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Study Questions Solutions Exam 1

Study Questions Solutions Exam 1 - 2-30(30—40 min Cost of...

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Unformatted text preview: 2-30 (30—40 min.) Cost of goods manufactured. Canseco Company Schedule of Cost of Goods Manufactured Year Ended December 31, 2007 (in thousands) Direct materials: Beginning inventory, January 1, 2007 $ 22,000 Purchases of direct materials 75,000 Cost of direct materials available for use 97,000 Ending inventory, December 31, 2007 26,000 Direct materials used Direct manufacturing labor Indirect manufacturing costs: Indirect manufacturing labor 15,000 Plant insurance 9,000 Depreciation—plant building & equipment 11,000 Repairs and maintenance—plant 4,000 Total indirect manufacturing costs Manufacturing costs incurred during 2007 Add beginning work~innprocess inventory, January 1, 2007 Total manufacturing costs to account for Deduct ending work-in‘process inventory, December 31, 2007 Cost of goods manufactured (to Income Statement) Canseco Company Income Statement Year Ended December 31, 2007 (in thousands) Revenues Cost of goods sold: Beginning finished goods, January 1, 2007 S 18,000 Cost of goods manufactured 136,000 Cost of goods available for sale 154,000 Ending finished goods, December 31, 2007 23,000 Cost of goods sold Gross margin Operating costs: Marketing, distribution, and customer-service costs 93,000 General and administrative costs 29,000 Total operating costs Operating income 2-15 $ 71,000 25,000 39,000 135,000 21,000 156,000 20,000 $136 000 #% $300,000 122 000 M 2—31 (254-30 min.) Income statement and schedule of cost of goods manufactured. Howell Corporation Income Statement for the Year Ended December 31, 2007 (in millions) Revenues $950 Cost of goods sold: Beginning finished goods, Ian. I, 2007 $ 70 Cost of goods manufactured (below) fig Cost of goods available for sale 715 Ending finished goods, Dec. 31, 2007 __§j @ Gross margin 290 Marketing, distribution, and customer-service costs _2le Operating income m Howell Corporation Schedule of Cost of Goods Manufactured for the Year Ended December 31, 2007 (in millions) Direct materials costs: Beginning inventory, Jan. 1, 2007 $ 15 Purchases of direct materials fl Cost of direct materials available for use 340 Ending inventory, Dec. 31, 2007 A Direct materials used $320 Direct manufacturing labor costs 100 Indirect manufacturing costs: Indirect manufacturing labor 60 Plant supplies used 10 Plant utilities 30 Depreciationiplant, building, and equipment 80 Plant supervisory salaries 5 Miscellaneous plant overhead i E Manufacturing costs incurred during 2007 640 Add beginning work—in—process inventory, Jan. 1, 2007 10 Total manufacturing costs to account for Deduct ending work-in—process, Dec. 31, 2007 Cost of goods manufactured .5: U1 VIVID 2-16 3-18 la. 11:). 2a. 2b. 3a. (3540 min.) CVP analysis, changing revenues and costs. SP = 8% X $1,000 = $80 per ticket VCU = $35 per ticket CMU = $80 2 $35 = $45 per ticket PC I $22,000 a month Q 2 PC = $22,000 CMU $45per ticket 2 489 tickets (rounded Up) = FC + TOI 2 $22,000 + $10,000 Q CMU $45 per ticket 2 $32,000 $45 per ticket = 7'12 tickets (rounded up) SP = $80 per ticket VCU = $29 per ticket CMU = $80 — $29 : $51 per ticket PC = $22,000 a month Q 2 FC 2 $22,000 C U $51perticket : 432 tickets (rounded 1113) : FC + TOI : $22,000 + $10,000 Q CMU $51 per ticket = $32,000 $51 per ticket 2 628 tickets (rounded up) SP = $48 per ticket VCU = $29 per ticket CMU = $48 — $29 = $19 per ticket FC 2 $22,000 a month Q = FC 3 $22,000 CMU $19per ticket = 1,158 tickets (rounded up) 3—5 2 F C + TOI : $22,000 + $10,000 313. Q CMU $19 per ticket = $32,000 $19 per ticket = 1,685 tickets (rounded up) The reduced commission sizably increases the breakeven point and the number of tickets required to yield a target operating income of $10,000: 8% Commission Fixed (Reguirement 21 Commission of $48 Breakeven point 432 1,158 Attain 01 of $10,000 628 1,685 4a. The $5 delivery fee can be treated as either an extra source of revenue (as done below) or as a cost offset. Either approach increases CMU $5: SP = $53 ($48 + $5) per ticket VCU : $29 per ticket CMU = $53 — $29 = $24 per ticket PC = $22,000 a month FC $22,000 Q : CMU $24 per ticket : 917 tickets (rounded up) = PC + TOI 2 $22,000 + $10,000 4b. Q CMU $24 per ticket : $32,000 $24 per ticket : 1,3 34 tickets (rounded up) The $5 delivery fee results in a higher contribution margin which reduces both the breakeven point and the tickets sold to attain operating income of $ 10,000. 