Midterm_Review_and_Solution - Commerce Mentor Program 294...

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Commerce Mentor Program 294 Midterm Review Session Question 1 (20 marks, suggested time 20 minutes) Cost Behaviour Looney Tunes Inc. (“LTI”) is a large firm with numerous departments. Recent experience suggests that the cost function used to estimate overhead in the Cartoons Department is no longer appropriate. The current cost function was developed three years ago. Since then, a number of changes occurred in the facilities and processes used in the Cartoons Department. The changes happened one at a time. Each time a change was made, the cost accountant felt the change was not major enough to justify calculating a new overhead cost function. LTI is in a very competitive industry and ,due to high demand for its products, the factory/plant is open 7 days a week. You have been assigned the task of developing a new cost function for overhead in the Cartoons Department. Initial analysis suggests that the number of direct labor hours is an appropriate cost driver. Departmental records are available for nine months. The records reveal the following information. Month Actual Overhead Direct Labor Hours March $83,250 8,538 April 68,200 8,812 May 68,150 8,740 June 73,500 8,976 July 38,310 2,123 August 76,640 9,218 September 79,500 8,943 October 68,750 8,821 November 68,200 8,794 Your assistant has analyzed the data for March through July and made the appropriate adjustments except for the following items (for which the assistant was unsure of the proper treatment). 1. The semiannual property tax bill for the Animation Department’s factory/plant was paid on June 30. The entire amount, $6,000 was charged to overhead for June. 2. The costs to install a new piece of equipment with a life of 5 years in the department was charged to overhead in March instead of being capitalized (cost of asset). The installation costs were $12,000.
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3. Cartoons’ factory/plant/equipment depreciation/amortization of $8,000 per month is included in overhead. The $8,000 includes amortization relating to the new equipment but not the installation costs. 4. A strike closed the factory/plant for three weeks in July. Several nonunion employees were kept on payroll during the strike. Their duties were general housekeeping and “busy work.” These costs were charged to overhead. You also have the details for the overhead account for the months of August and September. They are presented in the following table. You were hired on October 1 and have been keeping the department accounts since then. Therefore, you know that the data for October and November are correct, except for any adjustments needed for the preceding items. Cartoons Department Overhead Control August Date Explanation Amount Aug. 5 Payroll payment for indirect labor*** 7,000 Aug. 15 Power costs: Cartoons Department 13,140 Aug. 15 Power costs: Animation Department 5,850 Aug. 19 Payroll payment for indirect labor*** 7,000 Aug. 24 Factory depreciation/amortization 8,000 Aug. 31 Miscellaneous supplies used 35,650 Total for August
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Midterm_Review_and_Solution - Commerce Mentor Program 294...

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