Fixed Overhead Variances

Rostand Inc. operates a delivery service for over 70 restaurants. The corporation has a fleet of vehicles and has invested in a sophisticated, computerized communications system to coordinate its deliveries. Rostand has gathered the following actual data on last year’s delivery operations:

Rostand employs a standard costing system. During the year, a variable overhead rate of $5.10 per hour was used. The labor standard requires 0.80 hour per delivery.

Assume that the actual fixed overhead was $403,400. Budgeted fixed overhead was $400,000, based on practical capacity of 32,000 direct labor hours.

Required:

1. Calculate the standard fixed overhead rate based on budgeted fixed overhead and practical capacity.
$

2. Compute the fixed overhead spending and volume variances. Enter amounts as positive numbers and select Favorable or Unfavorable.

1. Zacks Corporation is a service company that measures its output by the number of customers served. The company has provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results of operations for December.

When the company prepared its planning budget at the beginning of December, it assumed that 25 customers would have been served. However, only 23 customers were served during December.

Required:

Prepare a performance report showing and interpreting the company’s activity and revenue and spending variances for December. Indicate in each case whether the variance is favorable (F) or unfavorable (U) that includes:

a. The Planning Budget

b. The Flexible Budget

c. Activity Variances

d. Revenue and Spending Variances

e. Explain the meaning of this report.

Find an article that explains a change to GDP (output) caused by any factor that influences either Dynamic Aggregate Demand or Dynamic Aggregate Supply. Explain how such a shift would be graphed using the DAD/DAS model.  

When this occurred, consumer confidence in Europe declined.  Consumer confidence impacts C, which is a component of AD (C+I+G+Nx) This is shown by people reducing their spending which impacts both the British and the US economy by having a decrease in the DAD (shift to the left). When this curve shifts to the left, we would expect US output to fall. We would also expect there to be a slight decrease in the price levels.

Requirements:

1) Post a link to any recent (3-5 years) news article that is explaining a change in either DAD or DAS.

2) Translate the article into the terms we used in this course. Identify which component of aggregate spending or aggregate supply is impacted, and in which direction.

3) Use the DAS/DAD model to predict the impact to price levels and output.  

Consider the following national income model:

? − ? − ?< − ?< = 0

? − ? − ?(? − ?) = 0

? − ? − ?? = 0

where Y= income, C=consumption, I= investment, G= government spending, T= taxes

?, ?, ?, and ? are parameters: ? is positive because consumption is positive even if disposable income (? − ?) is zero; ? is a positive fraction because it represents the marginal propensity to consume; ? is positive because even if ? is zero the government swill still have a positive tax revenue; ? is a positive fraction because it an income tax rate that is less than 100 percent.

?, ?, and ? are endogenous variables whereas ?, ?, ?, ?, ?, and ? are exogenous variable.

Part I. Using the implicit function rule, find the income-tax multiplier that explains how the income tax rate ? causes the (equilibrium) income to change. Does the result make economic sense? Explain its sign and economic implication.

Part II. In the same way, find how the government spending affects the (equilibrium) consumption. Does the result make economic sense? Explain its sign and economic implication.

3. For the table shown, answer the following questions:

1. What is the marginal propensity to consume for households in this economy?
2. Based on the assumptions of our aggregate expenditure model, fill in the columns for planned investment, government spending, and net exports. What is this type of expenditure called?
3. For each level of actual aggregate expenditure, calculate unplanned inventory investment.
4. What is the equilibrium level of aggregate expenditure in this economy? How do you know?
5. For each level of actual aggregate expenditure, label the future output tendency as “increase,” “decrease,” or “same” based on what you expect to happen to future output. What relationship does this categorization have to your answer in part d?

Suppose that new data indicates that the global economy is slowing down, and we are heading for another global recession. As a result, there is pessimism among domestic consumers and investors affecting consumer and investment spending.

(i) Show this development using Aggregate demand/Aggregate Supply (AD-AS) model of the domestic economy clearly. (Hint: Begin with the AD-AS diagram for the economy that shows the economy is in long-run equilibrium). Make sure to label the variables represented on the X-axis and Y-axis of the graph clearly. Also mark the curves in the graphs clearly indicating what they represent. Marks will depend on the neatness and completeness of the graph.

(ii) What are the fiscal and monetary policy measures that the policy makers (government and the central bank) can undertake to correct the impact of the fall in spending? (Explain as many policy measures in writing. Include any diagrammatic representation of the effects of these policies only if required).

(iii) What are the possible long run impacts of the recommended policy measures in part (b)? (Explain the impact in writing, a diagrammatic representation not required).

1. For the table shown, answer the following questions:

1. What is the marginal propensity to consume for households in this economy?
2. Based on the assumptions of our aggregate expenditure model, fill in the columns for planned investment, government spending, and net exports. What is this type of expenditure called?
3. For each level of actual aggregate expenditure, calculate unplanned inventory investment.
4. What is the equilibrium level of aggregate expenditure in this economy? How do you know?
5. For each level of actual aggregate expenditure, label the future output tendency as “increase,” “decrease,” or “same” based on what you expect to happen to future output. What relationship does this categorization have to your answer in part d?

