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All Textbook Solutions for Managerial Accounting: The Cornerstone of Business Decision-Making
1DQWhat are the three broad objectives of managerial accounting?3DQShould a managerial accounting system provide both financial and nonfinancial information? Explain.What is meant by controlling?Describe the connection between planning, feedback, and controlling.7DQExplain the role of financial reporting in the development of managerial accounting. Why has this changed in recent years?Explain the meaning of customer value. How is focusing on customer value changing managerial accounting?10DQExplain why todays managerial accountant must have a cross-functional perspective.Briefly explain the practice of enterprise risk management and the role that can be played by managerial accountants in enterprise risk management.13DQThe controller should be a member of the top management staff. Do you agree or disagree? Explain.What is ethical behavior? Is it possible to teach ethical behavior in a managerial accounting course?16DQ17DQThe provision of accounting information for internal users is known as a. accounting. b. financial accounting. c. managerial accounting. d. information provision. e. accounting for planning and control.The use and importance of managerial accounting is growing in each of the following areas except for a. enterprise risk management. b. nanotechnology advancements. c. corporate sustainability reporting. d. quality accounting. e. lean accounting.Setting objectives and identifying methods to achieve those objectives is called a. planning. b. decision making. c. controlling. d. performance evaluation. e. None of these.The process of choosing among competing alternatives is called a. planning. b. decision making. c. controlling. d. performance evaluation. e. None of these.5MCQAn effective managerial accounting system should track information about an organizations activities in which of the following areas? a. Development b. Marketing c. Production d. Design e. All of these.7MCQ8MCQ9MCQ10MCQThe Managerial Process Each of the following scenarios requires the use of accounting information to carry out one or more managerial accounting objectives. a. Laboratory Manager: An HMO approached me recently and offered us its entire range of blood tests. It provided a price list revealing the amount it is willing to pay for each test. In many cases, the prices are below what we normally charge. I need to know the costs of the individual tests to assess the feasibility of accepting its offer and perhaps suggest price adjustments on some of the tests. b. Operating Manager: This report indicates that we have 30% more defects than originally targeted. An investigation into the cause has revealed the problem. We were using a lower-quality material than expected, and the waste has been higher than normal. By switching to the quality level originally specified, we can reduce the defects to the planned level. c. Divisional Manager: Our market share has increased because of higher-quality products. Current projections indicate that we should sell 25% more units than last year. I want a projection of the effect that this increase in sales will have on profits. I also want to know our expected cash receipts and cash expenditures on a month-by-month basis. I have a feeling that some short-term borrowing may be necessary. d. Plant Manager: Foreign competitors are producing goods with lower costs and delivering them more rapidly than we can to customers in our markets. We need to decrease the cycle time and increase the efficiency of our manufacturing process. There are two proposals that should help us accomplish these goals, both of which involve investing in computer-aided manufacturing. I need to know the future cash flows associated with each system and the effect each system has on unit costs and cycle time. e. Manager: At the last board meeting, we established an objective of earning a 25% return on sales. I need to know how many units of our product we need to sell to meet this objective. Once I have the estimated sales in units, we need to outline a promotional campaign that will take us where we want to be. However, in order to compute the targeted sales in units, I need to know the expected unit price and a lot of cost information. f. Manager: Perhaps the Harrison Medical Clinic should not offer a full range of medical services. Some services seem to be having a difficult time showing any kind of profit. I am particularly concerned about the mental health service. It has not shown a profit since the clinic opened. I want to know what costs can be avoided if I drop the service. I also want some assessment of the impact on the other services we offer. Some of our patients may choose this clinic because we offer a full range of services. Required: Select the managerial accounting objective(s) that are applicable for each scenario: planning, controlling (including performance evaluation), or decision making.Differences between Managerial Accounting and Financial Accounting Jenna Suarez, the controller for Arben Company, has faced the following situations in the past 2 weeks: a. Ben Heald, head of production, wondered whether it would be more cost effective to buy parts partially assembled or to buy individual parts and assemble them at the Arben factory. b. The president of Arben reminded Jenna that the stockholders meeting was coming up, and he needed her to prepare a PowerPoint presentation showing the income statement and balance sheet information for last year. c. Ellen Johnson, vice president of sales, has decided to expand the sales offices for next year. She sent Jenna the information on next years rent and depreciation information for budgeting purposes. d. Jennas assistant, Mike, received the information from Ellen on depreciation and added it to depreciation expenses and accumulated depreciation on office equipment. e. Jenna compared the budgeted spending on materials used in production with the actual spending on materials used in production. Materials spending was significantly higher than expected. She set up a meeting to discuss this outcome with Ben Heald so that he could explain it. Required: Determine whether each request is relatively more managerial accounting oriented or financial accounting oriented.Customer Value, Strategic Positioning Adriana Alvarado has decided to purchase a personal computer. She has narrowed the choices to two: Drantex and Confiar. Both brands have the same processing speed, 6.4 gigabytes of hard-disk capacity, two USB ports, and a DVDRW drive, and each comes with the same basic software support package. Both come from mail-order companies with good reputations. The selling price for each is identical. After some review, Adriana discovers that the cost of operating and maintaining Drantex over a 3-year period is estimated to be 300. For Confiar, the operating and maintenance cost is 600. The sales agent for Drantex emphasized the lower operating and maintenance costs. The agent for Confiar, however, emphasized the service reputation of the product and the faster delivery time (Confiar can be purchased and delivered 1 week sooner than Drantex). Based on all the information, Adriana has decided to buy Confiar. Required: 1. What is the total product purchased by Adriana? 2. CONCEPTUAL CONNECTION How does the strategic positioning differ for the two companies? 3. CONCEPTUAL CONNECTION When asked why she decided to buy Confiar, Adriana responded, I think that Confiar offers more value than Drantex. What are the possible sources of this greater value ? What implications does this have for the managerial accounting information system? 4. CONCEPTUAL CONNECTION Suppose that Adrianas decision was prompted mostly by the desire to receive the computer quickly. Informed that it was losing sales because of the longer time to produce and deliver its products, the management of the company producing Drantex decided to improve delivery performance by improving its internal processes. These improvements decreased the number of defective units and the time required to produce its product. Consequently, delivery time and costs both decreased, and the company was able to lower its prices on Drantex. Explain how these actions translate into strengthening the competitive position of the Drantex PC relative to the Confiar PC. Also discuss the implications for the managerial accounting information system.The following describes the job responsibilities of two employees of Barney Manufacturing. Joan Dennison, Cost Accounting Manager. Joan is responsible for measuring and collecting costs associated with the manufacture of the garden hose product line. She is also responsible for preparing periodic reports that compare the actual costs with planned costs. These reports are provided to the production line managers and the plant manager. Joan helps to explain and interpret the reports. Steven Swasey, Production Manager. Steven is responsible for the manufacture of the high-quality garden hose. He supervises the line workers, helps to develop the production schedule, and is responsible for seeing that production quotas are met. He is also held accountable for controlling manufacturing costs. Required: CONCEPTUAL CONNECTION Identify Joan and Steven as line or staff and explain your reasons.Ethical Behavior Consider the following scenario between Dave, a printer, and Steve, an assistant in the local universitys athletic department. Steve: Dave, our department needs to have 10,000 posters printed for the basketball team for next year. Heres the mock-up, and well need them in a month. How much will you charge? Dave: Well, given the costs I have for ink and paper, 1 can come in at around 5,000. Steve: Great, heres what I want you to do. Print me up an invoice for 7,500. Huts our budget. Then, when they pay you, you give me a check for 2,500. Ill make sure that you get the job. Required: CONCEPTUAL CONNECTION Is Steves proposal ethical? What should Dave do?Manager: If I can reduce my costs by 40,000 during this last quarter, my division will show a profit that is 10% above the planned level, and I will receive a 10,000 bonus. However, given the projections for the fourth quarter, it does not look promising. I really need that 10,000. I know of one way that I can qualify. All I have to do is lay off my three most expensive salespeople. After all, most of the orders are in for the fourth quarter, and I can always hire new sales personnel at the beginning of the next year. Required: CONCEPTUAL CONNECTION What is the right choice for the manager to make? Why did the ethical dilemma arise? Is there any way to redesign the accounting reporting system to discourage the type of behavior that the manager is contemplating?Ethical Issues The following statements have appeared in newspaper editorials: 1. Business students come from all segments of society. If they have not been taught ethics by their families and by their elementary and secondary schools, a business school can have little effect. 2. Sacrificing self-interest for the collective good wont happen unless a majority of Americans also accept this premise. 3. Competent executives manage people and resources for the good of society. Monetary benefits and titles are simply the by-products of doing a good job. 4. Unethical firms and individuals, like high rollers in Las Vegas, are eventually wiped out financially. Required: CONCEPTUAL CONNECTION Assess and comment on each of the statements.18E19EExplain the difference between cost and expense.What is the difference between accumulating costs and assigning costs?What is a cost object? Give some examples.What is a direct cost? An indirect cost? Can the same cost be direct for one purpose and indirect for another? Give an example.What is allocation?What is the difference between a product and a service? Give an example of each.Define manufacturing overhead.Explain the difference between direct materials purchased in a month and direct materials used for the month.Define prime cost and conversion cost. Why cant prime cost be added to conversion cost to get total product cost?How does a period cost differ from a product cost?Define selling cost. Give five examples of selling cost.What is the cost of goods manufactured?What is the difference between cost of goods manufactured and cost of goods sold?What is the difference between the income statement for a manufacturing firm and the income statement for a service firm?Why do firms like to calculate a percentage column on the income statement (in which each line item is expressed as a percentage of sales)?Accumulating costs means that a. costs must be summed and entered on the income statement. b. each cost must be linked to some cost object. c. costs must be measured and tracked. d. costs must be allocated to units of production. e. costs have expired and must be transferred from the balance sheet to the income statement.Product (or manufacturing) costs consist of a. direct materials, direct labor, and selling costs. b. direct materials, direct labor, manufacturing overhead, and operating expense. c. administrative costs and conversion costs. d. prime costs and manufacturing overhead. e. selling and administrative costs.Use the following information for Multiple-Choice Questions 2-3 and 2-4: Wachman Company produces a product with the following per-unit costs: Last year, Wachman produced and sold 2,000 units at a price of 75 each. Total selling and administrative expense was 30,000. 2-3Refer to the information for Wachman Company on the previous page. Conversion cost per unit was a. 21. b. 25. c. 34. d. 40. e. None of these.4MCQThe accountant in a factory that produces biscuits for fast-food restaurants wants to assign costs to boxes of biscuits. Which of the following costs can be traced directly to boxes of biscuits? a. The cost of flour and baking soda b. The wages of the mixing labor c. The cost of the boxes d. The cost of packing labor e. All of these.Which of the following is an indirect cost? a. The cost of denim in a jeans factory b. The cost of mixing labor in a factory that makes over-the-counter pain relievers c. The cost of bottles in a shampoo factory d. The cost of restriping the parking lot at a perfume factory e. All of these.7MCQKelloggs makes a variety of breakfast cereals. Kelloggs is which of the following? a. Wholesaler b. Retailer c. Service firm d. Manufacturing firm e. None of these.9MCQStone Inc. is a company that purchases goods (e.g., chess sets, pottery) from overseas and resells them to gift shops in the United States. Stone Inc. is which of the following? a. Wholesaler b. Retailer c. Service firm d. Manufacturing firm e. None of these.JackMan Company produces die-cast metal bulldozers for toy shops. JackMan estimated the following average costs per bulldozer: Prime cost per unit is a. 8.65. b. 1.10. c. 0.95. d. 2.05. e. 9.75.12MCQUse the following information for Multiple-Choice Questions 2-13 through 2-18: Last year, Barnard Company incurred the following costs: Barnard produced and sold 10,000 units at a price of 31 each. 2-13Refer to the information for Barnard Company above. Prime cost per unit is a. 7.00. b. 20.00. c. 15.00. d. 5.00. e. 27.60.Use the following information for Multiple-Choice Questions 2-13 through 2-18: Last year, Barnard Company incurred the following costs: Barnard produced and sold 10,000 units at a price of 31 each. 2-14Refer to the information for Barnard Company above. Conversion cost per unit is a. 7.00. b. 20.00. c. 15.00. d. 5.00. e. 27.60.Use the following information for Multiple- Choice Questions 2-13 through 2-18: Last year, Barnard Company incurred the following costs: Barnard produced and sold 10,000 units at a price of 31 each. 2-15 Refer to the information for Barnard Company on the previous page. The cost of goods sold per unit is a. 7.00. b. 20.00. c. 15.00. d. 5.00. e. 27.60.16MCQUse the following information for Multiple-Choice Questions 2-13 through 2-18: Last year, Barnard Company incurred the following costs: Barnard produced and sold 10,000 units at a price of 31 each. 2-17 Refer to the information for Barnard Company on the previous page. The total period expense is a. 276,000. b. 200,000. c. 76,000. d. 40,000. e. 36,000.2-18 Use the following information for Multiple- Choice Questions 2-13 through 2-18: Last year, Barnard Company incurred the following costs: Barnard produced and sold 10,000 units at a price of 31 each. Refer to the information for Barnard Company on the previous page. Operating income is a. 34,000. b. 110,000. c. 234,000. d. 270,000. e. 74,000.Use the following information for Brief