPA range? What is your strategy for claiming the greater proportion of the ZOPA? Include at least fifteen academic references in your answers to the above questions with a minimum of five references coming from academic journals.

Please summarize the below two articles in you own words 150 words each article

Article 1

HIPAA Privacy Rule Thwarts Clinical Research Recruitment

Feb. 15, 2005 — Since the federal government's sweeping medical privacy rule went into effect two years ago, the additional paperwork required of academic institutions to obtain patients' consent to participate in clinical research trials has caused enrollment to plummet by as much as 50% at one institution and confusion among many others, a new editorial concludes.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included a major provision that required covered entities (hospitals, physicians, health plans, and other entities that handle patient information) to obtain confidentiality documentation from researchers before disclosing health data. This section of the law, which took effect as part of the overall medical privacy law in April 2003, was intended to ensure that patients' protected health information (PHI) would not be inappropriately disclosed or used during the course of a research trial.

But a lack of guidance by the U.S. Department of Health and Human Services (HHS) about how to interpret this provision and the resulting variability in approaches by research institutions "could not have been what was intended by the law and is not optimal for balancing the need for confidentiality and research progress," said Roberta B. Ness, MD, MPH, chairman of the Department of Epidemiology at the University of Pittsburgh Medical Center in Pennsylvania. "To put out the rules without guidance has resulted in a lack of clarity," she told Medscape in an interview.

Writing in the February issue of the Annals of Epidemiology, Dr. Ness describes the before-and-after effect of HIPAA's rules governing medical research as it applied to patient recruitment in a single-institution, prospective study to determine the cause of preeclampsia.

In the pre-HIPAA phase of the study, called the Pregnancy Exposures and Preeclampsia Program Project (PEPP I), 2,892 women were recruited in 55 months, for an average of 12.4 women per week. The study was renewed in early 2002, but recruitment was shut down for four months while the maternity hospital at which the study was conducted decided how to comply with upcoming medical privacy laws.

Between April and September 2003, recruitment into the study took place under new rules that disallowed all waivers of HIPAA medical record review, according to Dr. Ness. (Waivers allowing an institution to use or disclose PHI for research purposes can be granted if specific conditions are met, according to the privacy rule).

Under that restriction, "the only medical records PEPP II staff could review to determine potential eligibility were for women who had enrolled into a research registry," Dr. Ness writes. "Only about 10% of women enrolled into the registry, presumably because only a clinical staff was authorized to initiate registry enrollment."

Shortly afterward, the hospital's institutional review board allowed applications for a waiver so that researchers could review medical records and flag those that represented potentially eligible subjects, as had been done before HIPAA. Recruitment was further hindered because health provider consent was required before the clinical research staff could approach potential research subjects, and when the maternity hospital merged with the University of Pittsburgh in June 2004.

After HIPAA took effect, the average recruitment rate for participation in PEPP II was 2.5 women per week without a waiver, 5.7 women per week with a waiver, and 3.3 women per week since retraction of the HIPAA waiver, according to Dr. Ness.

"[R]ecruitment with a HIPAA waiver, as compared to pre-HIPAA, decreased by half; and recruitment without a HIPAA waiver fell by half again as compared to with a waiver," Dr. Ness writes. "We cannot identify other systematic explanations for these trends other than the obvious: local interpretation of the HIPAA regulations had a negative effect on the pace of our research."

The slowdown in Pittsburgh's ability to recruit additional subjects into the preeclampsia study has put the program "way behind where we should be," said Dr. Ness. "I have a long career of running prospective studies, and we have never been this far behind on a study at this juncture."

Many research institutions report being in a similar situation, Dr. Ness notes in the editorial. Nearly three quarters (72%) of the 331 U.S. investigators polled by the Association of American Medical Colleges reported that HIPAA was having an adverse effect on clinical research during the first six months after its implementation. Negative effects on patient recruitment, data access, and data acquisition were cited by more than 68% of the respondents.