3—6 3—27 (30 min.) Sales mix, new and upgrade customers. 1. New Upgrade Customers Customers SP $210 $120 VCU 90 40 CMU , 120 80 Let S = Number of units sold to upgrade customers 15.9 = Number of units sold to new customers Revenues — Variable costs — Fixed costs : Operating income [$210 (1.53) + $1208] — [$90 (1.58) + $403] — $14,000,000 = 01 $4358 — $1758 — $14,000,000 : OI Breakeven point is 134,616 units when 01 = 0 because $2608 = $14,000,000 S 2 53,846 units sold to upgrade customers (rounded) 1.53 : 80,770 units sold to new customers (rounded) BEP : 134,616 units Check Revenues ($210 x 80,770) + ($120 x 53,846) $23,423,220 Variable costs ($90 x 80,770) + ($40 x 53,846) 9,423,140 Contribution margin 14,000,080 Fixed costs 14,000,000 Operating income (caused by rounding) $ 80 2. When 200,000 units are sold, mix is: Units sold to new customers (60% x 200,000) 120,000 Units sold to upgrade customers (40% x 200,000) 80,000 Revenues ($210 x 120,000) + ($120 x 80,000) $34,800,000 Variable costs ($90 x 120,000) + ($40 x 80,000) 14,000,000 Contribution margin 20,800,000 Fixed costs 14,000,000 Operating income s 6,800,000 3—15 321. Let S then S Number of units sold to upgrade customers Number of units sold to new customers ll [$2103 + $120.8] — {$909 + $408] — $14,000,000 = 01 3305' — 130$ = $14,000,000 2005' 2 $14,000,000 S 70,000 units sold to upgrade customers S = 70,000 units sold to new customers BEP = 140,000 units Check Revenues ($210 x 70,000) + ($120 x 70,000) $23,100,000 Variable costs ($90 x 70,000) + ($40 x 70,000) 9,100,000 Contribution margin 14,000,000 Fixed costs 14,000,000 Operating income $ 0 3b. Let S = Number of units sold to upgrade customers then 9S 2 Number of units sold to new customers [$210 (95) + $1208] — [$90 (98) + $408] — $14,000,000 = 01 2,0103 — 8505' = $14,000,000 1,1608 = $ 14,000,000 S = 12,069 units sold to upgrade customers (rounded up) 95 = 108,621 units sold to new customers (rounded up) 120,690 units Check Revenues ($210 x 108,621) + ($120 x 12,069) $24,258,690 Variable costs ($90 x 108,621) + ($40 x 12,069) 10,258,650 Contribution margin 14,000,040 Fixed costs 14,000,000 Operating income (caused by rounding) $ 40 30. As Zapo increases its percentage of new customers, which have a higher contribution margin per unit than upgrade customers, the number of units required to break even decreases: New Upgrade Breakeven Customers Customers Point Requirement 3(a) 50% 50% 140,000 Requirement 1 60 40 134,616 Requirement 3(b) 90 10 120,690 3—16 4-16 (10 min) Job order costing, process costing. a. Job costing 1. Job costing b. Process costing m. Process costing 0. Job costing 11. Job costing d. Process costing 0. Job costing 6. Job costing p. Job costing f. Process costing q. Job costing g. Job costing r. Process costing h. Job costing (but some process costing) 3. Job costing i. Process costing t. Process costing j. Process costing 11. Job costing k. Job costing 4—17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead. Budgeted manufacturing 1 Budgeted manufactming : overhead costs ' overhead rate Budgeted direct manufacturing labor costs 2 W: 1.75 or 175% $ 1,000,000 Actual manufacturing Actual manufacturing : overhead costs overhead rate Actual direct manufacturing labor costs : W: 1.9 or 190% $980,000 2. Costs of Job 626 under actual and normal costing follow: Actual Norma] Costing Costing Direct materials 3; 40,000 $ 40,000 Direct manufacturing labor costs 30,000 30,000 Manufacturing overhead costs $30,000 x 1.90; $30,000 x 1.75 57,000 52,500 Total manufacturing costs of Job 626 $127,000 $122,500 43 3 Total manufacturing overhead 2 Actual manufacturing x Budgeted ' allocated under normal costing labor costs overhead rate $980,000 x 1.75 = $1,715,000 Underallocated manufacturing 3 Actual manufacturing _ Manufacturing overhead overhead costs overhead allocated Ii $1,862,000 — $1,715,000 = $147,000 There is no under- or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under— or overallocatead overhead. 4-18 (20 —30 min.) Job costing, normal and actual costing. 1 Budgeted indireee : W z W . 00“ rate Budgeted direct labor—hours 160,000 hours = $50 per direct labor—hour Actual indirect— : w = $6,888,000 005‘" rate Actual direct labor—hours 164,000 hours $42 per direct labor—hour These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers. 2a. Laguna Mission Model Model Normal costing Direct costs Direct materials $106,450 $127,604 Direct labor 36,276 41,410 142,726 169,014 Indirect costs Assembly support ($50 x 900; $50 x 1,010) 45,000 50,500 Total costs $187,726 $219,514 2b. Actual costing Direct costs Direct materials $106,450 $127,604 Direct labor 36,276 41 ,410 142,726 169,014 Indirect costs Assembly support ($42 X 900; $42 x 1,010) 37,800 42,420 Total costs M M 3. Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 900 direct labor—hours are known for the Laguna Model (June 2007), Anderson can compute the $187,726 cost figure using normal costing. Anderson can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait until the December 2007 year—end to compute the $180,526 cost of the Laguna Model using actual costing. Although not required, the following overview diagram summarizes Anderson Construction’s job-costing system. Assembly Support Direct Labor-Hours indirect Costs iNDIRECT COST POOL COST ALLOCATION BASE COST OBJECT: RESIDENT” HOME Direct Costs Direct Manufacturing Labor DIRECT COSTS Direct Materials 4-36 (35 min.) General ledger relationships, under— and overallocation. The solution assumes all materials used are direct materials. A summary of the T—accounts for Needham Company before adjusting for under— or overallocation of overhead follows: Direct Materials Control Work—in—Process Control 1-1—2006 30,000 Material used for 1-1-2U06 20,000 Transferred to Purchases 400,000 manufacturin 380,000 Direct materials 380,000 ' finished goods 940,000 12-31—2006 50,000 Direct manuf. Labor 360,000 Manuf. overhead Allocated 480,000 12—31-2006 300,000 Finished Goods Control Cost of Goods Sold 1-1-2006 10,000 Cost of goods Finished goods Transferred in sold 900,000 Sold 900,000 from WI? 940,000 12-31-2006 50,000 . Manufactuiin Overhead Control Manufacturin Overhead Allocated Manufacturing Manufacturing Overhead overhead Costs 540,000 allocated to work in process 480,000 1. From Direct Materials Control T—account, Direct materials issued to production = $3 80,000 that appears as a credit. Direct manufacturing labor costs Direct manufacturing wage rate per hour It 2. Direct manufacturing labor-hours $360,000 = — = 24,000 hours $15 per hour Manufacturing overhead % Direct manufacturing Manufacturing allocated _ labor hours X overhead rate il 24,000 hours x $20 = $480,000 3. From the debit entry to Finished Goods T—account, Cost of jobs completed and transferred from WTP = $940,000 4. From Work—in—Process T—account, Work in process inventory on 12/31/2006 = $300,000 5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before proration) = $900,000 4-32 = $20,000 + $3 80,000 + $360,000 + $480,000 — $940,000 Manufacturing overhead Debits to Manufacturing Credit to Manufacturing underallocated i Overhead Control W Overhead Allocated 2 $540,000 — $480,000 $60,000 underallocated 9) l 7. a. Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $60,000. Hence, Cost of Goods Sold = $900,000 + $60,000 = $960,000. b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold. Account balances in each account after proration follows: Preration of $60,000 Account Balance Underallocated Account Balance Account (Before Proration) Manufacturing Overhead (After Proration) (1) (2) (3) (4)=(2)+(3) Work in Process $ 300,000 (24%) 0.24 x $60,000 : $14,400 S 314,400 Finished Goods 50,000 ( 4%) 0.04 x $60,000 : 2,400 52,400 Cost of Goods Sold 900 000 (72" o) 0.72 x $60,000 : 43,200 943,200 $1,250,000 L004 $60,000 $1,310,000 8. Needham’s operating income using write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows: Write-off to Proration Based Cost of Goods on Ending Sold Balances Revenues $1,090,000 $1,090,000 Cost of goods sold 960,000 943 200 Gross margin 130,000 146,800 Marketing and- distribution costs 140 000 140,000 Operating income/(loss) $ 110,000) $ 6,800 9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in Process, Finished Goods and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, Finished Goods, and Cost of Goods Sold will better approximate the results if actual cost rates had been used rather than the write—off to Cost of Goods Sold method. Another consideration in Needham’s decision about how to dispose of underallocated manufacturing overhead is the effects on operating income. The write—off to Cost of Goods Sold will lead to an operating loss. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will help Needham avoid the loss and show an operating income. The main merit of the write—off to Cost of Goods Sold method is its simplicity. However, accuracy and the effect on operating income favor the preferred and recommended proration approach. 