Exercises 2-19 and 2-20: Slapshot Company makes ice hockey sticks. Last week, direct materials (wood, paint, Kevlar, and resin) costing 32,000 were put into production. Direct labor of 28,000 (10 workers 200 hours 14 per hour) was incurred. Manufacturing overhead equaled 60,000. By the end of the week, the company had manufactured 500 hockey sticks. Brief Exercise 2-19 Total Product Cost and Per-Unit Product Cost Refer to the information for Slapshot Company above. Required: 1. Calculate the total product cost for last week. 2. Calculate the per-unit cost of one hockey stick that was produced last week.Use the following information for Brief Exercises 2-19 and 2-20: Slapshot Company makes ice hockey sticks. Last week, direct materials (wood, paint, Kevlar, and resin) costing 32,000 were put into production. Direct labor of 28,000 (10 workers 200 hours 14 per hour) was incurred. Manufacturing overhead equaled 60,000. By the end of the week, the company had manufactured 500 hockey sticks. Brief Exercise 2-20 Prime Cost and Conversion Cost Refer to the information for Slapshot Company on the previous page. Required: 1. Calculate the total prime cost for last week. 2. Calculate the per-unit prime cost. 3. Calculate the total conversion cost for last week. 4. Calculate the per-unit conversion cost.Direct Materials Used in Production Slapshot Company makes ice hockey sticks. On June 1, Slapshot had 48,000 of materials in inventory. During the month of June, the company purchased 132,000 of materials. On June 30, materials inventory equaled 45,000. Required: Calculate the direct materials used in production for the month of June.Cost of Goods Manufactured Slapshot Company makes ice hockey sticks. During the month of June, the company purchased 132,000 of materials. Also during the month of June, Slapshot Company incurred direct labor cost of 113,000 and manufacturing overhead of 187,000. Inventory information is as follows: Required: 1. Calculate the cost of goods manufactured for the month of June. 2. Calculate the cost of one hockey stick assuming that 1,900 sticks were completed during June.Cost of Goods Sold Slapshot Company makes ice hockey sticks. During the month of June, 1,900 sticks were completed at a cost of goods manufactured of 437,000. Suppose that on June 1, Slapshot had 350 units in finished goods inventory costing 80,000 and on June 30, 370 units in finished goods inventory costing 84,000. Required: 1. Prepare a cost of goods sold statement for the month of June. 2. Calculate the number of sticks that were sold during June.Use the following information for Brief Exercises 2-24 and 2-25: Slapshot Company makes ice hockey sticks and sold 1,880 sticks during the month of June at a total cost of 433,000. Each stick sold at a price of 400. Slapshot also incurred two types of selling costs: commissions equal to 10% of the sales price and other selling expense of 65,000. Administrative expense totaled 53,800. Brief Exercise 2-24 Manufacturing Firm Income Statement Refer to the information for Slapshot Company on the previous page. Required: Prepare an income statement for Slapshot for the month of June.Use the following information for Brief Exercises 2-24 and 2-25: Slapshot Company makes ice hockey sticks and sold 1,880 sticks during the month of June at a total cost of 433,000. Each stick sold at a price of 400. Slapshot also incurred two types of selling costs: commissions equal to 10% of the sales price and other selling expense of 65,000. Administrative expense totaled 53,800. Brief Exercise 2-25 Income Statement Percentages Refer to the information for Slapshot Company above. Required: Prepare an income statement for Slapshot for the month of June and calculate the percentage of sales revenue represented by each line of the income statement. (Note: Round answers to one decimal place.)26BEA27BEB28BEBDirect Materials Used in Production Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers. On March 1, Morning Smiles had 25,000 of materials in inventory. During the month of March, the company purchased 350,000 of materials. On March 31, materials inventory equaled 40,000. Required: Calculate the direct materials used in production for the month of March.2-30 Cost of Goods Manufactured Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers. During the month of March, the company purchased 350,000 of materials. Also during the month of March, Morning Smiles incurred direct labor cost of 74,000 and manufacturing overhead of 190,000. Inventory information is as follows: Required: 1. Calculate the cost of goods manufactured for the month of March. 2. Calculate the cost of one coffee maker assuming that 8,100 coffee makers were completed during March.Cost of Goods Sold Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers. During the month of March, 8,100 coffee makers were completed at a cost of goods manufactured of 607,500. Suppose that on March 1, Morning Smiles had 1,000 units in finished goods inventory costing 70,000 and on March 31, 1,100 units in finished goods inventory costing 65,000. Required: 1. Prepare a cost of goods sold statement for the month of March. 2. Calculate the number of coffee makers that were sold during March.Use the following information for Brief Exercises 2-32 and 2-33: Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers and sold 8,000 coffee makers during the month of March at a total cost of 612,500. Each coffee maker sold at a price of 100. Morning Smiles also incurred two types of selling costs: commissions equal to 5% of the sales price and other selling expense of 45,000. Administrative expense totaled 47,500. 2-32 Manufacturing Firm Income Statement Refer to the information for Morning Smiles Coffee Company on the previous page. Required: Prepare an income statement for Morning Smiles for the month of March.Use the following information for Brief Exercise: Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers and sold 8,000 coffee makers during the month of March at a total cost of 612,500. Each coffee maker sold at a price of 100. Morning Smiles also incurred two types of selling costs: commissions equal to 5% of the sales price and other selling expense of 45,000. Administrative expense totaled 47,500. 2-33 Income Statement Percentages Refer to the information for Morning Smiles Coffee Company on the previous page. Required: Prepare an income statement for Morning Smiles for the month of March and calculate the percentage of sales revenue represented by each line of the income statement. (Note: Round answers to one decimal place.)Service Organization Income Statement Healing Hands Massage Hut offers high-end, specialized massages and grooming services, including manicures, pedicures, facials, and full-body massages. Healing Hands is a new startup service organization that generates monthly sales of 200,000. As a startup organization, Healing Hands spends 5,000 a month on advertising in local newspapers and on social media sites. In addition, each month Healing Hands spends 100,000 to pay its team of highly specialized massage therapists, and 10,000 to a technology company (to handle the companys website, massage appointment scheduling activities, and customer communications). Further, the company incurs a 15,000 monthly expense to rent its hut space in a hip new retail market. Finally, Healing Hands incurs 20,000 of monthly administrative expenses. Required: 1. Prepare an income statement for Healing Hands for the past month. 2. Briefly explain why Healing Hands income statement has no line item for cost of goods sold.35EProducts versus Services, Cost Assignment Holmes Company produces wooden playhouses. When a customer orders a playhouse, it is delivered in pieces with detailed instructions on how to put it together. Some customers prefer that Holmes put the playhouse together. Therefore, these customers purchase the playhouse, as well as pay an additional fee for Holmes to install the playhouse. Holmes then pulls two workers off the production line and sends them to construct the playhouse on site. Required: 1. What two products does Holmes sell? Classify each one as a product or a service. 2. CONCEPTUAL CONNECTION Do you think Holmes assigns costs individually to each product or service? Why or why not? 3. CONCEPTUAL CONNECTION Describe the opportunity cost of the installation process.Assigning Costs to a Cost Object, Direct and Indirect Costs Hummer Company uses manufacturing cells to produce its products (a cell is a manufacturing unit dedicated to the production of subassemblies or products). One manufacturing cell produces small motors for lawn mowers. Suppose that the motor manufacturing cell is the cost object. Assume that all or a portion of the following costs must be assigned to the cell. a. Salary of cell supervisor b. Power to heat and cool the plant in which the cell is located c. Materials used to produce the motors d. Maintenance for the cells equipment (provided by the maintenance department) e. Labor used to produce motors f. Cafeteria that services the plants employees g. Depreciation on the plant h. Depreciation on equipment used to produce the motors i. Ordering costs for materials used in production j. Engineering support (provided by the engineering department) k. Cost of maintaining the plant and grounds l. Cost of the plants personnel office m. Property tax on the plant and land Required: Classify each of the costs as a direct cost or an indirect cost to the motor manufacturing cell.Total and Unit Product Cost Martinez Manufacturing Inc. showed the following costs for last month: Last month, 4,000 units were produced and sold. Required: 1. Classify each of the costs as product cost or period cost. 2. What is the total product cost for last month? 3. What is the unit product cost for last month?Cost Classification Loring Company incurred the following costs last year: Required: 1. Classify each of the costs using the following table format. Be sure to total the amounts in each column. Example: Direct materials, 216,000. 2. What was the total product cost for last year? 3. What was the total period cost for last year? 4. If 30,000 units were produced last year, what was the unit product cost?Classifying Cost of Production A factory manufactures jelly. The jars of jelly are packed six to a box, and the boxes are sold to grocery stores. The following types of cost were incurred: Required: Classify each of the costs as direct materials, direct labor, or overhead by using the following table. The row for Jars is filled in as an example.Use the following information for Exercises 2-41 and 2-42: Grin Company manufactures digital cameras. In January, Grin produced 4,000 cameras with the following costs: There were no beginning or ending inventories of WIP. Exercise 2-41 Product Cost in Total and Per Unit Refer to the information for Grin Company above. Required: 1. What was the total product cost in January? 2. What was the product cost per unit in January?Use the following information for Exercises 2-41 and 2-42: Grin Company manufactures digital cameras. In January, Grin produced 4,000 cameras with the following costs: There were no beginning or ending inventories of WIP. Exercise 2-42 Prime Cost and Conversion Cost Refer to the information for Grin Company above. Required: 1. What was the total prime cost in January? 2. What was the prime cost per unit in January? 3. What was the total conversion cost in January? 4. What was the conversion cost per unit in January?Direct Materials Used Hannah Banana Bakers makes chocolate chip cookies for cafe restaurants. In June, Hannah Banana purchased 15,500 of materials. On June 1, the materials inventory was 3,700. On June 30, 1,600 of materials remained in materials inventory. Required: 1. What is the cost of the direct materials used in production during June? 2. CONCEPTUAL CONNECTION Briefly explain why there is a difference between the cost of direct materials that were purchased during the month and the cost of direct materials that were used in production during the month.Cost of Goods Sold Allyson Ashley makes jet skis. During the year, Allyson manufactured 94,000 jet skis. Finished goods inventory had the following units: Required: 1. How many jet skis did Allyson sell during the year? 2. If each jet ski had a product cost of 2,200, what was the cost of goods sold last year?Use the following information for Exercises 2-45 and 2-46: In September, Lauren Ashley Company purchased materials costing 200,000 and incurred direct labor cost of 120,000. Overhead totaled 325,000 for the month. Information on inventories was as follows: Exercise 2-45 Direct Materials Used, Cost of Goods Manufactured Refer to the information for Lauren Ashley above. Required: 1. What was the cost of direct materials used in September? 2. What was the total manufacturing cost in September? 3. What was the cost of goods manufactured for September?Use the following information for Exercises 2-45 and 2-46: In September, Lauren Ashley Company purchased materials costing 200,000 and incurred direct labor cost of 120,000. Overhead totaled 325,000 for the month. Information on inventories was as follows: Exercise 2-46 Cost of Goods Sold Refer to the information for Lauren Ashely Company above. Required: What was the cost of goods sold for September?Use the following information for Exercises 2-47 through 2-49. Jasper Company provided the following information for last year: Last year, beginning and ending inventories of work in process and finished goods equaled zero. Exercise 2-47 Cost of Goods Sold, Sales Revenue, Income Statement Refer to the information for Jasper Company on the previous page. Required: Calculate the cost of goods sold for last year.Use the following information for Exercises 2-47 through 2-49. Jasper Company provided the following information for last year: Last year, beginning and ending inventories of work in process and finished goods equaled zero. Exercise 2-48 Income Statement Refer to the information for Jasper Company on the previous page. Required: 1. Calculate the sales revenue for last year. 2. Prepare an income statement for Jasper for last year.Use the following information for Exercises 2-47 through 2-49. Jasper Company provided the following information for last year: Last year, beginning and ending inventories of work in process and finished goods equaled zero. Exercise 2-49 Income Statement Refer to the information for Jasper Company on the previous page. Required: 1. Prepare an income statement for Jasper for last year. Calculate the percentage of sales for each line item on the income statement. (Note: Round percentages to the nearest tenth of a percent.) 2. CONCEPTUAL CONNECTION Briefly explain how a manager could use the income statement created for Requirement 1 to better control costs.Understanding the Relationship between Cost Flows, Inventories, and Cost of Goods Sold Ivano Company has collected cost accounting information for the following subset of items for Years 1 and 2. Required: Calculate the values of the missing Items a through e.Manufacturing, Cost Classification, Product Costs and Selling and Administrative Costs, Income Statement Pops Drive-Thru Burger Heaven produces and sells quarter-pound hamburgers. Each burger is wrapped and put in a burger bag, which also includes a serving of fries and a soft drink. The price for the burger bag is 3.50. During December, 10,000 burger bags were sold. The restaurant employs college students part time to cook and fill orders. There is one supervisor (the owner, John Peterson). Pops maintains a pool of part-time employees so that the number of employees scheduled can be adjusted to the changes in demand. Demand varies on a weekly as well as a monthly basis. A janitor is hired to clean the building early each morning. Cleaning supplies are used by the janitor, as well as the staff, to wipe counters, wash cooking equipment, and so on. The building is leased from a local real estate company; it has no seating capacity. All orders are filled on a drive-thru basis. The supervisor schedules work, opens the building, counts the cash, advertises, and is responsible for hiring and firing. The following costs were incurred during December: Pops accountant, Elena DeMarco, does the bookkeeping, handles payroll, and files all necessary taxes. She noted that there were no beginning or ending inventories of materials. To simplify accounting for costs, Elena assumed that all part-time employees are production employees and that John Petersons salary is selling and administrative expense. She further assumed that all rent and depreciation expense on the building and fixtures are part of product cost. Finally, she decided to put all taxes into one category, taxes, and to treat them as administrative expense. Required: 1. Classify each of the costs for Pops December operations using the table format given below. Be sure to total the amounts in each column. Example: Hamburger meat, 4,500. 