An HHS advisory committee has proposed modifications to HIPAA that would better coordinate the rule's requirements with those of the Common Rule, a federal law that protects human research subjects, Dr. Ness writes. "We can only hope that the new Secretary for Health and Human Services will adopt these modifications," she concludes.

Article 2

Established by FDA to Expedite Patient Access to Medications

Approximately 10-15 years elapse between the discovery of a new drug in the laboratory and its therapeutic use in the clinical setting.^[1] One factor influencing the duration of drug development is the Food and Drug Administration's (FDA's) review of an agent's efficacy and safety data. In 2001, FDA's Center for Drug Evaluation and Research (CDER) and Center for Biologics Evaluation and Research (CBER) approved 31 new molecular entities.^[2-4] The average time from sponsor submission of a new drug application (NDA) or biologics license application (BLA) to FDA approval of these compounds was 18.6 months, an increase from 17.2 months in 2000, 12.9 months in 1999, and 12.5 months in 1998.

FDA has implemented several programs intended to reduce the review time of a new pharmaceutical and accelerate patient access to medications for the treatment of serious or life-threatening diseases. This review article provides an overview of these initiatives, with a focus on fast-track designation, priority review, accelerated approval, and orphan drug status. Imatinib mesylate (Gleevec, Novartis), which was approved for three phases (chronic, accelerated, and blast crisis) of chronic myelogenous leukemia (CML) in May 2001 and gastrointestinal stromal tumors (GIST) in February 2002, serves as an example of drug development focused on expedited patient access. The information on the clinical development and approval of imatinib was available through the Freedom of Information Act. Imatinib will be discussed throughout this review to illustrate the highlights and opportunities of each FDA program. Finally, the clinical implications of the programs will be described.

Regulatory Overview

There are multiple regulatory documents that outline the responsibilities of FDA and the industry sponsor throughout the drug development process, including the Prescription Drug User Fee Act (PDUFA) of 1992, the five-year renewal of PDUFA (PDUFA II), the recently approved PDUFA III, and the Food and Drug Modernization Act of 1997 (FDAMA). In addition, supporting regulatory documents (i.e., guidance documents) have been established that specifically relate to fast-track designation, accelerated approval, priority review, and orphan drug status. Although these four programs share features, each is a distinct initiative with different requirements. Fast-track designation relates to the interactions between the sponsor and FDA during the drug development process. Accelerated approval refers specifically to the design of studies performed by the sponsor, and priority review sets the time frame for FDA review of a submitted BLA or NDA. Finally, allowing drug manufacturers to seek orphan drug status encourages the development of drugs to treat rare diseases.

Calculating the Direct Labor Rate Variance and the Direct Labor Efficiency Variance

Guillermo's Oil and Lube Company is a service company that offers oil changes and lubrication for automobiles and light trucks. On average, Guillermo has found that a typical oil change takes 18 minutes and 6.2 quarts of oil are used. In June, Guillermo's Oil and Lube had 980 oil changes.

Guillermo's Oil and Lube Company provided the following information for the production of oil changes during the month of June:

Actual number of oil changes performed: 980
Actual number of direct labor hours worked: 286 hours
Actual rate paid per direct labor hour: $15.00
Standard rate per direct labor hour: $14.00

Required:

1. Calculate the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) for June using the formula approach.

2. Calculate the direct labor rate variance (LRV) and the direct labor efficiency variance (LEV) for June.

3. Calculate the total direct labor variance for oil changes for June.
$fill in the blank 9  

4. What if the actual wage rate paid in June was $13.00? What impact would that have had on the direct labor rate variance (LRV)? On the direct labor efficiency variance (LEV)? Indicate what the new variances would be below. If required, round your answers to the nearest cent.

Direct labor rate variance (LRV):
$fill in the blank 11  

Direct labor efficiency variance (LEV):
$fill in the blank 13  

Please use Excel to analyze the statement of cash flows for the table below.

1) What is the correlation between net income and operating cash flow?

