CASE ANALYSIS 1

NuLathe Company produces a turbo engine component for jet aircraft manufacturers. A standard cost system
has been used for years with good results. Unfortunately, NuLathe has recently experienced production problems. The
source for its direct material went out of business. The new source produces a similar but higher quality material. The
price per pound from the original source has averaged $7.00, while the price from the new source is $7.77. The use of
the new material results in a reduction in scrap. This scrap reduction reduces the actual consumption of direct material
from 1.25 to 1.00 pound per unit. In addition, the direct labor is reduced from 24 to 22 minutes per unit because there
is less scrap labor and machine setup time.
The direct material changeover occurred at the same time that labor negotiations resulted in an increase of
over 14% in hourly direct labor costs. The average rate rose from $12.60 per hour to $14.40 per hour. Production of
the main product requires a high level of labor skill. Because of a continuing shortage in that skill area, an interim
wage agreement had to be signed.
NuLathe started using the direct material on April 1, the same date that the new labor agreement went into
effect. NuLathe has been using standards that were set at the beginning of the calendar year. The direct material and
direct labor standards for the turbo engine component are as follows:
Direct material (1.2 lbs at $6.80 per lb)
$8.16
Direct labor (20 min. at $ 12.30 per DLH)
4.10
Standard prime cost per unit of product
$12.26
H. Foster, cost accounting supervisor, had been examining the accompanying performance report that had
been prepared at the close of business on April 30. When J. Keene, assistant controller, came into Fosters office, Foster
said, Look at this performance report. Direct material price increased 11% and the labor rate increased over 14%
during April. I expected greater variance, yet prime costs decreased over 5% from the $13.79 we experienced during
the first quarter of this year. The proper message just isnt coming through.
This has been an unusual period, said Keene. With all the unforeseen changes, perhaps we should revise
our standards based on current conditions and start over.
Foster replied, I think we can retain the current standards but expand the variance analysis. We could
calculate variances for the specific changes that have occurred to direct material and direct labor before we calculate
the normal price and quantity variances. What I really think would be useful for management right now is to determine
the impact the changes in direct material and direct labor had in reducing our prime costs per unit from $13.79 per
quarter to $13.05 in April a reduction of $0.74.

Direct
materials
Direct labor

Standar
d
$ 8.16
4.10
$12.26

NuLathe Company
Standard Prime Cost Variance Analysis
For April 20A
Price Variance
Quantity Variance
($0.97x1.0)
$0.97 unfavorable
($2.10x22/60) 0.77 unfavorable

($6.8x.2)
$1.36 favorable
($12.30x2/60) 0.41 unfavorable

Actual
$7.77
5.28
$13.05

NuLathe Company
Comparison of Actual Prime Cost
For April, 20A
Direct materials
Direct labor

First Quarter cost

$8.75
5.04
$13.79

April Cost
$7.77
5.28
$13.05

Percentage Increase (Decrease)

(11.2%)
4.8%
(5.4%)

Required:
1. Discuss the advantages of each of the following alternatives:
2. Prepare an analysis that reflects the impact the new direct material and new labor contract had on deducing
NuLathes prime costs per unit from $13.79 in the first quarter to $13.05 in April. The analysis should show the
changes in prime costs per unit that are to due to (a) the use of new direct material and (b) the new labor
contract. This analysis should be in sufficient detail to identify the changes due to direct material usage, and
the effect of direct material quality on direct labor usage.

CASE ANALYSIS 2

RCB Corporation is a manufacturer of a synthetic element. A.B. Meek, president of the company, has been
eager to obtain the operating results for the fiscal year just completed. Meek was surprised when the income
statement revealed that operating income dropped to $645,000 from $900,000, although sales volume had increased
by 100,000 units. This drop in during the past 12 months to improve the profitability of the company.
1. In response to a 10% increase in production costs, the sales price of the companys product was increased by
12%. This action took place on December 1, 20A.
2. The management of the Selling and Administrative Departments were given strict instructions to spend no
more in fiscal 20B than they did in fiscal 20A.
RCBs accountants prepared the following schedule of selected data to assist management. The companys
comparative income statement also appears below. RCB uses the FIFO method for finished goods.
RCB Corporation
Selected Operating and Financial Data
For 20A and 20B
20A
$10.00
1.50
2.50
1.00
3.00
$3,000,000
1,500,000
1,000,000
1,200,000
900,000
0
300,000