2. Prepare an income statement for the month of December. 3. CONCEPTUAL CONNECTION Elena made some simplifying assumptions. Were those reasonable? Suppose a good case could be made that the portion of the employees time spent selling the burger bags was really a part of sales. In that case, would it be better to divide their time between production and selling? Should John Petersons time be divided between marketing and administrative duties? What difference (if any) would that make on the income statement?Cost Assignment, Direct Costs Harry Whipple, owner of an inkjet printer, has agreed to allow Mary and Natalie, two friends who are pursuing masters degrees, to print several papers for their graduate courses. However, he has imposed two conditions. First, they must supply their own paper. Second, they must pay Harry a fair amount for the usage of the ink cartridge. Harrys printer takes two types of cartridges, a black one and a color one that contains the inks necessary to print in color. Black replacement cartridges cost 25.50 each and print approximately 850 pages. The color cartridge replacement cost 31 and prints approximately 310 color pages. One ream of paper costs 2.50 and contains 500 sheets. Marys printing requirements are for 500 pages, while Natalies are for 1,000 pages. Required: 1. Assuming that both women write papers using text only (i.e., black ink), what is the total amount owed to Harry by Mary? By Natalie? 2. What is the total cost of printing (ink and paper) for Mary? For Natalie? 3. Now suppose that Natalie illustrates her writing with many large colorful pie charts and pictures and that about 20% of her total printing is primarily color. Mary uses no color illustrations. What is the total amount owed to Harry by Natalie? What is the total cost of printing (ink and paper) for Natalie?Cost of Direct Materials, Cost of Goods Manufactured, Cost of Goods Sold Bisby Company manufactures fishing rods. At the beginning of July, the following information was supplied by its accountant: During July, the direct labor cost was 43,500, raw materials purchases were 64,000, and the total overhead cost was 108,750. The inventories at the end of July were: Required: 1. What is the cost of the direct materials used in production during July? 2. What is the cost of goods manufactured for July? 3. What is the cost of goods sold for July?Preparation of Income Statement: Manufacturing Firm Laworld Inc. manufactures small camping tents. Last year, 200,000 tents were made and sold for 60 each. Each tent includes the following costs: The only selling expenses were a commission of 2 per unit sold and advertising totaling 100,000. Administrative expenses, all fixed, equaled 300,000. There were no beginning or ending finished goods inventories. There were no beginning or ending work-in-process inventories. Required: 1. Calculate the product cost for one tent. Calculate the total product cost for last year. 2. CONCEPTUAL CONNECTION Prepare an income statement for external users. Did you need to prepare a supporting statement of cost of goods manufactured? Explain. 3. CONCEPTUAL CONNECTION Suppose 200,000 tents were produced (and 200,000 sold) but that the company had a beginning finished goods inventory of 10,000 tents produced in the prior year at 40 per unit. The company follows a first-in, first-out policy for its inventory (meaning that the units produced first are sold first for purposes of cost flow). What effect does this have on the income statement? Show the new statement.Cost of Goods Manufactured, Cost of Goods Sold Hayward Company, a manufacturing firm, has supplied the following information from its accounting records for the month of May: Required: 1. Prepare a statement of cost of goods manufactured. 2. Prepare a statement of cost of goods sold.Cost Identification Following is a list of cost terms described in the chapter as well as a list of brief descriptive settings for each item. Cost terms: a. Opportunity cost b. Period cost c. Product cost d. Direct labor cost e. Selling cost f. Conversion cost g. Prime cost h. Direct materials cost i. Manufacturing overhead cost j. Administrative cost Settings: 1. Marcus Armstrong, manager of Timmins Optical, estimated that the cost of plastic, wages of the technician producing the lenses, and overhead totaled 30 per pair of single-vision lenses. 2. Linda was having a hard time deciding whether to return to school. She was concerned about the salary she would have to give up for the next 4 years. 3. Randy Harris is the finished goods warehouse manager for a medium-sized manufacturing firm. He is paid a salary of 90,000 per year. As he studied the financial statements prepared by the local certified public accounting firm, he wondered how his salary was treated. 4. Jamie Young is in charge of the legal department at company headquarters. Her salary is 95,000 per year. She reports to the chief executive officer. 5. All factory costs that are not classified as direct materials or direct labor. 6. The new product required machining, assembly, and painting. The design engineer asked the accounting department to estimate the labor cost of each of the three operations. The engineer supplied the estimated labor hours for each operation. 7. After obtaining the estimate of direct labor cost, the design engineer estimated the cost of the materials that would be used for the new product. 8. The design engineer totaled the costs of materials and direct labor for the new product. 9. The design engineer also estimated the cost of converting the raw materials into their final form. 10. The auditor for a soft drink bottling plant pointed out that the depreciation on the delivery trucks had been incorrectly assigned to product cost (through overhead). Accordingly, the depreciation charge was reallocated on the income statement. Required: Match the cost terms with the settings. More than one cost classification may be associated with each setting; however, select the setting that seems to fit the item best. When you are done, each cost term will be used just once.Income Statement, Cost of Services Provided, Service Attributes Berry Company is an architectural firm located in Detroit, Michigan. The company works with small and medium-size construction businesses to prepare building plans according to the clients contract. The following data are provided for the previous year: Required: 1. Calculate the cost of goods manufactured. 2. Calculate the cost of goods sold. 3. Assume that the average fee for a design is 2,100. Prepare an income statement for Berry. 4. CONCEPTUAL CONNECTION Refer to the cost of goods sold (calculated in Requirement 2). What is the dominant cost? Briefly explain why this cost is the dominant one for Berry.Cost of Goods Manufactured, Income Statement W. W. Phillips Company produced 4,000 leather recliners during the year. These recliners sell for 400 each. Phillips had 500 recliners in finished goods inventory at the beginning of the year. At the end of the year, there were 700 recliners in finished goods inventory. Phillips accounting records provide the following information: Required: 1. Prepare a statement of cost of goods manufactured. 2. Compute the average cost of producing one unit of product in the year. 3. Prepare an income statement for external users.Cost Definitions Luisa Giovanni is a student at New York University. To help pay her way through college, Luisa started a dog walking service. She has 12 client dogssix are walked on the first shift (6:30 A.M. and 5:00 P.M.), and six are walked on the second shift (7:30 A.M. and 6:00 P.M.). Last month, Luisa noted the following: 1. Purchase of three leashes at 10 each (she carries these with her in case a leash breaks during a walk). 2. Internet service cost of 40 a month. This enables her to keep in touch with the owners, bill them by email, and so on. 3. Dog treats of 50 to reward each dog at the end of each walk. 4. A heavy-duty raincoat and hat for 100. 5. Partway through the month, Luisas friend, Jason, offered her a chance to play a bit role in a movie that was shooting on location in New York City. The job paid 100 and would have required Luisa to be on location at 6:00 A.M. and to remain for 12 hours. Regretfully, Luisa turned it down. 6. The dog owners pay Luisa 250 per month per dog for her services. Required: 1. At the end of the month, how would Luisa classify her Internet payment of 40as a cost on the balance sheet or as an expense on the income statement? 2. CONCEPTUAL CONNECTION Which of the above items is an opportunity cost? Why? 3. What price is charged? What is Luisas total revenue for a month?Cost Identification and Analysis, Cost Assignment, Income Statement Melissa Vassar has decided to open a printing shop. She has secured two contracts. One is a 5-year contract to print a popular regional magazine. This contract calls for 5,000 copies each month. The second contract is a 3-year agreement to print tourist brochures for the state. The state tourist office requires 10,000 brochures per month. Melissa has rented a building for 1,400 per month. Her printing equipment was purchased for 40,000 and has a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to a period based on the hours of usage. Melissa has scheduled the delivery of the products so that two production runs are needed. In the first run, the equipment is prepared for the magazine printing. In the second run, the equipment is reconfigured for brochure printing. It takes twice as long to configure the equipment for the magazine setup as it does for the brochure setup. The total setup costs per month are 600. Insurance costs for the building and equipment are 140 per month. Power to operate the printing equipment is strongly related to machine usage. The printing equipment causes virtually all the power costs. Power costs will run 350 per month. Printing materials will cost 0.40 per copy for the magazine and 0.08 per copy for the brochure. Melissa will hire workers to run the presses as needed (part-time workers are easy to hire). She must pay 10 per hour. Each worker can produce 20 copies of the magazine per printing hour or 100 copies of the brochure. Distribution costs are 500 per month. Melissa will receive a salary of 1,500 per month. She is responsible for personnel, accounting, sales, and productionin effect, she is responsible for administering all aspects of the business. Required: 1. What are the total monthly manufacturing costs? 2. What are the total monthly prime costs? What are the total monthly prime costs for the regional magazine? For the brochure? 3. What are the total monthly conversion costs? Suppose Melissa wants to determine monthly conversion costs for each product. Assign monthly conversion costs to each product using direct tracing and driver tracing whenever possible. For those costs that cannot be assigned using a tracing approach, you may assign them using direct labor hours. 4. Melissa receives 1.80 per copy of the magazine and 0.45 per brochure. Prepare an income statement for the first month of operations.Cost Analysis, Income Statement Five to six times a year, Kicker puts on tent sales in various cities throughout Oklahoma and the surrounding states. The tent sales are designed to show Kicker customers new products, engender enthusiasm about those products, and sell soon to be out-of-date products at greatly reduced prices. Each tent sale lasts 1 day and requires parking lot space to set up the Kicker semitrailer, a couple of show cars, a disc jockey playing music, and a tent to sell Kicker merchandise, distribute brochures, and so on. Last year, the Austin tent sale was held in a far corner of the parking lot outside the city exhibition hall where the automotive show was in progress. Because most customers were interested more in the new model cars than in the refurbishment of their current cars, foot traffic was low. In addition, customers did not want to carry speakers and amplifiers all the way back to where they had originally parked. Total direct costs for this tent sale were 14,300. Direct costs included gasoline and fuel for three pickup trucks and the semitrailer; wages and per diem for the five Kicker personnel who traveled to the show, rent on the parking lot space, and depreciation on the semitrailer, pickups, tent, tables (in tent), sound equipment, and the like. Revenue was 20,000. Cost of goods sold for the speakers was 7,000. Required: 1. CONCEPTUAL CONNECTION How do you suppose Kicker accounts for the costs of the tent sales? What income statement items are affected by the tent sales? 2. CONCEPTUAL CONNECTION What was the profit (loss) from the Austin tent sale? What do you think Kicker might do to make it more profitable in the future?Cost Classification, Income Statement Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateways work comes from contracts with city and state agencies in Nebraska. The companys sales volume averages 3 million, and profits vary between 0 and 10% of sales. Sales and profits have been somewhat below average for the past 3 years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids. Jack believes that Gateways current accounting system is deficient. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs of laying pipe, obtaining contracts, and administering the company. Yet all bids are based on the costs of laying pipe. With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of 165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own 114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Required: 1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day). 2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using equipment hours. What is the cost per equipment hour for these traceable costs?Cost Information and Ethical Behavior, Service Organization Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a 15,000 personal loan to pay offjust when his oldest son is starting college. Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first 2 years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit. Jean: Leroy, Im at a critical point in my business venture. If I can win the bid for the states advertising dollars, Ill be set. Winning the bid will bring 600,000 to 700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another 200,000 to 300,000 of new business. Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. Its a competitive business, though. As new as you are, I doubt that youll have much chance of winning. Jean: Youre forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governors campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work. Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, youll have to get support from Atlanta. You could take a lot of heat. Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that Im not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and Ill make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of 15,000. On top of that, Ill increase your annual salary by 20%. That should solve most of your financial difficulties. After all, we have been friends since day oneand what are friends for? Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide? Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firms bid. Required: 1. What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroys company would say about this situation? 