Accounting Areen has just been employed as a Trainee Management Accountant by Sarween & Sons, a newly established manufacturing company in Duhok. Areen is one of the seven members of a committee recently set up by the managing director of Sarween & Sons to advise the company on the benefits of changing its product costing method from Absorption costing to Activity Based Costing. As part of this project, Areen has come to you - the Finance Manager to ask for help with understanding the differences between activity-based costing and strategic activity-based management. Required: Explain how you would be of help to Areen?
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- Randy Harris, controller, has been given the charge to implement an advanced cost management system. As part of this process, he needs to identify activity drivers for the activities of the firm. During the past four months, Randy has spent considerable effort identifying activities, their associated costs, and possible drivers for the activities costs. Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an R2 of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the activity of inspecting finished goods produced an R2 of less than 80 percent for any single activity driver. Randy believes, however, that a satisfactory cost formula can be developed using two activity drivers: the number of batches and the number of inspection hours. Data collected for a 14-month period are as follows: Required: 1. Calculate the cost formula for inspection costs using the two drivers, inspection hours and number of batches. Are both activity drivers useful? What does the R2 indicate about the formula? 2. Using the formula developed in Requirement 1, calculate the inspection cost when 300 inspection hours are used and 30 batches are produced. Prepare a 90 percent confidence interval for this prediction.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?Aaron McKinney is a cost accountant for Majik Systems Inc. Martin Dodd, Vice President of Marketing, has asked Aaron to meet with representatives of Majik Systems major competitor to discuss product cost data. Martin indicates that the sharing of these data will enable Majik Systems to determine a fair and equitable price for its products. Would it be ethical for Aaron to attend the meeting and share the relevant cost data? Explain your answer.
- Leather Works is a family-owned maker of leather travel bags and briefcases located in the northeastern part of the United States. Foreign competition has forced its owner, Heather Gray, to explore new ways to meet the competition. One of her cousins, Wallace Hayes, who recently graduated from college with a major in accounting, told her about the use of cost variance analysis to learn about efficiencies of production. In May of last year, Heather asked Matt Jones, chief accountant, and Alfred Prudest, production manager, to implement a standard costing system. Matt and Alfred, in turn, retained Shannon Leikam, an accounting professor at Hardings College, to set up a standard costing system by using information supplied to her by Matts and Alfreds staff. To verify that the information was accurate, Shannon visited the plant and measured workers output using time and motion studies. During those visits, she was not accompanied by either Matt or Alfred, and the workers knew about Shannons schedule in advance. The cost system was implemented in June of last year. Recently, the following dialogue took place among Heather, Matt, and Alfred: HEATHER: How is the business performing? ALFRED: You know, we are producing a lot more than we used to, thanks to the contract that you helped obtain from Lean, Inc., for laptop covers. (Lean is a national supplier of computer accessories.) MATT: Thank goodness for that new product. It has kept us from sinking even more due to the inroads into our business made by those foreign suppliers of leather goods. HEATHER: What about the standard costing system? MATT: The variances are mostly favorable, except for the first few months when the supplier of leather started charging more. HEATHER: How did the union members take to the standards? ALFRED: Not bad. They grumbled a bit at first, but they have taken it in stride. Weve consistently shown favorable direct labor efficiency variances and direct materials usage variances. The direct labor rate variance has been flat. MATT: It should be since direct labor rates are negotiated by the union representative at the start of the year and remain the same for the entire year. HEATHER: Matt, would you send me the variance report for laptop covers immediately? The following chart summarizes the direct materials and direct labor variances from November of last year through April of this year (extracted from the report provided by Matt). Standards for each laptop cover are as follows: a. Three feet of direct materials at 7.50 per foot b. Forty-five minutes of direct labor at 14 per hour In addition, the data for May of this year, but not the variances for the month, are as follows: Actual direct labor cost per hour exceeded the budgeted rate by 0.10 per hour. Required: 1. For May of this year, calculate the price and quantity variances for direct labor and direct materials. 