Sales price per unit

Materials cost per unit
Direct labor cost per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Total fixed factory overhead
Total selling and administrative expenses
Quantity of units budgeted (normal capacity)
Quantity of units actually produced
Quantity of units sold
Quantity of units in beginning inventory
Quantity of units in ending inventory

20B
$11.20
1.65
2.75
1.10
3.30
$3,300,000
1,500,000
1,000,000
850,000
1,000,000
300,000
150,000

RCB Corporation
Statements of Operating Income
For the Years Ending November 30, 20A and 20B
(in thousands)
20A
Sales revenue
Cost of goods sold
Volume variance, (favorable) unfavorable
Gross profit
Selling and administrative expenses
Operating income

20B
$9,000

$7,200
(600)

6,600
2,400
1,500
$900

$11,200
$8,560
495

9,055
2,145
1,500
645

Required:
1. Explain to A.B. Meek why RCB Corporations net income decreased in the current fiscal year, despite the sales
price and sales volume increase.
2. A member of RCBs Accounting Department has suggested that the company adopt direct costing for internal
reporting purposes.
a. Prepare an operating income statement for the fiscal years ended November 30, 20A and 20B, for RCB
Corporation using the direct costing method.
b. Present a numerical reconciliation of the difference in operating income between the absorption
costing method currently in use and the direct costing method proposed.
3. Identify and discuss some of the advantages and disadvantages of using the direct costing method for internal
reporting purposes.

CASE ANALYSIS 3
Precision Gauge Corporation produces three gauges. These gauges, which measure density, permeability and
thickness, are known as D-gauge, P-gauge, and T-gauge, respectively. For many years, the company has been
profitable and has operated at capacity. In the last two years, however, prices on all gauges were reduced and selling

expenses increased to meet competition and to keep the plant operating at full capacity. The following third-quarter
results are representative of recent experiences:
Precision Gauge Corporation
Income statement
For Third Quarter, 20A
(in thousands)
D-gauge
P-gauge
T-gauge
Total
Sales
$900
$1,600
$900
$ 3,400
Cost of goods sold
770
1,048
950
2,768
Gross profit
130
552
(50)
632
Selling and administrative expenses
185
370
135
690
Income before income tax
$(55)
$182
$(185)
$(58)
Marvin Caplan, president of the company, is concerned about the results of the pricing, selling and production
policies. After reviewing the third quarter results, he announced that he would ask his management staff to consider a
course of action that includes the following suggestions:
a. Discontinue the T-gauge line immediately, T-gauge will not be returned to the line of products unless the
problem with the gauge are identified and resolved.
b. Increase quarterly sales promotion by $100,000 on the P-gauge product line to increase sales volume 15%.
c. Cut production on the D-gauge line by 50%, a quantity sufficient to meet the demand of customers who
purchase P-gauges. In addition, the traceable advertising and promotion for this line will be cut to $20,000
each quarter.
Joan Garth, who is the controller, suggested that a more careful study of the financial relationships be made to
determine the possible effect on the companys operating results as a consequence of the presidents proposed course
of action. The president agreed, and Tom Kirk, assistant controller, was assigned the analysis. To prepare the analysis,
Tom gathered the following information:
a. All three gauges are manufactured with common equipment and facilities.
b. The quarterly general selling and administrative expenses of $170,000 are allocated to the three gauge lines in
proportion to their dollar sales volume.
c. Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each gauge as
follows:
Quarterly Advertising and Promotion
Shipping expense
D-gauge
$100,000
$ 4 per unit
P-gauge
210,000
10 per unit
T-gauge
40,000
10 per unit
d. The unit manufacturing costs for the three products are as follows:
D-gauge
P-gauge
T-gauge
Direct materials
$ 17
$31
$ 50
Direct labor
20
40
60
Variable factory overhead
30
45
60
Fixed factory overhead
10
15
20
$77
$131
$ 190
e. The unit sales prices for the three products are $90, $200 and $180 for the D-gauge, P-gauge and T-gauge,
respectively.
f. The company is manufacturing at capacity and is selling all the gauges it produces.
Required:
1. Tom Kirk has suggested that the Precision Gauge Corporation product line income statement presented for the
third quarter of 20A is not suitable for analyzing proposals and making decisions such as the ones suggested
by Marvin Caplan.
a. Explain why the product line income statement presented is not suitable for analysis and decision
making.
b. Describe an alternative income statement format that is more suitable for analysis and decision
making and explain why it is better.
2. Using the operating data presented for Precision Gauge Corporation and assuming that the presidents
proposed course of action had been implemented at the beginning of the third quarter of 20A, evaluate the
presidents proposed course of action by specifically responding to the following points:
a. Is each of the three suggestions cost effective? Support your discussion by a differential cost analysis
that shows the net impact on income before tax for each of the three suggestions
b. Was the president correct in eliminating the T-gauge line? Explain.
c. Was the president correct in promoting the P-gauge line rather than the D-gauge line? Explain.
d. Does the proposed course of action make effective use of Precisions capacity? Explain.
3. Are there any nonquantitative factors that Precision Gauge Corporation should consider before it considers
dropping the T-gauge line? Explain.
CASE ANALYSIS 4