2. What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?1DQWhat is a driver? Give an example of a cost and its corresponding output measure or driver.Suppose a company finds that shipping cost is 3,560 each month plus 6.70 per package shipped. What is the cost formula for monthly shipping cost? Identify the independent variable, the dependent variable, the fixed cost per month, and the variable rate.Some firms assign mixed costs to either the fixed or variable cost categories without using any formal methodology to separate them. Explain how this practice can be defended.Explain the difference between committed and discretionary fixed costs. Give examples of each.Explain why the concept of relevant range is important when dealing with step costs.Why do mixed costs pose a problem when it comes to classifying costs into fixed and variable categories?Describe the cost formula for a strictly fixed cost such as depreciation of 15,000 per year.Describe the cost formula for a strictly variable cost such as electrical power cost of 1.15 per machine hour (i.e., every hour the machinery is run, electrical power cost goes up by 1.15).What is the scattergraph method, and why is it used? Why is a scattergraph a good first step in separating mixed costs into their fixed and variable components?Describe how the scattergraph method breaks out the fixed and variable costs from a mixed cost. Now describe how the high-low method works. How do the two methods differ?What are the advantages of the scattergraph method over the high-low method? The high-low method over the scattergraph method?13DQWhat is meant by the best-fitting line?What is the difference between the unit cost of a product under absorption costing and variable costing?16DQ(Appendix 3A) Explain the meaning of the coefficient of determination.A factor that causes or leads to a change in a cost or activity is a(n) a. slope. b. intercept. c. driver. d. variable term. e. cost object.Which of the following would probably be a variable cost in a soda bottling plant? a. Direct labor b. Bottles c. Carbonated water d. Power to run the bottling machine e. All of these.3MCQIn the cost formula, the term 128,000,000 a. is the total variable cost. b. is the dependent variable. c. is the variable rate. d. is the total fixed cost. e. cannot be determined from the above formula. Use the following information for Multiple-Choice Questions 3-4 through 3-7: The following cost formula was developed by using monthly data for a hospital. Total Cost = 128,000,000 + (12,000 Number of Patient Days)In the cost formula, the term 12,000 a. is the variable rate. b. is the dependent variable. c. is the independent variable. d. is the intercept. e. cannot be determined from the above formula. Use the following information for Multiple-Choice Questions 3-4 through 3-7: The following cost formula was developed by using monthly data for a hospital. Total Cost = 128,000,000 + (12,000 Number of Patient Days)6MCQ7MCQThe following cost formula for total purchasing cost in a factory was developed using monthly data. TotalCost=235,000+(75NumberofPurchaseOrders) Next month, 8,000 purchase orders are predicted. The total cost predicted for the purchasing department next month a. is 8,000. b. is 235,000. c. is 600,000. d. is 835,000. e. cannot be determined from the above formula.An advantage of the high-low method is that it a. is subjective. b. is objective. c. is the most accurate method. d. removes outliers. e. is descriptive of nonlinear data.10MCQ11MCQ12MCQThe total cost for monthly supervisory cost in a factory is 4,500 regardless of how many hours the supervisor works or the quantity of output achieved. This cost a. is strictly variable. b. is strictly fixed. c. is a mixed cost. d. is a step cost. e. cannot be determined from this information.Yates Company shows the following unit costs for its product: Yates started the year with 8,000 units in inventory, produced 50,000 units during the year, and sold 55,000 units. The value of ending inventory is a. greater under variable costing than absorption costing. b. greater under absorption costing than variable costing. c. the same under both variable and absorption costing. d. There is no ending inventory. e. This situation cannot happen.(Appendix 3A) In the method of least squares, the coefficient that tells the percentage of variation in the dependent variable that is explained by the independent variable is a. the intercept term. b. the x-coefficient. c. the coefficient of correlation. d. the coefficient of determination. e. None of these.Creating and Using a Cost Formula Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of 15,000 on its plant equipment. Also, each drive requires materials and manufacturing overhead resources. On average, the company uses 10,000 ounces of materials to manufacture 5,000 flash drives per month. Each ounce of material costs 3.00. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs 22,500 of variable manufacturing overhead resources to produce 5,000 flash drives per month. Required: 1. Create a formula for the monthly cost of flash drives for Big Thumbs. 2. If the department expects to manufacture 6,000 flash drives next month, what is the expected fixed cost (assuming that 6,000 units is within the companys current relevant range)? Total variable cost? Total manufacturing cost (i.e., both fixed and variable)?Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function Refer to the information for Pizza Vesuvio on the previous page. Pizza Vesuvios controller wants to calculate the fixed and variable costs associated with labor used in the restaurant. Required: Using the high-low method, calculate the fixed cost of labor, calculate the variable rate per employee hour, and construct the cost formula for total labor cost. Use the following information for Brief Exercises 3-17 through 3-20: Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for Budgeted Output Refer to the information for Pizza Vesuvio on the previous page. Assume that this information was used to construct the following formula for monthly labor cost. TotalLaborCost=5,237+(7.40EmployeeHours) Required: Assume that 675 employee hours are budgeted for the month of September. Use the total labor cost formula for the following calculations: 1. Calculate total variable labor cost for September. 2. Calculate total labor cost for September.Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period That Differs from the Data Period Refer to the information for Pizza Vesuvio on the previous page. Assume that this information was used to construct the following formula for monthly labor cost. TotalLaborCost=5,237+(7.40EmployeeHours) Required: Assume that 4,000 employee hours are budgeted for the coming year. Use the total labor cost formula to make the following calculations: 1. Calculate total variable labor cost for the year. 2. Calculate total fixed labor cost for the year. 3. Calculate total labor cost for the coming year. Use the following information for Brief Exercises 3-17 through 3-20: Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:Using Regression to Calculate Fixed Cost, Calculate the Variable Rate, Construct a Cost Formula, and Determine Budgeted Cost Refer to the information for Pizza Vesuvio on the previous page. Coefficients shown by a regression program for Pizza Vesuvios data are: Required: Use the results of regression to make the following calculations: 1. Calculate the fixed cost of labor and the variable rate per employee hour. 2. Construct the cost formula for total labor cost. 3. Calculate the budgeted cost for next month, assuming that 675 employee hours are budgeted. (Note: Round answers to the nearest dollar.) Use the following information for Brief Exercises 3-17 through 3-20: Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:Inventory Valuation under Absorption Costing Refer to the data for Judson Company above. Required: 1. How many units are in ending inventory? 2. Using absorption costing, calculate the per-unit product cost. 3. What is the value of ending inventory under absorption costing? Use the following information for Brief Exercises 3-21 and 3-22: During the most recent year, Judson Company had the following data associated with the product it makes:Inventory Valuation under Variable Costing Refer to the data for Judson Company above. Required: 1. How many units are in ending inventory? 2. Using variable costing, calculate the per-unit product cost. 3. What is the value of ending inventory under variable costing? Use the following information for Brief Exercises 3-21 and 3-22: During the most recent year, Judson Company had the following data associated with the product it makes:Absorption-Costing Income Statement Refer to the data for Osterman Company above. Required: 1. Calculate the cost of goods sold under absorption costing. 2. Prepare an income statement using absorption costing. Use the following information for Brief Exercises 3-23 and 3-24: During the most recent year, Osterman Company had the following data:Variable-Costing Income Statement Refer to the data for Osterman Company on the previous page. Required: 1. Calculate the cost of goods sold under variable costing. 2. Prepare an income statement using variable costing. Use the following information for Brief Exercises 3-23 and 3-24: During the most recent year, Osterman Company had the following data:Creating and Using a Cost Formula Kleenaire Motors manufactures hybrid sports utility vehicles (SUVs). Kleenaire incurs monthly depreciation costs of 10,000,000 on its highly automated plant machinery and warehousing facility. Also, each SUV requires materials and manufacturing overhead resources. On average, the company uses 75,000,000 pounds of steel to manufacture 50,000 SUVs per month. Each pound of steel costs 0.20. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs 200,000,000 of variable manufacturing overhead resources to produce 50,000 SUVs per month. Required: 1. Create a formula for the monthly cost of SUVs for Kleenaire. 2. If Kleenaire expects to manufacture 55,000 SUVs next month, what is the expected fixed cost (assuming that 55,000 units is within the companys current relevant range)? Total variable cost? Total manufacturing cost (i.e., both fixed and variable)?Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function Refer to the information for Speedy Petes above. Speedy Petes controller wants to calculate the fixed and variable costs associated with its cutting-edge delivery service. Required: Using the high-low method, calculate the fixed cost of deliveries, calculate the variable rate per delivery, and construct the cost formula for total delivery cost. Use the following information for Brief Exercises 3-26 through 3-29: Speedy Petes is a small start-up company that delivers high-end coffee drinks to large metropolitan office buildings via a cutting-edge motorized coffee cart to compete with other premium coffee shops. Data for the past 8 months were collected as follows:Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for Budgeted Output Refer to the information for Speedy Petes above. Assume that this information was used to construct the following formula for monthly delivery cost. TotalDeliveryCost=41,850+(12.00NumberofDeliveries) Required: Assume that 3,000 deliveries are budgeted for the following month of January. Use the total delivery cost formula for the following calculations: 1. Calculate total variable delivery cost for January. 2. Calculate total delivery cost for January.Brief Exercise 3-28 Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period that Differs from the Data Period Refer to the information for Speedy Petes on the previous page. Assume that this information was used to construct the following formula for monthly delivery cost. TotalDeliveryCost=41,850+(12.00NumberofDeliveries) Required: Assume that 3,000 deliveries are budgeted for the coming year. Use the total delivery cost formula to make the following calculations: 1. Calculate total variable delivery cost for the coming year. 2. Calculate total fixed delivery cost for the year. 3. Calculate total delivery cost for the year. Use the following information for Brief Exercises 3-26 through 3-29: Speedy Petes is a small start-up company that delivers high-end coffee drinks to large metropolitan office buildings via a cutting-edge motorized coffee cart to compete with other premium coffee shops. Data for the past 8 months were collected as follows:Using Regression to Calculate Fixed Cost, Calculate the Variable Rate, Construct a Cost Formula, and Determine Budgeted Cost Refer to the information for Speedy Petes on the previous page. Coefficients shown by a regression program for Speedy Petes data are: Required: Use the results of regression to make the following calculations: 1. Calculate the fixed cost of deliveries and the variable rate per delivery. 2. Construct the cost formula for total delivery cost. 3. Calculate the budgeted cost for next month, assuming that 3,000 deliveries are budgeted. (Note: Round answers to the nearest dollar.) Use the following information for Brief Exercises 3-26 through 3-29: Speedy Petes is a small start-up company that delivers high-end coffee drinks to large metropolitan office buildings via a cutting-edge motorized coffee cart to compete with other premium coffee shops. Data for the past 8 months were collected as follows:Inventory Valuation under Absorption Costing Refer to the data for Pelham Company on the previous page. Required: 1. How many units are in ending inventory? 2. Using absorption costing, calculate the per-unit product cost. 3. What is the value of ending inventory under absorption costing? Use the following information for Brief Exercises 3-30 and 3-31: During the most recent year, Pelham Company had the following data associated with the product it makes:Inventory Valuation under Variable Costing Refer to the data for Pelham Company on the previous page. Required: 1. How many units are in ending inventory? 2. Using variable costing, calculate the per-unit product cost. 3. What is the value of ending inventory under variable costing? Use the following information for Brief Exercises 3-30 and 3-31: During the most recent year, Pelham Company had the following data associated with the product it makes:Brief Exercise 3-32 Absorption-Costing Income Statement Refer to the data for Beyta Company above. Required: 1. Calculate the cost of goods sold under absorption costing. 2. Prepare an income statement using absorption costing. Use the following information for Brief Exercises 3-32 and 3-33: During the most recent year, Beyta Company had the following data:Brief Exercise 3-33 Variable-Costing Income Statement Refer to the data for Beyta Company above. Required: 1. Calculate the cost of goods sold under variable costing. 2. Prepare an income statement using variable costing. Use the following information for Brief Exercises 3-32 and 3-33: During the most recent year, Beyta Company had the following data:Variable and Fixed Costs What follows are a number of resources that are used by a manufacturer of futons. Assume that the output measure or cost driver is the number of futons produced. All direct labor is paid on an hourly basis, and hours worked can be easily changed by management. All other factory workers are salaried. a. Power to operate a drill (to drill holes in the wooden frames of the futons) b. Cloth to cover the futon mattress c. Salary of the factory receptionist d. Cost of food and decorations for the annual Fourth of July party for all factory employees e. Fuel for a forklift used to move materials in a factory f. Depreciation on the factory g. Depreciation on a forklift used to move partially completed goods h. Wages paid to workers who assemble the futon frame i. Wages paid to workers who maintain the factory equipment j. Cloth rags used to wipe the excess stain off the wooden frames Required: Classify the resource costs as variable or fixed.Cost Behavior, Classification Smith Concrete Company owns enough ready-mix trucks to deliver up to 100,000 cubic yards of concrete per year (considering each trucks capacity, weather, and distance to each job). Total truck depreciation is 200,000 per year. Raw materials (cement, gravel, and so on) cost about 25 per cubic yard of cement. Required: 1. Prepare a graph for truck depreciation. Use the vertical axis for depreciation cost and the horizontal axis for cubic yards of cement. 2. Prepare a graph for raw materials. Use the vertical axis for cost and the horizontal axis for cubic yards of cement. 3. Assume that the normal operating range for the company is 90,000 to 96,000 cubic yards per year. Classify truck depreciation and raw materials as variable or fixed costs. 