Quiz 1 study guide

Quiz Questions for Chapter 1 1. Waverly Company paid $5,000 cash for wages of production workers. This business event would: a. increase total assets and total equity. b. increase one asset account and decrease another asset account. c. decrease total assets and total equity. d. decrease one asset account and increase an equity account. 2. Warren Company makes candy. During the most recent accounting period, Warren paid $3,000 for raw materials, $4,000 for labor, and $2,000 for overhead costs that were incurred to make candy. Warren started and completed 10,000 units of candy, of which 7,000 were sold. Based on this information, Warren would recognize which of the following amounts of expense on the income

• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.

Cost of sales (including buying, distribution, and occupancy costs) 4. For the most recent year, what is the amount of cost of goods sold in the

July August September October November December $50,000 50,000 70,000 40,000 30,000 30,000 The cash payments for these deliveries would occur, in all cases, one month later. Labor costs were forecast at the same level as purchases, and were expected to follow an identical month-by-month pattern. Because of the need to pay wages weekly, however, the cash outlays for labor

Lumber inventory Issue On December 31, MD purchased lumber costing $4,410 which was received that day; however, it was not included in the inventory count or in accounts payable. The issue is whether the inventory should be included in the December 31, 2014 year end or not until the lumber was put into production in January.

|SUBJECT: |Bridgeton Industries Case Study | |TO: | | |FROM: | | |DATE: | | | | | | | | The current cost system allocates overhead costs once a year, as a function of direct labor dollars. This allocation strategy results in:

Company Wide Overhead Rate equal Forecast Overhead divided by Expected Machine Hours Overhead Rate equal $480,000 equal $6 per machine hour 80,000. Company Wide Rate: Direct Material Costs x Batch Size plus Direct Labor Costs x Batch Size Maxiflow: Alaska: 135 x 20 equal 2700 110 x 20 equal 2200 75 x 20 equal 1500 95 x 20 equal 1900 equal $4200 per batch equal $4100 per batch Departmental Rate. Direct Materials Costs plus Direct Labor Costs divided by Each Department Hour Maxiflow: 135 plus 75 equal $210 Radiator Parts Fabrication: 210 divided by 28 equal $7.50 per batch Radiator Assembly, Weld, and Test equal 210 divided by 30 equal $7 per batch Compressor Parts Fabrication: 210 divided by 32 equal $6.60 per batch Compressor Assembly and Test: 210 divided by 26 equal $8.10 per batch Alaska: 110 plus 95 equal 205 Radiator Parts Fabrication: 205 divided by 16 equal $12.80 per batch Radiator Assembly, Weld, and Test: 205 divided by 74 equal $2.70 per batch Compressor Parts Fabrication: 205 divided by 8 equal $25.60 per batch Compressor Assembly and Test: 205 divided by 66 equal $3.10 per batch. There was only a $100 difference between Maxiflow and Alaska when it came to company-wide rates per batch.

Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:

The wages of general production employees who are idled due to machine breakdown are classified as indirect costs. Direct costs are usually variable and change as production volumes change. Thus, direct materials and direct labor are typically variable costs. For special orders, some direct costs can be fixed, however. The costs (depreciation, electricity, and routine maintenance) associated with a machine dedicated to one product are direct costs of that product. Indirect costs cannot be easily and conveniently assigned to a special order. Rather, these costs are common costs, in that they are incurred to produce a variety of special orders. Maintenance costs of general purpose equipment, the supervisor’s salary, and utilities are direct costs needed to produce special orders in general, but are indirect costs for a particular special order. Moreover, general production costs, including property taxes, insurance, lawn care, cafeteria costs, and miscellaneous supplies consumed in production are indirect costs properly allocated to special orders manufactured.

3. You discover that a product sale was made and recorded in December for $128,600; the product had not yet been shipped. The cost

Chapter 1 The Foundational 15 Martinez Company’s relevant range of Production is 7,500 to 12,500 units. When it produces and sells 10,000 units, its unit costs are as follows:

b. The inventory write down recorded, as an expense by the company is $4.4 million. It is measured at lower of cost and net realizable value. Cost is measured by weighted average using standard cost method or

Overhead costs include rent, office staff, depreciation, and other. Once the flexible budget was complete, variances between the actual and flexible budget could be calculated (Exhibit B). The variance for frame assembly was favorable with actual costs being $82,663 less than in the flexible budget. The variances for wheel and final assembly however were both unfavorable. Wheel assembly had an unfavorable variance of $50,650, while final assembly variance was the highest at an unfavorable variance of $231,200. Taking into account these three aspects of direct cost, direct cost has an unfavorable variance $199,187. Although most overhead costs are fixed, 2/3 of other costs are variable and increase with the increased production. As shown in Exhibit B, overhead variance is unfavorable at $60,000. The direct cost variance and overhead variable together lead to a total unfavorable variance of $259,187.

The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production

Harvard Business School 9-206-048 Rev. April 18, 1983 Note on Financial Forecasting An important task of the manager or analyst is that of financial forecasting. In simplest terms, this is a systematic projection of the expected actions of management in the form of schedules, budgets, and financial statements. In this process, past physical statistics, financial ratios, relationships