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ON THE FIRST DAY OF CLASS?

What is accounting?

What is an accountant?

What is accounting used for?

DESIGNATED DOODLE ZONE

Cost Handy Handbook Page - 1 - McGraw Second Edition


How management accounting is different than financial accounting, tax, or audit ???

Don’t be afraid to take a big step if one is indicated. You can’t cross a chasm in two small jumps. DAVID LLOYD GEORGE (1863—1945), Statesman


Revenge is often like biting a dog because the dog bit you. AUSTIN O’MALLEY (1858—1932), Physician and humorist



About Debits and Credits …

Choose always the way that seems best, however rough it may be; custom will soon render it easy and agreeable. PYTHAGORAS (c. 580—c. 500 B.C.), Philosopher and mathematician




More Handy INFORMATION:

Management accounting information is unique in its ability to influence future decisions:

Differences between Financial and Managerial Accounting:

FINANCIAL MANAGERIALMeasures value Adds valueSummarizes past Emphasis on future decisionsAudience outside organization – stockholders, banks, etc.

Audience inside organization – managers

Objective and verifiable (so it can be audited)

Relevance and flexibility

Precision TimelinessSummarized data for organization Detail!GAAP No GAAPMandatory Not mandatory

The most beautiful thing in the world is the conjunction of learning and inspiration. WANDA LANDOWSKI (1879—1959), Musician

Shun idleness. It is a rust that attaches itself to the most brilliant of metals. VOLTAIRE [François-Marie Arouet] (1694—1778), Humorist

“On with the dance, let joy be unconfined” is my motto, whether there’s any dance to dance or any joy to unconfine. MARK TWAIN [Samuel L. Clemens] (1835—1910), Humorist


Budgets / forecasts/ outlooks

Cost models

Product costs

Daily, weekly, monthlyoperations

Project funding

Pricing decisions, CVP,sales, production,inventory, etc.

The two powers which in my opinion constitute a wise man are those of bearing and forbearing. EPICLETUS (c. 55—135), Philosopher


On The First Day of Class?

Do This At Home:

1. Find the Institute of Management Accountants website.2. On the website, find the document The Rights and Responsibilities

of a Certified Management Accountant (I found it on the page entitled After I Pass the Exams).

3. On this document, find the [four] standards of ethical conduct (this is really the information you are after, and you might find it elsewhere on the site). Place/copy/write that information here.



Nothing is particularly hard if you divide it into small jobs. HENRY FORD (1863—1947), Founder of the Ford Motor Company

REVIEW / SELF-QUIZDo you know the answers to these questions??

What are the four Financial Statements?

How do you increase an Asset account?… a Liability account?… a Revenue account?… an Expense account?

What is the Accounting Equation?

How is “profit” calculated (most simply)?

How does Managerial Accounting differ from Financial Accounting, Tax, and Auditing?

Note: We may or may not cover all of this material on this day of class, but we should cover the material before the next exam. So, if we have not covered this material, be sure to ask about it during the exam review.


TERMS AND FLOWS

FOUR TYPES OF COSTS:

Variable Costs (in total & per unit)

Fixed Costs (in total & per unit)

Product Costs

Period Costs

TERMS AND FLOWS

Three Categories of Product Costs:


The society that separates its scholars from its warriors will have its thinking done by cowards and its fighting by fools. THUCIDIDES (c. 455—c. 400 B.C.), Historian

The bravest are surely those who have the clearest vision of what is before them, glory and danger alike, and yet notwithstanding, go out to meet it. THUCIDIDES (c. 455—c. 400 B.C.), Historian


TERMS AND FLOWS

Combinations of Product Costs:

Prime Costs

Conversion Costs

Youth is the best time to be rich and the best time to be poor. EURIPIDES (c. 485—406 B.C.), Playwright



TERMS AND FLOWS

What is the most simple calculation of PROFIT (aka Income)?

Be not solitary, be not idle.ROBERT BURTON (1577—1640), Cleric and scholar

If things are not going well with you, begin your effort at correcting the situation by carefully examining the service you are rendering, and especially the spirit in which you are rendering it. ROGER BABSON (1875—1967), Statistician



TERMS AND FLOWS

[Name of Company]Absorption Costing Income Statement[ ______________________________ ]

[Name of Company]Variable Costing Income Statement[ ______________________________ ]

[Name of Company]Balance Sheet[ ______________________________ ]


TERMS AND FLOWS

The only way to get ride of a temptationIs to yield to it. OSCAR WILDE (1854—1900)

You will soon break the bow if you

Keep it always stretched.

PHAEDRUS (c. 15 B.C. – 50 A.D.), In the End, we will remember not the words of Fabulistour enemies, but the silence of our friends. MARTIN LUTHER KING JR. (1929—1968)

NOTE TO “SELF”! See problem: ____________________________

On page _________ of the Handy Handouts

For an example of t-accounts and cost flows.


A certain amount of opposition is a great help to a person. Kites rise against, not with the wind. JOHN NEAL (1793—1870), Writer


Let’s Take Notes ... TERMS AND FLOWS


What are Fixed Costs? … Variable Costs?

What are Product Costs? … Period Costs?

What are Prime Costs? … Conversion Costs?

What is Revenue? Expense? Profit? What is the Absorption Costing Income Statement format? What is the Variable Costing Income Statement format?

What is Cost of Goods Manufactured? What is Cost of Goods Sold?

What are the t-accounts down the left side? What is true of all of them?

What are the t-accounts across the top? What is true of all of them?

What are the t-accounts down the right side? What is true of all of them? What kind of account is COGS? I/S? DM? WIP? DL? MOH?

What phrase appears at the top of every Income Statement? Why? … every Balance Sheet? Why?

Note: We may or may not cover all of this material on this day of class, but we should cover the material before the next exam. So, if we have not covered this material, be sure to ask about it during the exam review.


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MANGO MOTORS(Variable and Fixed Costs)

Mango Motors has incurred the following expenses during the 1996 calendar year.

Sales revenue $810,000Fixed manufacturing costs 60,000Fixed selling and administrative costs 50,000Variable manufacturing costs 540,000Variable selling and administrative costs 67,500

Required:Calculate net income using both the absorption costing and the variable costing income statement formats.


SOMUCH STEREOS(Variable and Fixed Costs)

As the chief financial officer of SoMuch Stereos, headquartered in Timbuktoo, Tennessee, you have summarized the financial information for the fiscal year ending February 2000.

Direct materials $22,000Direct labor 14,000Variable manufacturing overhead 9,000Fixed manufacturing overhead 10,000Variable selling expense 5,000Fixed selling expense 16,000Fixed administrative expense 14,000Sales revenue 89,000

Required:The CEO has asked you to provide her with income statements using both the absorption costing format and the variable costing format.


BOJANGLE DANCE SHOES(Variable and Fixed Costs)

A partial list of sales and cost data is presented below for the Bojangle Dance Shoes Co. for the calendar year 2002.

Sales (18,000 units) $630,000Manufacturing costs: Prime costs $252,000 Variable MOH 84,000 Budgeted and actual fixed MOH 100,000Operating expenses: Variable selling expense 54,000 Fixed selling expense 45,000 Fixed administrative 90,000

Required:Calculate Bojangle’s cost of goods sold, contribution margin, and net income using both the absorption costing format and the variable costing format.


MULESKINNER ATHETIC WEAR(Cost Flows)

Below are summarized financial data of the Muleskinner Athletic Wear for the calendar year 2004.

Sales revenue $940,000 Indirect material $ 10,000Raw material (beginning inventory) 60,000 Indirect labor 25,000Raw material (ending inventory) 70,000 Depreciation on plant and equipment 100,000Work in process (beginning inventory) 120,000 Factory utilities 35,000Work in process (ending inventory) 115,000 Other factory costs 30,000Finished goods (beginning inventory) 150,000 Selling and administrative expenses 110,000Finished goods (ending inventory) 165,000 Direct labor 405,000Raw materials purchased 250,000 Raw materials requisitioned 240,000

Required:Calculate cost of goods manufactured, cost of good sold, and net income.


MULESKINNER ATHETIC WEAR, INC.Calculations …


CATTLE COMPANY(Cost Flows)

Below are summarized financial data of the Cattle Company for two consecutive years.

1997 1998Administrative expenses $135,000 $161,000Beginning finished goods 45,000 82,000Beginning work in process 71,000 65,000Beginning direct materials 96,000 108,000Sales 566,000 812,000Ending finished goods - 69,000Ending work in process - 84,000Ending direct materials - 102,000Cost of goods manufactured 445,000 562,000Direct materials requisitioned 190,000 235,000Direct labor 130,000 170,000Indirect materials 15,000 18,000All other manufacturing overhead costs 104,000 158,000

Required:a. Use T-accounts to show the flow of costs and revenues.b. Prepare income statements for both years.


CATTLE COMPANYCalculations (1997) ...


CATTLE COMPANYCalculations (1998) ...


JUDGE ELY JEANS(Cost Flows)

The December 31, 1999 ledger account balances are presented below for Judge Ely Jeans. Beginning inventories on January 1, 1999 were $37,600 for finished goods inventory, $49,600 for work in process inventory, and $29,500 for direct materials inventory.

Sales $715,200Insurance on production inventories 7,200Factory supervision 44,800Indirect materials 4,800Office equipment depreciation 7,200Utilities (60 percent factory) 36,000Delivery expense for finished products 4,000Direct labor 118,400Direct materials purchased 98,400Office fire insurance 2,640Finished goods inventory 52,000Indirect labor 10,400Administrative and marketing salaries 123,200Factory property tax 15,200Advertising 15,300Production equipment lease cost 35,200Work in process inventory 62,400Direct materials inventory 32,300

Required:Calculate cost of goods manufactured, cost of good sold, and net income.


JUDGE ELY JEANSCalculations ...


SLEEP WARM, INC.(Cost Flows)

The following data is available for Sleep Warm, Inc. for the month of August:

Beginning of August:Direct Materials inventory $18,500Work in Process inventory $12,000Finished Goods inventory $10,200

During August:Direct Labor cost $40,500Direct Materials purchases $80,000Total Overhead cost $105,750Sales Revenue $400,000Selling & Admin. Exp. $100,000

End of August:Direct Materials inventory $16,800Work in Process inventory $23,500Finished Goods inventory $9,100

Required:Calculate the cost of goods manufactured, the cost of goods sold, and net income for Sleepwell, Inc. in August.


SLEEP WARM, INC.Calculations ...


TRABER COMPANY(Cost Flows)

The following data pertain to Traber Company for the year ended December 31, 2004.

December 31. 2003 December 31, 2004Purchases of direct materials $75,000Direct labor 56,250Indirect labor 31,250Factory Insurance 15,000Depreciation—Factory 100,000Repairs and maintenance—Factory 18,750Marketing expenses 82,500General and administrative expenses 68,750Direct materials inventory $25,000 43,750Work-in-process inventory 41,250 43,750Finished goods inventory 28,750 25,000

Sales in 2004 were $625,000.

Required:Prepare a schedule of cost of goods manufactured and a statement of net income (in good form) for the year ended December 31, 2004.

Helpful Hint:First prepare the calculations using t-accounts, and then prepare the required schedules using the information from the t-accounts. Please turn in all your work (t-accounts and statements).


TRABER COMPANYCalculations…


TRABER COMPANYSchedule of Cost of Goods ManufacturedFor the Year Ended December 31, 2004

Direct materials used:

Direct materials inventory, 1-1-2004 $

Add: Purchases of direct materials ____________

Total materials available $

Deduct: Direct materials inventory, 12-31-2004 (___________)

Direct materials used in production $

Direct labor $

Manufacturing overhead

$

____________ $___________

Total manufacturing costs incurred $

Add: Beginning work in process inventory ____________

$

Deduct: Ending work in process inventory (___________)

Cost of Goods Manufactured $ .


TRABER COMPANYIncome Statement

For the Year Ended December 31, 2004

Sales $

Cost of Goods SoldFinished Goods Inventory, Beginning $Cost of Goods Manufactured ____________Total Goods Available for Sale $Finished Goods Inventory, Ending ____________

Less: Cost of Goods Sold (___________)

Gross Margin $

Less: Selling and administrative expenses:

$

____________

Total Selling & Administrative Expenses (___________)

Net Income $ .


HANNIBAL COMPANY(Cost Flows)

The following information is available for Hannibal Company:

Raw materials purchased $160,000Raw materials inventory, 1-1-1993 $23,400Raw materials inventory, 12-31-1993 $33,400Direct labor $100,000Indirect labor $20,000Factory rent $21,000Depreciation, factory equipment $30,000Factory utilities $5,978Sales salaries $55,000Sales commissions $38,000Administrative costs $61,000Sales revenue $600,000Work in process inventory, 1-1-1993 $6,520Work in process inventory, 12-31-1993 $7,498Finished goods inventory, 1-1-1993 $40,000Finished goods inventory, 12-31-1993 $57,050

Required:Calculate the cost of goods manufactured, cost of goods sold, and net income for Hannibal Co.


HANNIBAL COMPANYCalculations ...


BOB’S BEEF BOY(Cost Flows)

Bob, the owner and sole proprietor of Bob’s Beef Boy, sells hamburgers for carry out or drive through only. The restaurant is known for the high quality of the meat used in the burgers, and for the kaiser roll used in place of the normal hamburger bun.

Each Hamburger sells for $3.99. Bob employs several part-time employees and a full-time manager. He leases the building and hires a cleaning company to provide services on a weekly basis. The manager, who is paid a monthly salary, carries out all administrative functions such as hiring, scheduling, and counting cash. Bob purchases the ingredients needed to make hamburgers on a weekly basis to ensure its freshness; thus, there were no inventory balances at the beginning or the end of the year.

During the year 1997 the following expenses were incurred:

Ground meat $54,000 (No accusations here about “Where’s the beef!?”)Lettuce 6,750 Manager’s salary $41,000Tomatoes 7,500 Utilities 22,500Kaiser rolls 9,250 Depreciation, grill 7,000Condiments 2,650 Depreciation, signs 3,250Part-time labor, cooks 66,400 Advertising 3,500Part-time labor, servers 53,000 Rent 25,000Wrapping paper and bags 2,400 Cleaning services 6,800

Bob’s restaurant sold 120,000 hamburgers during 1997.

Required:1. Classify each cost as being a product cost (specify either direct materials, direct labor, or manufacturing

overhead) or as being a period cost.2. Use T-accounts to show the flow of costs and revenues for Bob’s Beef Boy.3. Prepare an income statement for the year.


BOB’S BEEF BOYCalculations ...


BILLY’S BOAT BONANZA, INC.(Classifying Costs)

Billy’s Boat Bonanza, Inc. assembles custom sailboats from components supplied by various manufactures. The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse. Below are listed some of the costs that are incurred at the company.

Required:For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, marketing and selling, or an administrative cost by placing an X in the appropriate box.

DirectLabor

DirectMaterials

Mfg.Overhead

Marketing & Selling

Admin.Cost

1. The wages of employees who build the sailboats.

2. The cost of advertising in the local newspapers.

3. The cost of an aluminum mast installed in a sailboat.

4. The wages of the assembly shop’s supervisor.

5. Rent on the boathouse.

6. The wages of the company’s bookkeeper.

7. Sales commissions paid to the company’s salespeople.

8. Depreciation on power tools.


DUNCAN’S AVIONICS(Classifying Costs)

Suppose that you have been given a summer job at Duncan’s Avionics, a company that manufacturers sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its tremendous growth. The bank requires financial statements before approving such a loan. You have been asked to help prepare the financial statements and were given a list of costs.

Required:Classify the following costs as either product (inventoriable) costs or period (noninventoriable) costs for purposes of preparing the financial statements for the bank by placing an X in the appropriate box.

Product Period 1. The cost of the memory chips used in a radar set.

2. Factory heating costs.

3. Factory equipment maintenance costs.

4. Training costs for new administrative employees.

5. The cost of the solder that is used in assembling the radar sets.

6. The travel costs of the company’s salespersons.

7. Wages and salaries of factory security personnel.

8. The cost of air-conditioning executive offices.

9. Wages and salaries in the department that handles billing customers.

10. Depreciation on the equipment in the fitness room used by factory workers.

11. Telephone expenses incurred by factory management.

12. The costs of shipping completed radar sets to customers.

13. The wages of the workers who assemble the radar sets.

14. The president’s salary.

15. Health insurance premiums for factory personnel.


GLOBAL, INC.(Classifying Costs)

Below are a number of costs that are incurred by Global, Inc., a corporation involved in several industries.

Required:In the following table, place an X in the appropriate column for each cost to indicate whether the cost involved would be variable or fixed with respect to the goods and services produced by the organization.

Cost Behavior

Cost Variable Fixed 1. Small glass plates used for lab tests in a hospital.

2. Straight-line depreciation of a building.

3. Top-management salaries.

4. Electrical costs of running machines.

5. Advertising of products and services.

6. Batteries used in manufacturing trucks.

7. Commissions to salespersons.

8. Insurance on a dentist’s office.

9. Leather used in manufacturing footballs.

10. Rent on a medical center.


MOORE COMPUTERS(Variable and Fixed Costs)

A partial list of sales and cost data is presented below for the Moore Computers for the calendar year 2003.

Sales $500,000Direct materials (Used) $60,000Direct labor $45,000Indirect labor (Fixed) $25,000Factory insurance (Fixed) $12,000Depreciation—Factory $80,000Repairs and maintenance—Factory (Variable) $15,000Marketing expenses (Variable) $66,000General and administrative expenses (Fixed) $55,000

Required:Calculate Moore Computer’s net income using both the absorption costing format and the variable costing format.


MOORE COMPUTERSCalculations…


PACIFIC COAST HOME FURNISHINGS(Cost Flows)

Consider the following information for Pacific Coast Home Furnishings for the year ended December 31, 2006:

Depreciation expense—Administrative office $42,900Depreciation expense—Plant and equipment $114,400Direct labor—Wages $633,100Direct materials inventory, Dec. 31, 2006 $32,500Direct materials inventory, Jan. 1, 2006 $23,400Direct materials purchases $201,500Finished goods inventory, Dec 31, 2006 $49,400Finished goods inventory, Jan. 1, 2006 $19,500Heat, light, & power—Plant $57,200Indirect labor $32,500Property taxes—Plant $44,200Sales representatives’ salaries $188,500Sales revenue $1,950,000Factory Supervisor’s salary $85,800Supplies—Administrative office $20,800Supplies—Plant $37,700Work-in-Process inventory, Dec. 31, 2006 $11,700Work-in-Process inventory, Jan. 1, 2006 $29,900

Required:Prepare a schedule of cost of goods manufactured and a statement of net income (in good form) for the year ended December 31, 2006.

Helpful Hint:First prepare the calculations using t-accounts, and then prepare the required schedules using the information from the t-accounts. Please turn in all your work (t-accounts and statements).


PACIFIC COAST HOME FURNISHINGSCalculations…


PACIFIC COAST HOME FURNISHINGSSchedule of Cost of Goods ManufacturedFor the Year Ended December 31, 2006

Direct materials used:






Direct labor $


$

____________

Total factory overhead $___________



Total manufacturing costs to account for $




PACFIC COAST HOME FURNISHINGSIncome Statement


Sales $

Cost of Goods SoldFinished Goods Inventory, Beginning $Cost of Goods Manufactured ____________Total Goods Available for Sale $Finished Goods Inventory, Ending ____________

Less: Cost of Goods Sold (___________)

Gross Margin $


$

____________

Total Selling & Administrative Expenses (___________)

Net Income $ .


BREAKEVEN (C-V-P)

What is the GOAL of any business?

How does a business accomplish this GOAL?

C-V-P analysis seeks the most profitable combination of …

Love itself is love’ chief nourishment. SEXTUS PROPERTIUS (c. 50—16 B.C.), Poet


BREAKEVEN (C-V-P)

How do costs behave … In Total

How do costs behave … Per Unit


BREAKEVEN (C-V-P)

The Relevance of the Relevant Range


There will always be a conflict between “good” and “good enough”.


HENRY MARTYN LELAND (1843—1932), Engineer


BREAKEVEN (C-V-P)

What kind of Cost is this?

Chance favours only those who know how to court her. CHARLES NICHOLLE (1866—1936), Physician and Scientist


BREAKEVEN (C-V-P)

Variable Costing information is necessary for breakeven calculations!

Variable Costing Income Statement:

VC Ratio =

CM Ratio =

Do the common thing in an uncommon way. BOOKER T. WASHINGTON (1856—1943), Educator


BREAKEVEN (C-V-P)

C-V-P Intuition:


BREAKEVEN (C-V-P)

Let us think about this a little more! What is the effect on Breakeven of …

1. A change in _________________________ ?

2. A change in _________________________ ?

3. A change in _________________________ ?


Every creative act of ours in relation to other people—an act of love, of help, of peacemaking—not merely has a future, but is eternal. NIKOLAY BERDYAYEV (1874—1948), Philosopher


BREAKEVEN (C-V-P)

Margin of Safety, and more!

Margin of Safety =

A Handful of Handy Formulas:

MS($) = Actual Revenue – Breakeven Revenue

MS Ratio = (Actual Revenue – Breakeven Revenue) ________ is GOOD!Actual Revenue

Operating Leverage = Contribution Margin / Profit

MS Ratio = 1 / Operating Leverage


You have your way. I have my way. As for the right way, the correct way, and the only way, it does not exist. FRIEDRICH NIETZCHE (1844—1900), Philosopher


BREAKEVEN (C-V-P)

The Effect of Taxes …

When including desired profit in a “breakeven” calculation, is this desired profit before/after tax??

A Handy of Formula:

NIBT = NIAT .(1 – Tax Rate)


When we have done our best, we may await the result without anxiety. JOHN BULLOCK (1834—1913), Financier and naturalist


BREAKEVEN (C-V-P)

Multi-Product Breakeven

My mother read me bedtime stories until I was six years old. It was a sneak attack on her part. As soon as I really got to like the stories, she said, “Here’s the book, now you read.” OCTAVIA BUTLER (1947—2006), Novelist

When [my mother] was dying, talking to me, she said: “Always try to be kind and nice to people. And if you do that, somebody will always speak up for you.” And I’ve found that to be a fact. They really do. B. B. KING, Musician


NOTE TO “SELF”![Cost Acccounting Students Only]

See problem: ____________________________


For an example of multi-product breakeven.

BREAKEVEN (C-V-P)

What would you describe as the theme of these quotes?

The harder you work, the harder it is to surrender. VINCE LOMBARDI I pray hard, work hard, and leave the rest to God. FLORENCE GRIFFITH JOYNER Work is a good word. When we work hard at something we enjoy and feel good about it, we feel good about ourselves again and again and again. MIKE KRZYZEWSKI Work Hard. There is no short cut. ALFRED P. SLOAN, JR. (1875-1966), Business leader and philanthropist Nothing will work unless you do. JOHN WOODEN The road to happiness lies in two simple principles: find what it is that interests you and that you can do well, and when you find it, put your whole soul into it, every bit of energy and ambition and natural ability you have. JOHN D. ROCKEFELLER, III


If the power to do hard work is not talent, it is the best possible substitute for it. JAMES A. GARFIELD


BREAKEVEN (C-V-P)


Can you draw a graph of Fixed Costs in total? … Fixed Costs per unit? … Variable Costs in total? … Variable Costs per unit? … Mixed Costs in total?

What formula can we use to draw a line in XY space?

What is the Variable Costing income statement format?

How does one calculate the VC Ratio in total? … per unit? How does one calculate the CM Ratio in total? … per unit? Does is CM calculated in total? … per unit?

The following formulas are important:(why don’t you fill them in here)

BE(units) =

BE($) =

SPU(x) =

TR =

MS($) =

MS Ratio =

NIBT =


STONE MONUMENT COMPANY (A)(Breakeven)

Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company.