2. Discuss the trend of the direct materials and labor variances. 3. What type of actions must the workers have taken during the period they were being observed for the setting of standards? 4. What can be done to ensure that the standards are set correctly? (CMA adapted)Assume you have been hired by Cabelas Sporting Goods. As part of your new role in the accounting department, you have been tasked to set up a responsibility accounting structure for the company. As your first task, your supervisor has asked you to give an example of a cost center, profit center, and an investment center within the Cabelas organization. Your supervisor is a little unsure of the difference between a profit center and investment center and would like you to explain the difference.Paul Golding and his wife, Nancy, established Crunchy Chips in 1938. Over the past 60 years, the company has established distribution channels in 11 western states, with production facilities in Utah, New Mexico, and Colorado. In 1980, Pauls son, Edward, took control of the business. By 2017, it was clear that the companys plants needed to gain better control over production costs to stay competitive. Edward hired a consultant to install a standard costing system. To help the consultant establish the necessary standards, Edward sent her the following memo: The manufacturing process for potato chips begins when the potatoes are placed into a large vat in which they are automatically washed. After washing, the potatoes flow directly to an automatic peeler. The peeled potatoes then pass by inspectors, who manually cut out deep eyes or other blemishes. After inspection, the potatoes are automatically sliced and dropped into the cooking oil. The frying process is closely monitored by an employee. After the chips are cooked, they pass under a salting device and then pass by more inspectors, who sort out the unacceptable finished chips (those that are discolored or too small). The chips then continue on the conveyor belt to a bagging machine that bags them in 1-pound bags. After bagging, the bags are placed in a box and shipped. The box holds 15 bags. The raw potato pieces (eyes and blemishes), peelings, and rejected finished chips are sold to animal feed producers for 0.16 per pound. The company uses this revenue to reduce the cost of potatoes. We would like this reflected in the price standard relating to potatoes. Crunchy Chips purchases high-quality potatoes at a cost of 0.245 per pound. Each potato averages 4.25 ounces. Under efficient operating conditions, it takes four potatoes to produce one 16-ounce bag of plain chips. Although we label bags as containing 16 ounces, we actually place 16.3 ounces in each bag. We plan to continue this policy to ensure customer satisfaction. In addition to potatoes, other raw materials are the cooking oil, salt, bags, and boxes. Cooking oil costs 0.04 per ounce, and we use 3.3 ounces of oil per bag of chips. The cost of salt is so small that we add it to overhead. Bags cost 0.11 each and boxes 0.52 each. Our plant produces 8.8 million bags of chips per year. A recent engineering study revealed that we would need the following direct labor hours to produce this quantity if our plant operates at peak efficiency: Im not sure that we can achieve the level of efficiency advocated by the study. In my opinion, the plant is operating efficiently for the level of output indicated if the hours allowed are about 10% higher. The hourly labor rates agreed upon with the union are: Overhead is applied on the basis of direct labor dollars. We have found that variable overhead averages about 116% of our direct labor cost. Our fixed overhead is budgeted at 1,135,216 for the coming year. Required: 1. Discuss the benefits of a standard costing system for Crunchy Chips. 2. Discuss the presidents concern about using the result of the engineering study to set the labor standards. What standard would you recommend? 3. Form a group with two or three other students. Develop a standard cost sheet for Crunchy Chips plain potato chips. Round all computations to four decimal places. 4. Suppose that the level of production was 8.8 million bags of potato chips for the year as planned. If 9.5 million pounds of potatoes were used, compute the materials usage variance for potatoes.