2) Explain the trends of cash flow from the table below.

3) What is the free cash flow from the table below?

Three years ago, Karen Suez and her brother-in-law Reece Jones opened Gigasales Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2017 were disappointing.

GIGASALES DEPARTMENT STORE

Income Statement

For the Year Ended December 31, 2017

Net sales

$518,000

Cost of goods sold

414,400

Gross profit

103,600

Operating expenses

Selling expenses

$74,000

Administrative expenses

14,800

88,800

Net income

$14,800

Karen believes the problem lies in the relatively low gross profit rate of 20%. Reece believes the problem is that operating expenses are too high. Karen thinks the gross profit rate can be improved by making two changes. (1) Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. (2) Buy merchandise in larger quantities and take all purchase discounts. These changes to purchasing practices are expected to increase the gross profit rate from its current rate of 20% to a new rate of 25%. Karen does not anticipate that these changes will have any effect on operating expenses.

Reece thinks expenses can be cut by making these two changes. (1) Cut 2018 sales salaries of $44,400 in half and give sales personnel a commission of 2% of net sales. (2) Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2018 delivery expenses of $29,600 by 40%. Reece feels that these changes will not have any effect on net sales.

Karen and Reece come to you for help in deciding the best way to improve net income.

Answer the following.

Which of the following indexes is reflecting more clearly price level and inflation trend:

A)  The Core Inflation Rate, or Personal Consumption Expenditure (PCE) price index excluding food & energy

B) GDP deflator which is average of the current prices of all goods & services in GDP expressed as percentage of base year prices

C) Consumer Price Index (CPI) - a measure of the average of prices paid by urban consumers for a fixed market basket of consumer goods and services

D) Real income, which is the purchasing power of nominal income measured by quantity of goods and services nominal income will buy

The changes in Aggregate Supply (AS shifters) resulted from:

A)  Changes in consumer spending, business investment, government expenditures and net export

B) Changes in input prices, productivity, nominal wages and legal-institutional environment

C) Changes in prices of goods and services produced

D)  Business failure, temporary shotdowns and changes in output rate

. The effects of a negative demand shock are:

A) The Aggregate Demand curve shifts leftward with a reduction in price level and in the output that is below the potential GDP and is called recessionary gap

B)  Aggregate demand curve shifts rightward with higher prices and bigger output above the potential GDP called inflationary gap

C) Decrease in Aggregate Supply, higher prices and and lower output which generates stagflation (negative supply shock)

D) Increase in Aggregate Supply with lower prices and bigger output, called positive supply shock

To restore the macroeconomic equilibrium with full-employment the supply side theories emphasized:

A)  The control of money and interest rates as mechanisms for shifting Aggregate demand

B) The role of government spending and taxes

C) The importance to control both Aggregate Demand and Aggregate Supply by shifting both curves

D) The importance to shift Aggregate Supply by changing costs of resources, government taxes and regulation

1. Suppose you are asked to advise a risk-avert individual who is to invest $50 million for six month either in the U.S. or in U.K. Given the following information, where would you advise her/him to invest? Annual rate of interest in the US, iu.s. = 4%; annual rate of interet in UK, iu.k. = 5%; Spot exchange rate =1.8 dollars per pound; and six month forward exchange rate = 1.6 dollars per pound.

Let the following equations represent a model of an economy.

                        1. Y = C + I + G + X - M

                        2. C = 100 + 0.8Y

                        3. I = 200

                        4. G = 250

                        5. X = 100

                        6. M = 50 + 0.05Y

            a. How much is equilibrium income and open economy multiplier?

            b. Is the balance of payments in surplus or deficit?

            c. By how much do we need to change G in order to have a balance of payments         

                 equilibrium?

            d. What will be the impact on Y and the trade balance if exports increase by 10 (say

                due to an increase in foreign demand) and Fed cuts the discount rate which results

                in an increase in investment by 10 and an increase in autonomous consumption by

               10.