Variable manufacturing costs $800 per headstoneSelling & general variable costs 200 per headstoneTotal variable costs $1,000 per headstone

The company’s annual fixed costs are:Manufacturing overhead $4,500,000 Selling & general administrative 1,500,000Total $6,000,000

The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year.

Required: 1. Determine the breakeven point in units and dollars.2. What is Stone Monument Co.’s breakeven point as a percentage of normal capacity?


STONE MONUMENT COMPANY (B)(Breakeven)





Required: 1. How many units must be sold to earn a net income of $1,400,000?2. What dollar value of sales must be earned to earn a net income of $1,400,000?


STONE MONUMENT COMPANY (C)(Breakeven)





Required: 1. How many units must be sold to earn a net income of 25 percent of sales?2. What dollar value of sales must be earned to earn a net income of 25 percent of sales?


STONE MONUMENT COMPANY (D)(Breakeven)





Required: 1. How many units must be sold to earn a net income of $400 per unit?2. What dollar value of sales must be earned to earn a net income of $400 per unit?


STONE MONUMENT COMPANY (E)(Breakeven)





Required: At what price per unit must the headstones be sold in order for the Stone Monument Company to earn a net income of $21,000,000?


STONE MONUMENT COMPANY (F)(Breakeven)





Required: 1. If Stone Monument Company has a “Normal” year, what is the company’s margin of safety?2. If Stone Monument Company has a “Normal” year, what is the company’s margin of safety ratio?


STONE MONUMENT COMPANY (G)(Breakeven)





Required: Net income taxes for Stone Monument Company have been averaging 30 percent and are not expected to change.

1. How many units must Stone Monument Co. sell to earn an after-tax profit of $1,400,000?2. What dollar value of sales must Stone Monument Co. earn to earn an after-tax profit of $1,400,000?


EAST MEETS WEST COMPANY (A)(Breakeven)

East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set selling price at $10 per unit.

Required: 1. Determine the breakeven point in units and dollars.2. If East Meets West Company wants to earn a $15,000 profit on the sale of its compasses, find the

number of units and sales revenue required to achieve this goal.


EAST MEETS WEST COMPANY (B)(Breakeven)


Management has decided that the number calculated in (A) is not realistic. That is, demand for the compasses is not strong enough and competition is too strong to allow East Meets West Company to sell 8,750 units. Instead, management wants to determine how many units would be required to achieve a profit of 15 percent of sales revenue. Notice above that variable cost is 60 percent of selling price and that management wants profit to be 15 percent of sales revenue.

Required: Calculate the number of units and the sales revenue necessary to reach management’s goal.


EAST MEETS WEST COMPANY (C)(Breakeven)


East Meets West Company is faced with $.80 per unit increase in labor cost and wants to compensate for this by decreasing its fixed cost. It decides to give up some rented space and move all of its operations into its own plant, reducing fixed cost by $2,000. At the same time management believes that increasing the selling price of each unit by $.40 will not adversely affect demand for its product, and that a target profit of $9,000 can be maintained.

Required: If all these changes are incorporated in the analysis, what is the number of units that must be produced and sold?


EAST MEETS WEST COMPANY (D)(Breakeven)


Income taxes are a percentage of net income. East Meets West is subject to a 30 percent tax rate and management seeks an after-tax profit of $8,400.

Required: 1. Determine the breakeven point in units and dollars.2. Determine the unit sales and revenue necessary to earn an after-tax income of $8,400.


EAST MEETS WEST COMPANY (E)(Breakeven)


The company’s managers want to determine the level of operations required to earn a profit of $12,000 before taxes. They also want to know if it would be more profitable to change the method of operations by automating part of the compass assembly and eliminating some of the direct labor currently required.

The company faces two alternatives: maintain its current production operations or use the more automated production process. Selling price of the compass is $10 and East Meets West Company’s management has no plans to change the price. By changing the production process, the company would incur fixed costs of $27,500 per year and variable costs of $5 per compass.

Required: Determine which of the two production alternatives is preferable by examining the margin of safety ratio for both alternatives.


SADLY CORPORATION(Breakeven)

The following data are expected for Sadly Corporation’s in 2003:

Sales price (SP) per unit $10Fixed costs (FC) $300,000Contribution margin (CM) 50% of sales

Required:1. Determine the breakeven point in units.2. Determine the breakeven point in dollars.


THE HAT SOURCE(Breakeven)

The Hat Source operates a chain of women’s hat stores around the country. The stores carry many styles of hats that are sold at the same price. Sales personnel in the shops are paid a substantial commission on each hat sold (in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts.

The following cost and revenue data relate to Store 47 in Kansas City and are typical of one of the company’s many outlets:

Per HatSales price $ 30.00Variable expenses: Invoice cost $ 13.50 Sales commission 4 .50 Total variable expenses $ 18 .00

AnnualFixed expenses: Advertising $ 30,000 Rent 20,000 Salaries 100,000 Total fixed expenses $150,000

Required:1. Calculate the annual break-even point in dollar sales and unit sales for Store 47.2. Suppose the manager of Store 47 wants to make $30,000 of net income. How does this the change the

breakeven calculation?


JOLLY ROGER CANDIES(Breakeven)

The following information is available for Jolly Roger Candies and the Ocean Blue Candy production process.

Per UnitPrice of item $4Variable costs 3 Contribution margin $1

Total fixed costs $400

Required:1. How many units must be sold in order to make a profit before taxes of $300?2. What would the profit before taxes be if the sale volume increased 20% above the breakeven point?3. If the variable costs (VC) increase to $3.50 per unit, how many units must be sold to make a profit

after taxes of $300 (assume a 40% tax rate).


HOWARD'S LIMITED(Breakeven)

The management of Howard's Ltd. is involved in the preliminary analysis of a potential new product. The product will sell for $35 per unit and requires variable costs of $20 per unit. Fixed costs are anticipated to be $30,000 per month.

Required:Answer each of the following independent questions:

1. What is the breakeven point in units? In dollars?2. What annual dollar sales volume would be needed to earn $510,000 before taxes?3. What is the margin of safety ratio for question 2?4. How many units must be sold each month to earn an annual after tax profit of $864,000? The tax rate is

40%.


CLEAR TOYS(Breakeven)

Clear Toys is preparing next year's budget for one of their stores. The store has a contribution margin ratio of 60% and its fixed costs are $18,000.

Required:(Treat each part separately)1. If sales increase by $12,000 above the breakeven point, how much will income increase?2. If the advertising budget is increased by $6,000, it is estimated that sales will increase by $9,000. Should the

additional advertising be purchased?3. If salaries are increased by $3,000, how much must sales be increased to cover the increased cost?4. It is estimated that sales will increase from 12,000 to 18,000 units if the unit sales price is reduced from $10

to $8 and advertising is increased by $2,000. Is it profitable to do so?


CASSIDY COMPANY(Breakeven)

Cassidy Company makes a deluxe product CASS for special orders. The following are the actual results of operations in 1996.

Sales revenue $ 500,000Direct materials used 210,000Direct labor costs 140,000Variable overhead cost 30,000Contribution margin 100,000Gross margin 70,000Total fixed costs 110,000Fixed overhead ? Variable selling and administrative costs ?

Required:1. Determine the total variable costs of production.2. Determine the full manufacturing costs for 1996.3. What is the total variable selling and administrative costs?4. What is the fixed overhead costs for 1996?5. Determine the breakeven sales dollars for 1996.6. What is the operating leverage for 1996?


CASSIDY COMPANYCalculations ...


DEERING BANJO COMPANY(Multiple-Product Breakeven)

Deering Banjo Company manufactures two basic models of banjos: the Boston and the Deluxe. The Deluxe is Deering's professional model of banjo and uses higher quality materials and is more carefully crafted. More information on these products is provided below.

Selling VariablePrice Costs

Boston $1,200 $700Deluxe $5,000 $2000

Fixed costs of $3,000,000 are incurred annually.The expected mix of the banjos is 60% Boston and 40% Deluxe.

Required:1. Calculate breakeven in units for the Deering Banjo Company.2. Calculate breakeven revenue for the Deering Banjo Company.


ALCATRAZ ARTIFACTS(Multiple-Product Breakeven)

Alcatraz inmates produce three artifacts, the “Al”, the “Cat”, and the “Raz”. More information is provided below.

Artifacts“Al” “Cat” “Raz” Total

Sales in units 2,000 3,000 5,000 10,000Selling price per unit $20 $50 $40Variable cost per unit $16 $36 $28Total fixed cost $77,000

Required: 1. Calculate the breakeven point in units and dollars.2. What is the breakeven point if the sales mix of artifacts “Al” and “Cat” is 40% each, leaving “Raz”

with 20% of total sales?


PHONY PHONES COMPANY(Multiple-Product Breakeven)

Phony Phones Company sells landline telephones. Phony Phones has three products, Corded, 2.4 GHz, and 5.8 GHz. Relevant information for these products are as follows:

Corded 2.4 GHz 5.8 GHz TotalLast period’s sales $750,000 $600,000 $150,000 $1,500,000Percent of sales 50% 40% 10% 100%Price $30 $32 $40Unit variable costContribution margin

Total fixed cost

24 $ 6

24 $ 8

36 $ 4

$165,000

Required: 1. Calculate the breakeven point in units and dollars.2. What sales level will the store need to reach a target after-tax profit of $59,400? Assume a tax rate of

40%.


PHONY PHONES COMPANYCalculations ...


[Based on a homework problem that Dr. Fessler completed as a cost accounting student (CMA, adapted)]

ABTEX ELECTRONICS(Multiple-Product Breakeven)

Abtex Electronics manufactures two products -- tape recorders and electronic calculators -- and sells them nationally to wholesalers and retailers. Abtex management is very pleased with the company’s performance for the current fiscal year. Projected sales through December 31, 1997, indicate that 70,000 tape recorders and 140,000 electronic calculators will be sold this year. The projected earnings statement, which appears below, shows that Abtex will exceed its earnings goal of 9% on sales after taxes.

ABTEX ELECTRONICSProjected Earnings Statement for the Year Ended December 31, 1997

TAPERECORDERS

ELECTRONICCALCULATORS

TotalAmount(000s)

PerUnit

TotalAmount(000s)

PerUnit

Total(000s)

Sales $1,050 $15.00 $3,150 $22.50 $4,200.0Production Costs: Materials $ 280 $ 4.00 $ 630 $ 4.50 $ 910.0 Direct labor 140 2.00 420 3.00 560.0 Variable overhead 140 2.00 280 2.00 420.0 Fixed overhead 70 1.00 210 1.50 280.0 Total prod. costs $ 630 $ 9.00 $1,540 $11.00 $2,170.0Gross margin $ 420 $ 6.00 $1,610 $11.50 $2,030.0Fixed selling and admin. 1,040.0NI before income taxes $ 990.0Income taxes (55%) 544.5Net income $ 445.5

The tape recorder business has been fairly stable the last few years, and the company does not intend to change the tape recorder price. However, the competition among manufacturers of electronic calculators has been increasing. Abtex’s calculators have been very popular with consumers. In order to sustain this interest in its calculators and to meet the price reductions expected from competitors, management has decided to reduce the wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 1998. At the same time the company plans to spend an additional $57,000 on advertising during fiscal year 1998. As a consequence of these actions, management estimates that 80% of its total revenue will be derived from calculator sales as compared with 75% in 1997. As in prior years, the sales mix is assumed the same at all volume levels. (That is, the sales mix in units will not necessarily be the same as in 1997; however, the sales mix in 1998 will be constant no matter what volume levels occur.)

The total fixed overhead costs will not change in 1998, nor will the variable overhead cost rates (applied on a direct-labor-hour base). However, the cost of materials and direct labor is expected to change. The cost of solid state electronic components will be cheaper in 1998. Abtex estimates that material costs will drop 10% for the tape recorders and 20% for the calculators in 1998. However, direct labor costs for both products will increase 10% in the coming year. Variable overhead rates will be unchanged at $2.00 per unit.

Required: 1. How many tape recorder and electronic calculator units did Abtex Electronics have to sell in 1997 to

break even?2. How many tape recorder and electronic calculator units will Abtex have to sell in 1998 to break even?


ABTEX ELECTRONICSCalculations ...


BAGS AND MORE(Breakeven)

Bags And More is the exclusive distributor for a revolutionary bookbag. The product sells for $60 per unit and has a CM ratio of 40%. The company’s fixed expenses are $360,000 per year.

Required:1. What are the variable expenses per unit?2. Using the equation method:

a. What is the break-even point in units and in sales dollars?b. What sales level in units and in sales dollars is required to earn an annual profit of $90,000?c. Assume that through negotiation with the manufacturer Bags And More is able to reduce its variable

expenses by $3 per unit. What is the company’s new break-even point in units and in sales dollars?


BAGS AND MORECalculations…


LANDIS PLAYHOUSES(Breakeven)

Susan Landis has a small plant that makes playhouses. She sells them to local customers at $3,000 each. Her costs are as follows:

Costs Per Unit Total Direct material------------------------------- $1,200Direct labor----------------------------------- $ 400Variable overhead -------------------------- $ 150Variable selling------------------------------ $ 50Fixed production overhead ---------------- $200,000Fixed selling and administrative----------- $80,420

Susan is in a 35 percent tax bracket.

Required:1. How many playhouses must she sell to earn $495,014 after taxes?2. What level of revenue is needed to yield an after-tax income equal to 20 percent of sales?


LANDIS PLAYHOUSESCalculations…


GREEN SODA(Breakeven)

One of the products produced by Green Soda is Lime Blast. The selling price per half-gallon is $4.50, and variable cost of production is $2.70. Total fixed costs per year are $316,600. The company is currently selling 200,000 half-gallons per year.

Required:1. What is the margin of safety in dollars?2. What is the degree of operating leverage?3. If the company can increase sales in units by 30 percent, what percentage increase will it experience in

income? Prove your answer using the income statement approach.4. If the company increases advertising by $41,200 sales in units will increase by 15 percent. What will be the

new break-even point in units and in dollars? The new degree of operating leverage?


GREEN SODACalculations…


BAREFOOT BOOKS(Multiple-Product Breakeven)

Barefoot Books is a small book store that rents space in a neighborhood shopping mall for $19,200 a year. Its utilities add another $7,680 yearly. The total staff salaries and benefits projected for next year equal $56,000. Barefoot Books also spends $900 on advertising and $2,400 on professional services. Other overhead expenses total $11,500.

John Couch, the company’s owner, would like to make a $26,640 profit after taxes next year, when her tax rate will be 40 percent. The store sells hardbound books, paperback books, and magazines. The average variable cost of each category of items and Barefoot’s markup on variable cost is $12.00 and 50 percent, hardbacks; $2.40 and 25 percent, paperbacks; and $2.00 and 60 percent, magazines.

In past years, 70 percent of the store’s sales revenue came from hardback books, 20 percent from paperbacks, and the remaining 10 percent from magazines.

Required:1. What is the contribution margin of each sales item?2. What are the store’s projected fixed costs for next year?3. What is the breakeven point (in dollars) for Barefoot Books to achieve zero profit?4. What sales level will the store need to reach the target after-tax profit?


BAREFOOT BOOKSCalculations…


RELEVANT COSTS

Relevant Cost

Sunk Cost

Opportunity Cost

Incremental Cost

The main idea in golf as in life, I suppose, is to learn to accept what cannot be altered, and to keep on doing one’s reasoned and resolute best whether the prospect be bleak or rosy. BOBBY JONES (1902—1971), Professional golfer


RELEVANT COSTS

Handy Notes:

Examples of Decisions made using Relevant Cost thought:

1. Machine replacement2. Make or buy3. Keep or drop (a product line)4. Special orders5. Scarce resources6. Sell now or process further

IN A NUTSHELL …

I believe that every right implies a responsibility; every opportunity, an obligation; every possession, a duty.


JOHN D. ROCKEFELLER, JR. (1874—1960), Business executive and philanthropist


RELEVANT COSTS

Some Relevant Quotes (pun intended):

Bankers, being human, are reluctant to admit mistakes…. One way to hide a little mistake is to bury it under a bigger one. So Bankers cure a problem loan by lending more money to the source of the problem….

-- Bill Dutcher,“Confessions of a Penn Square Borrower”The Wall Street JournalAugust 15, 1985, p. 24

To terminate a project in which $1.1 billion has been invested represents an unconscionable mishandling of taxpayers’ dollars.

-- Senator Denton,November 4, 1981

Completing Tennessee-Tombigbee [Waterway Project] is not a waste of taxpayer dollars. Terminating the project at this stage of development would, however, represent a serious waste of funds already invested.

-- Senator Sasser,November 4, 1981

When it comes down to it, no one with any sense would abort a $2.5 billion construction project. And, by extension, no administration would abort a $200 billion national investment in nuclear energy. So the trick for the industry is to get more new plants under construction without the (anti-nuclear) movement knowing about it. By the time they get around to demonstrating and challenging the license, we’ll have a million


tons of steel and concrete in the ground, and no one in their right mind will stop us.

-- M. Dowie,“Atomic Psyche-Out”Mother Jones, 6, p. 23 (1981)


RELEVANT COSTS


What is a Relevant Cost? What is a Sunk Cost? Are sunk costs relevant? What is an Opportunity Cost? Are opportunity costs relevant?

What types of decisions can be/are made using relevant cost thought?

Vitality shows in not only the ability to

persist but the ability to start over.

F. SCOTT FITZGERALD (1896—1940), Writer

Unshared joy is an unlighted candle.SPANISH PROVERB


JOE SLOW(Classifying Relevant and Irrelevant Items)

Joe Slow is a salesperson for Forrester Fine Foods. He is considering a 250-mile trip to visit a potential customer, Finding Foodstore. Following are factors he is pondering. Hmmm.

1. __________ The cost of traveling the 250 miles to Finding Foodstore.

2. __________ The time he will spend on the road.

3. __________ The time he will spend visiting with Finding Foodstore executives.

4. __________ The amount of time already devoted to Finding Foodstore.

5. __________ The revenue potential from Finding Foodstore.

6. __________ The cost of his last visit to Finding Foodstore.

7. __________ The probability that his visit will result in new sales.

8. __________ The cost of lunch for himself if he visits Finding Foodstore.

9. __________ The cost of lunch he would buy for Finding Foodstore executives.

Required: For each item listed, indicate whether it is relevant (R) or irrelevant (I).


JUDE LAW & ASSOCIATES(Relevant Costs)

MACHINE REPLACEMENT

Jude Law & Associates, a local law firm, purchased and installed a new computer system two weeks ago at a cost of $35,500. Later Jude’s brother, John, stopped by the law office to say hello. While there, he noticed the new system. He remarked that it is too bad the system was not the latest and quickest because, if it were, the data input time would be cut in half. John suggested that Jude consider updating his system. Jude responded that he cannot because he just purchased the system two weeks ago. Perhaps Jude should reconsider.

Both systems have a useful life of 5 years.

Old NewSystem System

Start up:Cost of system $35,500 $76,000

Operating:Annual depreciation $ 7,000 $15,000Annual labor cost 36,000 18,000Annual maintenance cost 1,000 1,000

Shutdown:Residual value of system $ 500 $ 1,000Current sale price of old system 10,000

Required:Should Jude Law keep the old system or purchase the new one?


TIGÉR BOATS(Relevant Costs)

SPECIAL ORDER

Tigér Boats has been in business in Abilene, Texas, since 1995. Tigér Boats sells to boat stores around the world. A representative for Boats Inc., the largest chain of boat retail stores in the U.S., approached the owner of Tigér Boats, Bill Bird, interested in purchasing 1,000 boats for $12,500 each. The largest previous order was for 100 boats, so this large order requires special consideration.

The $12,500 offer from Boats Inc. is much less than Tigér Boat’s normal selling price of $16,000 per boat. In fact, the boats cost $13,000 to produce, so the company would lose $500 per boat if it accepts the offer by Boats Inc.

Expected sales (5,500 units at $16,000 each) $88,000,000Less: Cost of goods sold (see detail below) (71,500,000)Expected gross margin $16,500,000

Detailed calculation of cost of goods sold:Per Unit Total

Number of units 1 5,500

Direct material $ 5,000 $27,500,000Direct labor 5,500 30,250,000Variable manufacturing overhead 1,000 5,500,000Fixed manufacturing overhead 1,500 8,250,000Total cost of goods sold $13,000 $71,500,000

Required:Should Bill Bird accept or reject the offer?


APPLE APPLIANCES(Relevant Costs)

MAKE OR BUY

You are the production manager at Apple Appliances, a company that produces convection ovens. A vendor has approached you about supplying the timer assemblies for the convection ovens for $12 each. Apple currently makes its own timers; your research reveals that the company uses 80,000 timers each year and they cost $14 each to produce in-house.

Number of timers produced each year 80,000

Per Unit TotalDirect material $ 5 $ 400,000Direct labor 4 320,000Variable manufacturing overhead 1 80,000Fixed manufacturing overhead 4 320,000Total cost of goods sold $14 $1,120,000

Required:Should you accept or reject the offer?


TINA’S BEST CHOCOLATE (A)(Relevant Costs)

SELL NOW OR PROCESS FURTHER

Among its many products, Tina Noel’s privately held company imports cocoa beans and processes them into cocoa powder and cocoa butter. A portion of the cocoa powder is used in the production of chocolate candy; the remainder of the cocoa powder is sold to Jerry & Ed’s Ice Cream for use in ice cream production.

Tina is considering the possibility of processing the remaining cocoa powder into an instant cocoa mix that she will sell under the Tina’s Best brand.

Required:Should Tina sell the cocoa powder to Jerry & Ed’s or process further and sell as an instant cocoa mix?


Purchase Cocoa Beans:$500 per ton

Joint production costs: $600 per ton

Total joint costs:$1,100 per ton

Cocoa butter sales value:$750 for ¾ ton

Cocoa powder sales value:

$500 for ¼ ton

Additional processing cost:$800 for ¼ ton

Instant cocoa sales value:

$2,000 for ¼ ton

TINA’S BEST CHOCOLATE (B)(Relevant Costs)

SCARCE RESOURCES

Tina’s production facility in Hillsboro, Kansas, makes two candy products, The Light and The Dark. Plant capacity is limited by its available machine time, only 700 hours are available in the plant each month. The company can sell as many cases of each candy as it produces.

Cost per Case: The Light The DarkMachine hours required per case ………………… .02 MH ……… .05 MH

Sales price ……………………………………….. $10.00 ………. $14.00Less: Variable costs: Direct material ………………………………… $ 3.00 ……… $ 3.75 Direct labor 2.00 2.50 Variable overhead …………………………….. 3.00 ……… 3.75 Variable S&A 1 .00 2 .00 Total variable costs $ 9 .00 $12 .00 Contribution margin per case $ 1.00 $ 2.00Less: Fixed costs (allocated at 25% of sales) …….. .25 ……… .50 Net income per case $ 0 .75 $ 1 .50

Required:Which product should Tina produce and sell?


FUNK AND WAGNALL(Classifying Relevant and Irrelevant Items)

Funk and Wagnall, attorneys at law, have been asked to represent a local client in proceedings to be held in San Francisco, California. Required: Classify each of the following items on the basis of their relationship to this engagement. Items may have multiple classifications.

Relevant Costs Irrelevant CostsOpportunity Outlay* Outlay* Sunk

1. The case will require three attorneys to stay four nights in a San Francisco hotel. The predicted hotel bill is $1,200.

2. Funk and Wagnall’s professional staff is paid $800 per day for out-of-town assignments.

3. Last year, depreciation on Funk and Wagnall’s office was $12,000.

4. Round-trip transportation to San Francisco is expected to cost $600 per person for the engagement.

5. The firm has recently accepted an engagement that will require partners to spend two weeks in Dallas. The predicted out-of-pocket costs of this engagement are $8,500.

6. The firm has a maintenance contract on its word processing equipment that will cost $2,200 next year.

7. If the firm accepts the engagement in San Francisco, it will have to decline a conflicting engagement in Orlando that would have provided a net cash inflow of $7,200.

