Introduction
Danshui Plant No.2 is a contract manufacturer locating in southern China and was assembles electronic products for companies wishing to save labor costs and they are using semiskilled labor for less than 1 dollar an hour. In August 2010, Danshui Plant No.2 in southern China has a 1 year contract in the period between 1 June 2010 and 31 May 2011 with Apple incorporation to assemble the Apple iPhone 4. Based on the contract, Danshui need to assemble 2.4 million iPhones within 1 year. However, Wentao Chen, manager of Danshui Plant No.2 was anxious about the plant is not able to assemble 2.4 million as their expected and is operating at a loss when the third month of the contract. Their current production was only 180,000 units
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Question 3
Prepare a flexible budget for 180,000 iPhone 4’s and calculate flexible budget variances using actual costs for August.
Question 4
Estimate material price and usage for flash memories, labor rate and usage (efficiency) variances, and the overhead spending variance for August.
i. Direct Material Price Variance (Flash Memory)
= (Actual Price – Standard Price) Actual Quantity Purchased
= ( – $ 27.00) 180,000 units
= ($ 29.16 – $ 27.00) 180,000 units
= $ 388,800 U
ii. Direct Material Usage Variance (Flash Memory)
= (Actual Quantity – Standard Quantity) Standard Price
= (180,000 units – 200,000 units) $ 27.00
= $ 540,000 F
Therefore, the total material variance is $ 151,200 Favorable. iii. Direct Labor Rate Variance (Flash Memory)
= (Actual Rate– Standard Rate) Actual Hours (production)
= ( – $ 13.11) 180,000 units
= ($ 17.18 – $ 13.11) 180,000 units
= $ 732,600 U
iv. Direct Labor Usage (Efficiency) Variance
= [Actual Hour (production) – Standard Hour (production)] Standard Rate
= (180,000 units –
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To effectively plan overhead costs for a product the management must aim to eliminate activities that do not add any value to the product in question. The process of costing is very important in that it supplies information on evaluation and control to various aspects of a business enterprise. Variance measures price and quantity differences that occur in any budgeted and actual prices and quantities. There exist a difference between fixed overhead spending variance and variable overhead spending variance in that the fixed overhead spending variance does not include estimation error while variable spending variable does.
Appendix 2: Estimation of Direct material, Direct labor and Variable Costs for the New Budget
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5) Prepare Flexible budget for 180,000 iPhone 4’s and calculate flexible budget variances using actual costs for August.
1. As we can see from the Exhibit 1, 176,087 Apple iPhone 4’s would have to have been completed for Danshui Plant No.2 to break even.
a new memory chip is introduced, price is high, yield is low, and production capacity