4—33 5-14 Increasing the number of indirect—cost pools does NOT guarantee increas 1: a curacy of product or service costs. If the existing cost pool is already homogeneous, i . asing the number of cost pools will not increase aceuracy. If the existing cost pool is - - ornogeneous, accuracy will increase only if the increased cost pools themselves in . '- e in homogeneity vis-a—vis the single cost pool. 5-15 The controller faces a difficult nge. The benefits of a better accounting system show up in improved decisions by m. r gers. It is important that the controller have the support of these managers when seeki g ncreased investments in accounting systems. Statements by these managers showing h a 1 eir decisions will be improved by a better accounting system are the controller’s best , : ments when seeking increased funding. For example, the new system will result in n e accurate product costs which will influence pricing and product mix decisions. I' " new system can also be used to reduce product costs which will lower selling price s a result, the customer will benefit from the new system. 5-16 (20min) Cost hierarchy. 1. a. Indirect manufacturing labor costs of $1,000,000 support direct manufacturing labor and are output unit~level costs. Direct manufacturing labor generally increases with output units, and so will the indirect costs to support it. b. Batch-level costs are costs of activities that are related to a group of units of a product rather than each individual unit of a product. Purchase order-related costs (including costs of receiving materials and paying suppliers) of $500,000 relate to a group of units of product and are batch-level costs. c. Cost of indirect materials of $25 0,000 generally changes with labor hours or machine hours which are unit—level costs. Therefore, indirect material costs are output unit— levei costs. d. Setup costs of $600,000 are batch~level costs because they relate to a group of units of product produced after the machines are set up. e. Costs of designing processes, drawing process charts, and making engineering changes for individual products, $800,000, are product-sustaining because they relate to the costs of activities undertaken to support individual products regardless of the number of units or batches in which the product is produced. f. Machine-related overhead costs (depreciation and maintenance) of $i,100,000 are output unit-level costs because they change with the number of units produced. g. Plant management, plant rent, and insurance costs of $900,000 are facility-sustaining costs because the costs of these activities cannot be traced to individual products or services but support the organization as a whole. 5-3 2. The complex boom box made in many batches wiil use significantiy more batch—level overhead resources compared to the simple boom box that is made in a few batches. In addition, the complex boom box will use more product—sustaining overhead resources because it is compiex. Because each boom box requires the same amount of machine-hours, both the simple and the complex boom box will be allocated the same amount of overhead costs per boom box if Teiedor uses oniy machine—hours to allocate overhead costs to boom boxes. As a result, the compiex boom box wiil be undercosted (it consumes a relatively high level of resources but is reported to have a relatively low cost) and the simple boom box wili be overcosted (it consumes a relatively low level of resources but is reported to have a relatively high cost). 3. Using the cost hierarchy to calculate activity—based costs can heip rTeledor to identify both the costs of individual activities and the cost of activities demanded by individual products. Teledor can use this information to manage its business in several ways: a. Pricing and product mix decisions. Knowing the resources needed to manufacture and sell different types of boom boxes can help Teledor to price the different boom boxes and also identify which boom boxes are more profitable. It can then emphasize its more profitable products. b. Teledor can use information about the costs of different activities to improve processes and reduce costs of the different activities. Teledor could have a target of reducing costs of activities (setups, order processing, etc.) by, say, 3% and constantly seek to eliminate activities and costs (such as engineering changes) that its customers perceive as not adding value. c. Teledor management can identify and evaluate new designs to improve performance by analyzing how product and process designs affect activities and costs. (1. Teledor can use its ABC systems and cost hierarchy information to plan and manage activities. What activities shouid be performed in the period and at what cost? 5-4 ...
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