8. The firm’s variable overhead is $40 per client-hour.

9. The firm pays $150 per year for Mr. Funk’s subscription to a law journal.

10. Last year the firm paid $7,500 to increase the insulation in its building.

* An outlay cost is a cost that requires a cash disbursement sooner or later.


FRODO COMPANY(Relevant Costs)

MACHINE REPLACEMENT

Frodo Company is trying to determine whether or not to replace an old machine with a brand new machine with lower annual operating costs.

Old Machine New MachineBook value/cost $30,000 $40,000Salvage value in 5 yrs. $0 $0Annual operating cost $15,000 $4,000Current resale value $2,000 N/ARemaining life 5 yrs. 5 yrs.

Required: Should Frodo Company keep the old machine or purchase the new one?


TOLEDO TORPEDO COMPANY(Relevant Costs)

MACHINE REPLACEMENT

Toledo Torpedo Company is considering replacement of an existing machine used for finishing products. Annual revenue of $100,000 will not change regardless of the decision. Summary data on the existing machine and the new machine are as follows:

Existing Machine1. Initial cost of $120,000 (purchase made eight years ago)2. Current book value of $40,000 ($120,000 minus accumulated depreciation of $80,000 using the

straight-line method3. Current disposal value of $4,0004. Estimated remaining useful life of four years with zero terminal disposal value5. Variable operating costs per year of $80,000

New Machine1. Current purchase price of $60,0002. Estimated useful life of four years with zero terminal disposal value3. Variable operating costs per year of $56,000

Required:Should Toledo Torpedo Company keep the old machine or purchase the new one?


HASSLE COMPANY(Relevant Costs)

MAKE OR BUY

Hassle Company produces ceramic teapots with wooden handles, and its production facility in Patchogue, NY has idle capacity (i.e., no opportunity cost). The 1998 budget specifies that 20,000 wooden handles will be required so the company can produce the same number of teapots. Costs to manufacture the handles are as follows:

Direct Material $ .60Direct Labor $ .40Variable Mfg. Overhead $ .10Fixed Mfg. Overhead $ .20 Total $1.30

Superb Handle Co. specializes in the production of wooden handles for ceramic teapots. Superb has offered to supply handles for $1.25 each.

Required: Should Hassle Company MAKE the handles for use in teapot production, or BUY them from Superb Handle Co.?


CALIFORNIA TEXTBOOKS (A)(Relevant Costs)

MAKE OR BUY

California Textbooks produces high-quality textbooks, and incurs the following costs for making the book covers.

COST OF MAKING COVERSTotal Costs for

10,000 unitsCosts

Per UnitDirect materials $ 10,000 $ 1Direct labor 80,000 8Variable overhead applied 40,000 4Fixed overhead applied 50,000 5Total costs $180,000 $18

Textbook-Covers-R-Us has offered to produce the textbook covers for a price of $16 each.If the textbook covers are purchased, $20,000 of fixed costs will be saved.

Required:Should California Textbooks make or buy the textbook covers?


CALIFORNIA TEXTBOOKS (B)(Relevant Costs)

MAKE OR BUY

California Textbooks produces high-quality textbooks, and incurs the following costs for making the book covers.

COST OF MAKING COVERSTotal Costs for

10,000 unitsCosts

per UnitDirect materials $ 10,000 $ 1Direct labor 80,000 8Variable overhead applied 40,000 4Fixed overhead applied 50,000 5Total costs $180,000 $18

Textbook-Covers-R-Us has offered to produce the textbook covers for a price of $16 each.If the textbook covers are purchased, $20,000 of fixed costs will be saved.

Additionally, if the textbook covers are purchased, the released production facilities can be used to manufacture other products with a contribution margin of $19,000 or can be rented out for $5,000. California Textbooks now has four options: (1) Make, (2) Buy and leave facilities idle, (3) Buy and use facilities for other products, or (4) Buy and rent.

Required:Which option is best for California Textbooks?


ADAMS’ COMPANY

(Relevant Costs)

SCARCE RESOURCES

Adams’ Company specializes in manufacturing titanium into bicycle frames and golf clubs, their only two product lines. A recent strike in Russia has stopped all production of this rare metal, but Adams’ foresaw this event occurring and has stockpiled 80,000 lbs. of titanium in inventory. No more titanium can be purchased for the foreseeable future and the managers at Adams’ Company must decide whether to use their titanium inventory to produce bicycle frames or to produce golf clubs.

Bicycle Frames ------ $40/unit contribution margin, each frame requires 8 lbs. of titanium to produceSet of Golf Clubs ---- $32/unit contribution margin, each set of clubs requires 4 lbs. of titanium to produce

Fortunately for Adams’ Company, everything they make can be sold regardless of which product they produce.

Required: How many of each product should Adams’ Company make to maximize Income?


SAM ENTERPRISES(Relevant Costs)

SCARCE RESOURCES

Sam Enterprises manufactures two products, Cans and Can-ettes. More information regarding these two products can be found below.

Cans Can-ettesSelling price per unit $10 $15Variable expenses per unit 7 9Contribution margin per unit $ 3 $ 6Contribution-margin ratio 30% 40%

Additionally, as the owner of Sam Enterprises, you know that you only have 1,000 hours of production capacity available. You can produce three Cans per hour but only one Can-ette per hour.

Required:Which product should you choose to produce, Cans or Can-ettes? Show all supporting calculations.


MOEHRLE MANUFACTURING(Relevant Costs)

SPECIAL ORDER

Moehrle Manufacturing makes computer monitors which sell for $150 each. Steve, the CEO of Moehrle Manufacturing, has received a special order to produce monitors with a special logo. The special logo would increase the production cost of each monitor by $5.00 over and above the normal costs to manufacture these computer monitors, as detailed below. Moehrle Manufacturing has excess capacity and so can fill this order without disturbing production for other customers.

Costs to manufacture:Direct materials $45Direct labor $30Variable mfg. overhead $30Fixed mfg. overhead $22Total $127

Required: What is the minimum selling price Steve should accept for this order?


TILLAMOOK CHEESE CO.(Relevant Costs)

SELL NOW OR PROCESS FURTHER

Tillamook Cheese Co. (TCC) produces not only cheese but also ice cream and butter in its facility in Tillamook, Oregon. Raw milk is the primary direct material used to produce all three products. Currently 40% of the TCC’s production is cheese, 50% is ice cream, and 10% is butter. You were recently hired as an accountant and were asked to determine if it would be more profitable instead to sell any of the raw milk as milk rather than use it to produce cheese, ice cream, or butter.

Which products should be processed further??

Product: Cheese Ice Cream ButterSales value at split off (i.e., raw milk) $400,000 $500,000 $100,000Sales value if processed further $450,000 $679,000 $110,000Cost of further processing $ 17,000 $103,000 $ 14,000

Joint costs (milk truck) $150,000Joint costs are allocated by the sales value at split off

Required: What product or products should Tillamook Cheese Co. continue to produce?


TILLAMOOK CHEESE CO.Calculations ...

Note: Tillamook Cheese Co. is the name of a real company, but all of the data in this problem are purely fictional.


ANDRETTI COMPANY(Relevant Costs)

Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below:

Direct materials $10.00Direct labor 4.50Variable overhead 2.30Fixed overhead 5.00 ($300,000)Variable selling expenses 1.20Fixed selling expenses 3 .50 ($210,000)

Total cost per unit $26 .50

Required:A number of questions relating to the production and sale of Daks are given below. Each question is independent.

1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year. The company could increase sales by 25 percent above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed expenses be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would b $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. You have been asked by the president to compute the per unit break-even price on this order.

3. The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be "seconds". Due to the irregularities, it will be impossible to sell these units at the regular price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price?

4. Due to a strike in its supplier's plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to continue to operate at 30 percent of normal levels for the two-month period. As an alternative, Andretti could close it plant down entirely for the two months. If the plant were closed, fixed overhead costs would continue at 60 percent of their normal level during the two-month period; the fixed selling costs would be reduced by 20 percent while the plant was closed. What would be the dollar advantage or disadvantage of closing the plant for the two month period?

5. An outside manufacturer has offered to produce Daks for Andretti Company and to ship them directly to Andretti's customers If Andretti Company accepts this offer, the facilities that is uses to produce Daks would be idle; however, fixed overhead costs would be reduced by 75 percent from their present level. Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. Compute the unit cost figure that is relevant for the comparison against whatever quoted price is received from the outside manufacturer.


ANDRETTI COMPANYCalculations ...


FABULOUS FURNITURE(Identifying Relevant Costs)

A number of costs are listed below that may be relevant in decisions faced by the management of Fabulous Furniture, a furniture manufacturer:

Case 1 Case 2

RelevantNot

Relevant RelevantNot

Relevanta. Sales revenue

b. Direct materials

c. Direct labor

d. Variable manufacturing overhead

e. Book value-Model A3000 machine

f. Disposal value-Model A3000 machine

g. Depreciation-Model A3000 machine

h. Market value-Model B3800 machine (cost)

i. Fixed manufacturing overhead (general)

j. Variable selling expense

k. Fixed selling expense

l. General administrative overhead

Required:Place an X in the appropriate column to indicate whether each item is relevant in the following situations. Requirement 1 relates to Case 1 above, and requirement 2 relates to Case 2. Consider the two cases independently.

Case 1:The company chronically runs at capacity and the old Model A3000 machine is the company’s constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company’s present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead.

Case 2:The old Model A3000 machine is not the company’s constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.


BOHR, INC.(Relevant Costs: Make or Buy)

Bohr Inc. manufacturers machine parts for aircraft engines. CEO Billy Bohr is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $124,000. If Bohr does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:

Costs per UnitDirect materials $28Direct labor 18Variable manufacturing overhead 6Fixed overhead 4

In addition to these costs, Bohr would also incur a retooling and design cost of $8,000 to produce part OP89.

Required:Should Bohr, Inc. accept the offer from the subcontractor? Why or why not?


PAULEY’S PARTS COMPANY(Relevant Costs: Disposal of Assets)

Pauley’s Parts Company has an inventory of 2,000 different parts for a line of cars that has been discontinued. The net book value of inventory in the accounting records is $50,000. The parts can be either remachined at a total additional cost of $25,000 and then sold for $30,000 or sold as is for $2,500.

Required:What should Pauley’s Parts Company do with these 2,000 car parts?


GILLIGAN’S BOAT RENTALS(Relevant Costs: Asset Replacement)

An uninsured boat costing $90,000 was wrecked the first day it was used. It can be either sold as is for $9,000 cash and replaced with a similar boat costing $92,000 or rebuilt for $75,000 and be brand new as far as operating characteristics and looks are concerned.

Required:Should Gilligan’s Boat Rentals replace or fix the old boat?


EARL CORPORATION(Relevant Costs: Sell Now or Process Further)

Earl Corporation manufacturers products A, B, and C from a joint process. Joint costs are allocated on the basis of relative sales value at the end of the joint process. Additional information for Earl Corporation follows:

A B C TotalUnits produced ………………………….... 12,000 8,000 4,000 24,000Joint costs ……………………………….... $144,000 $60,000 $36,000 $240,000Sales value after joint processing …...…… $240,000 $100,000 $60,000 $400,000Additional costs for further processing …... $ 28,000 $20,000 $12,000 $ 60,000Sales value if processed further ………...... $280,000 $120,000 $80,000 $480,000

Required:Should product A, B, or C be processed further and then sold?


STEWART COMPANY(Relevant Costs: Make or Buy)

Stewart Company needs 20,000 units of a part to use in producing one of its products. If Stewart buys the part from Woodrow Company for $85 instead of making it, Stewart could not use the released facilities in another manufacturing activity. Fifty percent of the fixed overhead will continue regardless of CEO David Stewart’s decision. The cost data are as follows:

Costs per UnitDirect materials $35Direct labor 11Variable overhead 19Fixed overhead 20

$85

Required:Determine which alternative is more attractive to Stewart and by what amount.


GAMERS, INC.(Relevant Costs: Scarce Resources)

Gamers Inc. produces two basic types of video games, Bash and Gash. Pertinent data for Gamers Inc. follows:

BASH GASHSales price $200 $140Costs Direct materials 56 26 Direct labor 30 50 Variable factory overhead* 50 25 Fixed factory overhead* 20 10 Marketing costs (all variable) 28 20 Total costs $184 $131Operating income $16 $9

*Based on labor hours.

The video craze is at its height so that either BASH or GASH alone can be sold to keep the plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games. BASH and GASH are processed through the same production departments.

Required:Which product should be produced? Briefly explain your answer.


FOSTER’S BAR-B-QUE(Relevant Costs: Special Orders)

Foster’s Bar-B-Que is a popular lunch-time spot. Foster is conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable cost for each meal is about $2, and he figures his fixed costs, on a daily basis, at about $1,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat about 700 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Foster to lower the price to $3.50 per meal for each of the 50 bus tour members.

Required:Should Foster accept the $3.50 price? Why or why not? What I the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal?


JOHNSON COUNTY SENIOR SERVICES(Relevant Costs: Dropping or Retaining a Segment)

Johnson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Johnson County area. Three services are provided for seniors—home nursing, meals on wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform tests ordered by their physicians. The meals on wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow:

TotalHome

NursingMeals onWheels

House-keeping

Revenues………………………… $900,000 $260,000 $400,000 $240,000Less variable expenses………….. 490,000 120,000 210,000 160,000Contribution margin…………….. 410,000 140,000 190,000 80,000Less fixed expenses: Depreciation…………………… 68,000 8,000 40,000 20,000 Liability insurance…………….. 42,000 20,000 7,000 15,000 Program administrators’ salaries 115,000 40,000 38,000 37,000 General administrative overhead* 180,000 52,000 80,000 48,000Total fixed expenses……………… 405,000 120,000 165,000 120,000Net operating income (loss)……… $ 5,000 $ 20,000 $ 25,000 $(40,000)

*Allocated on the basis of program revenues

The head administrator of Johnson County Senior Services, Marsha Davis, is concerned about the organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year’s results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Davis asked for more information about the financial advisability or perhaps discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. Depreciation charges assume zero salvage value. None of the general administrative overhead would be avoided if the housekeeping program was dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:1. Should the housekeeping program be discontinued? Explain. Show computations to support your answer.2. Recast the about data in a format that would be more useful to management assessing the long-run financial

viability of the various services.


JOHNSON COUNTY SENIOR SERVICESCalculations…


JOB-ORDER COSTING

The Cost/Managerial Accounting Problem:



JOB-ORDER COSTING

Why are manufacturing costs accumulated in inventory?

Why is the absorption costing income statement format GAAP??

Be willing to make decisions. That’s the most important quality in a good leader. Don’t fall victim to what I call the “ready-aim-aim-aim-aim syndrome.” You must be willing to fire. T. BOONE PICKENS, Financier


I owe all of my success in life to having been always a quarter of an hour beforehand. HORATIO NELSON (1758—1805), Vice Admiral of the Royal Navy


JOB-ORDER COSTING

Two Income Statement Formats:

Absorption Costing Income Statement

Variable Costing Income Statement



JOB-ORDER COSTING

How Can Unit Costs Be Calculated?


EGG YOLK YUMMIES(Applying Overhead)

Egg Yolk Yummies manufactures hard yellow candies. The company’s production process is largely automated, and the company incurs monthly expenses of $25,000 for depreciation and factory leases. In addition, on January 1st, 1999, Egg Yolk paid $48,000 for fire insurance covering the entire production facility for the months January 1st through December 31st, 1999. Also, Egg Yolk paid $36,000 on December 15th to maintain and refurbish the production machines and facilities.

Required:When calculating monthly net income, how much manufacturing overhead expense should Egg Yolk Yummies use for each of the months of 1999, January through December?

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total

$384,000


Job-Order Costing & APPLYING OVERHEAD

PDOR =

Applied MOH =


As I think back and look forward, I see how nothing is unambiguous; nothing is without risk. Salvation does not come through simplicities.

A. BARTLETT GIAMATTI (1938—1989), Educator and baseball executive


Job-Order Costing & APPLYING OVERHEAD

Question: Why Allocate?

Handy Notes:

Answer: To match revenues and expenses!For example: factory insurance may be paid annually, but managers want monthly information for decision making

Helpful for bidding on new jobs.

Examples of allocation bases: DLH -- 31% DL$ -- 31% MH -- 12% DM$ -- 4% Units -- 5% Other -- 17%

(e.g., EDS used total expenses)

It’s easier to hide your light under a bushel than to keep your shady side dark. HELEN ROWLAND (c. 1875—1950), Journalist and humorist


THE BAIZE COMPANY(Applying Overhead)

The Baize Company allocates manufacturing overhead to production based on direct labor hours. The following information is available for The Baize Company:

Estimated manufacturing overhead $403,200Actual manufacturing overhead $378,000Estimated direct labor hours 21,000Actual direct labor hours 20,000

Required:1. Compute the manufacturing overhead rate for The Baize Company.2. Compute the amount of applied manufacturing overhead.3. Compute the amount of underapplied or overapplied overhead for the year.


ROBIN HOOD, INC.(Applying Overhead)

Robin Hood, Inc., allocates manufacturing overhead to production based on machine hours. The following information is available:

Estimated manufacturing overhead $2,000,000Actual manufacturing overhead $2,400,000Estimated machine hours 125,000Estimated direct labor hours 210,000Actual machine hours 140,000Actual direct labor hours 200,000

Required:1. Compute the manufacturing overhead rate for Robin Hood, Inc.2. Compute the amount of applied manufacturing overhead.3. Compute the amount of underapplied or overapplied overhead for the year.


HALO PRODUCTS COMPANY(Applying Overhead)

The Halo Products Company uses direct labor hours as the basis for applying overhead to products. Estimated manufacturing overhead costs for 1997 are $200,000, and estimated direct labor hours for the year are 32,000 hours. During 1997, 36,400 actual direct labor hours were worked and the Manufacturing Overhead Control account had a year end balance of $256,200.

Required:1. Compute the manufacturing overhead rate for 1997.2. Compute the amount of applied manufacturing overhead for 1997.3. Compute the amount of underapplied or overapplied overhead for the year.4. Compute the actual overhead cost per direct labor hour.


NARCISSUS NEEDLES(Applying Overhead)

Narcissus Needles allocates overhead on the basis of direct labor hours (DLH). The management of Narcissus has estimated the following costs for the 1997 fiscal year, all related to factory and production processes:

Factory Utilities $10,000Depreciation on factory equipment 15,000Supervisors' salaries 30,000Janitorial supplies 6,000Factory Insurance 9,000

Management has also estimated that 3,500 direct labor hours will be worked during the year.

Required:1. What is the predetermined overhead rate (PDOR) that Narcissus should use to apply overhead?2. If 3,600 direct labor hours were actually worked during the fiscal year, what would be applied overhead?3. If 3,600 direct labor hours were worked and actual costs incurred were as follows, how much overhead was

overapplied or underapplied?Factory Utilities $10,500Depreciation on factory equipment 15,000Supervisors' salaries 30,000Janitorial supplies 5,200Factory Insurance 8,500


McKAY MILLS(Applying Overhead)

Suppose McKay Mills at the beginning of the year expected to incur $1,335,000 of overhead expenses in 1995. McKay has a policy of allocating overhead on the basis of direct labor hours using a plant-wide rate. McKay has three departments -- Yarn, Fabric and Clothing -- which expect to incur 500, 410 and 735 hours (respectively) of direct labor hours in 1995.

Required: What predetermined overhead rate (PDOR) should McKay Mills use?

McKay Mills departments actually incurred direct labor hours as follows: Yarn (455), Fabric (420) and Clothing (750).

Required: How much overhead should be applied to each department when $1,372,000 of overhead costs were actually incurred?


BUFFALO BROILERS(Applying Overhead)

Buffalo Broilers is the manufacturer of a countertop oven-broiler and estimates overhead costs of $500,000 for 1992. Three possible overhead application bases are being considered by management; they are direct labor hours, direct labor cost, and machine hours. Estimated 1992 activity levels for each of the potential application bases are given below:

Direct labor hours 100,000 hoursDirect labor cost $800,000Machine hours 80,000 hours

The broiler requires two direct labor hours, $18.00 of direct labor cost, and 1.2 hours of machine time. The balance in the manufacturing overhead account was $576,000 on December 31, 1992. During 1992, 120,000 direct labor hours were worked at a cost of $930,000, and 90,000 machine hours were used. There were 60,000 oven-broilers manufactured in 1992.

Required:1. Compute the 1992 manufacturing overhead rate using each of the three potential application bases.2. Compute the underapplied or overapplied overhead that would have occurred in 1992 using each of the

application bases.3. Assume direct labor hours was used as the application base. Compute the unit cost of overhead using

actual overhead cost and actual activity for the year.


BUFFALO BROILERSCalculations ...


HOWDY COMPANY(Applying Overhead)

Morris Company manufactures products to customer specifications and employs a job-order costing system. Predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined overhead rate in department A is based on machine hours, and the rate in department B is based on direct labor cost. At the beginning of 1995, the company's management made the following estimates:

DepartmentA B

Direct labor-hours 12,000 60,000Machine-hours 70,000 8,000Direct materials cost $510,000 $650,000Direct labor cost $130,000 $420,000Manufacturing overhead cost $602,000 $735,000

Job 205 was initiated into production on August 1 and completed on August 10. The company's cost records show the following information on the job:

DepartmentA B

Direct labor-hours 30 85Machine-hours 110 20Direct materials cost $470 $332Direct labor cost $290 $680

Required:1. Compute the predetermined overhead rate that should be used during the year in department A. Compute

the rate that should be used in department B.

2. Compute the total overhead cost applied to job 205.

3. What would be the total cost of job 205? If the job contains 50 units, what would be the cost per unit?

4. At the end of 1995, the records of Morris Company revealed the following actual cost and operating data for all jobs worked on during the year. What was the amount of under- or overapplied overhead in each department at the end of 1995?

DepartmentA B

Direct labor-hours 10,000 62,000Machine-hours 65,000 9,000Direct materials cost $430,000 $680,000Direct labor cost $108,000 $436,000Manufacturing overhead cost $570,000 $750,000


HOWDY COMPANYCalculations ...


AXIOM PRODUCTS(Applying Overhead)

Axiom Products is a manufacturing company that operates a job-order costing system. Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the company would incur $170,000 in manufacturing overhead costs for the year and work 85,000 machine-hours.

Required:1. Compute Axiom’s predetermined overhead rate.2. Assume that during the year the company actually worked 80,000 machine hours and incurred the costs

indicated in the Manufacturing Overhead and Work in Process t-accounts below. Compute the amount of overhead cost that would be applied to Work in Process for the year, and make the entry in the t-accounts.

3. Compute the amount of under- or overapplied overhead for the year, and show the balance in your Manufacturing Overhead t-account. Prepare a journal entry to close out the balance in this account to Cost of Goods Sold.

4. Explain why the manufacturing overhead was underapplied or overapplied for the year.

Manufacturing Overhead Work in Process

(Utilities) $14,000 ____________ (Direct materials) $530,000(Insurance) 9,000 (Direct labor) 85,000(Maintenance) 33,000 (Overhead) _________(Indirect materials) 7,000(Indirect labor) 65,000(Depreciation) 40,000

Balance


AXIOM PRODUCTSCalculations…


HOLMAN COMPANY(Applying Overhead)

Holman Company is a furniture manufacturing firm in a suburb of Billings, Montana. It uses a job-order costing system. It applies factory overhead costs on the basis of direct labor-hours. At the beginning of 2004, management estimated that the company would incur $284,000 of factory overhead costs for the year and work 71,000 direct labor-hours.

During the year, the company actually worked 75,000 direct labor-hours and incurred these factory overhead costs:

a. Paid $75,400 cash for utilities, power, and other miscellaneous items for the manufacturing plants.b. Recognized $58,000 depreciation on manufacturing property, plant, and equipment for the year.c. Paid $25,000 cash for the insurance premium on manufacturing property and plant.d. Incurred advertising costs, $10,000.e. Incurred indirect labor costs, $54,600.f. Incurred indirect material costs, $53,000.g. Paid the $55,000 salary of the factory superintendent.h. Accrued sales and administrative salaries, $85,000.