Use the following information of Alfred Industries. Standard manufacturing overhead based on normal monthly volume: Fixed ($304,500 ÷ 20,000 units) $ 15.23 Variable ($100,000 ÷ 20,000 units) 5.00 $ 20.23 Units actually produced in current month 18,000 units Actual overhead costs incurred (including $300,000 fixed) $ 383,800 Compute the overhead spending variance and the volume variance. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance).) Loading...

Use the following information of Alfred Industries.

Compute the overhead spending variance and the volume variance. (Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance).)

This Tuesday evening at 7:05 p.m., Justin Wolfers, an economics professor at the University of Michigan, started a provocative Twitter thread about panic buying. Spurred by fear of the spreading coronavirus, shoppers have been mobbing stores worldwide. They’re stockpiling canned goods, flour, sugar, bottled water, hand sanitizer—and toilet paper.

In Australia, where Wolfers was born, one desperate customer reportedly pulled a knife trying to score the last roll on the shelf at a Woolworths Supermarket in Sydney.

Wolfers believes desperate buyers aren’t crazy. “The economics of toilet paper shortages is the same as bank runs,” he tweeted. You stockpile toilet paper because others are stocking up too, depleting supplies.

“My argument is simply that panic buying can be rational,” said Wolfers in a phone interview with Forbes on Wednesday. “There is nothing inherent in markets that prevents this.” Until the FDIC started guaranteeing bank deposits in 1933, it made sense for nervous savers to pull their money out when they saw their neighbors doing the same.

What can be done to preclude toilet paper shortage-sparked violence? “The U.S. needs a strategic toilet paper reserve,” said Wolfers, guaranteeing that Americans have the supplies they need should stores run out.

In all seriousness, what does Wolfers think fear-sparked buying means for U.S. retailers like Costco, Walmart, Target and Kroger? “In the short term it’s good news,” he says, because extra purchases spike revenues. But in the long run, it’s unlikely to change those companies’ fortunes. “Once they have more toilet paper, people aren’t going to poo more,” he says. They’ll wait until their supply runs out to make further purchases.

Oliver Chen, a retail analyst at Cowen in New York, says virus-driven panic buying is giving a boost to curbside services offered by companies like Target and Walmart. Target reported this week in an earnings call that once customers try the service, where they order and pay online and then pick up their purchases at a designated spot outside a store, they increase their spending at Target by 25%. Cowen estimates that only 10% to 11% of shoppers use the service, leaving plenty of room for growth.

One more plus for retailers: “When you use the curbside service, it increases your loyalty as a shopper,” says Chen. He predicts that panic buying will drive up sales by 1% to 2% in the first quarter at retailers who sell groceries and staples. Given that operating margins are a low 3% to 7%, even a small increase in sales is significant.

Sucharita Kodali, an analyst at Forrester, says many retailers have missed an opportunity to hike prices during the scare. “What should have been a winning lottery ticket these guys were handed, they basically squandered,” she says. Without gouging customers, stores could have easily hiked prices by 10% or more on staples and banked the extra profit. “A lot of retailers foolishly let that opportunity pass,” she says. (Most state price-gouging laws, barring increases of 10% or more, only kick in after a state of emergency has been called.)

Wolfers disagrees with Kodali about the wisdom of price hikes during a perceived public health crisis. “Costco’s implicit promise to the customer is, ‘We will never screw you,’” he says. “Raising prices on toilet paper would destroy that trust.”

Rupesh Parikh, a retail analyst at Oppenheimer, says Costco made the right call to hold prices steady. “Costco is a company that puts the customer at the center of everything they do,” he says.

Today Costco reported that February 2020 sales increased 13.8% over the previous year due to “concerns over the coronavirus.” Though Parikh rates the stock a “buy,” he doesn’t believe the Issaquah, Washington-based chain, whose revenue hit $155 billion last year, will benefit from coronavirus buying in the long run. Shoppers who bought extra staples in February will wait to replenish them, possibly causing a sales dip in coming months. “If people don’t use up their supplies, that poses a risk going forward,” he says.

In Australia, where there are 52 confirmed cases of coronavirus including 2 deaths, a Costco store in Canberra has reportedly set limits on toilet paper purchases. Customers can buy no more than two 48-roll packs at a time. That should last them a while.

Assessment Tasks:

Study “The Economics Of Panic Buying” online article above and complete the following tasks.

Complete all 4 tasks:

1. Describe your knowledge or experience with the panic buying that took place in Sydney/Melbourne.                                                                                                                           

2. Use the demand and supply model to describe the phenomenon of the panic buying which you describe in task 1 and illustrate the consequences of the panic buying on market equilibrium. Discuss whether there is an increase in demand or an increase in quantity demanded during the panic buying and explain your answer.                                                    

3. Use the demand and supply model to illustrate the sellers’ responses to the panic buying, such as the curbside service provided by Target and Walmart. Discuss the impact of the curbside service on market equilibrium.