4. CONCEPTUAL CONNECTION Briefly describe actions that Smith management could take to reduce the truck depreciation cost from year to year. 5. CONCEPTUAL CONNECTION Briefly describe actions that Smith management could take to reduce the total raw materials cost from year to year.36E37E38EStep Costs, Relevant Range Bellati Inc. produces large industrial machinery. Bellati has a machining department and a group of direct laborers called machinists. Each machinist can machine up to 500 units per year. Bellati also hires supervisors to develop machine specification plans and oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee, at most, three machinists. Bellatis accounting and production history shows the following relationships between number of units produced and the annual costs of supervision and materials handling (by machinists): Required: 1. Prepare a graph that illustrates the relationship between direct labor cost and number of units produced in the machining department. (Let cost of direct labor be the vertical axis and number of units be the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost? 2. Prepare a graph that illustrates the relationship between the cost of supervision and the number of units produced. (Let cost of supervision be the vertical axis and number of units be the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost? 3. Suppose that the normal range of production is between 1,400 and 1,500 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 500 units. What is the increase in the cost of direct labor? Cost of supervision?Matching Cost Behavior Descriptions to Cost Behavior Graphs Select the graph (A through L) that best matches the numbered (1 through 7) italicized descriptions of various cost behavior. For each graph, the vertical (y) axis represents total dollars of cost, and the horizontal (x) axis represents output units during the period. The graphs may be used more than once. 1. The cost of depreciation. The asset being depreciated is a large piece of production machinery equipment where the straight-line depreciation method is used. letter _________ 2. The cost of operating a forklift. The forklift is used to move work-in-process inventory in groups of 100 units across the factory floor. letter _________ 3. The cost of direct materials. The first 2,000 pounds of direct materials are free because they are donated by the local city government. After that, the direct materials cost consists of a per-unit amount that decreases after a threshold of 2,500 total pounds is reached. letter _________ 4. The cost of inspecting finished goods inventory. Each unit is inspected by a quality expert who is paid the same amount for each unit inspected. letter _________ 5. The cost of product shipping for all output shipped in the period. The shipping cost per unit decreases with each unit shipped up to a certain number of units, at which time the shipping cost per unit remains constant. letter _________ 6. The cost of compliance with Environmental Protection Agency (EPA) regulations. An electric car plant manufactures car batteries. Part of the manufacturing process involves the emission of toxic chemicals into the environment, which is regulated by the EPA in the form of a fee assessed on a per-unit manufactured basis. The per-unit cost of complying with these regulations increases with every fifth battery produced. letter ______ 7. The cost of customer energy consumption. The local electric utility company uses a pricing system designed to encourage customers to conserve energy usage. Therefore, the rate per kilowatt-hour that is charged to customers increases with each hour the customer consumes. letter _______Examine the graphs in Exercise 3-40. Required: As explained in the chapter, cost behavior patterns can be described as fixed, variable, semi-variable, mixed, or step function (i.e., semi-fixed) in nature. Explain the exact type of cost behavior pattern represented by each of the cost curves shown in graphs A through L. Note that some of the graphs might represent a combination of multiple cost behavior patterns.42E43EHigh-Low Method Refer to the information for Luisa Crimini above. Required: 1. Which month represents the high point? The low point? 2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. 3. Using your answers to Requirement 2, write the cost formula for tanning services. 4. Calculate the total predicted cost of tanning services for September for 2,500 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? 5. CONCEPTUAL CONNECTION Identify and briefly explain any additional issues that Luisa might be wise to consider when using the high-low method to estimate the costs of her tanning salon.Scattergraph Method Refer to the information for Luisa Crimini above. Required: CONCEPTUAL CONNECTION Prepare a scattergraph based on Luisas data. Use monthly cost for the vertical axis and number of appointments for the horizontal axis. Based on an examination of the scattergraph, does there appear to be a linear relationship between the cost of tanning services and the number of appointments? Use the following information for Exercises 3-44 through 3-46: Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:Method of Least Squares Refer to the information for Luisa Crimini on the previous page. Required: 1. Using a computer spreadsheet program such as Excel, run a regression on these data. Based on the regression output, write the cost formula for tanning. (Note: Round the fixed cost to the nearest dollar and the variable rate to the nearest cent.) 2. Using the formula computed in Requirement 1, what is the predicted cost of tanning services for September for 2,500 appointments? Use the following information for Exercises 3-44 through 3-46: Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:Use the following information for Exercises 3-47 and 3-48: During the past year, the high and low use of three different resources for Fly High Airlines occurred in July and April. The resources are airplane depreciation, fuel, and airplane maintenance. The number of airplane flight hours is the driver. The total costs of the three resources and the related number of airplane flight hours are as follows: Exercises 3-47 High-Low Method, Cost Formulas Refer to the information for Fly High Airlines above. Required: Use the high-low method to answer the following questions. 1. What is the variable rate for airplane depreciation? The fixed cost? 2. What is the cost formula for airplane depreciation? 3. What is the variable rate for fuel? The fixed cost? 4. What is the cost formula for fuel? 5. What is the variable rate for airplane maintenance? The fixed cost? 6. What is the cost formula for airplane maintenance? 7. Using the three cost formulas that you developed, predict the cost of each resource in a month with 36,000 airplane flight hours.Use the following information for Exercises 3-47 and 3-48: During the past year, the high and low use of three different resources for Fly High Airlines occurred in July and April. The resources are airplane depreciation, fuel, and airplane maintenance. The number of airplane flight hours is the driver. The total costs of the three resources and the related number of airplane flight hours are as follows: Exercises 3-48 Changing the Cost Formula for a Month to the Cost Formula for a Year Refer to the information for Fly High Airlines above. Required: 1. Develop annual cost formulas for airplane depreciation, fuel, and airplane maintenance. 2. Using the three annual cost formulas that you developed, predict the cost of each resource in a year with 480,000 airline flight hours.Method of Least Squares, Developing and Using the Cost Formula The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received: The cost driver used was number of parts inspected. Required: 1. What is the cost formula? 2. Using the cost formula from Requirement 1, identify each of the following: independent variable, dependent variable, variable rate, and fixed cost per month. 3. Using the cost formula, predict the cost of receiving for a month in which 6,800 parts are inspected.The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received: The cost driver used was number of parts inspected. Method of Least Squares, Budgeted Time Period Is Different from Time Period Used to Generate Results Refer to the company information in Exercise 3-49. Required: 1. What is the cost formula for a year? 2. Using the cost formula from Requirement 1, predict the cost of parts inspection for a year in which 70,000 parts are inspected.Identifying the Parts of the Cost Formula; Calculating Monthly, Quarterly, and Yearly Costs Using a Cost Formula Based on Monthly Data Gordon Companys controller, Eric Junior, estimated the following formula, based on monthly data, for overhead cost: OverheadCost=150,000+(52DirectLabourHours) Required: 1. Link each term in column A to the corresponding term in column B. 2. If next months budgeted direct labor hours equal 8,000, what is the budgeted overhead cost? 3. If next quarters budgeted direct labor hours equal 23,000, what is the budgeted overhead cost? 4. If next years budgeted direct labor hours equal 99,000, what is the budgeted overhead cost?Inventory Valuation under Absorption Costing Amiens Company produced 20,000 units during its first year of operations and sold 18,900 at 17 per unit. The company chose practical activityat 20,000 unitsto compute its predetermined overhead rate. Manufacturing costs are as follows: Required: 1. Calculate the unit cost for each of these four costs. 2. Calculate the cost of one unit of product under absorption costing. 3. How many units are in ending inventory? 4. Calculate the cost of ending inventory under absorption costing.Inventory Valuation under Variable Costing Lane Company produced 50,000 units during its first year of operations and sold 47,300 at 12 per unit. The company chose practical activityat 50,000 unitsto compute its predetermined overhead rate. Manufacturing costs are as follows: Required: 1. Calculate the cost of one unit of product under variable costing. 2. Calculate the cost of ending inventory under variable costing.Income Statements under Absorption and Variable Costing In the coming year, Kalling Company expects to sell 28,700 units at 32 each. Kallings controller provided the following information for the coming year: Required: 1. Calculate the cost of one unit of product under absorption costing. 2. Calculate the cost of one unit of product under variable costing. 3. Calculate operating income under absorption costing for next year. 4. Calculate operating income under variable costing for next year.(Appendix 3A) Method of Least Squares Using Computer Spreadsheet Program The controller for Beckham Company believes that the number of direct labor hours is associated with overhead cost. He collected the following data on the number of direct labor hours and associated factory overhead cost for the months of January through August. Required: 1. Using a computer spreadsheet program such as Excel, run a regression on these data. Print out your results. 2. Using your results from Requirement 1, write the cost formula for overhead cost. (Note: Round the fixed cost to the nearest dollar and the variable rate to the nearest cent.) 3. CONCEPTUAL CONNECTION What is R2 based on your results? Do you think that the number of direct labor hours is a good predictor of factory overhead cost? 4. Assuming that expected September direct labor hours are 700, what is expected factory overhead cost using the cost formula in Requirement 2?(Appendix 3A) Method of Least Squares Using Computer Spreadsheet Program Susan Lewis, owner of a florist shop, is interested in predicting the cost of delivering floral arrangements. She collected monthly data on the number of deliveries and the total monthly delivery cost (depreciation on the van, wages of the driver, and fuel) for the past year. Required: 1. Using a computer spreadsheet program such as Excel, run a regression on these data. Print out your results. 2. Using your results from Requirement 1, write the cost formula for delivery cost. (Note: Round the fixed cost to the nearest dollar and the variable rate to the nearest cent.) 3. CONCEPTUAL CONNECTION What is R2 based on your results? Do you think that the number of direct labor hours is a good predictor of delivery cost? 4. Using the cost formula in Requirement 2, what would predicted delivery cost be for a month with 300 deliveries?Identifying Fixed, Variable, Mixed, and Step Costs Consider each of the following independent situations: a. A computer service agreement in which a company pays 150 per month and 15 per hour of technical time b. Fuel cost of the companys fleet of motor vehicles c. The cost of beer for a bar d. The cost of computer printers and copiers at your college e. Rent for a dental office f. The salary of a receptionist in a law firm g. The wages of counter help in a fast-food restaurant h. The salaries of dental hygienists in a three-dentist office. One hygienist can take care of 120 cleanings per month. i. Electricity cost which includes a 15 per month billing charge and an additional amount depending on the number of kilowatt-hours used Required: 1. For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost. (Hint: First, consider what the driver or output measure is. If additional assumptions are necessary to support your cost type decision, be sure to write them down.) Example: Raw materials used in productionVariable cost 2. CONCEPTUAL CONNECTION Change your assumption(s) for each situation so that the cost type changes to a different cost type. List the new cost type and the changed assumption(s) that gave rise to it. Example: Raw materials used in production. Changed assumptionthe materials are difficult to obtain, and a years worth must be contracted for in advance. Now, this is a fixed cost. (This is the case with diamond sales by DeBeers Inc. to its sightholders. See the following website for information: www.keyguide.net/sightholders/.)Identifying Use of the High-Low, Scattergraph, and Least Squares Methods Consider each of the following independent situations: a. Shaniqua Boyer just started her new job as controller for St. Matthias General Hospital. She wants to get a feel for the cost behavior of various departments of the hospital. Shaniqua first looks at the radiology department. She has annual data on total cost and the number of procedures that have been run for the past 15 years. However, she knows that the department upgraded its equipment substantially 2 years ago and is doing a wider variety of tests. So, Shaniqua decides to use data for just the past 2 years. b. Francis Hidalgo is a summer intern in the accounting department of a manufacturing firm. His boss assigned him a special project to determine the cost of manufacturing a special order. Francis needs information on variable and fixed overhead, so he gathers monthly data on overhead cost and machine hours for the past 60 months and enters them into his personal computer. A few keystrokes later, he has information on fixed and variable overhead costs. c. Ron Wickstead sighed and studied his computer printout again. The results made no sense to him. He seemed to recall that sometimes it helped to visualize the cost relationships. He reached for some graph paper and a pencil. d. Lois March had hoped that she could find information on the actual cost of promoting new products. Unfortunately, she had spent the weekend going through the files and was only able to find data on the total cost of the sales department by month for the past 3 years. She was also able to figure out the number of new product launches by month for the same time period. Now, she had just 15 minutes before a staff meeting in which she needed to give the vice president of sales an expected cost of the average new product lauch. A light bulb went off in her head, and she reached for paper, pencil, and a calculator. Required: Determine which of the following cost separation methods in being used: the high-low method, the scattergraph method, or the method of least squares.Identifying Variable Costs, Committed Fixed Costs, and Discretionary Fixed Costs Required: Classify each of the following costs for a jeans manufacturing company as a variable cost, committed fixed cost, or discretionary fixed cost. a. The cost of buttons b. The cost to lease warehouse space for completed jeansthe lease contract runs for 2 years at 5,000 per year c. The salary of a summer intern d. The cost of landscaping and mowing the grassthe contract with a local mowing company runs from month to month e. Advertising in a national magazine for teenage girls f. Electricity to run the sewing machines g. Oil and spare needles for the sewing machines h. Quality training for employeestypically given for 4 hours at a time, every 6 months i. Food and beverages for the company Fourth of July picnic j. Natural gas to heat the factory during the winterScattergraph, High-Low Method, and Predicting Cost for a Different Time Period from the One Used to Develop a Cost Formula Refer to the information for Farnsworth Company on the previous page. Required: 1. Prepare a scattergraph based on the 10 months of data. Does the relationship appear to be linear? 2. Using the high-low method, prepare a cost formula for the receiving activity. Using this formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? 