Required:1. Compute the firm’s predetermined overhead rate.2. Compute the amount of factory overhead that should be applied to the Work-in-Process Inventory account

for the year.3. Compute the amount of overapplied or underapplied overhead to be closed into the Cost of Goods Sold

account at the end of the year.


HOLMAN COMPANYCalculations…


EVERYTHING INCORPORATED(Process Costing and Job-Order Costing)

Everything Incorporated has many industries in which it is involved. The following is a list of some its diversified businesses:

Business Job-Order Costing Process Costing

Custom yacht builder.

Golf course designer.

Potato chip manufacturer.

Business consultant.

Plywood manufacturer.

Soft-drink bottler.

Film studio.

Bridge construction company.

Manufacturer of fine custom jewelry.

Made-to-order garment factory.

Factory making one personal computer model.

Fertilizer factory.

Required:In each of the previous businesses, place an X in the appropriate column to indicate whether job-order costing or process costing is more appropriate.


[EVEN MORE] JOB-ORDER COSTING

** NOTE TO “SELF”! **

See this problem ____________________________


For an example of cost flows with applied MOH.


Knowledge is food for the soul. PLATO (c. 427—347 B.C.), Philosopher

Saddle your dreams afore you ride ‘em. MARY WEBB (1881—1927), Novelist


ARC LIGHT & SOUND(Job-Order Costing)

Arc Light & Sound uses a job-order costing system. The company’s inventory balances on April 1, the start of the fiscal year, were as follows:

Raw materials $32,000Work in process $20,000Finished goods $48,000

During the year, the following transactions were completed:

1. Raw materials were purchased on account, $170,000.2. Raw materials were issued from the storeroom for use in production, $180,000 (80% direct and 20%

indirect).3. Employee salaries and wages were accrued as follows: direct labor, $200,000; indirect labor, $82,000; and

selling and administrative salaries, $90,000.4. Utility costs were incurred in the factory, $65,000.5. Advertising costs were incurred, $100,000.6. Prepaid insurance expired during the year, $20,000 (90% related to factory operations, and 10% related to

selling and administrative activities).7. Depreciation was recorded, $180,000 (85% related to factory assets, and 15% related to selling and

administrative assets).8. Manufacturing overhead was applied to jobs at the rate of 175% of direct labor cost.9. Goods that cost $700,000 to manufacture according to their job cost sheets were transferred to the finished

goods warehouse.10. Sales for the year totaled $1,000,000 and were all on account. The total cost to manufacture these goods

according to their job cost sheets was $720,000.

Required:1. Using t-accounts, compute Cost of Goods Manufactured, Cost of Goods Sold, and Net Income.2. Prepare an Income Statement for the year, in good form.


ARC LIGHT & SOUNDCalculations ...


MARIE MANUFACTURING COMPANY(Job-Order Costing)

The following data pertain to the Marie Manufacturing Company for the year ended December 31, 2004. The company used 51,000 direct labor hours during 2004.

Beginning direct material inventory $ 42,000Ending direct material inventory 48,000Beginning work-in-process inventory 84,000Ending work-in-process inventory 93,000Beginning finished goods inventory 124,000Ending finished goods inventory 133,000Direct material purchased 850,000Indirect material used in production 4,000Factory supplied used 6,200Depreciation on the factory 60,000Depreciation on the sales office 4,000Depreciation on the administrative office 3,000Sales salaries 120,000Sales revenue 3,335,000Assembly-line labor cost 820,000Factory security guard cost 12,000Factory supervision 82,600Depreciation on production equipment 560,000Depreciation on sales office equipment 22,200

Additional Information:The overhead is applied using a budgeted rate that is set every December by forecasting the following year's production (in units) and relating it to forecast direct labor hours. The budget for 2004 called for 50,000 direct labor hours and $750,000 of factory overhead.

Required:1. Materials requisitioned during 20042. Overhead applied during 20043. Overapplied or underapplied overhead during 20044. Cost of Goods Manufactured during 20045. (Adjusted) Cost of Goods Sold during 20046. Net income for January


MARIE MANUFACTURING COMPANYCalculations ...


ROLEY POLEY COMPANY(Job-Order Costing)

Below are data for Roley Poley Company as of year-end, December 31, 2002.

Sales salaries ……… $ 85,000Advertising ……… 44,000Direct materials inventory ……… 126,100Direct materials used ……… 325,000Work in process ……… 73,900Indirect labor ……… 22,700Depreciation, factory ……… 31,000Property taxes (70 percent production plant) 18,000Fire insurance (80 percent production plant) 9,800Sales commissions ……… 28,500Administrative salaries ……… 167,200Finished goods ……… 77,300Direct labor ……… 293,480Indirect material ……… 11,600Direct materials purchased ……… 319,700Utilities (80 percent factory) ……… 45,000Rent, office equipment ……… 8,700Depreciation, office ……… 17,400Depreciation, factory equipment ……… 44,000Sales ……… 1,281,700Miscellaneous office expense ……… 4,300Sales returns and allowances ……… 36,100

All accounts have normal balances. Beginning work in process was $49,000 and beginning finished goods was $87,300. Roley Poley pays income taxes at a rate of 40% of pretax income.

Roley Poley’s 2002 budget called for production of 800 unicycles. On average it takes 26 hours of direct labor per unicycle at a wage rate of $11 per hour. The manufacturing overhead rate is $6.00 per direct labor hour. During 2002, 920 unicycles were produced. Actual direct labor hours averaged 3 per unit more than expected.

Required:1. Calculate the beginning balance of direct materials inventory2. Calculate the total prime cost for 2002.3. Calculate the underapplied or overapplied overhead for the year.4. Calculate the cost of goods manufactured.5. Calculate the average unit cost of unicycles completed during 2002.6. Calculate the cost of goods sold, and net income before and after taxes.


ROLEY POLEY COMPANYCalculations ...


PLENTIFUL PRINTING, INC.(Job-Order Costing)

You are asked to bring the following incomplete accounts of one of Plentiful Printing's printing plants up to date through January 31, 1992. Also consider the data that appears below.

Materials (12/31/91 Balance) $15,000Factory Department Overhead (total January charges) $57,000Finished Goods (12/31/91 Balance) $20,000

Additional Information:

1. The overhead is applied using a budgeted rate that is set every December by forecasting the following year's overhead and relating it to forecast direct labor costs. The budget for 1992 called for $400,000 of direct labor and $600,000 of factory overhead.

2. The only job unfinished on January 31, 1992, was No. 419, on which total production costs were $13,000 (direct labor cost of $2,000 --125 direct labor hours--, direct materials cost of $8,000, and manufacturing overhead costs of $3,000).

3. Total materials placed into production during January were $90,000.4. Cost of goods manufactured during January was $180,000.5. Materials inventory as of January 31 was $20,000.6. Finished goods inventory as of January 31 was $15,000.7. All factory workers earn the same rate of pay. Direct labor hours for January totaled 2,500.8. Sales during January of $285,000 were made.9. Selling costs of $57,000 and administrative costs of $12,000 were incurred during January.

Required:1. Materials purchased during January2. Cost of Goods Sold during January3. Direct labor costs incurred during January4. Overhead applied during January5. Balance, Work in Process, December 31, 19916. Balance, Work in Process, January 31, 19927. Overapplied or underapplied overhead for January8. Net income for January


PLENTIFUL PRINTING, INC.Calculations ...


POLARIS COMPANY(Job-Order Costing)

The Polaris Company uses a (normal costing) job-order system. The following data relate to October 2005, the first month of the company’s fiscal year.

1. Raw materials purchased, $210,000.2. Raw materials issued to production, $190,000 ($178,000 direct materials and $12,000 indirect

materials). 3. Direct labor cost incurred, $90,000. Indirect labor cost incurred, $110,000.4. Depreciation recorded on factory equipment, $40,000.5. Other manufacturing overhead incurred during October, $70,000.6. The company applies manufacturing overhead cost to production on a basis of $8 per machine-

hour. There were 30,000 machine hours recorded for October.7. Production orders costing $520,000 were completed during October and transferred to finished

goods.8. Production orders that had cost $480,000 to complete were shipped to customers during the

month. These goods were invoiced at 25 percent above cost.9. Selling costs of $54,000 and administrative costs of $42,000 were incurred.10. Raw materials had a beginning balance of $14,000. Work in process had a beginning balance of

$42,000. Finished goods had a beginning balance of $37,000.

Required:1. Prepare all T-accounts and calculate both the net income and cash flow of Polaris Company for

the month of October 2005.2. Compute the ending balance of each account.


POLARIS COMPANYCalculations ...


THE SWIZZLE MANUFACTURING COMPANY(Job-Order Costing)

The Swizzle Manufacturing Company is a manufacturer of custom-made equipment and relies heavily on direct labor in the completion of its jobs. The company uses a job-order costing system and applies manufacturing overhead cost to jobs on the basis of direct labor hours. At the beginning of 1994, the following estimates were made as a basis for computing a predetermined overhead rate for the year:

Manufacturing overhead cost .......... $360,000Direct labor hours .......................... 20,000 hours

The following transactions took place during the year (all purchases and services were acquired on account):

1. Raw materials were purchased for use in production, $200,0002. Raw materials were requisitioned for use in production (all direct materials), $185,0003. Utility bills were incurred, $70,000 (90% related to factory operations, and the remainder related to selling

and administrative activities)4. Salary and wage costs were incurred:

Direct labor (21,400 hours) ...................... $230,000Indirect labor .......................................... 90,000Selling and administrative salaries ............ 110,000

5. Maintenance costs were incurred in the factory, $54,0006. Advertising costs were incurred, $136,0007. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder

related to selling and administrative equipment)8. Rental cost incurred on buildings, $120,000 (85% related to factory operations, and the remainder related to

selling and administrative facilities)9. Manufacturing overhead cost was applied to jobs, $ __?___10. Sales for the year (all on account) totaled $1,200,000. These goods cost $780,000 to manufacture.

The balances in the inventory accounts at the beginning of the year were:Raw Material $10,000Work in Process 15,000Finished Goods 30,000

Work in Process at December 31, 1994, totaled $22,000

Required:Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and a statement of net income (in good form) for the year ended December 31, 1994.

Helpful Hint:First prepare the calculations using t-accounts, then prepare the required schedules using the information from the t-accounts. Please turn in all your work (t-accounts and statements).


THE SWIZZLE MANUFACTURING COMPANYCalculations ...


THE SWIZZLE MANUFACTURING COMPANYSchedule of Cost of Goods ManufacturedFor the Year Ended December 31, 1994

Direct materials:






Direct labor $


$

____________

Actual overhead costs $

Add / (Deduct): Over (Under) applied overhead ____________

Manufacturing overhead applied to Work In Process $___________







THE SWIZZLE MANUFACTURING COMPANYSchedule of Cost of Goods Sold


Finished goods inventory, 1-1-1994 $

Add: Cost of goods manufactured ___________

Goods available for sale $

Less: Finished goods inventory, 12-31-1994 (___________)

Cost of goods sold $

Add / (Deduct): Under (Over) applied overhead ____________

Adjusted cost of goods sold $ .

THE SWIZZLE MANUFACTURING COMPANYIncome Statement


Sales $

Less: Cost of goods sold (___________)

Gross margin $


$

____________ (___________)

Net Income $ .


MARSHALL PROPS UNLIMITED(Job-Order Costing)

Marshall Props Unlimited designs and fabricates movie props. The company’s balance sheet as of January 1, 2006:

Marshall Props UnlimitedBalance Sheet

January 1, 2006

AssetsCurrent Assets: Cash................................................................. $15,000 Accounts Recievable....................................... 40,000 Inventories: Raw materials................................................. $25,000 Work in process.............................................. 30,000 Finished goods (props awaiting shipment)..... 45,000 100,000 Prepaid insurance............................................ 5,000Total current assets............................................ 160,000Buildings and equipment................................... 500,000Less accumulated depreciation.......................... 210,000 290,000Total assets........................................................ $450,000

Liabilities and Stockholders EquityAccounts payable.............................................. $75,000Capital stock......................................................$250,000Retained earnings.............................................. 125,000 375,000Total liabilities and stockholders’ equity........... $450,000

Since each prop is a unique design and may require anything from a few hours to a month or more to complete, Marshall Props uses a job-order costing system. Overhead in the fabrication shop is charged to props on the basis of direct-labor cost. The company estimated that it would incur $80,000 in manufacturing overhead and $100,000 in direct labor cost during the year. The following transactions were recorded during the year:

a. Raw materials, such as wood, paints, and metal sheeting, were purchased on account, $80,000.b. Raw materials were issued to production, $90,000; $5,000 of this amount was for indirect materials.c. Payroll costs incurred and paid; direct labor, $120,000; indirect labor, $30,000; and selling and administrative

salaries, $75,000.d. Fabrication shop utilities costs incurred, $12,000.e. Deprecation recorded for the year, $30,000 ($5,000 on selling and administrative assets; $25,000 on fabrication

shop assets).f. Prepaid insurance expired, $4,800 ($4,000 related to fabrication shop operations, and $800 related to selling and

administrative activities).g. Shipping expenses incurred, $40,000h. Other manufacturing overhead costs incurred, $17,000.i. Manufacturing overhead was applied to production. Overhead is applied on a basis of direct labor cost.j. Movie props that cost $310,000 to produce according to their job cost sheets were completed.k. Sales for the year totaled $450,000 and were all on account. The total cost to produce these movies props was

$300,000 according to their job cost sheets.l. Collections on account from customers, $445,000.m. Payments on account to suppliers, $150,000.

Required:1. Use t-accounts to calculate COGM, COGS, and Net Income.2. Was manufacturing overhead underapplied or overapplied for the year? By how much?3. Prepare a Schedule of COGM, a Schedule of COGS, and Income Statement for the year.


MARSHALL PROPS UNLIMITEDCalculations…


MARSHALL PROPS UNLIMITED

Marshall Props UnlimitedSchedule of Cost of Goods ManufacturedFor the Year Ended December 31, 2006

Direct materials:





Direct materials used in production

Less: Indirect materials ____________ $

Direct labor $


$

____________

Actual overhead costs $

Add / (Deduct): Over (Under) applied overhead ____________

Manufacturing overhead applied to Work In Process $___________







MARSHALL PROPS UNLIMITED

Marshall Props UnlimitedSchedule of Cost of Goods Sold


Finished goods inventory, 1-1-2006 $

Add: Cost of goods manufactured ___________

Goods available for sale $

Less: Finished goods inventory, 12-31-2006 (___________)

Cost of goods sold $

Add / (Deduct): Under (Over) applied overhead ____________

Adjusted cost of goods sold $ .

Marshall Props UnlimitedIncome Statement


Sales $


Gross margin $


$

____________ (___________)

Net Income $ .


OATMAN COMPANY(Job-Order Costing)

Oatman Company is a manufacturing firm that uses a job-order cost system. On January 1, 2010, the company’s inventory balances were as follows:

Direct materials........................ $16,000Work in process........................ 10,000Finished goods.......................... 30,000

The company applies overhead cost to jobs on the basis of machine-hours. For 2010, the company estimated that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following transactions were recorded during 2010:

a. Direct materials purchased on account, $200,000.b. Direct materials requisitioned for use in production, $190,000.c. The following costs were incurred for employee services:

Direct labor...............................$160,000Indirect labor............................ 27,000Sales commissions.................... 36,000Administrative salaries............. 80,000

d. Heat, power, and water costs incurred in the factory, $42,000.e. Prepaid insurance expired during the year, $10,000 (90% relates to factory operations, and 10% relates to

selling and administrative activities).f. Advertising costs incurred, $50,000.g. Depreciation recorded for the year, $60,000 (85% relates to factory operations, and 15% relates to selling

and administrative activities).h. Manufacturing overhead cost was applied to production. The company recorded 40,000 machine-hours for

the year.i. Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished

goods warehouse.j. Sales for the year totaled $700,000 and were all on account. The total cost to manufacture these goods

according to their job cost sheets was $475,000.

Required1. Use t-accounts to calculate COGM, COGS, and net income.2. Write journal entries for every applicable number in the t-accounts. (Remember that every arrow is a

journal entry.)3. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of

the information needed for the income statement is available in the journal entries and t-accounts you have prepared.)


OATMAN COMPANYCalculations… [T-Accounts]


OATMAN COMPANYCalculations… [Journal Entries]


OATMAN COMPANY

Oatman CompanyIncome Statement


Sales $


Gross margin $


$

____________ (___________)

Net Income $ .


ACTIVITY-BASED COSTING

How can unit costs be calculated? (Some review, some new)



How might PERRY MASON define ABC?

Sometimes you win, sometimes you lose, and sometimes you get rained out. SATCHEL PAIGE (c. 1905—1982), Baseball player

Pessimism is depreciated will-to-live. ALBERT SCHWEITZER (1875—1965), Philosopher and physician




Two ways ABC differs from Job-Order Costing:

It is what you are inside that matters. You, yourself, are your only real capital. VLADIMIR ZWORYKIN (1889—1982), Physicist

It often takes more courage to change one’s opinion than to stick to it.


GEORG CHRISTOPH LICHTENBERG (1742—1799), Physicist and philosopher



HANDY NOTES:

ABC Steps:

Pools of MOH

Total Activity and Cost in pools

Calculate “Cost per” in pools

“Apply” to products/lines

It is easy to learn something about everything,but difficult to learn everything about something. NATHANIEL EMMONS (1745—1840), Clergyman



See problem:

____________________________


For an example of ABC.


REVIEW / SELF-QUIZ (Job-Order Costing and ABC)Do you know the answers to these questions??

Job-order costing is used for what type(s) of products? How is cost-per-unit calculated in job-order costing? Both ABC and job-order costing are trying to answer the same question: what is

it?

How does one calculate PDOR? How does one calculate Applied MOH? Where does Applied MOH go in the t-accounts? Where does Over- or Under-Applied MOH go in the t-accounts? Where do period costs go in the t-accounts?

How might Perry Mason define ABC? How is ABC different than job-order costing? What steps are performed when calculating activity-based costs?



HANDY Information:Robin Cooper (literally one of the inventors of Activity-Based Costing) suggests four levels for classifying manufacturing activities:

1. A unit-level activity is performed on each individual unit of products or services of the firm. Examples of unit-level activities include using direct materials, using direct labor-hours, inserting a component, and inspecting every unit. A unit-level activity is volume-based. The required activity varies in proportion with the quantity of the cost object. The resource consumption driver and the activity consumption driver are most likely to be the same for unit level activities.

2. A batch-level activity is performed for each batch or group of units or products or services. A firm incurs a batch-level activity for each batch or group of units of products or services scheduled to be processed together, rather than for each individual unit of the cost object. A batch has more than one unit of a product or service or more than one product or service. Examples of batch-level activities are setting up machines, placing purchase orders, scheduling production, conducting inspections by batch, handling materials, and expediting production.

3. A product-sustaining activity supports the production of a specific product or service. Examples of product-sustaining activities include designing products, administering parts required for products, and engaging in engineering changes to modify products.

4. A facility-sustaining activity supports the operation in general. These activities are not caused by products or customer service needs and cannot be traced to individual units, batches, or products. Examples of facility sustaining activities include providing security and safety, performing maintenance of general purpose machines, managing the plant, incurring factory property taxes and insurance and closing of the books each month. Some firms refer to these activities as business or infrastructure sustaining activities.

Examples of Activities and Activity Levels for a Manufacturer of Electric Motors

Activity Activity LevelDirect materials UnitDirect labor-hours UnitMachine-hours UnitNumber of production orders BatchNumber of special components Batch

Robin Cooper, “Cost Classification in Unit-Based Manufacturing Cost Systems,” Journal of Cost Management, Fall 1990, pp. 5-14.



ARE YOU EVERYTHING YOU COULD BE?People the world over came to the museum to walk across

Marble Floor and gaze adoringly at Marble Statue. Soon Marble Floor began to resent being treated like a doormat and said as much to Marble Statue.

“It’s not fair!” Floor complained. “We started at the same place, but you’re revered while I’m ignored.”

“My friend,” Statue replied. “You have a short memory. We originated in the same cave, but don’t you remember what happened after that?”

“No,” Floor pouted.

“Let me remind you. When the designer cut us from the cave, you resisted his tools and efforts to shape you.”

“Of course I did!” Floor shouted. “It hurt! I didn’t need to be shaped.”

“When you fought being shaped, he worked on me,” Statue said. “I was willing to endure the hardship because it takes work to reach toward your potential.”

“I never thought of it that way,” Floor said.

“You gave up halfway,” said Statue. “So don’t blame the people who step on you now.”


-- Adapted from The Motivational Manager, Lawrence Ragan Communications


MIZZOU COMPANY(Activity-Based Costing)

Mizzou Company manufactures two products, the Miz and the Zou. The company estimated it would incur $130,890 in manufacturing overhead costs during the current period. Overhead currently is assigned to products on the basis of direct labor hours. Data concerning the current period’s operations appear below:

Miz ZouEstimated volume 400 units 1,200 unitsDirect labor hours per unit 0.70 hour 1.20 hoursDirect material cost per unit $10.70 $16.70Direct labor cost per unit $11.20 $19.20

Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following three activity pools:

Activity Cost Pool Activity Measure Overhead CostMachine Setups Number of setups $13,570Purchase Orders Number of purchase orders $91,520General Factory Direct labor hours $25,800

Expected ActivityActivity Cost Pool Miz Zou TotalNumber of setups 100 130 230Number of purchase orders 810 1,270 2,080Number of direct labor hours 280 1,440 1,720

Required:1. Compute the predetermined overhead rate using the traditional method. Using this rate and the other

data from the problem, calculate the unit product cost of both products.2. Determine the activity rate (i.e,. predetermined overhead rate) for each of the cost pools.3. Use the activity rates you calculated in (2.) above to:

a. Compute the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system.

b. Then, determine the amount of manufacturing overhead cost per unit of each product.c. Finally, compute the unit product cost of each product.


MIZZOU COMPANYCalculations ...


AUDIO BASICS CORPORATION (Activity-Based Costing)

Audio Basics Corporation manufactures two types of video cassettes: standard and high-grade. The standard cassettes are primarily for home use. The high-grade version is used for television commercials.

Management believes the accounting system may not be accurately allocating costs to products, particularly since sales of the high-grade video tapes have been increasing. Management asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on the direct labor costs in the products. For your investigation, you have data from last year. Last year's manufacturing overhead was $880,000 based on production of 320,000 standard cassettes and 100,000 high-grade cassettes. Direct labor and direct materials costs were as follows:

Standard High-Grade TotalDirect labor $348,000 $132,000 $480,000Direct materials $250,000 $228,000 $478,000

Management determined that overhead costs are caused by three cost drivers. The cost drivers and their costs for last year were as follows:

Activity LevelCost Pool Costs Assigned Cost Driver Standard High-Grade TotalProduction Run Setup $400,000 Number of production runs 40 10 50Quality Testing $360,000 Quality tests performed 180 120 300Packing Activities $120,000 Shipping orders processed 100 50 150 Total overhead $880,000

Required:

1. (a) How much of the overhead will be assigned to each product if the above three cost drivers are used to allocate overhead?

(b) What is the total cost per unit produced for each product?

2. (a) How much of the overhead will be assigned to each product if direct labor cost had been used to allocate overhead?

(b) What would the total cost per unit produced be for each product?


AUDIO BASICS CORPORATION Calculations ...


J.B. GOODE COMPANY(Activity-Based Costing)

J.B. Goode Company produces two models of guitars. One is a standard acoustic guitar model that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made acoustic-electric guitar with pearl inlays and a body constructed from special woods. The custom guitar sells for $1,000. Both guitars require 10 hours of direct labor to produce, but the custom guitar is manufactured by more experienced workers who are paid at a higher rate.