L. Forest is a member of the planning and analysis staff for IDI Inc. Forest has been asked by B. Rolland, chief
financial offer of IDI, to prepare a capital expenditure analysis for a proposal to modernize the Western Plant. Because
of the size of the proposed investment, this analysis will be given to the board of directors for expenditure approval.
Several years ago, as director of planning and analysis at IDI, Rolland was instrumental in convincing the board
to open the Western Plan. However, recent competitive pressures have forced all of IDIs manufacturing divisions to
consider alternatives to improve their market position. To Rollands dismay, the Western Plant may be sold in the near
future unless significant improvements in cost control and production efficiency are achieved.
Westerns production manager, an old friend of Rolland, has submitted a proposal for the acquisition of an
automated materials movement system. Rolland is anxious to have this proposal approved because it will ensure the
continuance of the Western Plant and preserve her friends position. The plan calls for the replacement of a number of
forklift trucks and operators with a computer-controlled conveyer-belt system that feeds directly into refrigeration
units. This automation would eliminate the need for a number of materials handlers and increase the output capacity
of the plant.
Rolland gave this proposal to Forest along with the data to be used in making the capital expenditure analysis.
When Forest completed his analysis, the proposed project appeared quite healthy. However, after investigating
equipment similar to that proposed, Forest discovered that the estimated residual value of $850,000 was very
optimistic; information previously provided by several vendors estimates this value to be $100,000. Forest also
discovered that instead of 12 years, industry trade publications considered 8 years to be the maximum life of similar
conveyor-belt systems. As a result, Forest prepared a second analysis based on this new information. When Rolland
saw the second analysis, she told Forest to discard this revised material, warned him not to discuss the new estimates
with anyone at IDI, and ordered him not to present any of this information to the board of directors.
Required:
1. Explain how L. Forest, a management accountant, should evaluate B. Rollands directives to repress the
revised analysis. Take into consideration the specific standards of competence, confidentiality, integrity and/or
objectivity.
2. Identify the specific steps L. Forest should take to resolve this situation.

CASE ANALYSIS 5

Defco Division of Gunnco Corporation requests of Omar Division a supply of Electrical Fitting 1726, which is not
available from any other source. Omar Division, which is operating at capacity, sells this part to its regular customers
for $7.50 each. Defco, operating at 50% capacity, is willing to pay $5 each for this fitting. Defco needs the fitting for a
brake unit that it plans to manufacture on essentially a cost basis for an aircraft manufacturer.
Omar division produces Electrical Fitting 1726 at a variable cost of $4.25. The cost (and sales price) of the
brake unit to be built by the Defco Division is as follows:
Purchased parts (outside vendors)
$22.50
Omar electrical fitting 1726
5.00
Other variable costs
14.00
Fixed factory overhead and administrative expense
8.00
Total
$ 49.50
Defco believes that the price concession is necessary to obtain the job from the aircraft manufacturer. Gunnco
uses return on investment and dollar profits in measuring division and division manager performance.
Required:
1. Recommend whether or not Omar Division should supply Electrical Fitting 1726 to Defco Division.
2. Discuss whether or not it would be a short-run economic advantage to Gunnco Corporation for Omar Division
to supply the Defco Division with Electrical Fitting 1726 at $5 each.
3. Discuss the organizational and managerial behavior difficulties inherent in this situation and recommend to
Gunncos president how the problem should be handled.