3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated? Use the following information for Problems 3-60 and 3-61: Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controllers department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:Method of Least Squares, Predicting Cost for Different Time Periods from the One Used to Develop a Cost Formula Refer to the information for Farnsworth Company on the previous page. However, assume that Tracy has used the method of least squares on the receiving data and has gotten the following results: Required: 1. Using the results from the method of least squares, prepare a cost formula for the receiving activity. 2. Using the formula from Requirement 1, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? (Note: Round your answer to the nearest dollar.) 3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated?Cost Behavior, High-Low Method, Pricing Decision Fonseca, Ruiz, and Dunn is a large, local accounting firm located in a southwestern city. Carlos Ruiz, one of the firms founders, appreciates the success his firm has enjoyed and wants to give something back to his community. He believes that an inexpensive accounting services clinic could provide basic accounting services for small businesses located in the barrio. He wants to price the services at cost. Since the clinic is brand new, it has no experience to go on. Carlos decided to operate the clinic for 2 months before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic adopted an hourly charge of 25, half the amount charged by Fonseca, Ruiz, and Dunn for professional services. The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional service. During February, the activity was 150 hours. Costs for these two levels of activity usage are as follows: Required: 1. Classify each cost as fixed, variable, or mixed, using hours of professional service as the activity driver. 2. Use the high-low method to separate the mixed costs into their fixed and variable components. (Note: Round variable rates to two decimal places and fixed amounts to the nearest dollar.) 3. Luz Mondragon, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per professional hour ? How much of this charge is variable? How much is fixed? (Note: Round answers to two decimal places.) 4. CONCEPTUAL CONNECTION Suppose the accounting center averages 170 professional hours per month. How much would need to be charged per hour for the center to cover its costs ? Explain why the per-hour charge decreased as the activity output increased. (Note: Round answers to two decimal places.)63PVariable and Fixed Costs, Cost Formula, High-Low Method Li Ming Yuan and Tiffany Shaden are the department heads for the accounting department and human resources department, respectively, at a large textile firm in the southern United States. They have just returned from an executive meeting at which the necessity of cutting costs and gaining efficiency has been stressed. After talking with Tiffany and some of her staff members, as well as his own staff members, Li Ming discovered that there were a number of costs associated with the claims processing activity. These costs included the salaries of the two paralegals who worked full time on claims processing, the salary of the accountant who cut the checks, the cost of claims forms, checks, envelopes, and postage, and depreciation on the office equipment dedicated to the processing. Some of the paralegals time appears to vary with the routine processing of uncontested claims, but considerable time also appears to be spent on the claims that have incomplete documentation or are contested. The accountants time appears to vary with the number of claims processed. Li Ming was able to separate the costs of processing claims from the costs of running the departments of accounting and human resources. He gathered the data on claims processing cost and the number of claims processed per month for the past 6 months. These data are as follows: Required: 1. Classify the claims processing costs that Li Ming identified as variable and fixed. 2. What is the independent variable? The dependent variable? 3. Use the high-low method to find the fixed cost per month and the variable rate. What is the cost formula? 4. CONCEPTUAL CONNECTION Suppose that an outside company bids on the claims processing business. The bid price is 4.60 per claim. If Tiffany expects 75,600 claims next year, should she outsource the claims processing or continue to do it in-house?Cost Separation About 8 years ago, Kicker faced the problem of rapidly increasing costs associated with workplace accidents. The costs included the following: A safety program was implemented with the following features: hiring a safety director, new employee orientation, stretching required four times a day, and systematic monitoring of adherence to the program by directors and supervisors. A year later, the indicators were as follows: Required: 1. CONCEPTUAL CONNECTION Discuss the safety-related costs listed. Are they variable or fixed with respect to speakers sold? With respect to other independent variables (describe)? 2. CONCEPTUAL CONNECTION Did the safety program pay for itself? Discuss your reasoning.Variable-Costing and Absorption-Costing Income Borques Company produces and sells wooden pallets that are used for moving and stacking materials. The operating costs for the past year were as follows: During the year, Borques produced 200,000 wooden pallets and sold 204,300 at 9 each. Borques had 8,200 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing. Required: 1. What is the per-unit inventory cost that is acceptable for reporting on Borquess balance sheet at the end of the year ? How many units are in ending inventory? What is the total cost of ending inventory? 2. Calculate absorption-costing operating income. 3. CONCEPTUAL CONNECTION What would the per-unit inventory cost be under variable costing? Does this differ from the unit cost computed in Requirement 1? Why? 4. Calculate variable-costing operating income. 5. Suppose that Borques Company had sold 196,700 pallets during the year. What would absorption-costing operating income have been? Variable-costing operating income?Refer to the information for Farnsworth Company (p. 139) for the first 10 months of data on receiving orders and receiving cost. Now suppose that Tracy has gathered 2 more months of data: Note: For the following requirements, round the intercept terms to the nearest dollar, round the variable rates to the nearest cent, and R2 to two decimal places. Required: 1. Run two regressions using a computer spreadsheet program such as Excel. First, use the method of least squares on the first 10 months of data. Then, use the method of least squares on all 12 months of data. Write down the results for the intercept, slope, and R2 for each regression. Compare the results. 2. CONCEPTUAL CONNECTION Prepare a scattergraph using all 12 months of data. Do any points appear to be outliers? Suppose Tracy has learned that the factory suffered severe storm damage during Month 11 that required extensive repairs to the receiving areaincluding major repairs on a forklift. These expenses, included in Month 11 receiving costs, are not expected to recur. What step might Tracy, using her judgment, take to amend the results from the method of least squares? 3. CONCEPTUAL CONNECTION Rerun the method of least squares, using all the data except for Month 11. (You should now have 11 months of data.) Prepare a cost formula for receiving based on these results, and calculate the predicted receiving cost for a month with 1,450 receiving orders. Discuss the results from this regression versus those from the regression for 12 months of data.(Appendix 3A) Scattergraph, High-Low Method, Method of Least Squares, Use of Judgment The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed. The costs must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past 8 quarters have been collected: Note: For the following requirements, round the fixed cost to the nearest dollar, round the variable rates to three decimal places, and the R2 to two decimal places. Required: 1. Prepare a scattergraph by plotting power costs against machine hours. Does the scatter-graph show a linear relationship between machine hours and power cost? 2. Using the high and low points (i.e., the high-low method), compute a power cost formula. (Note: Round answers to three decimal places.) 3. Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination. 4. CONCEPTUAL CONNECTION Rerun the regression, and drop the point (20,000, 26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?(Appendix 3A) Separating Fixed and Variable Costs, Service Setting Louise McDermott, controller for the Galvin plant of Veromar Inc., wanted to determine the cost behavior of moving materials throughout the plant. She accumulated the following data on the number of moves (from 100 to 800 in increments of 100) and the total cost of moving materials at those levels of moves: Required: 1. Prepare a scattergraph based on these data. Use cost for the vertical axis and number of moves for the horizontal axis. Based on an examination of the scattergraph, does there appear to be a linear relationship between the total cost of moving materials and the number of moves? 2. Compute the cost formula for moving materials by using the high-low method. Calculate the predicted cost for a month with 550 moves by using the high-low formula. (Note: Round the answer for the variable rate to three decimal places and the answer for total fixed cost and total cost to the nearest dollar.) 3. CONCEPTUAL CONNECTION Compute the cost formula for moving materials using the method of least squares. (Note: For the method of least squares, round the variable rate to two decimal places and total fixed cost and total cost to the nearest dollar.) Using the regression cost formula, what is the predicted cost for a month with 550 moves? What does the coefficient of determination tell you about the cost formula computed by regression? 4. CONCEPTUAL CONNECTION Evaluate the cost formula using the least squares coefficients. Could it be improved? Try dropping the third data point (300, 3,400), and rerun the regression.(Appendix 3A) Cost Formulas, Single and Multiple Cost Drivers For the past 5 years, Garner Company has had a policy of producing to meet customer demand. As a result, finished goods inventory is minimal, and for the most part, units produced equal units sold. Recently, Garners industry entered a recession, and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that at least cover its variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Toward that end, the president of Garner Company implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. To help implement the policy, Garners controller developed the following cost formulas: where X = direct labor hours. Required: 1. Compute the total unit variable cost. Suppose that Garner has an opportunity to accept an order for 20,000 units at 212 per unit. Each unit uses 1 direct labor hour for production. Should Garner accept the order? (The order would not displace any of Garners regular orders.) 2. (Appendix 3A) Explain the significance of the coefficient of determination measures for the cost formulas. Did these measures have a bearing on your answer in Requirement 1? Should they have a bearing? Why? 3. (Appendix 3A) Suppose that a multiple regression equation is developed for overhead costs: Y = 100,000 + 85X1 + 5,000X2 + 300X3, where X1 = Direct Labor Hours, X2 = Number of Setups, and X3 = Engineering Hours. The coefficient of determination for the equation is 0.89. Assume that the order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information, should the company accept the special order referred to in Requirement 1? Is there any other information about cost behavior that you would like to have? Explain.Suspicious Acquisition of Data, Ethical Issues Bill Lewis, manager of the Thomas Electronics Division, called a meeting with his controller, Brindon Peterson, and his marketing manager, Patty Fritz. The following is a transcript of the conversation that took place during the meeting: Bill: Brindon, the variable costing system that you developed has proved to be a big plus for our division. Our success in winning bids has increased, and as a result our revenues have increased by 25%. However, if we intend to meet this years profit targets, we are going to need something extraam I right, Patty? Patty: Absolutely. While we have been able to win more bids, we still are losing too many, particularly to our major competitor, Kilborn Electronics. If we knew more about their bidding strategy, we could be more successful at competing with them. Brindon: Would knowing their variable costs help? Patty: Certainly. It would give me their minimum price. With that knowledge, Im sure that we could find a way to beat them on several jobs, particularly on those jobs where we are at least as efficient. It would also help us to identify where we are not cost competitive. With this information, we might be able to find ways to increase our efficiency. Brindon: Well, I have good news. Ive been talking with Carl Penobscot, Kilborns assistant controller. Carl doesnt feel appreciated by Kilborn and wants to make a change. He could easily fit into our team here. Plus, Carl has been preparing for a job switch by quietly copying Kilborns accounting files and records. Hes already given me some data that reveal bids that Kilborn made on several jobs. If we can come to a satisfactory agreement with Carl, hell bring the rest of the information with him. Well easily be able to figure out Kilborns prospective bids and find ways to beat them. Besides, I could use another accountant on my staff. Bill, would you authorize my immediate hiring of Carl with a favorable compensation package? Bill: I know that you need more staff, Brindon, but is this the right thing to do? It sounds like Carl is stealing those files, and surely Kilborn considers this information confidential. I have real ethical and legal concerns about this. Why dont we meet with Laurie, our attorney, and determine any legal problems? Required: 1. Is Carls behavior ethical? What would Kilborn think? 2. Is Bill correct in supposing that there are ethical and/or legal problems involved with the hiring of Carl? (Reread the section on corporate codes of conduct in Chapter 1.) What would you do if you were Bill? Explain.What are job-order costing and process costing? What types of firms use job-order costing? Process costing?Give some examples of service firms that might use job-order costing, and explain why it is used in those firms.What is normal costing? How does it differ from actual costing?Why are actual overhead rates seldom used in practice?Explain how overhead is assigned to production when a predetermined overhead rate is used.What is underapplied overhead? When Cost of Goods Sold is adjusted for underapplied overhead, will the cost increase or decrease? Why?What is overapplied overhead? When Cost of Goods Sold is adjusted for overapplied overhead, will the cost increase or decrease? Why?Suppose that you and a friend decide to set up a lawn mowing service next summer. Describe the source documents that you would need to account for your activities.Why might a company decide to use departmental overhead rates instead of a plantwide overhead rate?What is the role of materials requisition forms in a job-order costing system? Time tickets? Predetermined overhead rates?Carver Company uses a plantwide overhead rate based on direct labor cost. Suppose that during the year, Carver raises its wage rate for direct labor. How would that affect overhead applied? The total cost of jobs?12DQIs the cost of a job related to the price charged? Explain.If a company decides to increase advertising expense by 25,000, how will that affect the predetermined overhead rate? Eventual cost of goods sold?How can a departmental overhead system be converted to a plantwide overhead system?