Most of J.B. Goode’s sales come from the standard guitar, but sales of the custom model have been growing. Here is the company’s sales, production, and cost information for last year.

Standard CustomGuitar Guitar

Sales and production volume in units 900 100Unit costs:

Direct materials $ 150 $ 375Direct labor 180 240Manufacturing overhead 135 135

Total unit costs $465 $750

Manufacturing Standard CustomOverhead Cost Amount Cost Driver Guitar GuitarBuilding rent $40,000 Square footage 3,000 1,000Maintenance 15,000 Direct labor hours 9,000 1,000Purchasing 22,000 Number of purchase orders 1,500 500Inspection 12,000 Number of inspections 400 600Indirect materials 15,000 Number of units 900 100Supervision 28,000 Number of inspections 400 600Supplies 3,000 Number of units 900 100

Total Overhead $135,000

The company allocates overhead costs using the traditional method with an activity base of direct labor hours. Normal production in the facility utilizes 10,000 direct labor hours.

Chuck B., president of J.B. Goode, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling prices of the guitar may not be covering its true cost. Required:

1. Using the traditional method, how much overhead is allocated to the standard guitars, and how much to the custom guitars? Discuss why this might not be an accurate way to assign overhead costs to products.

2. J.B. Goode’s controller developed the cost driver and activity data presented above. Use activity-based costing to assign the total cost of overhead to each model of guitar.

3. Calculate the cost of one custom guitar using activity-based costing. Why is the cost different from the cost calculated using the traditional allocation method? At the current selling price, is the company covering its true cost of production? Explain your answers.


J.B. GOODE COMPANYCalculations ...


THE CUTTERS, INC. (A)(Activity-Based Costing)

Chase Gardner is an expatriate product manager for The Cutters, Inc., a manufacturer of hunting blades and knives. Its production facilities are located in Argentina. In recent years profits have begun to decline and Chase is trying to improve the situation by focusing the company’s sales efforts on the most profitable products. Chase’s reports generally indicate that complex, low volume products (such as The Hunter) are much more profitable than simple, high volume products (such as The Carver).

The Cutters currently uses a job-order costing and allocates manufacturing overhead to product lines using direct labor hours. 780,000,000 Pesos (Argentine) of manufacturing overhead costs were incurred during 2003, and 10,000 direct labor hours occurred producing all of the company’s many product lines.

Additional information about The Hunter and The Carver product lines is provided below.

The Hunter The CarverSales 19,500,000 Pesos 53,000,000 PesosCost: Direct material cost 4,500,000 Pesos 10,000,000 Pesos Direct labor cost 1,200,000 Pesos 6,000,000 Pesos

Units produced 15,000 100,000Total direct labor hours worked 80 400

Required:Using job-order costing, apply overhead to The Hunter and The Carver and calculate the gross profit of these two product lines.


THE CUTTERS, INC. (A)Calculations ...


THE CUTTERS, INC. (B)(Activity-Based Costing)

Sales and direct costs remain as described in The Cutters, Inc. (A). However, rather than allocating indirect manufacturing costs to product lines using a single rate, Chase is considering the use of more sophisticated costing methods. With activity-based costing in mind, he has collected the following information.

COST DRIVER OVERHEAD COST POOL OVERHEAD COSTNumber of parts POOL 1

Materials purchasing and handling cost

75,000,000 Pesos

Number of production runs POOL 2Production engineering and design 60,000,000 PesosProduction machine setup 40,000,000 Pesos

Number of machine hours POOL 3Production machine depreciation 300,000,000 PesosProduction machine maintenance 50,000,000 Pesos

Number of components tested POOL 4Quality testing 100,000,000 Pesos

Direct labor hours POOL 5Plant security 25,000,000 PesosPlant supervision 70,000,000 PesosBuilding maintenance 10,000,000 PesosFactory supplies 20,000,000 PesosFactory insurance 30,000,000 PesosTotal Manufacturing Overhead 780,000,000 Pesos

The Cutters, Inc., experienced the following levels of activity:Number of parts 750,000Number of production runs 25Number of machine hours 2,000Number of components tested 25,000Number of direct labor hours 10,000

Additional information regarding the The Hunter and The Carver can be found below.The Hunter The Carver

Number of units produced 15,000 100,000Number of parts per unit 3 1Number of production runs 1 1Number of machine hours 16 48Number of components tested 1,000 100Number of direct labor hours 80 400

Required:Using activity-based costing, apply overhead to The Hunter and The Carver and calculate the gross profit of these two product lines.


THE CUTTERS, INC. (B)Calculations ...


THE CUTTERS, INC. (B)Calculations (continued) ...


GREASY HANDS(Activity-Based Costing)

Greasy Hands, a small hamburger eatery, has identified the following resources used in its operations:

a. Breadb. Hourly helpc. Store rentd. Ground beefe. Catsupf. Advertising for two-pound burger specialg. Salary for the store managersh. Utilitiesi. $1-off-coupon for the second orderj. Bags

Required:1. Classify these costs as unit-level, batch-level, product-sustaining, or facility-sustaining costs.2. Suggest a proper cost driver for each of the above items.


HBM INDUSTRIES(Activity-Based Costing)

HBM Industries manufactures industrial tools after creating a mold for each newly designed tool. The president of HBM Industries personally inspects every unit during the trial run of a new mold and 10 percent of the units manufactured in the first three batches. Some of the activities of the firm follow:

a. Designing moldsb. Creating moldsc. Inspecting productsd. Modifying moldse. Setting up productionf. Requesting and moving materialsg. Machiningh. Insuring equipmenti. Paying suppliersj. Heating the factory

Required:1. Classify each of the activities as a unit-level, batch-level, product-sustaining, or facility-sustaining

activity.2. Identify a proper cost driver for each activity.


CHEETAH COMPANY(Activity-Based Costing)

Cheetah Company has identified the following overhead cost pools and cost drivers:

Cost Pools Activity Costs Cost Driver Driver ConsumptionMachine setup $360,000 Setup hours 3,000Materials handling 100,000 Pounds of materials 25,000Electric power 40,000 Kilowatt-hours 40,000

The following cost information pertains to the production of its products The Quick and The Dead.

The Quick The DeadNumber of units produced 4,000 20,000Direct materials cost ($) $40,000 $50,000Direct labor cost ($) $24,000 $40,000Number of setup hours 200 240Pounds of materials used 1,000 3,000Kilowatt-hours 2,000 4,000

Required:Use the activity-based costing approach to calculate the unit cost for each product.


CHEETAH COMPANYCalculations…


KNOB NOSTER HOSPITAL(Activity-Based Costing)

Knob Noster Hospital uses a hospital wide overhead rate based on nurse-hours. The critical care unit (CCU), which has 30 beds, applies overhead using patient-days. Its budgeted cost and operating data for the year follow:

Budget Information

Hospital total overhead $69,120,000Hospital total nurse-hours 1,152,000

Budget Cost Driver Information for CCU for the Month of June

Cost Pool Budget Cost Cost Driver Budget Cost Driver ActivityBeds $810,000 Number of bed-days 900Equipment 422,500 Number of patient-days 845Nursing care 457,500 Number of nurse-hours 6,000

$1,690,000

In June, Knob Noster Hospital’s critical care unit had the following operating data:

Nurse-hours 5,900Patient-days 870

Required:1. Calculate the CCU’s overhead costs for the month of June using

a. The hospital-wide rate.b. The CCU department-wide rate.c. The ABC cost drivers for the CCU department.

2. Explain the differences and determine which overhead assignment method is more appropriate.


KNOB NOSTER HOSPITALCalculations…


PROCESS COSTING

We are still answering what question?

Process costing is used for what types of products?

When a company uses process costing, costs are accumulated by … _________________



PROCESS COSTING

How can unit costs be calculated? (Some review material, some new)



PROCESS COSTING

Parallel and Sequential Processing

When you get to the end of your rope, tie a knot and hang on. FRANKLIN D. ROOSEVELT (1882—1945), 32nd U.S.

President


PROCESS COSTING

What is an EQUIVALENT UNIT? (“EU,” for short)



PROCESS COSTING

HANDY NOTES:

Process Costing Steps: Summarize total physical units and cost Compute EU and Cost per EU Account for cost of units completed and

cost of ending inventory

The greatest results in life are usually attained by simple means and the exercise of ordinary qualities. These may for the most part be summed up in these two—common sense and perseverance. OWEN FELTHAM (c. 1602—1668), Writer

A professional is someone who can do his best work when he doesn’t feel like it. ALISTAIR COOKE (1908—2004), Journalist

Truth is often eclipsed but never extinguished. LIVY (59 B.C. —17 A.D.), Historian


See problem: ____________________________

On page _________


of the Handy Handouts

For an example of process costing, including EU calculations.


PROCESS COSTING


Job-order costing, ABC and process costing are trying to answer the same question: what is it?

On what types of products would you generally use Process Costing?

What is sequential processing? What is parallel processing?

What is an EU? How do you calculate EU using the weighted-average method? How do you calculate EU using the FIFO method? In what t-account do you calculate EU?

What steps are performed when calculating process costs?

Good has two meanings: It means that which is good absolutely and that which is good for somebody. ARISTOTLE (384—322 B.C), Philosopher


B. G. WIP COMPANY(Process Costing)

B. G. Wip Company manufactures and sells buggy whips as novelty items. A continuous flow production operation is necessary to satisfy demand. The company is relatively new and the accountant hired last month worked only for a job order manufacturing company before this position. The accountant is familiar with what costs to accumulate as product costs, but is having difficulty determining the amount of output for the month so that unit costs can be computed. Below are some notes the accountant has gathered to help determine the output for the last process center in the manufacturing process.

2,000 units were in beginning inventory.9,000 units were transferred in from the preceding process center during the month.7,700 units were completed and transferred to finished goods inventory during the month.

Both the beginning and ending work in process inventory had all material added. Conversion was 60 percent complete on the beginning work in process inventory but only 1/3 complete on the ending inventory.

Required:Prepare a schedule for the new accountant showing the amount of production for the period in the department. Use both the weighted average and FIFO methods.


ABIQUA ACRES(Process Costing)

The following information is available for the Pasteurization Department of the Abiqua Acres dairy farm for the year 1996:

Units CostsWork in process, January 1(100% complete as to direct materials,40% complete for conversion costs) 5,000

Direct materials $20,000Conversion costs 16,000

Total work in process, January 1 $36,000

Started in production during the year 60,000

Costs added:Direct materials $250,000Conversion costs 450,000

Total costs added during 1996 $700,000

Work in process, December 31(100% complete as to direct materials,50% complete as to conversion costs)

Units transferred out during the year 57,000

Materials are added at the beginning of the process. Round unit costs to 4 decimal places.

Required:1. What would be the equivalent units of production for materials using the weighted average method?2. What would be the equivalent units of production for conversion costs using the weighted average method?3. What would be the cost per equivalent unit of production for materials using the weighted average

method?4. What would be the cost per equivalent unit of production for conversion costs using the weighted average

method?5. What would be the cost of goods transferred out using the weighted average method?6. What would be the cost of ending work in process using the weighted average method?

Repeat steps 1 through 6 using the FIFO Method.


ABIQUA ACRESWeighted Average Method … Calculations ...


ABIQUA ACRESFIFO Method … Calculations ...


THE JOHN COMPANY(Process Costing)

October 2005 manufacturing cost data are presented below for the Machining process center of The John Company.

Beginning work in process consists of 5,000 gallons, all materials, 60 percent of conversion. Beginning work in process costs include $5,050 materials and $3,270 conversion. Gallons started in October are 40,000. Material costs in October are $44,000. Conversion costs in October are $48,600. Ending work in process consists of 10,000 gallons, all materials and 40 percent of conversion.

Required:1. Calculate the value of goods transferred-out and ending inventory using the weighted average method.2. Calculate the value of goods transferred-out and ending inventory using the FIFO method.


THE JOHN COMPANYWeighted Average Method … Calculations ...


THE JOHN COMPANYFIFO Method … Calculations …


STEINMUELLER STEINS, INC.(Process Costing)

The following information is available for the Molding Department of Steinmueller Steins for the month of July:

Units CostsWork in process, July 1(70% complete for conversion costs) 5,000

Direct materials $ 6,000Direct labor 3,000Manufacturing overhead 4,000

Total work in process, July 1 $13,000

Started in production during July 20,000

Costs added:Direct materials $18,000Direct labor 8,000Manufacturing overhead 10,000

Total costs added during July $36,000

Work in process, July 31(80% complete for conversion costs) 2,000

Materials are added at the beginning of the process. Round unit costs to 2 decimal places.

Required:1. What would be the equivalent units of production for materials using the Weighted Average Method?2. What would be the equivalent units of production for conversion costs using the Weighted Average

Method?3. What would be the cost per equivalent unit of production for materials using the Weighted Average

Method?4. What would be the cost per equivalent unit of production for conversion costs using the Weighted Average

Method?5. What would be the cost of goods transferred out using the Weighted Average Method?6. What would be the cost of ending work in process using the Weighted Average Method?

Repeat steps 1 through 6 using the FIFO Method.


STEINMUELLER STEINS, INC.Weighted Average Method … Calculations ...


STEINMUELLER STEINS, INC.FIFO Method … Calculations ...


CANDLELIGHT CANDLES CO.(Process Costing)

The following is data for the August 2001 operations of the production department of Candlelight Candles.

Beginning inventory:Units in process 25,000Percent complete with respect to materials 100%Percent complete with respect to conversion 40%

Costs in the beginning inventory:Materials $42,650Conversion 17,152Total $59,802

Units started into production during August 510,000Units completed and transferred out 523,000

Costs added to production during NovemberMaterials $433,500Conversion 339,690Total $773,190

Work in process inventory, ending:Units in process 12,000Percent complete with respect to materials 100%Percent complete with respect to conversion 80%

Required:Calculate the value of goods transferred-out and ending inventory using both the weighted average and FIFO methods.


CANDLELIGHT CANDLES CO.Weighted Average Method … Calculations ...


CANDLELIGHT CANDLES CO.FIFO Method … Calculations ...


CUTTING EDGE SKIS(Process Costing)

The following is data for the November, 1997, operations of the shaping and milling department of Cutting Edge Skis.

Work in process inventory, beginning:Units in process 200Percent complete with respect to materials 50%Percent complete with respect to conversion 30%

Costs in the beginning inventory:Materials $3,000Conversion 1,000Total $4,000

Units started into production during November 5,000Units completed and transferred out 4,800

Costs added to production during NovemberMaterials $74,000Conversion 70,000Total $144,000

Work in process inventory, ending:Units in process 400Percent complete with respect to materials 40%Percent complete with respect to conversion 25%

Required:1. Calculate the value of goods transferred-out and ending inventory using the weighted average method.2. Calculate the value of goods transferred-out and ending inventory using the FIFO method.


CUTTING EDGE SKISWeighted Average Method … Calculations ...


CUTTING EDGE SKISFIFO Method … Calculations ...


BROTHER’S BAKERIES (A)(Process Costing)

Brother’s Bakeries makes loafs of bread for various distributors. Two departments are involved—Mixing and Baking. Data relating to the loaves of bread mixed in the Mixing Department during June are given below:

Loaves Percentof Bread Completed

Work in process, June 1............................. 30,000 55%Started into processing during June........... 480,000 --Work in process, June 31........................... 20,000 90%

All materials are added at the beginning of processing in the Mixing Department.

Required:Calculate the loaves of bread transferred-out of the Mixing Department and in ending inventory using the weighted average method.


BROTHER’S BAKERIES (A)Calculations…


BROTHER’S BAKERIES (B)(Process Costing)

Brother’s Bakeries makes loafs of bread for various distributors. Two departments are involved—Mixing and Baking. Data relating to the loaves of bread mixed in the Mixing Department during June are given below:

Loaves Percentof Bread Completed

Work in process, June 1............................. 30,000 55%Started into processing during June........... 480,000 --Work in process, June 31........................... 20,000 90%

All materials are added at the beginning of processing in the Mixing Department.

Required:Calculate the loaves of bread transferred-out of the Mixing Department and in ending inventory using the FIFO method.


BROTHER’S BAKERIES (B)Calculations…


PIPES COMPANY(Process Costing)

The Pipes Company manufactures a high-quality metal pipe in two departments, Welding and Finishing. Materials are introduced at various points during work in the Welding Department. After the welding is completed, the materials are transferred into the Finishing Department.

Selected data relating to the Welding Department during Many are given below:

Production data:Pounds in process, May 1: materials 100%

complete, conversion 90% complete......................................................... 70,000Pounds started into production during May.................................................. 350,000Pounds completed and transferred to Finishing............................................ ?Pounds in process, May 31: materials 75% complete,

conversion 25% complete......................................................................... 40,000

Cost data:Work in process inventory, May 1:

Materials cost.........................................................................................$ 86,000Conversion cost..................................................................................... 36,000

Cost added during May:Materials cost......................................................................................... 447,000Conversion cost..................................................................................... 198,000

The company uses the weighted-average method.

Required:Calculate the value of goods transferred-out and ending inventory using the weighted average method.


PIPES COMPANYCalculations…


EDWARDS, INC.(Process Costing)

Edwards Inc. manufactures a single product and uses process costing. The company’s product goes through two processing departments, Hammering and Drilling. The following activity was recorded in the Hammering Department during July:

Production data:Units in process, July 1: materials 60% complete,

conversion 30% complete......................................................................... 60,000Units started into production........................................................................ 510,000Units completed and transferred to Drilling................................................. ?Units in process, July 31: materials 80%

complete, conversion 40% complete......................................................... 70,000

Cost dataWork in process inventory, July 1:

Materials cost.........................................................................................$ 27,000Conversion cost..................................................................................... 13,000 $ 40,000

Cost added during July:Materials cost......................................................................................... 468,000Conversion cost..................................................................................... 357,000 825,000

Total cost.......................................................................................................... $865,000

Materials are added at several stages during the hammering process. The company uses the FIFO method.

Required:Calculate the value of goods transferred-out and ending inventory using the FIFO method.


EDWARDS, INC.Calculations…


BUDGETING

THE FIRM

What we hope ever to do with ease, we must first learn to do with diligence.

SAMUEL JOHNSON (1709—1784), Lexicographer and writer

Failure is the condiment that gives success its flavor.


TRUMAN CAPOTE (1924—1984), Writer


BUDGETING

What is a “BUDGET”?

Budgets are used for TWO major purposes:


The art of living is always to make a good thing out of a bad thing.

E. F. SCHUMACHER (1911—1977), Economist


BUDGETING

Additional Handy Information:

The Roles of Budgeting [also, The Benefits of Budgeting]:

Planning = linking objectives and resourcesMotivation = degree of participation, level of goals (goal theory)Evaluation = fair and productiveCoordination = among Marketing, Operations, Finance, Distribution, Purchasing, etc.Communication = “ – “Education = learning about business by all levels of managers and staffRitual = need to do more than just go through the motions every year to reap the benefits of planning

The Environments of Budgeting:

Economic Variables = assumptions, indicators, and forecasts are implicit at the onset of budgetingOrganizational Factors = corporate culture, company tradition and taboos, leadership stylesBehavioral Patterns = link between management philosophy, leadership style, and budget formulation; budget slack and budgeting behavior; “people make budgets work, not vice versa”

Managerial Decisions About the Budget Process:

What? = management’s decisions about the form or structure of the budget; line-item, program, or other budget modelsHow? = specific process of assigning resources during budget deliberations; incremental, zero-base, and hybrid forms of budgeting; tradeoff: time vs. accuracyWho? = personnel who will be directly involved in formulating the budget; authoritative vs. participative budgeting

One does what one is; one becomes what one does.ROBERT [Edler von] MUSIL (1880—1942), Novelist and essayist


BUDGETING

Budgets are generally prepared in this order:

The Master Budget =


It is not in everyone’s power to secure wealth, office or honors; but everyone may be good, generous, and wise.

LUC de CAPIERS (1715—1747), Moralist and essayist


BUDGETING

Punctuality is the politeness of kings.


LOUIS XVIII (1755—1824), King of France


BUDGETING


What is a budget?

Budgets are used for what two major purposes in organizations?

In what order are the budgets prepared?

What do the words “pro-forma” mean?

What is the master budget?

[N]o legacy is so rich as honesty. WILLIAM SHAKESPEARE, All’s Well That Ends Well

Character is long-standing habit. PLUTARCH (c. 46—120 A.D.), Biographer

Grant me the courage not to give up even though I think it is hopeless. CHESTER W. NIMITZ (1885—1966), U.S. Navy Admiral


BEE-SAFE COMPANY(Budgeting)

BeeSafe Company manufactures burglar-resistant commercial door locks. Recently, the company began selling locks on the Web, and the company expects sales to increase dramatically compared with the prior year. For the past year, 2004, unit sales were as follows:

First quarter 21,000Second quarter 26,000Third quarter 25,000Fourth quarter 30,000

Because the company started selling locks on the web, it expects sales in each quarter of 2005 will be 30 percent higher than they were in 2004. The selling price for each lock is $40.

Required:What will be sales, in units and in dollars, in 2005?


BEE-GO COMPANY(Budgeting)

Bee-Go produces a sports drink that is sold in southern Florida. The company expects sales to be 15,600 bottles in January, 16,500 bottles in February, 16,000 bottles in March, and 18,500 bottles in April. There are 1,600 bottles on hand at the start of January. Bee-Go desires to maintain monthly ending inventory equal to 10 percent of next month’s expected sales.

Required:How many units (bottles) will Bee-Go need to produce in the months of January, February, and March?


BEE-KILL CHEMICAL (A)(Budgeting)

Bee-Kill Chemical company has estimated that production for the next five quarters will be:

Production InformationQuarter 1, 2006 46,000 unitsQuarter 2, 2006 42,000 unitsQuarter 3, 2006 50,000 unitsQuarter 4, 2006 39,000 unitsQuarter 1, 2007 48,000 units

Finished units of production require 4 pounds of raw material per unit. The raw material cost is $4 per pound. There are 45,000 pounds of raw material on hand at the beginning of Quarter 1, 2006. Bee-Kill desires to have 30 percent of the next quarter’s material requirements on hand at the end of each quarter.

Required:1. How many pounds of raw material will need to be purchased for Quarters 1 through 4 of 2006?2. How much will Bee-Kill spend on raw materials during 2006?


BEE-KILL CHEMICAL (B)(Budgeting)



It takes 2.5 hours of direct labor to produce each unit of finished product. Direct labor costs are $20 per hour. Each employee can work 450 hours per quarter.

Required:1. How many hours of direct labor will be required for Quarters 1 through 4 of 2006?2. How much will Bee-Kill spend on direct labor during 2006?


BEE-KILL CHEMICAL (C)(Budgeting)



Bee-Kill has manufacturing overhead costs as follows:

Variable Costs Fixed Costs per QuarterIndirect material $2.25 per unit Supervisor salaries $80,000Indirect labor 1.50 per unit Factory depreciation 30,000Utilities 1.00 per unit Other 4,100

Required:1. How much will Bee-Kill spend on variable manufacturing overhead costs each quarter of 2006?2. How much will Bee-Kill spend in total on manufacturing overhead during 2006?


BEE-CEE’S GUITAR EMPORIUM (A)(Budgeting)

Bee-Cee’s Guitar Emporium budgeted Credit sales in the first quarter of 2006 to be as follows:

January $60,000February 80,000March 90,000

Credit sales in December 2005 are expected to be $100,000. The Emporium expects to collect 80 percent of a month’s sales in the month of sale and 20 percent in the following month.

Required:Estimate cash receipts for each month of the first quarter of 2006.


BEE-CEE’S GUITAR EMPORIUM (B)(Budgeting)

Bee-Cee’s Guitar Emporium expects to make instrument purchases in the first quarter of 2006 as follows:

January $42,000February 56,000March 63,000

Purchases in December of 2005 are expected to be $70,000. The Emporium expects that 10 percent of a month’s purchases will be paid in the month of purchase and 90 percent will be paid the following month.