- Tom Young, vice president of Dunn Company (a producer of plastic products), has been supervising the implementation of an activity-based cost management system. One of Toms objectives is to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, Tom has decided to focus on two processes: production and customer service. Within each process, one activity will be selected for improvement: molding for production and sustaining engineering for customer service. (Sustaining engineers are responsible for redesigning products based on customer needs and feedback.) Value-added standards are identified for each activity. For molding, the value-added standard calls for nine pounds per mold. (Although the products differ in shape and function, their size, as measured by weight, is uniform.) The value-added standard is based on the elimination of all waste due to defective molds (materials is by far the major cost for the molding activity). The standard price for molding is 15 per pound. For sustaining engineering, the standard is 60 percent of current practical activity capacity. This standard is based on the fact that about 40 percent of the complaints have to do with design features that could have been avoided or anticipated by the company. Current practical capacity (the first year) is defined by the following requirements: 18,000 engineering hours for each product group that has been on the market or in development for five years or less, and 7,200 hours per product group of more than five years. Four product groups have less than five years experience, and 10 product groups have more. There are 72 engineers, each paid a salary of 70,000. Each engineer can provide 2,000 hours of service per year. There are no other significant costs for the engineering activity. For the first year, actual pounds used for molding were 25 percent above the level called for by the value-added standard; engineering usage was 138,000 hours. There were 240,000 units of output produced. Tom and the operational managers have selected some improvement measures that promise to reduce non-value-added activity usage by 30 percent in the second year. Selected actual results achieved for the second year are as follows: The actual prices paid per pound and per engineering hour are identical to the standard or budgeted prices. Required: 1. For the first year, calculate the non-value-added usage and costs for molding and sustaining engineering. Also, calculate the cost of unused capacity for the engineering activity. 2. Using the targeted reduction, establish kaizen standards for molding and engineering (for the second year). 3. Using the kaizen standards prepared in Requirement 2, compute the second-year usage variances, expressed in both physical and financial measures, for molding and engineering. (For engineering, explain why it is necessary to compare actual resource usage with the kaizen standard.) Comment on the companys ability to achieve its targeted reductions. In particular, discuss what measures the company must take to capture any realized reductions in resource usage.Tim Johnson is a news reporter and feature writer for The Wall Street Review, an important daily newspaper for financial managers. Tim’s assignment is to develop two feature articles: one on life-cycle costing and one on business analytics, including interviews with chief financial officers and operating managers. Tim has a generous travel budget for research into company history, operations, and market analysis for the firms he selects for the article. Tim has asked you to recommend industries and firms that would be good candidates for the article. What would you advise? Explain your recommendations.As CEO of Riverside Marine, Rachel Moore knows it is important to control costs and to respond quickly to changes in the highly competitive boat-building industry. When Gerbig Consulting proposes that Riverside Marine invest in an ERP system, she forms a team to evaluate the proposal: the plant engineer, the plant foreman, the systems specialist, the human resources director, the marketing director, and the management accountant. A month later, the management accountant Miles Cobalt reports that the team and Gerbig estimate that if Riverside Marine implements the ERP system, it will incur the following costs: Costs of the Project a.$390,000 in software costs b. $85,000 to customize the ERP software and load Riverside Marine'sdata into the new ERP system c. $112,000 for employee training Benefits of the Project a. More efficient order processing should lead to savings of $185,000. b. Streamlining the manufacturing process so that it maps into the ERP…
- Tim Johnson is a news reporter and feature writer for The Wall Street Review, an important daily newspaper for financial managers. Tim’s assignment is to develop a feature article on target costing, including interviews with chief financial officers and operating managers. Tim has a generous travel budget for research into company history, operations, and market analysis for the firms he selects for the article. Tim has asked you to recommend industries and firms that would be good candidates for the article. What would you advise? Explain your recommendations.Mel Gibbeson has recently graduated from a business school and has joined the family business as anaccountant. At the first management meeting with production, marketing and sales, a great deal oftime was spent discussing the unit cost of products.Required:What kinds of decisions can managers make using the unit cost information? (explain with detail)Aaron McKinney is a cost accountant for Majik Systems Inc. Martin Dodd, Vice President of Marketing, has asked Aaron to meet with representatives of Majik Systems’ major competitor to discuss product cost data. Martin indicates that the sharing of these data will enable Majik Systems to determine a fair and equitable price for its products. Instructions: Would it be ethical for Aaron to attend the meeting and share the relevant cost data? Explain your answer using150 words or more