(Appendix 4B) Describe the difference between producing and support departments.17DQ18DQ19DQ(Appendix 4B) Explain the difference between the direct method and the sequential method.Which of the following statements is true? a. Job-order costing is used only in manufacturing firms. b. Process costing is used only for services. c. Job-order costing is simpler to use than process costing because the recordkeeping requirements are less. d. The job cost sheet is subsidiary to the work-in-process account. e. All of these.The ending balance of which of the following accounts is calculated by summing the totals of the open (unfinished) job-order cost sheets? a. Raw Materials b. Overhead Control c. Work in Process d. Finished Goods e. Cost of Goods SoldIn a normal costing system, the cost of a job includes a. actual direct materials, actual direct labor, and estimated (applied) overhead. b. estimated direct materials, estimated direct labor, and estimated overhead. c. actual direct materials, actual direct labor, actual overhead, and actual selling cost. d. actual direct materials, actual direct labor, and actual overhead. e. None of these. Job-order costing requires the use of actual, not normal, costing.The predetermined overhead rate equals a. actual overhead divided by actual activity level for a period. b. estimated overhead divided by estimated activity level for a period. c. actual overhead minus estimated overhead. d. actual overhead multiplied by actual activity level for a period. e. one-twelfth of estimated overhead.5MCQApplied overhead is a. an important part of normal costing. b. never used in normal costing. c. an important part of actual costing. d. the predetermined overhead rate multiplied by estimated activity level. e. the predetermined overhead rate multiplied by estimated activity level for the month.The overhead variance is overapplied if a. actual overhead is less than applied overhead. b. actual overhead is more than applied overhead. c. applied overhead is less than actual overhead. d. estimated overhead is less than applied overhead. e. estimated overhead is more than applied overhead.Which of the following is typically a job-order costing firm? a. Paint manufacturer b. Pharmaceutical manufacturer c. Cleaning products manufacturer d. Cement manufacturer e. Large regional medical centerWhich of the following is typically a process-costing firm? a. Paint manufacturer b. Custom cabinetmaker c. Large regional medical center d. Law office e. Custom framing shop10MCQ11MCQ12MCQWilson Company has a predetermined overhead rate of 5 per direct labor hour. The job-order cost sheet for Job 145 shows 500 direct labor hours costing 10,000 and materials requisitions totaling 17,500. Job 145 had 1,000 units completed and transferred to Finished Goods. What is the cost per unit for Job 145? a. 20 b. 17.50 c. 25 d. 30 e. 22,500(Appendix 4A) When a job costing 2,000 is finished but not sold, the following journal entry is made:(Appendix 4B) Those departments responsible for sold to customers are referred to as a. profit-making departments. b. producing departments. c. cost centers. d. support departments. e. None of these.16MCQ(Appendix 4B) An example of a producing department is a. a materials storeroom. b. the maintenance department. c. engineering design. d. assembly. e. All of these.(Appendix 4B) An example of a support department is a. data processing. b. personnel. c. a materials storeroom. d. payroll. e. All of these.(Appendix 4B) The method that assigns support department costs only to producing departments in proportion to each departments usage of the service is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. None of these.(Appendix 4B) The method that assigns support department costs by giving partial recognition to support department interactions is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. None of these.(Appendix 4B) The method that assigns support department costs by giving full recognition to support department interactions is known as a. the sequential method. b. the proportional method. c. the reciprocal method. d. the direct method. e. None of these.Predetermined Overhead Rate, Overhead Application At the beginning of the year, Ilberg Company estimated the following costs: Ilberg uses normal costing and applies overhead on the basis of direct labor cost. (Direct labor cost is equal to total direct labor hours worked multiplied by the wage rate.) For the month of December, direct labor cost was 43,700. Required: 1. Calculate the predetermined overhead rate for the year. 2. Calculate the overhead applied to production in December.Overhead Variance (Over- or Underapplied), Closing to Cost of Goods Sold At the end of the year, Ilberg Company provided the following actual information: Ilberg uses normal costing and applies overhead at the rate of 80% of direct labor cost. At the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) was 1,890,000. Required: 1. Calculate the overhead variance for the year. 2. Dispose of the overhead variance by adjusting Cost of Goods Sold.Use the following information for Brief Exercises 4-24 and 4-25: At the beginning of the year, Hallett Company estimated the following: Brief Exercise 4-24 Predetermined Departmental Overhead Rates, Applying Overhead to Production Refer to the information for Hallett Company above. Hallett uses departmental overhead rates. In the cutting department, overhead is applied on the basis of machine hours. In the sewing department, overhead is applied on the basis of direct labor hours. Actual data for the month of June are as follows: Required: 1. Calculate the predetermined overhead rates for the cutting and sewing departments. 2. Calculate the overhead applied to production in each department for the month of June. 3. By how much has each departments overhead been overapplied? Underapplied?Use the following information for Brief Exercises 4-24 and 4-25: At the beginning of the year, Hallett Company estimated the following: Refer to the information for Hallett Company above. Hallett uses departmental overhead rates. In the cutting department, overhead is applied on the basis of machine hours. In the sewing department, overhead is applied on the basis of direct labor hours. Actual data for the month of June are as follows: Brief Exercise 4-25 Convert Departmental Data to Plantwide Data, Plantwide Overhead Rate, Apply Overhead to Production Refer to the information in Brief Exercise 4-24 for data. Now, assume that Hallett has decided to use a plantwide overhead rate based on direct labor hours. Required: 1. Calculate the predetermined plantwide overhead rate. (Note: Round to the nearest cent.) 2. Calculate the overhead applied to production for the month of June. 3. Calculate the overhead variance for the month of June.Prepare Job-Order Cost Sheets, Predetermined Overhead Rate, Ending Balance of WIP, Finished Goods, and COGS At the beginning of June, Rhone Company had two jobs in process, Job 44 and Job 45, with the following accumulated cost information: During June, two more jobs (46 and 47) were started. The following direct materials and direct labor costs were added to the four jobs during the month of June: At the end of June, Jobs 44, 45, and 47 were completed. Only Job 45 was sold. On June 1, the balance in Finished Goods was zero. Required: 1. Calculate the overhead rate based on direct labor cost. (Note: Round to three decimal places.) 2. Prepare a brief job-order cost sheet for the four jobs. Show the balance as of June 1 as well as direct materials and direct labor added in June. Apply overhead to the four jobs for the month of June, and show the ending balances. 3. Calculate the ending balances of Work in Process and Finished Goods as of June 30. 4. Calculate the Cost of Goods Sold for June.Use the following information for Brief Exercises 4-27 and 4-28: Quillen Company manufactures a product in a factory that has two producing departments, Cutting and Sewing, and two support departments, S1 and S2. The activity driver for S1 is number of employees, and the activity driver for S2 is number of maintenance hours. The following data pertain to Quillen: Brief Exercises 4-27 (Appendix 4B) Assigning Support Department Costs by Using the Direct Method Refer to the information for Quillen Company above. Required: 1. Calculate the cost assignment ratios to be used under the direct method for Departments S1 and S2. (Note: Each support department will have two ratiosone for Cutting and the other for Sewing.) 2. Allocate the support department costs to the producing departments by using the direct method.Use the following information for Brief Exercises 4-27 and 4-28: Quillen Company manufactures a product in a factory that has two producing departments, Cutting and Sewing, and two support departments, S1 and S2. The activity driver for S1 is number of employees, and the activity driver for S2 is number of maintenance hours. The following data pertain to Quillen: Brief Exercises 4-28 (Appendix 4B) Sequential Method Refer to the information for Quillen Company above. Now assume that Quillen uses the sequential method to allocate support department costs. S1 is allocated first, then S2. Required: 1. Calculate the cost assignment ratios to be used under the sequential method for S2, Cutting, and Sewing. Carry out your answers to four decimal places. 2. Allocate the overhead costs to the producing departments by using the sequential method.Predetermined Overhead Rate, Overhead Application At the beginning of the year, Estes Company estimated the following costs: Estes uses normal costing and applies overhead on the basis of direct labor cost. (Direct labor cost is equal to total direct labor hours worked multiplied by the wage rate.) For the month of September, direct labor cost was 46,300. Required: 1. Calculate the predetermined overhead rate for the year. 2. Calculate the overhead applied to production in September.Overhead Variance (Over- or Underapplied), Closing to Cost of Goods Sold At the end of the year, Estes Company provided the following actual information: Estes uses normal costing and applies overhead at the rate of 75% of direct labor cost. At the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) was 1,670,000. Required: 1. Calculate the overhead variance for the year. 2. Dispose of the overhead variance by adjusting Cost of Goods Sold.Use the following information for Brief Exercises 4-31 and 4-32: At the beginning of the year, Jonson Company estimated the following: Brief Exercise 4-31 Predetermined Departmental Overhead Rates, Applying Overhead to Production Refer to the information for Jonson Company above. Jonson uses departmental overhead rates. In the firing department, overhead is applied on the basis of kiln hours (number of hours spent in the gas-fired kiln). In the polishing department, overhead is applied on the basis of direct labor hours. Actual data for the month of July are as follows: Required: 1. Calculate the predetermined overhead rates for the firing and polishing departments. 2. Calculate the overhead applied to production in each department for the month of July. 3. By how much has each departments overhead been overapplied? Underapplied?Use the following information for Brief Exercises 4-31 and 4-32: At the beginning of the year, Jonson Company estimated the following: Refer to the information for Jonson Company above. Jonson uses departmental overhead rates. In the firing department, overhead is applied on the basis of kiln hours (number of hours spent in the gas-fired kiln). In the polishing department, overhead is applied on the basis of direct labor hours. Actual data for the month of July are as follows: Brief Exercise 4-32 Convert Departmental Data to Plantwide Data, Plantwide Overhead Rate, Apply Overhead to Production Refer to the information in Brief Exercise 4-31 for data. Now, assume that Jonson has decided to use a plantwide overhead rate based on direct labor hours. Required: 1. Calculate the predetermined plantwide overhead rate. (Note: Round to the nearest cent.) 2. Calculate the overhead applied to production for the month of July. 3. Calculate the overhead variance for the month of July.Prepare Job-Order Cost Sheets, Predetermined Overhead Rate, Ending Balance of WIP, Finished Goods, and COGS At the beginning of March, Mendez Company had two jobs in process, Job 86 and Job 87, with the following accumulated cost information: During March, two more jobs (88 and 89) were started. The following direct materials and direct labor costs were added to the four jobs during the month of March: At the end of March, Jobs 86, 87, and 89 were completed. Only Job 87 was sold. On March 1, the balance in Finished Goods was zero. Required: 1. Calculate the overhead rate based on direct labor cost. (Note: Round to three decimal places.) 2. Prepare a brief job-order cost sheet for the four jobs. Show the balance as of March 1 as well as direct materials and direct labor added in March. Apply overhead to the four jobs for the month of March, and show the ending balances. 3. Calculate the ending balances of Work in Process and Finished Goods as of March 31. 4. Calculate the Cost of Goods Sold for March.Use the following information for Brief Exercises 4-34 and 4-35: Sanjay Company manufactures a product in a factory that has two producing departments, Assembly and Painting, and two support departments, S1 and S2. The activity driver for S1 is square footage, and the activity driver for S2 is number of machine hours. The following data pertain to Sanjay: Brief Exercises 4-34 (Appendix 4B) Assigning Support Department Costs by Using the Direct Method Refer to the information for Sanjay Company above. Required: 1. Calculate the cost assignment ratios to be used under the direct method for Departments S1 and S2. (Note: Each support department will have two ratiosone for Assembly and the other for Painting.) 2. Allocate the support department costs to the producing departments by using the direct method.Use the following information for Brief Exercises 4-34 and 4-35: Sanjay Company manufactures a product in a factory that has two producing departments, Assembly and Painting, and two support departments, S1 and S2. The activity driver for S1 is square footage, and the activity driver for S2 is number of machine hours. The following data pertain to Sanjay: Brief Exercises 4-35 (Appendix 4B) Sequential Method Refer to the information for Sanjay Company on the previous page. Now assume that Sanjay uses the sequential method to allocate support department costs. S1 is allocated first, then S2. Required: 1. Calculate the cost assignment ratios to be used under the sequential method for S2, Assembly, and Painting. Carry out your answers to four decimal places. 2. Allocate the overhead costs to the producing departments by using the sequential method.Job-Order Costing versus Process Costing a. Hospital services b. Custom cabinet making c. Toy manufacturing d. Soft-drink bottling e. Airplane manufacturing (e.g., 767s) f. Personal computer assembly g. Furniture making (e.g., computer desks sold at discount stores) h. Custom furniture making i. Dental services j. Paper manufacturing k. Nut and bolt manufacturing l. Auto repair m. Architectural services n. Landscape design services o. Flashlight manufacturing Required: Identify each of these preceding types of businesses as using either job-order or process costing.Job-Order Costing versus Process Costing a. Auto manufacturing b. Dental services c. Auto repair d. Costume making Required: CONCEPTUAL CONNECTION For each of the given types of industries, give an example of a firm that would use job-order costing. Then, give an example of a firm that would use process costing.Calculating the Predetermined Overhead Rate, Applying Overhead to Production At the beginning of the year, Debion Company estimated the following: Debion uses normal costing and applies overhead on the basis of direct labor hours. For the month of March, direct labor hours were 7,600. Required: 1. Calculate the predetermined overhead rate for Debion. 2. Calculate the overhead applied to production in March.Calculating the Predetermined Overhead Rate, Applying Overhead to Production, Reconciling Overhead at the End of the Year, Adjusting Cost of Goods Sold for Under- and Overapplied Overhead At the beginning of the year, Han Company estimated the following: Han uses normal costing and applies overhead on the basis of direct labor hours. For the month of January, direct labor hours were 6,950. By the end of the year, Han showed the following actual amounts: Assume that unadjusted Cost of Goods Sold for Han was 927,000. Required: 1. Calculate the predetermined overhead rate for Han. 2. Calculate the overhead applied to production in January. (Note: Round to the nearest dollar.) 3. Calculate the total applied overhead for the year. Was overhead over- or underapplied? By how much? 4. Calculate adjusted Cost of Goods Sold after adjusting for the overhead variance.Calculating Departmental Overhead Rates and Applying Overhead to Production At the beginning of the year, Glaser Company estimated the following: Glaser uses departmental overhead rates. In the assembly department, overhead is applied on the basis of direct labor hours. In the testing department, overhead is applied on the basis of machine hours. Actual data for the month of March are as follows: Required: 1. Calculate the predetermined overhead rates for the assembly and testing departments. 