Required:Estimate cash disbursements related to purchases for each month of the first quarter of 2006.


MISSOURI RETAILERS (A)(Budgeting)

Missouri Retailers expects Credit sales in the next quarter as follows:

February $ 85,000March 95,000April 75,000May 85,000June 108,000

Prior experience has shown that 50 percent of a month’s sales are collected in the month of sale, 30 percent in the month following sale, and the remaining 20 percent in the second month following sale.

Required:Estimate budgeted cash receipts for April, May and June.


MISSOURI RETAILERS (B)(Budgeting)

Missouri Retailers expects to make inventory purchases in the next quarter as follows:

March $50,000April 55,000May 65,000June 88,000

Prior experience has shown that 30 percent of a month’s purchases are paid in the month of purchase and 70 percent in the month following purchase.

Required:Estimate cash disbursements related to purchases for April, May and June.


WHITTLE COMPANY(Budgeting)

Whittle Company plans to sell 4,600 units in October and 5,000 units in November of 1997. The beginning inventory of finished goods on October 1 is expected to be 650 units. Whittle has a policy of wanting to have 10% of next month's sales as ending inventory.

Required: How much production should Whittle’s schedule for the month of October?


PARADISE COMPANY(Budgeting)

Paradise Company forcasted the following information about its inventories for the fiscal year ending June 30, 1995.

7/1/94 6/30/95

Raw Material 40,000 lbs. 50,000 lbs.Work In Process 10,000 lbs. 10,000 lbs.Finished Goods 80,000 lbs. 50,000 lbs.

During the manufacturing process, 2 lbs. of raw material is used to produce one finished unit of product.

Required: If 500,000 units are expected to be manufactured during the fiscal year, how much raw material should Paradise Company plan on purchasing?


WHISKERS PRODUCTS, INC.(Budgeting)

Whiskers Products expects the following sales to occur during 1996:

Sales Volume Sales RevenueFebruary 110,000 $55,000March 120,000 $60,000April 100,000 $50,000May 120,000 $60,000June 110,000 $55,000

Whiskers Products makes all sales on account. Fifty percent of the sales is collected in the month of the sale, thirty percent is collected in the following month, and the remaining twenty percent is collected two months after the sale.

Required: Calculate the second quarter cash budget for Whisker Products, Inc.


KAITLYN KORPORATION(Budgeting)

The cash balance of Kaitlyn Korp. at the beginning of the month is $15,000, the balance required in the cash account at the end of the month is $12,000, cash disbursements are $125,000, and cash collections from customers for the month are $90,000.

Required: How much money should Kaitlyn Korp. borrow?


ARCHER COMPANY(Budgeting)

Archer Company has budgeted sales of 30,000 units in April, 40,000 units in May, and 60,000 units in June. The company has 6,000 units on hand on April 1.

Required: If the company requires an ending inventory equal to 20 percent of the following month's sales, what should be Archer Company's production in May?

Refer to the data for Archer Company above. Each unit requires 3 pounds of material X. Some 24,000 pounds of material X were on hand April 1, and the company requires materials on hand at the end of each month equal to 25 percent of the following month's production needs.

Required: For April, the company should purchase how many pounds of material X?


WARD COMPANY(Budgeting)

Actual sales in Ward Company were: June, $30,000; July, $50,000; and August, $70,000. Sales in September are expected to be $60,000.

Required Part 1: If all sales are made on account and 30 percent of a month's sales are collected in the month of sale, 50 percent in the first month after sale, and 15 percent in the second month after sale, then what are cash receipts for September budgeted to be?

Required Part 2: If twenty percent of sales are cash sales, then the remaining 80 percent of sales are on account. If 30 percent of a month's account sales are collected in the month of sale, 50 percent in the first month after sale, and 15 percent in the second month after sale, then what are cash receipts for September budgeted to be?


YOUNG PRODUCTS(Budgeting)

Young Products produces coat racks. The projected sales for the first quarter of the coming year and the beginning and ending inventory data are as follows:

Sales (units) 100,000Unit price $15Beginning inventory (units) 8,000Targeted ending inventory (units) 12,000

The coat racks are molded and then painted. Each rack requires four pounds of metal, which costs $2.50 per pound. The beginning inventory of raw materials is 4,000 pounds. Young Products wants to have 6,000 pounds of metal in inventory at the end of the quarter. Each rack produced required thirty minutes of direct labor time, which is billed at $9.00 per hour.

Required: For the first quarter prepare a …

1. Sales budget2. Production budget3. Direct materials purchases budget4. Direct labor budget


YOUNG PRODUCTSCalculations ...


CYCLONE COMPANY(Production Budget)

Cyclone Company has the following sales budget for the next year:

Quarter 1 10,000 unitsQuarter 2 8,000 unitsQuarter 3 12,000 unitsQuarter 4 14,000 units

Company policy is to have a finished goods inventory at the end of each quarter equal to 20 percent of the next quarter’s sales.

Required:Calculate the budgeted production for the second quarter of the next year.


PENNER CORPORATION(Production and Materials Purchase Budgets)

Penner Corporation’s budget calls for the following sales next year:

Quarter 1 45,000 unitsQuarter 2 38,000 unitsQuarter 3 34,000 unitsQuarter 4 48,000 units

Each unit of the product requires 3 pounds of direct material. The company’s policy is to begin each quarter with an inventory of the product equal to 10 percent of that quarter’s sales requirements and an inventory of direct materials equal to 20 percent of that quarter’s direct materials requirements for productions.

Required:Determine the production and materials purchase budgets for the second quarter.


PENNER CORPORATIONCalculations ...


KIT INCORPORATED(Cash Budget)

Kit Incorporated has the following budget data for 2006:

Cash balance, beginning $ 10,000Collections from customers 150,000Expenses: Direct materials purchases 25,000 Operating expenses 50,000 Payroll 75,000 Income taxes 6,000 Machinery purchases 30,000

Operating expenses include $20,000 depreciation for buildings and equipment. The company requires a minimum cash balance of $20,000.

Required:Compute the amount the firm needs to finance or excess cash available for Kit Incorporated to invest.


KIT INCORPORATEDCalculations…


CMSU WHO(Accounts Receivable Collections Budget)

CMSU Who’s credit sales have the following historical pattern:

70 percent collected in the month of sale15 percent collected in the first month after sale10 percent collected in the second month after sale 4 percent collected in the third month after sale 1 percent uncollectible

These sales on open account (credit sales have been budgeted for the last six months in 2007.

July $ 60,000August 70,000September 80,000October 90,000November 100,000December 85,000

Required:1. Determine the estimated total cash collections from accounts receivable during October 2007.2. Compute the estimated total cash collections during the fourth quarter from credit sales of the fourth

quarter.


CMSU WHOCalculations…


Sincerity and truth are the basis of every virtue. CONFUCIUS (551—479 B.C.), Philosophoer

Logic is a machine of the mind, and if it is used honestly it ought to bring out an honest

conclusion. G. K. CHESTERTON (1874—1936), Journalist and essayist


STANDARD COSTS and FLEXIBLE BUDGETING

DAY #1

What I hope you always remember (BOOK BUYING EXAMPLE):What two reasons can be used to explain literally any variance?

#1.

#2.


It is not the mountain we conquer but ourselves.


EDMUND HILLARY (1919—present), Explorer and the first man conquer Mt. Everest



Static Budget =

Flexible Budget =

Budget =

Standard =

We will learn how to calculate four variances:



FOOLS GOLD JEWELRY(Standard Costs and Flexible Budgeting)

Fools Gold Jewelry produced 1,300 rings during March.

The standard cost of each ounce of gold used in a ring is $295 per ounce. The standard quantity of material for each ring is a half ounce of gold per ring.The cost of gold purchased and used in March was $198,900 at $300 per ounce.

Required: Calculate the direct materials price variance and the direct materials quantity variance.


GEE-WHIZ SHOES(Standard Costs and Flexible Budgeting)

The standard labor cost in the production of a pair of Gee-Whiz Shoes is .5 hours at $18 per hour.During the month of June, 20,000 pairs were produced. Actual labor costs were $172,900 for 9,500 hours.

Required: 1. Calculate the actual labor rate paid during June.2. Calculate the direct labor rate variance and the direct labor efficiency variance for the month of June.


COWBOY BOOTS CO.(Standard Costs and Flexible Budgeting)

Cowboy Boots Company uses a standard cost system. The standard material and labor costs for producing each pair of boots are as follows

Materials (1.5 yards × $9.00) $13.50Direct labor (.5 hours × $15) $ 7.50

During May, the company produced 7,000 pairs of boots. 10,000 yards of material were purchased for $80,000.11,000 yards of material were used in production.

Also during May, 3,800 direct labor hours were worked at a cost of $58,900.

Required: Calculate the material price and quantity variances and labor rate and efficiency variances.


COWBOY BOOTS CO.Calculations ...


BIG DOG FOODS(Standard Costs and Flexible Budgeting)

Big Dog Foods operates a small plant in Tigard, Oregon, manufacturing dog food using human-quality ingredients. Big Dog produces dog food in batches of 1,000 pounds. The product sells for $4.00 per pound.

Standard costs for 2006 are:Standard direct labor cost = $15 per hourStandard direct labor hours per batch = 8 hoursStandard cost of Ground Brown Rice = $0.20 per poundStandard pounds of Ground Brown Rice per batch = 800 poundsStandard cost of Chicken Meal = $0.40 per poundStandard pounds of Chicken Meal per batch = 200 pounds

At the start of 2006, the company estimated monthly production and sales of 40 batches. During the month of June, 2006 (typically a somewhat slow month) 30 batches were produced (not an unusual level of production for this month). The following costs were incurred:

Direct labor costs were $4,800 for 300 hours.24,500 pounds of Ground Brown Rice costing $4,655 were purchased and used.5,900 pounds of Chicken Meal costing $2,419 were purchased and used.

Required: Calculate all variances for material and labor.


BIG DOG FOODSCalculations ...


P.W. PRODUCTS(Standard Costs and Flexible Budgeting)

P.W. Products has developed the following standards for one of its products:

Direct materials 25 pounds at $4 per poundDirect labor 8 hours at $10 per hour

The following activity was recorded for the production of 12,000 units during the month of August:

Materials purchased 350,000 pounds at $4.12 per poundMaterials used 304,000 poundsDirect labor 95,400 hours at $10.55 an hour

Required: 1. Compute the materials price variance.2. Compute the materials usage variance.3. Compute the labor rate variance.4. Compute the labor efficiency variance.


P.W. PRODUCTSCalculations ...


POSTMODERN PRODUCTS(Standard Costs and Flexible Budgeting)

Postmodern Products manufactures a single product, for which the following standards have been developed:

Standard Quantity Standard Price Standardor Hours or Rate Cost

Direct materials 5 feet $3 per foot $15Direct labor ? hours ? per hour ?

During October, the company purchased 15,200 feet of direct materials at a cost of $47,880, all of which was used in the production of 3,000 units.

A total of 5,400 hours was spent on production during the month. The actual cost of direct labor was $61,560. The following labor variances have been computed:

Total labor variance $1,185 UnfavorableLabor rate variance $ 540 Favorable

Required: 1. For direct materials, compute (a) the actual cost paid for materials per foot, (b) the materials price

variance, and (c) the materials usage variance.2. For direct labor, compute (a) the standard labor rate per hour, (b) the standard hours allowed for the

output of 3,000 units, and (c) the standard hours allowed per unit of product.


POSTMODERN PRODUCTSCalculations ...


LANDS’ END MEN’S SUITS(Standard Costs and Flexible Budgeting)

The following information is available:

Std. DM cost per yard = $6.00

DM qty. std. = 2.8 yards of material.6 yards of waste how the standard was established

.1 yards of rejects(Std. Qty.) = 3.5 yards per suit

Actual price per yard $5.00Actual quantity used per suit 4 yardsYards purchased 10,000Units produced 2,700

Required: Calculate all variances.


PIRATES, INC.(Standard Costs and Flexible Budgeting)

Pirates, Inc. uses a standard cost system. Pirates has established the following standards for the cost of one unit of product.

Std. Qty. Std. Price or RateDirect labor 1.25 hours $12.00 per hour

During June, Pirates incurred total factory direct labor wages for June of $327,600. Pirates manufactured 22,000 units of product during June, using 28,000 direct labor hours.

Required:1. What is the direct labor rate variance for June?2. What is the direct labor efficiency variance for June?3. What was the actual direct labor rate for June?


SMITH COMPANY(Standard Costs and Flexible Budgeting)

Let’s do this example:

Standards:DM 10 lbs. at @ $8.25 / lb.DL 3.5 hrs at @ $9.65 / hour

Actuals:Units produced 3,200DM purchased 36,000 @ $8.35 / lb.DM used 31,800 lbs.DL 11,520 hoursDL cost $112,896

Required: 1. Compute material price and usage variances2. Compute labor rate and efficiency variances


SMITH COMPANYCalculations ...


SHOCKEY COMPANY(Direct MaterialsVariances)

Shockey Company used 3,375 pounds of steel in June to manufacture 900 units. The company paid $30 per pound during the month to purchase the steel. On June 1, the firm had 500 pounds of steel on hand. At the end of June, the firm only had 250 pounds of steel in its warehouse. The company spent 4,200 direct labor hours in June and the average wage during the month is $42 per hour.

Additional important information:

Steel allowed per unit…………………………………….. 4 lbs. per unitStandard cost per pound of steel…………………………. $25 per lb.Standard direct labor wage……………………………….. $40 per direct labor hourStandard direct-labor hours per unit of product………….. 5

Required: 1. Compute for June, Shockey Company’s purchase price and usage variances for steel.2. Compute for June, Shockey Company’s direct labor rate and efficiency variances.


SHOCKEY COMPANYCalculations…


WABASH CANNONBALL(Direct Materials Variances)

Wabash Cannonball has the following data from its operations for the month just completed:

Direct materials purchased....................................... 30,000 poundsDirect materials used................................................ 28,000 poundsTotal direct materials purchased costs...................... $90,000Standard price of direct materials............................. $3.25 per poundDirect materials usage variance-unfavorable............ $6,500

Required: 1. Compute the price per pound paid to purchase direct materials.2. Compute the direct materials price variance.3. Compute the total standard quantity of direct materials for the operation.


WABASH CANNONBALLCalculations…


KSU COMPANY(Direct Labor Variances)

KSU Company’s direct labor costs for the month of January follow:

Total direct labor-hours worked................................................. 40,000Total standard direct labor-hours for units manufactured.......... 42,000Average hourly wage rate paid for direct labor.......................... $25Direct labor efficiency variance.................................................. $48,000 favorable

Required: 1. What is KSU’s standard hourly rate?2. What is KSU’s direct labor rate variance?


KSU COMPANYCalculations…


CREAMED CORNHUSKER, INC.(Direct Labor Variances)

Creamed Cornhusker’s direct labor costs for the month of February follow:

Direct labor hourly rate paid....................................................... $30.00Total standard direct labor hours for production........................ 12,000Direct labor hours worked.......................................................... 11,000Direct labor rate variance............................................................ $33,000 favorable

Required: 1. Compute Cornhusker’s standard direct wage per hour in February.2. Compute Cornhusker’s direct labor efficiency variance.


CREAMED CORNHUSKER, INC.Calculations…



DAY #2

Normal Cost System: Extended Normal Cost System:


Small opportunities are often the beginning of great enterprises. DEMOSTHENES (384—322), Orator and statesman



If you wouldn’t write it and sign it, don’t say it. EARL WILSON (1907—1987), Columnist

Living well and beautifully and justly are all one thing. SOCRATES (c. 470—399 B.C.), Philosopher


What is the difference between a budget and a standard? What is a static budget? What is a flexible budget? What four variances should you be able to calculate? When utilizing standard costs, what is another name for the PDOR? When utilizing standard costs, how is the “activity” calculated? Know Thy Calculations!


TRUE-BLUE CORPORATION(Standard Costs and Flexible Budgeting)

True-Blue Corporation has the following information available for December, 2003:

VOH Std. Rate $3.85 per DLHActual VOH $1,600Actual DLH 400 hoursStd. Hours Allowed 420 hours



STRANGE FIRE, P.C.(Standard Costs and Flexible Budgeting)

Strange Fire, P.C., has the following information available for the first quarter of 2004:

Actual VOH $54,000Standard OH Applied $56,000Actual “hours” incurred 2,900 hoursVariable OH Rate $20 per hour

Required: What is the Standard Quantity?


THE COSTUME COMPANY(Standard Costs and Flexible Budgeting)

The Costume Company incurred the following during the fiscal year ending January 31, 2002:

Budgeted FOH $800,000Expected Production 25,000 unitsStd. FOH Rate $8 per DLHActual Production 25,250 unitsActual FOH $802,000Actual Hours 102,000



TALLYHO COMPANY(Standard Costs and Flexible Budgeting)

Normal activity for Tallyho Company is 100,000 units.

Tallyho CompanyOperating Data for 2005

Production in units 110,000Sales in units, at $80 each 90,000Ending inventory in units 20,000Actual production costs:

Variable $2,255,000Fixed $3,200,000

Selling and administrative expenses:Variable at $5 per unit $450,000Fixed $1,400,000

Standards and budgets:Budgeted fixed production costs $3,000,000Standard variable production costs $20 per unit

Required: Calculate all fixed manufacturing overhead variances.


FROSTEE FREEZE COMPANY(Standard Costs and Flexible Budgeting)

Each Super-Tastee required 2.5 machine hours (standard) per unit at a variable overhead cost of $2.20 per machine hour (standard).

Actual production was 3,000 Super-Tastees, actual machine hours used was 7,300, and actual variable factory overhead was $16,850.

The standard fixed overhead cost per Super-Tastee was $0.90 per machine hour. Normal (budgeted) production was 3,100 Super-Tastees, and actual fixed overhead was $7,890.

Required: Calculate all variable and fixed manufacturing overhead variances.


FROSTEE FREEZE COMPANYCalculations …


BENTON COMPANY(Standard Costs and Flexible Budgeting)

Benton Co. provides the following information from their cost system. Benton records standard overhead based on direct labor hours.

Actual units completed 310Actual labor cost (@ $6.90) $20,769Budgeted total overhead $45,900Actual variable overhead $25,150Actual fixed overhead $23,800

Standard specification per unit of finished product:

Direct labor (9 hrs./unit) $63.00Variable overhead $72.00Fixed overhead $81.00

Required: Calculate the standard hours, manufacturing overhead rate, and the variances.


BENTON COMPANYCalculations ...


BEACHSIDE INDUSTRIES (A)(Variable Overhead Variances)

Beachside Industries manufactures metal detectors. The cost of each metal detector includes direct materials, direct labor, and factory overhead. The firm traces all direct costs to products, but assigns overhead based on direct labor hours. The following measures have been provided for the month of July:

Budgeted variable factory overhead $21,000Budgeted direct labor hours 3,500Budgeted metal detectors to manufacture 7,000

Actual variable factory overhead $21,840Actual direct labor hours 3,780Actual metal detectors manufactured 6,720

Required:1. Compute the spending variance and the efficiency variance for variable factory overhead.2. Comment on the factory’s operation in July with regard to variable factory overhead.


BEACHSIDE INDUSTRIES (B)(Fixed Overhead Variances)

Beachside Industries manufactures metal detectors. The cost of each metal detector includes direct materials, direct labor, and factory overhead. The firm traces all direct costs to products, but assigns overhead based on direct labor hours. The following information is available for the month of July:

Budgeted fixed factory overhead $126,000Budgeted direct labor hours 3,500Budgeted metal detectors to manufacture 7,000

Actual fixed factory overhead $128,800Actual direct labor hours 3,780Actual metal detectors manufactured 6,720

Required:1. Compute the spending variance and the volume variance for fixed factory overhead.2. Comment on the factory’s operation in July with regard to fixed factory overhead.


BIG LEAGUE, INC.(Comprehensive Variance Problem)

Big League Inc. manufactures baseballs and other equipment, measuring production volume in direct labor-hours and uses a flexible budget system to plan and control department overhead. Standard costs of manufacturing a dozen baseballs are as follows:

Direct materialsLeather 2 sheets x $ 2 $ 4String 6 spools x $ 1 6Cork 1 sheet x $2 2

Direct labor 2 hours x $ 6 12Variable overhead 2 hours x $ 3 6Fixed overhead 2 hours x $ 2 4 Total $34

The overhead rate is 3,000 direct labor hours per month, though practical capacity is 3,500 hours per month. Variable overhead costs are expected to vary with the numbers of direct labor-hours actually used. During March, the plant produced 1,500 dozen baseballs. In addition, the following costs were incurred in March:

Direct MaterialLeather Purchased 4,000 sheets at $2.00/sheet and used 3,050 sheetsString Purchased 12,000 spools at $1.10/spool and used 9,100 spoolsCork Purchased 2,000 sheets at $1.95/sheet and used 1,650 sheets

Direct LaborRegular time 2,800 hours at $6.00 and 400 hours at $6.25Overtime All of the 400 hours at $6.25 were subject to overtime premium amounting

to $1,250 which is included in variable overheadFactory Overhead

Variable $ 10,000Fixed $ 6,500

Required:1. What is the most appropriate time to record any variance of actual materials prices from standard?2. What is the total direct materials price variance?3. What is the total direct materials usage variance?4. What is the direct labor rate (price) variance?5. What is the direct labor efficiency variance?6. What is the variable overhead spending variance?7. What is the variable overhead efficiency variance?8. What is the budget (spending) variance for fixed overhead?9. What is the factory overhead production volume variance?


BIG LEAGUE INC.Calculations ...


BIG LEAGUE INC.Calculations (continued) ...



DAY #3

Why do unfavorable variances occur?? Who is to blame?

DM :

DM :

DL :

DL :

I think we consider too much the good luck of the early bird, and not enough the bad luck of the early worm. FRANKLIN D. ROOSEVELT (1882—1945), U.S. President



Why do unfavorable variances occur?? Who is to blame?

VOH :

VOH :

FOH :

FOH :

You cannot be a leader and ask other people to follow you, unless you know how to follow, too. SAM RAYBURN (1882—1961), Legislator


BEALE STREET BLUES, INC.(Standard Costs and Flexible Budgeting)

At the beginning of 1987, Beale Street Blues, Inc., adopted the following standards: Total InputDirect materials 3 lbs. @ $2.50 per lb. $ 7.50Direct labor 5 hrs. @ $7.50 per hr. $37.50Factory overhead:

Variable $3.00 per direct labor hour $15.00Fixed $4.00 per direct labor hour $20 .00

Standard costper unit $80 .00

Normal volume per month is 40,000 standard labor hours. Beale’s January 1987 budget was based on normal volume. During January Beale produced 7,800 units, with records indicating the following: Direct materials purchased 25,000 lbs. @ $2.60Direct materials used 23,100 lbs.Direct labor 40,100 hrs. @ $7.30Total factory overhead $300,000Variable overhead $130,000

Required:For the month of January 1987, compute the following variances, indicating whether each is favorable or unfavorable:

1. Direct materials price variance, based on purchases. 2. Direct materials usage variance. 3. Direct labor rate variance. 4. Direct labor efficiency variance. 5. Variable factory overhead efficiency variance. 6. Fixed factory overhead spending variance. 7. Factory overhead volume variance.


BEALE STREET BLUES, INC.Calculations ...


BALLYCANALLY CORPORATION(Standard Costs and Flexible Budgeting)

The following information is available for Ballycanally's operations for the latest calendar year. Treat each variance calculation independently.

Materials Variances

AX-89: Standard ActualMaterial Price $1.75 $1.80Sheets Requisitioned 13,000 13,250Sheets Purchased 14,000Units Produced 6,500 6,300

Labor Variances

Deluxe Model: Standard ActualLabor Hours 4,100Labor Costs $36,000 $37,105Units Produced 2,000Standard Hours Per Unit 2

Variable Overhead Variances

Supplies Expense: Standard ActualCost Per Labor Hour $1.20 $1.22Labor Hours 27,750Standard Allowable Hours 28,000

Fixed Overhead Variances

Standard Units Allowed 60,000Volume Variance $6,000 FStandard Fixed Cost Rate $2.50 per unitTotal Fixed Cost Variance $5,500 U

Required:

1. Materials variances: Calculate the standard allowable sheets per unit and all variances.

2. Labor variances: Calculate the actual labor rate per hour and all variances.

3. Variable overhead variances: Calculate the actual supplies expense and all variances.

4. Fixed overhead variances: Calculate actual and budgeted fixed overhead and all variances.


BALLYCANALLY CORPORATIONCalculations ...


BRÖTCHEN BAKERY(Standard Costs and Flexible Budgeting)

Brötchen Bakery sells brötchen (rolls) by the case to specialty shops in the U.S. During April, Brötchen Bakery produced 1,450 cases of rolls and incurred the following actual costs.

Actual CostsVariable overhead ………………………………………….. $ 11,000Fixed overhead …………………………………………….. 26,000Actual labor cost (8,000 direct-labor hours) ……………….. 151,200Actual material cost (30,000 pounds purchased and used) … 66,000

Standard cost and annual budget information are as follows:

Standard Costs per CaseDirect labor (5 hours at $18) …………………………………. $ 90.00Direct material (20 pounds at $2) ……………………………. 40.00Variable overhead (5 hours at $1.50) ………………………… 7.50Fixed overhead (5 hours at $3) ………………………………. 15 .00 Total $152 .50

Annual Budget InformationVariable overhead …………………………………………. $150,000Fixed overhead ……………………………………………. $300,000Planned activity for year ………………………………….. 100,000 direct-labor hours

Required:Prepare as complete an analysis of cost variances as is possible from the available data.


BRÖTCHEN BAKERYCalculations ...


COXWAIN COMPANY(Standard Costs and Flexible Budgeting)

Information on Coxwain Company's direct materials costs for the month of January 2003 was as follows:

Actual quantity purchased 18,000Actual unit purchase price $ 3.60Materials purchase price variance — unfavorable (based on purchases) $ 3,600Standard quantity allowed for actual production 16,000Actual quantity used 15,000

Required: What was the direct material usage variance for January 2003?


KENNEL STREET COMPANY(Standard Costs and Flexible Budgeting)

Information on Kennel Street Company's direct material costs is as follows:

Standard unit price $3.60Actual quantity purchased 1,600Standard quantity allowed for actual production 1,450Materials purchase price variance — favorable $ 240

Required: What was the actual purchase price per unit, rounded to the nearest penny?


REBEL COMPANY(Standard Costs and Flexible Budgeting)

Information on Rebel Co.'s direct material costs for May 2005 is as follows:

Actual quantity of direct materials purchased and used 30,000 lbs.Actual cost of direct materials $ 84,000Unfavorable direct materials usage variances $ 3,000Standard quantity of direct materials allowed for May production 29,000 lbs.

Required: For the month of May, what was Rex's direct materials price variance?


BARBERSHOP COMPANY(Standard Costs and Flexible Budgeting)

Information on Barbershop Company's direct labor costs for the month of January 2001 is as follows:

Actual direct-labor hours 34,500Standard direct-labor hours 35,000Total direct-labor payroll $ 241,500Direct-labor efficiency variance — favorable $ 3,200

Required: What is Barbershop's direct labor rate variance?


TUBBER COMPANY(Standard Costs and Flexible Budgeting)

Tubber Co. uses a standard cost system. The following information pertains to direct labor for Product T for the month of October:

Actual rate paid $ 8.40 per hourStandard rate $ 8.00 per hourStandard hours allowed for actual production 2,000 hoursLabor efficiency variance $ 1,600 unfavorable

Required: What were the actual hours worked?


THOR’S HAMMER, INC.(Standard Costs and Flexible Budgeting)

For the month of April, Thor’s Hammer's records disclosed the following data relating to direct labor:

Actual costs $10,000Rate variance 1,000 favorableEfficiency variance 1,500 unfavorableStandard cost $ 9,500

For the month of April, actual direct labor hours amounted to 2,000.

Required: In April, what was Thor’s Hammer’s standard direct labor rate per hour?


DUNCE COMPANY(Standard Costs and Flexible Budgeting)

The following processing standards have been set for Dunce Co.'s clerical workers:

Number of hours per 1,000 paper processed 150Number of papers processed per year 1,500,000Wage rate per 1,000 papers $600Standard variable cost of processing 1,500,000 papers $900,000Fixed costs per year $150,000

The following information pertains to the 1,200,000 papers that were processed during 2006:

Total cost $915,000Labor cost $760,000Labor hours 190,000

Required:1. Assuming standard performance, what should be Dunce's expected total cost to process the 1,200,000

papers be for 2006?2. What would be Dunce's labor rate variance for 2006?


HERRY COMPANY(Standard Costs and Flexible Budgeting)

The following information relates to one department of Herry Company for the fourth quarter 2004:

Actual total overhead (fixed plus variable) $178,500Budget formula $110,000 plus $0.50/hr.Total overhead application rate $1.50/hr.Spending variance $8,000 unfavorableVolume variance $5,000 favorable

The total overhead variance is divided into three variances — spending, efficiency, and volume.

Required:1. What were the actual hours worked in this department during the quarter?2. What were the standard hours allowed for good output in this department during the quarter?


HERDING CATS, INC.(Standard Costs and Flexible Budgeting)

Herding Cats reported the following data for 2002:

Actual hours 40,000Denominator hours 50,000Standard hours allowed for output 42,000

The predetermined overhead rate was $9.00 per hour, of which $3.00 was variable and $6.00 was fixed.

Required: Given these data, what was the company's volume variance for the year?


BOSNA CORPORATION(Standard Costs and Flexible Budgeting)

The following information is available for the variable overhead expense of Bosna Corporation:

Estimated 1995 sales $2,000,000Bad debt 0.5% of salesBudgeted bad debt ??

Actual 1995 sales $2,450,000Actual bad debt $12,500

Required: Calculated budgeted bad debt expense and the bad debt variance.


STIEGL CORPORATION(Standard Costs and Flexible Budgeting)

The following information is available for the variable overhead expense of Stiegl Corporation:

Budgeted indirect labor per direct labor hour $2 / DLHBudgeted indirect labor for 1995 $24,000Total (actual) indirect labor hours for 1995 15,000Total (actual) indirect labor cost for 1995 $27,500

Required: Calculate the variable overhead spending variance for indirect labor.


JOINT COSTS

Prosperity is no just scale; adversity is the only balance to weigh friends. PLUTARCH (c. 46—c. 120 A.D.), Biographer and moralist


Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots. EDWARD GEORGE BULWER-LYTTON (1803—1873), Writer


JOINT COSTS

A Helping Hand

Companies may engage in a single process to simultaneously generate various different outputs such as the refining of crude oil may produce gasoline, motor oil, heating oil, and kerosene. A single process in which one product cannot be manufactured without producing others is known as a joint process. The costs incurred for materials, labor, and overhead during a joint process are referred to as the joint cost of the production process.

The point at which joint process outputs are first identifiable as individual products is called the split-off point. Once the split-off point is reached, the joint cost has already been incurred and is a sunk cost that cannot be changed regardless of what future course of action is taken.

There are several methods companies use to distribute joint costs to products. Under the physical units method, joint costs are distributed to products on the basis of some physical measure such as pounds, tons, gallons, board feet, atomic weight, or heat units.

For example, suppose that Canyon Lumber Company processes logs into four types of lumber totaling 6,000,000 board feet. Total joint cost is $372,000. First we find the proportion of the total units for each grade, and then assign each grade its proportion of joint cost.

Types Board Feet % of Units Joint Cost Allocation Douglas Fir 900,000 0.15 $ 55,800 Western Red Cedar 2,400,000 0.40 148,800 Forrest Oak 1,200,000 0.20 74,400 Tiger Maple 1,500,000 0.25 93,000

Totals 6,000,000 $ 372,000

The sales-value-at-split-off method allocates joint cost based on each product’s share of market or sales value at the split-off point. Using the same example of lumber mill cost given in the preceding discussion of the physical units method, the joint cost of $372,000 is distributed to the various grades on the basis of their sales value at split-off.

Quantity Produced Price at Split-Off Sales Value % of Total Allocated

Types (Board Feet) (per Board Foot) at Split-Off Sales Value Joint Cost Douglas Fir 900,000 $ 0.300 $ 270,000 0.2699 $ 100,403 Western Red Cedar 2,400,000 0.200 280,000 0.4799 178,523 Forrest Oak 1,200,000 0.121 145,200 0.1452 54,014 Tiger Maple 1,500,000 0.070 105,000 0.1050 39,060

Totals 6,000,000 $1,000,200 1.0000 $ 372,000

The net realizable value method assigns cost based on the joint products’ proportional net realizable values. Net realizable value (NRV) is equal to product sales revenue at split-off minus any incremental costs, which are incurred between the split-off point and the point of sale. Once the net realizable value for each product is determined, calculate the joint cost allocation using the sales value at split-off method.

Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots.


EDWARD GEORGE BULWER-LYTTON (1803—1873), Writer


ABILENE MEAT PACKERS(Joint Costs)

In-Class Assignment

Group Members ________________________________________________________________________________________________________________________________________________________

Abilene Meat Packers experienced the operating statistics in the following table for its joint meat cutting process during March 2006. The costs of the joint process were direct material, $19,000; direct labor, $11,100; and overhead, $4,300. The main products are ribs, brisket, and steak. The products do not require any additional processing or disposal costs, although management may consider additional processing.

Sales ValueProducts Weight in Pounds at Split-Off Ribs 4,300 $66,000 Brisket 6,700 $43,000 Steak 5,400 $11,200

a. Calculate the per pound and total value of each joint product based on (1) relative sales value and (2) pounds.

b. Discuss the advantages and disadvantages of each allocation base for (1) financial statement purposes and (2) decisions about the desirability of processing the joint products beyond the split-off point.


ABILENE MEAT PACKERSCalculations ...


SPARTAN, INC.(Joint Cost)

Spartan Inc. produces joint products Alpha, Beta, and Chi from a process. This information concerns a batch produced in May at a joint cost of $120,000:

Units Produced After Split-Off: Product and Sold Total Additional Costs Total Sales ValueAlpha 2,000 $20,000 $180,000Beta 4,000 20,000 100,000Chi 8,000 5,000 20,000

Required:How much of the joint cost should be allocated to each joint product using the net realizable value method?


CAROLINA CORP.(Joint Costs)

Carolina Corp. manufactures tar from coal and from petroleum from a joint process. It allocates joint costs on the basis of sales value at split-off. Processing 750 gallons of coal tar and 1,500 gallons of petroleum tar to the split-off point costs $6,840. The sales value at split-off is $15 per gallon for coal tar and $21 for petroleum tar. Petroleum tar requires an additional process beyond split-off at a cost of $3.75 per gallon before it can be sold.

Required:What is Carolina’s cost to produce 1,500 gallons of petroleum tar?


SOAP ‘N SUDS, INC.(Joint Costs)

Soap ‘N Suds Inc. manufactures two lines of liquid hand soap, Mango Delight and Kiwi Surprise, from a joint process. The joint costs incurred are $210,000 for a standard production run that generates 90,000 gallons of Mango Delight and 60,000 gallons of Kiwi Surprise. Mango Delight sells for $2.25 per gallon, when Kiwi Surprise sells for $3.50 per gallon.

Required:1. Assuming that both products are sold at the split-off point, how much of the joint cost of each production run

is allocated to Mango Delight on a net realizable value basis?2. If no additional costs are incurred after the split-off point, how much of the joint cost of each production run

is allocated to Kiwi Surprise on the physical measure method basis?3. If additional processing costs beyond the split-off point are $1.30 per gallon for Mango Delight and $0.80

per gallon for Kiwi Surprise, how much of the joint cost of each production run is allocated to Kiwi Surprise on a net realizable value basis?

4. If additional processing cost beyond the split-off point are $1.30 per gallon for Mango Delight and $0.80 per gallon for Kiwi Surprise, how much of the joint cost of each production run is allocated to Mango Delight on a physical measure method basis?


SOAP ‘N SUDS, INC.Calculations ...


ABSORPTION COSTING AND VARIABLE COSTING

Absorption Costing Variable CostingIncome Statement Income Statement




Some HANDY Information:Absorption Costing I/S Variable Costing I/S

GAAP Not GAAP

FOH considered an asset*;results in future cost avoidancebecause incurring cost now will make future costs unnecessary,therefore has future servicepotential and is an asset

FOH not considered an asset*;viewed as relating to capacityto produce, not productionitself

*Asset = something that has future service potential

HANDY NOTES:Advantages of Variable Costing Income Statement Format:

1. Dovetails with C-V-P2. More useful information for pricing decisions3. Changes in inventory don’t affect NI4. Managers find it easier to understand5. Impact of fixed costs on NI emphasized6. More difficult to “game”



When will Net Income be the same for both approaches?When will Net Income be different??


To be good is noble; but to show others how to be good is nobler and no trouble.


MARK TWAIN “Following the Equator” Dover



A conceptual discussion about “gaming” …



To have ideas is to gather flowers; to think, is to weave them into garlands. ANNE-SOPHIE SWETCHINE (1782—1857), Writer


BOWLING COMPANY(Absorption Costing and Variable Costing Income Statements)

Bowling Company produces a single product. The cost characteristics of the product and of the manufacturing plant for 2005 are given below:

Beginning inventory in units - 0 -Units produced 6,000Units sold 5,000Ending inventory in units 1,000

Selling price per unit $20Selling and administrative expenses:

Variable per unit $ 3Fixed per year $10,000

Cost of a unit of product: Absorption VariableDirect materials $ 2 $ 2Direct labor 4 4Variable overhead 1 1Fixed overhead ($30,000 ÷ 6,000 units) 5 -- Total cost per unit $12 $ 7

Required:Calculate net income under absorption costing and variable costing for 2005.


BOWLY COMPANYCalculations ...


HOLLANDAISE COMPANY(Absorption Costing and Variable Costing Income Statements)

Hollandiase Company produces a single product.

Number of units produced annually 5,000Variable costs per unit:

Direct material, direct labor, and variable manufacturing overhead $5Selling and administrative expense $1

Fixed costs per year:Manufacturing overhead $15,000Selling and administrative expense $21,000

Selling price per unit $15.00

Year 1 Year 2 Year 3Units Produced 5,000 5,000 5,000Units Sold 5,000 4,000 6,000

Required:1. Calculate the production cost of a single unit of product under the absorption and variable costing methods.2. Calculate net income for years 1, 2 and 3 with under the absorption and variable costing methods.3. Reconcile any differences between net income calculated using both methods.


HOLLAND COMPANYCalculations ...


FAST COMPANY(Absorption Costing and Variable Costing Income Statements)

Presented below is the operating data of Fast Company in the years 2002, 2003 and 2004.

Variable costs per unit:Direct materials $4.00Direct labor 1.50Variable overhead (estimated and actual) 0.50Variable selling and administrative 0.25

Estimated fixed overhead was $150,000 each year. Actual fixed overhead was also $150,000. Normal production volume was 150,000 units per year. The sales price each year was $10 per unit. Fixed selling and administrative expenses were $50,000 per year. Other operating data were as follows:

2002 2003 2004Beginning inventory ----- ----- 50,000Production 150,000 150,000 150,000Sales 150,000 100,000 200,000Ending inventory ----- 50,000 -----

Required:Prepare variable-costing and absorption-costing income statements for 2002, 2003 and 2004.


FAST COMPANYCalculations ...


SOUTH STREET FURNITURE CO.(Absorption Costing and Variable Costing Income Statements)

The South Street Furniture Company makes cabinets for televisions and VCR units. Normal capacity for the company is 80,000 units per year. During year-ended December 31, 2004, 78,000 units were manufactured.

Prime cost $25 per unitVariable overhead $ 3 per unitVariable selling and administrative cost $ 3 per unitFixed overhead cost $480,000Fixed selling and administrative cost $340,000

During the year, 72,000 units were sold for $50 each. Beginning inventory was 8,000 units with variable manufacturing costs of $26 and applied fixed overhead of $5 per unit. The FIFO inventory method is used.

Required:1. Prepare a variable costing income statement for the South Street Furniture Company2. Prepare an absorption costing income statement for the South Street Furniture Company.3. Prepare a schedule to reconcile the difference in net income between the two costing methods.


SOUTH STREET FURNITURE CO.Calculations ...


STETSON COMPANY(Absorption Costing and Variable Costing Income Statements)

Stetson Company began business on January 1, 2001. It is now the end of 2002. The company uses absorption costing. The president is trying to decide whether to adopt variable costing for measuring management performance. She has asked you to prepare comparative income statements for 2001 and 2002 under absorption and variable costing.

The following simplified data are available:

2001 2002Beginning inventory ----- 4,000Production 6,000 900Sales 2,000 3,000Ending inventory 4,000 1,900

Variable manufacturing costs per unit …………….. $2.00Fixed manufacturing costs ………………………… $10,000Denominator volume in units ……………………… 10,000Fixed manufacturing costs per unit ……………….. $1.00Fixed selling and administrative costs ……………. $1,400Variable selling and administrative costs per unit sold $0.50Selling price per unit ……………………………… $8.50

There were no inventories of work in process or raw materials. Production was far below expected volume in 2002 because of persistent shortages of raw materials.

Required:1. Prepare the requested comparative income statements.2. Explain the difference in operating income between absorption costing and variable costing in each of

the two years. 3. Sales rose in 2002. Did operating income rise? Explain.


STETSON COMPANYCalculations ...


STETSON COMPANYCalculations (continued) ...


BELLY RUB PRODUCTIONS(Absorption Costing and Variable Costing Income Statements)

Below are the Production, sales and cost data for Belly Rub Productions’ only product. Normal capacity is producing 10,000 units annually.

Belly Rub ProductionsCalendar Years 2001 through 2004

2001 2002 2003 2004Sales in units 8,000 9,000 13,000 10,000Production in units 10,000 12,000 10,000 8,000Direct materials per unit $ 6 $ 6 $ 7 $ 8Direct labor per unit $ 3 $ 4 $ 4 $ 5Variable MOH per unit $ 2 $ 2 $ 3 $ 4Fixed MOH $50,000 $60,000 $70,000 $80,000Variable S&A per unit $ 3 $ 3 $ 4 $ 5Fixed S&A $30,000 $35,000 $40,000 $50,000Sales price per unit $25 $27 $30 $35Beg. Inventory in units 0 2,000 5,000 2,000

Required:1. Calculate the production cost of a single unit of product under the absorption and variable costing methods.2. Calculate net income for 2001, 2002 and 2003 using both the absorption and variable costing methods.3. Reconcile any differences between net income calculated using both methods.


BELLY RUB PRODUCTIONSCalculations ...


BELLY RUB PRODUCTIONSCalculations (continued) ...


ROCKY MOUNTAIN BICYCLE CLUB(Absorption Costing and Variable Costing)

Rocky Mountain Bicycle Club produces all-terrain mountain bikes which are very popular in the Wyoming area. The bikes are sold at $350. The following production information for 2005 is available below:

Units in beginning inventory 0Units produced 5,000Units sold 4,000Units in ending inventory 2,000Variable costs per unit: Direct materials $60 Direct labor 70 Variable manufacturing overhead 25 Variable selling and administrative 10Fixed costs: Fixed manufacturing overhead $300,000 Fixed selling and administrative 400,000

Required:1. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle. Prepare

an income statement based on absorption costing.2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle. Prepare an

income statement based on variable costing.


ROCKY MOUNTAIN BICYCLE CLUBCalculations …


GEORGETOWN, INC.(Absorption Costing and Variable Costing)

Georgetown, Inc. manufactures toothbrushes that sell at wholesale for $2.00 per unit. The company had no beginning inventory in 2005. These data summarize the 2005 and 2006 operations:

2005 2006Sales 2,000 units 2,400 unitsProduction: 2,200 units 2,200 unitsProduction cost – Variable (per unit) $ 0.70 $ 0.70 – Fixed $ 1,100.00 $ 1,100.00Marketing – Variable $ 0.50 $ 0.50Administrative – Fixed $ 300.00 $ 300.00

Required:Prepare the following:1. An income statement for each year based on absorption costing.2. An income statement for each year based on variable costing.3. A reconciliation and explanation of the differences in the operating income resulting from using the

absorption costing method and variable costing method.


GEORGETOWN, INC.Calculations …


GROVER MANUFACTURING(Absorption Costing and Variable Costing)

Grover Manufacturing has the following information for the years ended Dec. 31, 2003 and Dec. 31, 2004:

Units 2003 2004 Beginning inventory (units) 300 Price $75 $75 Units sold 1,100 2,000 Actual production (units) 1,300 1,500 Budgeted production (units) 1,500 1,500Unit variable costs Manufacturing $35 $35 Selling and administrative $10 $10Fixed costs Manufacturing $27,000 $27,000 Selling and administrative $4,000 $4,000

Required:1. Prepare the absorption cost and variable cost income statements for 2003 and 2004.2. Prepare a reconciliation and explanation for the differences between absorption cost and variable cost income for both years.


GROVER MANUFACTURINGCalculations …


THE LOST ART OF HENRY JONESA critic, an artist, and a scholar were assembled on a

panel for an art history presentation at a university. During the question and answer portion of the lecture, a student asked the panel to name the greatest artist who ever lived.

“Michelangelo,” responded the critic.“Monet,” said the artist.“Henry Jones,” replied the scholar.“Henry Jones?” questioned the student. “Who is Henry

Jones?”“Many years ago, he was a janitor at this very institution.”“How can you compare a janitor to great artists like Monet

and Michelangelo?”“Henry Jones has more talent than either of those men,”

said the scholar.“Then why have we never heard of him?” asked the

student.“Because he never thought he was good enough, so he

never cultivated his talents nor shared them with the world,” the scholar sighed. “Henry Jones is lost to us forever, because he never lived up to his potential.”

Adapted from American Scandal!, Pat Williams, Destiny Image Publishers


I don’t paint things. I only paint the difference between things.HENRI MATISSE (1869—1954), Artist

Anyone can hold the helm when the sea is calm. PUBLILIUS SYRUS (c. 42 B.C.), Writer


TRANSFER PRICING

Education is the best provision for old age.


ARISTOTLE (384—322 B.C.), Philosopher


TRANSFER PRICING

A HELPING HAND

A transfer price is the price charged when one division of a company provides goods or services to another division of the company. The profits of both the buying (incurring a cost) and selling (realizing revenue and expenses) divisions are impacted by the purchase, but the transfer price nets out for the company as a whole.

Many methods can be used to establish a transfer price. Generally, the highest price the buying division would be willing to pay is the market price (if known); the lowest price the selling division would be willing to accept is the relevant (variable) cost of the product.

The market price method sets the transfer price as the outside market price of the selling division’s product or service.

Cost-Based Transfer Price MethodsVariable cost: transfer price is based on the variable cost per unit.Full cost: transfer price equals a product or service’s variable costs plus fixed costs allocated to it.Variable cost + markup: transfer price equals variable cost plus a markup.

For example, variable cost plus 25%Full cost + markup: transfer price equals full cost plus a markup.

For example, 120% of full cost.

A negotiated transfer price results when top management allows the buying and selling division managers to negotiate a transfer price.

Whether or not the selling division has idle capacity will influence the price the selling division is willing to accept for the good or service. When the selling division must displace outside business to provide goods or services to another division, the lost profit is an opportunity cost for the selling division.

