Part 1. Tho Otanl-Smith Company sells products in excess of $30 million a year to the United States Government. As a separate cost center of its parent company, the O-S Company must file a Disclosure Statement describing in detall the company’s cost accounting system.

On January 1, 19-, the company was awarded a firm fixed-price contract which called for 1,000 units of product MAC. The performance period was one year and the total price of the contract was $8,058,000. When the government auditor analyzed the contract six months later, Inconsistencies were found between the company’s methods of timating direct labor costs and the mettrod described in its disclosed accounting practices. In the proposal (Exhibit 1) which re- sulted in the contract, manufacturing labor was estimated as a total dollar amount which included significant, disparate elements or functions of manufacturing labor. Manufacturing labor was cal- culated by using a plant-wida labor rate multiplied by the estimated manufacturing hours. The auditor found that the company’s cost accounting system, budget procedure, and reporting methods provided for the breakdown of manufacturing costs into functional, levels, using the Indi- vidual worker or functional average labor rates.

Exhibit 1

CONTRACT PROPOSAL

Manufacturing labor (400 hours).

RATES

$5.45/hr.

S. 2,180 4

Manufacturing overhead (based on direct labor dollars)…

180%

3,924

Total

6,104

General and administrative expenses..

20%

10%

ESTIMATES

1,221

Total cost

7,325

Profit

733

Contract price por unit…….

8,058

Total contract price, 1,000 units.

$9,058,000

Required: A new unit cost and total dollar difference due to the above stated Inconsistency be

(2) Revising all other factors stated incorrectly.

S

tween pricing and costing! (1) Using the new rate of $5.10 for manufacturing labor, developed by the auditor, and

Requirements: