In accounting terms, 2hat can be concluded about the case study? Sthembiso, a recent M.B.A. who is the only cost accountant at a manufacturing plant which is the largest employerin Illovo Valley, a town of about 20,000 peopleZama, the plant managerZama: "Sthembiso, come into my office for a few minutes. You know that the company brass wants to increasethe amount of automation in some of our factories. I just got word that this plant will be the first to beautomated."Sthembiso: "But the cost and accounting analyses we sent to headquarters last year showed that it wouldn't beprofitable to make changes like that in this plant. Why did they pick this one?"Zama: "Apparently, top management wants to try robots and all the high-tech gadgets at one factory, to see ifthey increase product quality and pay for themselves. They think that in the long run, stockholders will benefitfrom automation. Anyway, the decision has been made, and it's our job to make it work. We're going to have tosell the work force and the community on the decision."Sthembiso: "That won't be easy. Hundreds of people are going to lose their jobs. There isn't much else that theycan do around here, either."Zama: "Some of the factory people will be able to stay on, if they get some additional training. We can convincethe workers and the people in town that the decision was necessary, if we can show them accounting and costinformation to justify the decision. If they see good, sound reasoning for the action, they'll be less likely to resistand cause trouble. We need for them to maintain productivity and efficiency until the new equipment is here. Iwant you to work on a cost summary we can release to the employees and the town newspaper, showing whyautomation is a good idea."Sthembiso: "But the net present value and other analyses I did earlier showed this plant should stay the way itis."Zama. "When we were working on the analyses, you said yourself that the benefits of automation are hard toidentify and assign numbers to. You had to make several assumptions in order to do those analyses. If you changesome of your assumptions, you can make the numbers look better. Try a longer useful life for the new equipment,or change some of the projected cost information. As soon as you have the new numbers, bring them to me tolook at."

Accounting - Accounting is the process of documenting a business's financial transactions. These…

.B.A. who is the only cost accountant at a manufacturing plant whi n of about 20,000 people ger me into my office for a few minutes. You know that the compan nation in some of our factories. I just got word that this plan ost and accounting analyses we sent to headquarters last year sk

.B.A. who is the only cost accountant at a manufacturing plant whi n of about 20,000 people ger me into my office for a few minutes. You know that the compan nation in some of our factories. I just got word that this plan ost and accounting analyses we sent to headquarters last year sk

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter8: Standard Costs And Variances

Section: Chapter Questions

Problem 2EB: Salley is developing material and labor standards for her company. She finds that it costs $0.55 per...

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Tonya Martin, CMA and controller or the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the divisions pricing decisions. Their conversation was as follows: Tonya: Doug, as you know, about 25% of our business is based on government contracts, with the other 75% based on jobs from private sources won through bidding. During the last several years, our private business has declined. We have been losing more bids than usual. After some careful investigation, I have concluded that we are overpricing some jobs because of improper assignment of overhead costs. Some jobs are also being underpriced. Unfortunately, the jobs being overpriced are coming from our higher-volume, labor-intensive products, so we are losing business. Dong: I think I understand. Jobs associated with our high-volume products are being assigned more overhead than they should be receiving. Then when we add our standard 40% markup, we end up with a higher price than our competitors, who assign costs more accurately. Tonya: Exactly. We have two producing departments, one labor-intensive and the other machine-intensive. The labor-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labor-intensive. We have been using a plantwide rate based on direct labor hours to assign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive a greater share of the machine-intensive departments overhead than they deserve. This problem can be greatly alleviated by switching to departmental overhead rates. For example, an average high-volume job would be assigned 100,000 of overhead using a plantwide rate and only 70,000 using departmental rates. The change would lower our bidding price on high-volume jobs by an average of 42,000 per job. By increasing the accuracy of our product costing, we can make better pricing decisions and win back much of our private-sector business. Doug: Sounds good. When can you implement the change in overhead rates? Tonya: It wont take long. I can have the new system working within four to six weekscertainly by the start of the new fiscal year. Doug: Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labor-intensive department. This new overhead assignment scheme will push down the cost on the government jobs, and we will lose revenues. They pay us full cost plus our standard markup. This business is not threatened by our current costing procedures, but we cant switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. Tonya: You do have a point. I thought of this issue also. According to my estimates, we will gain more revenues from the private sector than we will lose from our government contracts. Besides, the costs of our government jobs are distorted. In effect, we are overcharging the government. Doug: They dont know that and never would unless we switch our overhead assignment procedures. I think I have the solution. Officially, lets keep our plantwide overhead rate. All of the official records will reflect this overhead costing approach for both our private and government business. Unofficially. I want you to develop a separate set of books that can be used to generate the information we need to prepare competitive bids for our private-sector business. Required: 1. Do you believe that the solution proposed by Doug is ethical? Explain. 2. Suppose that Tonya decides that Dougs solution is not right and objects strongly. Further suppose that, despite Tonyas objections, Doug insists strongly on implementing the action. What should Tonya do?
Salley is developing material and labor standards for her company. She finds that it costs $0.55 per pound of material per widget. Each widget requires 6 pounds of material per widget. Salley is also working with the operations manager to determine what the standard labor cost is for a widget. Upon observation, Salley notes that it takes 3 hours in the assembly department and 1 hour in the finishing department to complete one widget. All employees are paid $10.50 per hour. A. What is the standard materials cost per unit for a widget? 8. What is the standard labor cost per unit for a widget?
Vargas, Inc., produces industrial machinery. Vargas has a machining department and a group of direct laborers called machinists. Each machinist is paid 25,000 and can machine up to 500 units per year. Vargas also hires supervisors to develop machine specification plans and to oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee three machinists, at most. Vargass accounting and production history reveal the following relationships between units produced and the costs of direct labor and supervision (measured on an annual basis): Required: 1. Prepare two graphs: one that illustrates the relationship between direct labor cost and units produced, and one that illustrates the relationship between the cost of supervision and units produced. Let cost be the vertical axis and units produced the horizontal axis. 2. How would you classify each cost? Why? 3. Suppose that the normal range of activity is between 2,400 and 2,450 units and that the exact number of machinists is currently hired to support this level of activity. Further suppose that production for the next year is expected to increase by an additional 400 units. How much will the cost of direct labor increase (and how will this increase be realized)? Cost of supervision?
Reggie Wilmore has just started a new businessbuilding and installing custom garage organization systems. Reggie builds the cabinets and work benches in his workshop, then installs them in clients garages. Reggie figures his overhead for the coming year will be 12,000. Since his business is labor intensive, he plans to use direct labor hours as his overhead driver. For the coming year, he expects to complete 100 jobs, averaging 25 direct labor hours each. However, he has the capacity to complete 125 jobs averaging 25 direct labor hours each. Required: 1. Four measures of activity level were mentioned in the text. Which two measures is Reggie considering in computing a predetermined overhead rate? 2. Compute the predetermined overhead rates using each of the measures in your answer to Requirement 1. 3. Which one would you recommend that Reggie use? Why?
Reggie Wilmore has just started a new businessbuilding and installing custom garage organization systems. Reggie builds the cabinets and work benches in his workshop, then installs them in clients garages. Reggie figures his overhead for the coming year will be 12,000. Since his business is labor intensive, he plans to use direct labor hours as his overhead driver. For the coming year, he expects to complete 100 jobs, averaging 25 direct labor hours each. However, he has the capacity to complete 125 jobs averaging 25 direct labor hours each. Required: 1. What source documents will Reggie need to account for costs in his new business? 2. Suppose Reggies business grows, and he expands his workshop and hires three additional carpenters to help him. What source documents will he need now?
Sarina is a cost controller in a manufacturing company that produces ceramic products. The production of the products will go through two processing departments that are the molding and finishing department. The company uses weighted average process costing method in determining the unit cost of its products. She is reviewing the monthly production report of the finishing department that was prepared by her newly hired assistant cost controller. She gets confused with the figures in the report. It is not only the format of the report, but Sarina also concerns on the RM25.71 cost per unit which she felt is higher than their normal unit cost. The production and cost information extracted from report are shown below: Finishing Department Costs: Cost Incurred Work in process inventory, 1 October, RM8,208 450 units; materials 100% complete; conversion Consist of: 60% complete (i) transferred in cost RM4,068 (ii) materials cost…
Rene Alverez knew she was in over her head soon after she took the job. Even so, the opportunity for promotion comes along rarely and she believed that she would grow into it. Ms. Alverez is the cost accounting specialist assigned to the finishing department of Standard Tool Company. Bill Sawyer, the manager of the finishing department, knows exactly what he is doing. In each of the three years he has managed the department, the cost per unit of product transsferred out of his Work in Process Inventory account has declined. His ability to control cost if highly valued, and it is widely believed that he will be the successor to the plant manager, who is being promoted to manufacturing vice president. One more good year would surely seal the deal for Mr. Sawyer. It was little wonder that Ms. Alverez was uncomfortable in challenging Mr, Sawyer’s estimate of the percentage of completion of the department’s ending inventory.He contended that the inventory was 60 percent complete, but she…
Rene Alverez knew she was in over her head soon after she took the job. Even so, the opportunity for promotion comes along rarely and she believed that she would grow into it. Ms. Alverez is the cost accounting specialist assigned to the finishing department of Standard Tool Company. Bill Sawyer, the manager of the finishing department, knows exactly what he is doing. In each of the three years he has managed the department, the cost per unit of product transsferred out of his Work in Process Inventory account has declined. His ability to control cost if highly valued, and it is widely believed that he will be the successor to the plant manager, who is being promoted to manufacturing vice president. One more good year would surely seal the deal for Mr. Sawyer. It was little wonder that Ms. Alverez was uncomfortable in challenging Mr, Sawyer’s estimate of the percentage of completion of the department’s ending inventory.He contended that the inventory was 60 percent complete, but she…
3. Roger has just been hired as an accountant and is in the process of performing some cost accounting calculations. The factory where he works produces tennis balls and uses a plant-wide cost pool under their simple costing system. The factory's total Manufacturing Overhead (MOH) costs are budgeted for: rent for the factory, $72,000; factory utilities, $40,000; quality control salaries, $52,000; and janitorial salaries, $36,000 in addition to assembly line workers' wages of $246,000, tennis ball coating costs of $10,000, and tennis ball core costs of $5,000. What is the budgeted MOH rate using one plant-wide pool based on Direct Labor (DL) cost? A) $0.33 B) $0.81 C) $3.57 D) $4.35
After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 109,000 units of the Sport model and 44,500 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by one-third. Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility Activity Cost Driver Cost Driver Volume Sport Pro Total Assembly building Assembling Machine-hours 6,900 30,900 37,800 Setting up machines Setup hours 49 490 539 Handling material Production runs 17 49 66 Packaging building Inspecting and…
After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 104,000 units of the Sport model and 42,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 29 percent. Cost Drivers and Cost Driver Volumes—CenterPoint Manufacturing Facility Cost Driver Volume Activity Cost Driver Sport Pro Total Assembly building Assembling Machine-hours 6,400 30,400 36,800 Setting up machines Setup hours 44 440 484 Handling material Production runs 12 44 56 Packaging…
Goulburn, Incorporated produces parts for heavy equipment used in mining and construction. The plant that produces one part common to many vehicles is highly automated, so all labor is considered part of factory overhead. The plant manager, who has just been promoted, would like to understand how overhead costs fluctuate in order to improve planning and budgets. After discussions with both financial and operations members of the plant staff, there is general agreement that the best cost driver for overhead is machine-hours. Monthly data were collected from the most recent two years on machine-hours and overhead. More months of data were available, but a process change had taken place about 30 months earlier, so the staff believed any data from before that time would be misleading. The data are shown in the following table: Month Machine-Hours Factory Overhead 1 39,300 $ 527,100 2 37,300 416,500 3 30,100 365,800 4 42,400 498,200 5 50,600 590,700 6 45,500 503,400 7…