The most beautiful thing in the world is the conjunction of learning and inspiration.-- Wanda Landowski (1879—1959), Musician

Shun idleness. It is a rust that attaches itself to the most brilliant of metals. -- Voltaire [François-Marie Arouet] (1694—1778), Humorist

“On with the dance, let joy be unconfined” is my motto, whether there’s any dance to dance or any joy to unconfine. -- Mark Twain [Samuel L. Clemens] (1835—1910), Humorist


The two powers which in my opinion constitute a wise man are those of bearing and forbearing. -- Epicletus (c. 55—135), Philosopher


TRANSFER PRICING

More on Transfer Pricing

Why are transfer prices necessary? Because many companies are decentralized. In decentralized companies, decision-making authority and empowerment is spread throughout the company, not just to a few top managers. Hence, you read in textbooks about responsibility centers such as cost centers, profit centers, and investment centers. In practice, such responsibility centers are sometimes called “divisions”.

There are many advantages and disadvantages of a decentralized company.

Advantages:1. Lower-level managers usually have better information than does top management for making

operational decisions.2. Local managers can make decisions more quickly, benefiting customers and others.3. Decentralized decision-making gives lower-level managers more experience making decisions—which

is good training for higher-level positions.4. Relatedly, top management can concentrate on big decisions rather than worrying about day-to-day

operations.5. Smaller, decentralized units are more flexible to changing business conditions.6. Decentralized organizations are better able to expose its divisions to competition, which can improve

division performance.7. Decentralized can provide lower-level managers with greater motivation and job satisfaction because

of their higher levels of responsibility.

Disadvantages:1. Lower-level managers can make decisions without understanding the true big picture.2. Lower-level managers are less experienced decision-makers and can make poor decisions.3. There can be a lack of coordination among lower-level managers.4. More sophisticated (and expensive) accounting control systems are required in decentralized

organizations.5. More training of lower-level managers must occur.6. The personal objectives of lower-level managers may different than those of the organization (at least

as represented by top management). For instance, a lower-level manager may be concerned about earning a year-end bonus and use methods that are not in the best interest of the company as a whole to earn that bonus.

7. Innovation can be more difficult to introduce and implement in a decentralized company.

Centralization exists when top management controls the major functions of an organization. Centralization also has advantages and disadvantages.

Advantages:1. There are greater economies of scale when company resources are coordinated centrally.2. There is improved control over organizational resources.3. More complex organization-wide activities can be performed.

Disadvantages:1. As a company grows larger, there is upper limit to how much can be controlled by top management.2. Relatedly, as company activities grow more complex, they can be centrally unmanageable.3. Diminishing returns of centralization can occur.


TEXAS PRODUCTS, INC.(Transfer Pricing)

In-Class Assignment

Group Members ________________________________________________________________________________________________________________________________________________________

Texas Products, Inc. is a decentralized company. Each division has its own sales force and production facilities and is operated as an investment center. Top management uses return on investment (ROI) for performance evaluation of division managers. The Midland Division has just been awarded a contract for a product that uses a component manufactured by the Amarillo Division as well as by outside suppliers. Midland used a cost figure of $3.80 for the component when the bid was prepared for the new product. Amarillo supplied this cost figure in response to Midland’s request for the average variable cost of the component.

Midland Division anticipates a total cost of $26.25 for the product (including the $3.80 cost of the Amarillo component) and won the contract with a bid of $36.25.

Variable manufacturing cost $16.80 (including $3.80)Variable selling and distribution cost 3.15Fixed manufacturing cost 6 .30 Total cost [New Product] $26 .25

Amarillo has an active sales force that is continually soliciting new customers. Amarillo’s regular selling price for the component Midland needs for the new product is $6.50. Sales of the component are expected to increase. Amarillo management has the following costs associated with the component:

Variable manufacturing cost $3.20Variable selling and distribution cost 0.60Fixed manufacturing cost 1 .20 Total cost [Component] $5 .00

The two divisions have been unable to agree on a transfer price for the component. Corporate management has never established a transfer price because interdivisional transactions have never occurred. The following suggestions have been made for the transfer price:

Regular selling price Regular selling price less variable selling and distribution expenses Manufacturing cost plus 15 percent Variable manufacturing cost plus 20 percent

Required:1. Compute each of the suggested transfer prices.2. Discuss the effect of each of the transfer prices might have on the Amarillo Division management’s attitude

toward intra-company business.3. Is the negotiation of a price between the Midland and Amarillo Divisions a satisfactory method to solve the

transfer price problem?4. Should the corporate management of Texas Products, Inc., become involved in this transfer controversy?

Explain.


TEXAS PRODUCTS, INC.Calculations…


ZEPHYR COMPANY(Transfer Pricing)

Zephyr Company’s Mechanics Division produces a high powered motor used in smaller electronics. Sales and cost data on the motor follow:

Selling price per unit on the outside market $80Variable cost per unit $42Fixed costs per unit (based on capacity) $18Capacity in units 30,000

Zephyr has a Computer Division that would like to begin purchasing this motor from the Mechanics Division. The Computer Division is currently purchasing 5,000 motors each year from another company at a cost of $76 per motor. Zephyr Company evaluates its division managers on the basis of divisional profits.

Required:1. Assume that the Mechanics Division is now only selling 25,000 motors each year to outside customers. a. From the standpoint of the Mechanics Division, what is the lowest acceptable transfer price for motors

sold to the Computer Division?b. From the standpoint of the Computer Division, what is the highest acceptable transfer price for motors

acquired from the Mechanics Division? c. If left free to negotiate without interference, would you expect the division mangers to voluntarily agree

to the transfer of 5,000 motors from the Mechanics Division to the Computer Division? Why or why not?

d. From the standpoint of the entire company, should a transfer take place? Why or why not?2. Assume that the Mechanics Division is now selling all of the motors it can product to outside customers. a. From the standpoint of the Computer Division, what is the lowest acceptable transfer price for motors

sold to the Computer Division?b. From the standpoint of the Mechanics Division, what is the highest acceptable transfer price for motors

acquired from the Mechanics Division? c. If left free to negotiate without interference, would you expect the division mangers to voluntarily agree

to the transfer of 5,000 motors from the Mechanics Division to the Computer Division? Why or why not?

d. From the standpoint of the entire company, should a transfer take place? Why or why not?


ZEPHYR COMPANYCalculations…


RAINBOW, INC.(Transfer Pricing)

Rainbow, Inc.’s Yellow Division produces a part that is used by the Green Division. The cost of manufacturing the part follows:

Direct materials $20Direct labor 4Variable overhead 6Fixed overhead* 10Total cost $40

* Based on a practical volume of 100,000 parts

Other costs incurred by the Yellow Division are as follows:

Fixed selling and administrative $400,000Variable selling (per unit) 2

The part usually sells for between $56 and $60 in the external market. Currently, the Yellow Division is selling it to external customers for $58. The division is capable of producing 100,000 units of the part per year; however, because of a weak economy, only 75,000 parts are expected to be sold during the coming year. The variable selling expenses are avoidable if the part is sold internally.

The Green Division has been buying the same part from an external supplier for $56. It expects to use 25,000 units of the part during the coming year. The manger of the Green Division has offered to buy 25,000 units from the Yellow Division for $36 per unit.

Required:1. Determine the minimum transfer price that the Yellow Division would accept.2. Determine the maximum transfer price that the manager of the Green Division would pay.3. Assume a transfer price of $36 each. What will be the operating income for the Yellow Division?4. Should an internal transfer take place? Why or why not? If you were the manager of the Yellow Division,

would you sell the 25,000 components for $36 each? Explain.


RAINBOW, INC.Calculations…


CARDINAL MANUFACTURING(Transfer Pricing)

The Jocketty Division of Cardinal Manufacturing produces a component used by the LaRussa Division in its finished product. Jocketty, which is operating at full capacity, sells the components in an active external market for $80 per unit. The current transfer price for the unit is the market price, or $80. Variable costs on the unit are $50.

LaRussa Division is operating at 75 percent capacity. The division has an opportunity to bid on a special order from a large wholesaler. Accountants have prepared the following cost analysis for LaRussa’s manager:

Variable costsManufacturing $30Shipping 10Electrical component purchased

Transfer price (from Jocketty) 80Total variable costs $120

Fixed costs (based on 100% capacity) 30Total costs $150

The manager considers the total cost too high to allow a competitive bid on the special order. To obtain the order, LaRussa must bid no more than $130. Accordingly, the manager has asked Jocketty Division to reduce its transfer price to $60. Jocketty’s manager has refused because the division can sell all its production to external customers at $80 per unit.

Required:1. Will Cardinal Manufacturing’s overall contribution margin per unit increase or decrease if Jocketty sells its

component to LaRussa for the special order?2. Should corporate management force the transfer at a price of $60 per unit?


CARDINAL MANUFACTURINGCalculations…


THE COST OF UNETHICAL BEHAVIOR


One man practicing sportsmanship is far better than 50 preaching it.


KNUTE K. ROCKNE (1888—1931), College football coach



Really great people always see the best in others; it is the little man who looks for the worst – and finds it.


SAMUEL COLERIDGE-TAYLOR (1875—1912), Composer and conductor




Never bend your head. Always hold it high. Look the world straight in the face.


HELLEN KELLER (1880—1968), Writer and lecturer



Fame is something which must be won; honor is something which must not be lost.


ARTHUR SCHOPENHAUER (1788—1860), Philosopher




If you get hung up on everybody else’s hang-ups,


then the whole world’s going to be nothing more than one huge gallows.

RICHARD BRAUTIGAN (1935—1984), Writer and poet



Your honesty influences others to be honest.


GEORGE WASHINGTON (1732—1799), 1st U.S. President




The less you do, the better you do it.


MARCELLO MASTROIANNI (1924—1996), Actor



REVIEW / SELF-QUIZWere you paying attention??If I asked you to prepare some review questions, what would you ask?


MISCELLANEOUS


Common sense is not so common. VOLTAIRE (1694—1778), Philosopher and writer

We cannot all do GREAT THINGS, but we can do SMALL THINGSWITH GREAT LOVE. MOTHER TERESA (1910—1997)

OBSERVATIONS FROM THE ANCIENTS …

Hope is a waking dream. ARISTOTLE (384—322 B.C.), Philosopher

Fate leads the willing, drags the unwilling. CLEANTHES (c. 331—231 B.C.), Philosopher

Human behavior flows from three main sources: desire, emotion, and knowledge.

PLATO (c. 428—348 B.C.), Philosopher

I hold this as a rule of life:

Too much of anything is bad. TERENCE (c. 186—159 B.C.), Dramatist

... INDEX ...

Problem Topic Page

Let’s Take Notes! ON THE FIRST DAY OF CLASS? 1

Let’s Take Notes! TERMS AND FLOWS 7MANGO MOTORS (Variable and Fixed Costs) 15SOMUCH STEROES (Variable and Fixed Costs) 16BOJANGLE DANCE SHOES (Variable and Fixed Costs) 17MULESKINNER ATHLETIC WEAR (Cost Flows) 18CATTLE COMPANY (Cost Flows) 20JUDGE ELY JEANS (Cost Flows) 24SLEEP WARM, INC. (Cost Flows) 26TRABER COMPANY (Cost Flows) 28HANNIBAL COMPANY (Cost Flows) 32BOB’S BEEF BOY (Cost Flows) 34BILLY’S BOAT BONANZA, INC. (Classifying Costs) 37DUNCAN’S AVIONICS (Classifying Costs) 38GLOBAL, INC. (Classifying Costs) 39MOORE COMPUTERS (Variable and Fixed Costs) 40PACIFIC COAST HOME FURNISHINGS (Cost Flows) 42

Let’s Take Notes! BREAKEVEN (C-V-P) 47STONE MONUMENT COMPANY (A) (Breakeven) 59STONE MONUMENT COMPANY (B) (Breakeven) 60STONE MONUMENT COMPANY (C) (Breakeven) 61STONE MONUMENT COMPANY (D) (Breakeven) 62STONE MONUMENT COMPANY (E) (Breakeven) 63STONE MONUMENT COMPANY (F) (Breakeven) 64STONE MONUMENT COMPANY (G) (Breakeven) 65EAST MEETS WEST COMPANY (A) (Breakeven) 66EAST MEETS WEST COMPANY (B) (Breakeven) 67EAST MEETS WEST COMPANY (C) (Breakeven) 68EAST MEETS WEST COMPANY (D) (Breakeven) 69EAST MEETS WEST COMPANY (E) (Breakeven) 70SADLY CORPORATION (Breakeven) 71THE HAT SOURCE (Breakeven) 72JOLLY ROGER CANDIES (Breakeven) 73HOWARD’S LIMITED (Breakeven) 74CLEAR TOYS (Breakeven) 75CASSIDY COMPANY (Breakeven) 76DEERING BANJO COMPANY (Multiple-Product Breakeven) 78ALCATRAZ ARTIFACTS (Multiple-Product Breakeven) 79PHONY PHONES COMPANY (Multiple-Product Breakeven) 80ABTEX ELECTRONICS (Multiple-Product Breakeven) 82BAGS AND MORE (Breakeven) 86LANDIS PLAYHOUSES (Breakeven) 88GREEN SODA (Breakeven) 90BAREFOOT BOOKS (Multiple-Product Breakeven) 92

Cost Handy Handbook - i - McGraw Second Edition

... INDEX ...

Problem Topic Page

Let’s Take Notes! RELEVANT COSTS 95JOE SLOW (Classifying Relevant and Irrelevant Items) 99JUDE LAW & ASSOCIATES (Relevant Costs) MACHINE REPLACEMENT 100TIGÉR BOATS (Relevant Costs) SPECIAL ORDER 101APPLE APPLIANCES (Relevant Costs) MAKE OR BUY 102TINA’S BEST CHOCOLATE (A) (Relevant Costs) SELL NOW OR PROCESS FURTHER 103TINA’S BEST CHCOLATE (B) (Relevant Costs) SCARCE RESOURCES 104FUNK AND WAGNALL (Classifying Relevant and Irrelevant Items) 105FRODO COMPANY (Relevant Costs) MACHINE REPLACEMENT 106TOLEDO TORPEDO COMPANY (Relevant Costs) MACHINE REPLACEMENT 107HASSLE COMPANY (Relevant Costs) MAKE OR BUY 108CALIFORNIA TEXTBOOKS (A) (Relevant Costs) MAKE OR BUY 109CALIFORNIA TEXTBOOKS (B) (Relevant Costs) MAKE OR BUY 110ADAMS’ COMPANY (Relevant Costs) SCARCE RESOURCES 111SAM ENTERPRISES (Relevant Costs) SCARCE RESOURCES 112MOEHRLE MANUFACTURING (Relevant Costs) SPECIAL ORDER 113TILLAMOOK CHEESE CO. (Relevant Costs) SELL NOW OR PROCESS FURTHER 114ANDRETTI COMPANY (Relevant Costs) 116FABULOUS FURNITURE (Identifying Relevant Costs) 119BOHR, INC. (Relevant Costs: Make or Buy) 120PAULEY’S PARTS COMPANY (Relevant Costs: Disposal of Assets) 121GILLIGAN’S BOAT RENTALS (Relevant Costs: Asset Replacement) 122EARL CORPORATION (Relevant Costs: Sell Now or Process Further) 123STEWART COMPANY (Relevant Costs: Make or Buy) 124GAMERS, INC. (Relevant Costs: Scarce Resources) 125FOSTER’S BAR-B-QUE (Relevant Costs: Special Orders) 126JOHNSON COUNTY SENIOR SERVICES (Relevant Costs: Dropping or Retaining Segment) 128

Cost Handy Handbook - ii - McGraw Second Edition

... INDEX ...

Problem Topic Page

Let’s Take Notes! JOB-ORDER COSTING 131EGG YOLK YUMMIES (Applying Overhead) 135

Let’s Take Notes! JOB-ORDER COSTING & APPLYING OVERHEAD 136THE BAIZE COMPANY (Applying Overhead) 139ROBIN HOOD, INC. (Applying Overhead) 140HALO PRODUCTS COMPANY (Applying Overhead) 141NARCISSUS NEEDLES (Applying Overhead) 142McKAY MILLS (Applying Overhead) 143BUFFALO BROILERS (Applying Overhead) 144HOWDY COMPANY (Applying Overhead) 146AXIOM PRODUCTS (Applying Overhead) 150HOLMAN COMPANY (Applying Overhead) 152EVERYTHING INCORPORATED (Process Costing and Job-Order Costing) 154

Let’s Take Notes! [EVEN MORE] JOB-ORDER COSTING 155ARC LIGHT & SOUND (Job-Order Costing) 158MARIE MANUFACTURING CO. (Job-Order Costing) 160ROLEY POLEY COMPANY (Job-Order Costing) 162PLENTIFUL PRINTING, INC. (Job-Order Costing) 164POLARIS COMPANY (Job-Order Costing) 166THE SWIZZLE MANUFACTURING CO. (Job-Order Costing) 168 MARSHALL PROPS UNLIMITED (Job-Order Costing) 172OATMAN COMPANY (Job-Order Costing) 176

Let’s Take Notes! ACTIVITY-BASED COSTING 181MIZZOU COMPANY (Activity-Based Costing) 188AUDIO BASICS CORPORATION (Activity-Based Costing) 190J.B. GOODE COMPANY (Activity-Based Costing) 192THE CUTTERS, INC. (A) (Activity-Based Costing) 194THE CUTTERS, INC. (B) (Activity-Based Costing) 196GREASY HANDS (Activity-Based Costing) 199HBM INDUSTRIES (Activity-Based Costing) 200CHEETAH COMPANY (Activity-Based Costing) 202KNOB NOSTER HOSPITAL (Activity-Based Costing) 204

Cost Handy Handbook - iii - McGraw Second Edition

... INDEX ...

Problem Topic Page

Let’s Take Notes! PROCESS COSTING 207B.G. WIP COMPANY (Process Costing) 213ABIQUA ACRES (Process Costing) 217THE JOHN COMPANY (Process Costing) 218STEINMUELLER STEINS, INC. (Process Costing) 222CANDLELIGHT CANDLES CO. (Process Costing) 226CUTTING EDGE SKIS (Process Costing) 230BROTHER’S BAKERY (A) (Process Costing) 234BROTHER’S BAKERY (B) (Process Costing) 236PIPES COMPANY (Process Costing) 238EDWARDS, INC. (Process Costing) 240

Let’s Take Notes! BUDGETING 243BEE-SAFE COMPANY (Budgeting) 249BEE-GO COMPANY (Budgeting) 250BEE-KILL CHEMICAL (A) (Budgeting) 251BEE-KILL CHEMICAL (B) (Budgeting) 252BEE-KILL CHEMICAL (C) (Budgeting) 253BEE-CEE’S GUITAR EMPORIUM (A) (Budgeting) 254BEE-CEE’S GUITAR EMPORIUM (B) (Budgeting) 255MISSOURI RETAILERS (A) (Budgeting) 256MISSOURI RETAILERS (B) (Budgeting) 257WHITTLE COMPANY (Budgeting) 258PARADISE COMPANY (Budgeting) 259WHISKERS PRODUCTS, INC. (Budgeting) 260KAITLYN KORPORATION (Budgeting) 261ARCHER COMPANY (Budgeting) 262WARD COMPANY (Budgeting) 263YOUNG PRODUCTS (Budgeting) 264CYCLONE COMPANY (Production Budget) 267PENNER CORPORATION (Production and Materials Purchase Budgets) 268KIT INCORPORATED (Cash Budget) 270CMSU WHO (Accounts Receivable Collections Budget) 272

Cost Handy Handbook - iv - McGraw Second Edition

... INDEX ...

Problem Topic Page

Let’s Take Notes! (Day #1) STANDARD COSTS AND FLEXIBLE BUDGETING275

FOOLS GOLD JEWELRY (Standard Costs and Flexible Budgeting) 277GEE-WHIZ SHOES (Standard Costs and Flexible Budgeting) 278COWBOY BOOTS CO. (Standard Costs and Flexible Budgeting) 280BIG DOG FOODS (Standard Costs and Flexible Budgeting) 282P.W. PRODUCTS (Standard Costs and Flexible Budgeting) 284POSTMODERN PRODUCTS (Standard Costs and Flexible Budgeting) 286LANDS END MENS SUITS (Standard Costs and Flexible Budgeting) 288PIRATES, INC. (Standard Costs and Flexible Budgeting) 289SMITH COMPANY (Standard Costs and Flexible Budgeting) 290SHOCKEY COMPANY (Direct Materials Variances) 294WABASH CANNONBALL (Direct Materials Variances) 296KSU COMPANY (Direct Labor Variances) 298CREAMED CORNHUSKER, INC. (Direct Labor Variances) 300


TRUE-BLUE CORPORATION (Standard Costs and Flexible Budgeting) 305STRANGE FIRE, P.C. (Standard Costs and Flexible Budgeting) 306THE COSTUME COMPANY (Standard Costs and Flexible Budgeting) 307TALLYHO COMPANY (Standard Costs and Flexible Budgeting) 308FROSTEE FREEZE COMPANY (Standard Costs and Flexible Budgeting) 310BENTON COMPANY (Standard Costs and Flexible Budgeting) 312BEACHSIDE INDUSTRIES (A) (Variable Overhead Variances) 315BEACHSIDE INDUSTRIES (B) (Fixed Overhead Variances) 316BIG LEAGUE, INC. (Comprehensive Variance Problem) 318


BEALE STREET BLUES, INC. (Standard Costs and Flexible Budgeting) 324BALLYCANALLY CORPORATION (Standard Costs and Flexible Budgeting) 328BRÖTCHEN BAKERY (Standard Costs and Flexible Budgeting) 332COXWAIN COMPANY (Standard Costs and Flexible Budgeting) 335KENNEL STREET COMPANY (Standard Costs and Flexible Budgeting) 336REBEL COMPANY (Standard Costs and Flexible Budgeting) 337BARBERSHOP COMPANY (Standard Costs and Flexible Budgeting) 338TUBBER COMPANY (Standard Costs and Flexible Budgeting) 339THOR’S HAMMER, INC. (Standard Costs and Flexible Budgeting) 340DUNCE COMPANY (Standard Costs and Flexible Budgeting) 341HERRY COMPANY (Standard Costs and Flexible Budgeting) 342HERDING CATS, INC. (Standard Costs and Flexible Budgeting) 343BOSNA CORPORATION (Standard Costs and Flexible Budgeting) 344STIEGL CORPORATION (Standard Costs and Flexible Budgeting) 345

Cost Handy Handbook - v - McGraw Second Edition

... INDEX ...

Problem Topic Page

Let’s Take Notes! JOINT COSTS 347ABILENE MEAT PACKERS (Joint Costs) 349SPARTAN, INC. (Joint Costs) 351CAROLINA CORP. (Joint Costs) 352SOAP ‘N SUDS, INC. (Joint Costs) 354

Let’s Take Notes! ABSORPTION COSTING AND VARIABLE COSTING 357BOWLING COMPANY (Absorption and Variable Costing Income Statements) 362HOLLANDAISE COMPANY (Absorption and Variable Costing Income Statements) 364FAST COMPANY (Absorption and Variable Costing Income Statements) 366SOUTH STREET FURNITURE CO. (Absorption and Variable Costing Income Statements) 368STETSON COMPANY (Absorption and Variable Costing Income Statements) 370BELLY RUB PRODUCTIONS (Absorption and Variable Costing Income Statements) 374ROCKY MOUNTAIN BICYCLE CLUB (Absorption Costing and Variable Costing) 378GEORGETOWN, INC. (Absorption Costing and Variable Costing) 380GROVER MANUFACTURING (Absorption Costing and Variable Costing) 382

Let’s Take Notes! TRANSFER PRICING 385TEXAS PRODUCTS, INC. (Transfer Pricing) 389ZEPHYR COMPANY (Transfer Pricing) 392RAINBOW, INC. (Transfer Pricing) 394CARDINAL MANUFACTURING (Transfer Pricing) 396

Let’s Take Notes! THE COST OF UNETHICAL BEHAVIOR 399

Let’s Take Notes! MISCELLANEOUS 407

Cost Handy Handbook - vi - McGraw Second Edition

mango motors - nickfessler.com homenickfessler.com/handy_handbook/mcgraw_handbook_cost_v2.doc ·...

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