2. Calculate the overhead applied to production in each department for the month of March. 3. By how much has each departments overhead been overapplied? Underapplied?Job-Order Costing Variables On July 1, Job 46 had a beginning balance of 1,235. During July, prime costs added to the job totaled 560. Of that amount, direct materials were three times as much as direct labor. The ending balance of the job was 1,921. Required: 1. What was overhead applied to the job during July? 2. What was direct materials for Job 46 for July? Direct labor? 3. Assuming that overhead is applied on the basis of direct labor cost, what is the overhead rate for the company? (Note: Round your answer to two decimal places.)Source Documents For each of the following independent situations, give the source document that would be referred to for the necessary information. Required: 1. Direct materials costing 460 are requisitioned for use on a job. 2. Greiners Garage uses a job-order costing system. Overhead is applied to jobs based on direct labor hours. Which source document gives the number of direct labor hours worked on Job 2004-276? 3. Pasilla Investigative Services bills clients on a monthly basis for costs to date. Job 3-48 involved an investigator following the clients business partner for a week by automobile. Mileage is billed at number of miles times 0.75. 4. The foreman on the Jackson job wonders what the actual direct materials cost was for that job.Applying Overhead to Jobs, Costing Jobs Jagjit Company designs and builds retaining walls for individual customers. On August 1, there were two jobs in process: Job 93 with a beginning balance of 8,750 and Job 94 with a beginning balance of 7,300. Jagjit applies overhead at the rate of 8 per direct labor hour. Direct labor wages average 18 per hour. Data on August costs for all jobs are as follows: During August, Jobs 95 and 96 were started. Job 93 was completed on August 17, and the client was billed at cost plus 40%. All other jobs remained in process. Required: 1. Calculate the number of direct labor hours that were worked on each job in August. 2. Calculate the overhead applied to each job during the month of August. 3. Prepare job-order cost sheets for each job as of the end of August. 4. Calculate the balance in Work in Process on August 31. 5. What is the price of Job 93? 6. CONCEPTUAL CONNECTION Partway though the year, Jagjit bought a bulldozer to handle larger jobs. The bulldozer cost 38,000 and is needed for larger commercial jobs. Smaller residential jobs can still be done with the smaller bobcat tractor. How could the bulldozers cost be applied to only those jobs that need the larger equipment?Applying Overhead to Jobs, Costing Jobs Gorman Company builds internal conveyor equipment to client specifications. On October 1, Job 877 was in process with a cost of 18,640 to date. During October, Jobs 878, 879, and 880 were started. Data on costs added during October for all jobs are as follows: Overhead is applied to production at the rate of 80% of direct labor cost. Job 877 was completed on October 28, and the client was billed at cost plus 50%. All other jobs remained in process. Required: 1. Prepare a brief job-order cost sheet showing the October 1 balances of all four jobs, plus the direct materials and direct labor costs during October. (Note: There is no need to calculate applied overhead at this point or to total the costs.) 2. Calculate the overhead applied to each job during October. 3. Calculate the balance in Work in Process on October 31. 4. What is the price of Job 877?Balance of Work in Process and Finished Goods, Cost of Goods Sold Derry Company uses job-order costing. At the end of the month, the following information was gathered: The beginning balance of Finished Goods was 300, consisting of Job 300, which was not sold by the end of the month. Required: 1. Calculate the balance in Work in Process at the end of the month. 2. Calculate the balance in Finished Goods at the end of the month. 3. Calculate Cost of Goods Sold for the month.Job-Order Cost Sheets, Balance in Work in Process and Finished Goods Prull Company, a job-order costing firm, worked on three jobs in July. Data are as follows: Overhead is applied to jobs at the rate of 10 per machine hour. By July 31, Jobs 86 and 88 were completed. Jobs 82 and 86 were sold. Job 87 remained in process. On July 1, the balance in Finished Goods was 49,000 (consisting of Job 82 for 25,600 and Job 84 for 23,400). Prull prices its jobs at cost plus 20%. During July, variable marketing expenses were 4% of sales, and fixed marketing expenses were 1,275; administrative expenses were 3,900. (Round all amounts to the nearest dollar.) Required: 1. Prepare job-order cost sheets for all jobs in process during July, showing all costs through July 31. 2. Calculate the balance in Work in Process on July 31. 3. Calculate the balance in Finished Goods on July 31. 4. Calculate Cost of Goods Sold for July. 5. Calculate operating income for Prull Company for the month of July.Cost Flows Consider the following independent jobs. Overhead is applied in Department 1 at the rate of 6 per direct labor hour. Overhead is applied in Department 2 at the rate of 8 per machine hour. Direct labor wages average 10 per hour in each department. Required: Fill in the missing data for each job.Job Cost Flows Roseler Company uses a normal job-order costing system. The company has two departments through which most jobs pass. Overhead is applied using a plantwide overhead rate of 10 per direct labor hour. During the year, several jobs were completed. Data pertaining to one such job, Job 9-601, follow: Required: 1. Compute the total cost of Job 9-601. 2. Compute the per-unit manufacturing cost for Job 9-601. For Requirements 3 and 4, assume that Roseler uses departmental overhead rates. In Department A, overhead is applied at the rate of 3 per direct labor hour. In Department B, overhead is applied at the rate of 7 per machine hour. 3. Compute the total cost of Job 9-601. 4. Compute the per-unit manufacturing cost for Job 9-601.Calculation of Work in Process and Cost of Goods Sold with Multiple Jobs Ensign Landscape Design designs landscape plans and plants the material for clients. On April 1, there were three jobs in process, Jobs 39, 40, and 41. During April, two more jobs were started, Jobs 42 and 43. By April 30, Jobs 40, 41, and 43 were completed and sold. The following data were gathered: Overhead is applied at the rate of 110% of direct labor cost. Jobs are sold at cost plus 30%. Selling and administrative expenses for April totaled 4,575. (Round all amounts to the nearest dollar.) Required: 1. Prepare job-order cost sheets for each job as of April 30. 2. Calculate the ending balance in Work in Process (as of April 30) and Cost of Goods Sold for April. 3. Construct an income statement for Ensign Landscape Design for the month of April.(Appendix 4A) Journal Entries Yurman Inc. uses a job-order costing system. During the month of May, the following transactions occurred: a. Purchased materials on account for 29,670. b. Requisitioned materials totaling 24,500 for use in production. Of the total, 9,200 was for Job 58, 8,900 for Job 59, and the remainder for Job 60. c. Incurred direct labor of 32,400, with an average wage of 18 per hour. Job 58 used 800 hours; Job 59, 600 hours; and Job 60, 400 hours. d. Incurred and paid actual overhead of 17,880 (credit Various Payables). e. Charged overhead to production at the rate of 4.80 per direct labor hour. f. Completed and transferred Jobs 58 and 59 to Finished Goods. g. Sold Job 57 (see beginning balance of Finished Goods) and Job 58 to their respective clients on account for a price of cost plus 40%. Beginning balances as of May 1 were: Required: 1. Prepare the journal entries for Transactions a through g. 2. Prepare brief job-order cost sheets for Jobs 58, 59, and 60. 3. Calculate the ending balance of Raw Materials. 4. Calculate the ending balance of Work in Process. 5. Calculate the ending balance of Finished Goods.(Appendix 4B) Direct Method of Support Department Cost Allocation Stevenson Company is divided into two operating divisions: Battery and Small Motors. The company allocates power and general factory costs to each operating division using the direct method. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. Support department cost allocations using the direct method are based on the following data: Required: 1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places.) 2. Allocate the support service costs to the operating divisions. (Note: Round all amounts to the nearest dollar.) 3. Assume divisional overhead rates are based on direct labor hours. Calculate the overhead rate for the Battery Division and for the Small Motors Division. (Note: Round overhead rates to the nearest cent.)(Appendix 4B) Sequential Method of Support Department Cost Allocation Refer to Exercise 4-51 for data. Now assume that Stevenson uses the sequential method to allocate support department costs to the operating divisions. General Factory is allocated first in the sequential method for the company. Required: 1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places.) 2. Allocate the support service costs to the operating divisions. (Note: Round all amounts to the nearest dollar.) 3. Assume divisional overhead rates are based on direct labor hours. Calculate the overhead rate for the Battery Division and for the Small Motors Division. (Note: Round overhead rates to the nearest cent.)Overhead Application and Job-Order Costing Heurion Company is a job-order costing firm that uses a plantwide overhead rate based on direct labor hours. Estimated information for the year is as follows: Heurion worked on five jobs in July. Data are as follows: By July 31, Jobs 741 and 743 were completed and sold. The remaining jobs were in process. Required: 1. Calculate the plantwide overhead rate for Heurion Company. (Note: Round to the nearest cent.) 2. Prepare job-order cost sheets for each job showing all costs through July 31. (Note: Round all amounts to the nearest dollar.) 3. Calculate the balance in Work in Process on July 31. 4. Calculate Cost of Goods Sold for July.54PCalculating Ending Work in Process, Income Statement Pavlovich Prosthetics Company produces artificial limbs for individuals. Each prosthetic is unique. On January 1, three jobs, identified by the name of the person being fitted with the prosthetic, were in process with the following costs: During the month of January, two more jobs were started, Jasper and Dashell. Materials and labor costs incurred by each job in January are as follows: Tillson and Jaspers prosthetics were completed and sold by January 31. Required: 1. If overhead is applied on the basis of direct labor dollars, what is the overhead rate? (Note: Round your answer to four decimal places.) 2. Prepare simple job-order cost sheets for each of the five jobs in process during January. (Note: Round all amounts to the nearest dollar.) 3. What is the ending balance of Work in Process on January 31? What is the Cost of Goods Sold in January? 4. Suppose that Pavlovich Prosthetics Company prices its jobs at cost plus 30%. In addition, during January, marketing and administrative expenses of 2,635 were incurred. Prepare an income statement for the month of January.Overhead Applied to Jobs, Departmental Overhead Rates Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xanias plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year: Required: 1. Compute a predetermined overhead rate for the plant as a whole based on machine hours. 2. Compute predetermined overhead rates for each department using machine hours. (Note: Carry your calculations out to three decimal places.) 3. CONCEPTUAL CONNECTION Job 73 used 20 machine hours from Department A and 50 machine hours from Department B. Job 74 used 50 machine hours from Department A and 20 machine hours from Department B. Compute the overhead cost assigned to each job using the plantwide rate computed in Requirement 1. Repeat the computation using the departmental rates found in Requirement 2. Which of the two approaches gives the fairer assignment? Why? (Note: Round cost to the nearest cent.) 4. CONCEPTUAL CONNECTION Repeat Requirement 3, assuming the expected overhead cost for Department B is 60,000 (not 33,000). For this company, would you recommend departmental rates over a plantwide rate? (Note: Round overhead rates to the nearest cent.)Overhead Rates, Unit Costs Folsom Company manufactures specialty tools to customer order. There are three producing departments. Departmental information on budgeted overhead and various activity measures for the coming year is as follows: Currently, overhead is applied on the basis of machine hours using a plantwide rate. However, Janine, the controller, has been wondering whether it might be worthwhile to use departmental overhead rates. She has analyzed the overhead costs and drivers for the various departments and decided that Welding and Finishing should base their overhead rates on machine hours and that Assembly should base its overhead rate on direct labor hours. Janine has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 35% markup over full manufacturing cost. Round all overhead rates to the nearest cent. Round all bid prices to the nearest dollar. Required: 1. Calculate a plantwide rate for Folsom Company based on machine hours. What is the bid price of each job using this rate? 2. Calculate departmental overhead rates for the producing departments. What is the bid price of each job using these rates?Calculate Job Cost and Use It to Calculate Price Suppose that back in the 1970s, Steve was asked to build speakers for two friends. The first friend, Jan, needed a speaker for her band. The second friend, Ed, needed a speaker built into the back of his hatchback automobile. Steve figured the following costs for each: Steve knew that Jans job would be easier, since he had experience in building the type of speaker she needed. Her job would not require any special equipment or specialized fitting. Eds job, on the other hand, required specialized design and precise fitting. Steve thought he might need to build a mock-up of the speaker first, to fit it into the space. In addition, he might have to add to his tool collection to complete the job. Normally, Steve figured a wage rate of 6 per hour and charged 20% of labor and materials as an overhead rate. Required: 1. Prepare job-order cost sheets for the two jobs, showing total cost. 2. CONCEPTUAL CONNECTION Which cost do you think is more likely to be accurate? How might Steve build in some of the uncertainty of Eds job into a budgeted cost?(Appendix 4A) Unit Cost, Ending Work in Process, Journal Entries During August, Leming Inc. worked on two jobs. Data relating to these two jobs follow: Overhead is assigned on the basis of direct labor hours at a rate of 11. During August, Job 64 was completed and transferred to Finished Goods. Job 65 was the only unfinished job at the end of the month. Required: 1. Calculate the per-unit cost of Job 64. 2. Compute the ending balance in the work-in-process account. 3. Prepare the journal entries reflecting the completion and sale on account of Job 64. The selling price is 175% of cost. (Note: Round all journal entry amounts to the nearest dollar.)(Appendix 4A) Journal Entries, Job Costs The following transactions occurred during the month of April for Nelson Company: a. Purchased materials costing 4,610 on account. b. Requisitioned materials totaling 4,800 for use in production, 3,170 for Job 518 and the remainder for Job 519. c. Recorded 65 hours of direct labor on Job 518 and 90 hours on Job 519 for the month. Direct laborers are paid at the rate of 14 per hour. d. Applied overhead using a plantwide rate of 6.20 per direct labor hour. e. Incurred and paid in cash actual overhead for the month of 973. f. Completed and transferred Job 518 to Finished Goods. g. Sold on account Job 517, which had been completed and transferred to Finished Goods in March, for cost (2,770) plus 25%. Required: 1. Prepare journal entries for Transactions a through e. 2. Prepare job-order cost sheets for Jobs 518 and 519. Prepare journal entries for Transactions f and g. (Note: Round to the nearest dollar.) 3. Prepare a schedule of cost of goods manufactured for April. Assume that the beginning balance in the raw materials account was 1,025 and that the beginning balance in the work-in-process account was zero.(Appendix 4A) Predetermined Overhead Rates, Variances, Cost Flows Barrymore Costume Company, located in New York City, sews costumes for plays and musicals. Barrymore considers itself primarily a service firm, as it never produces costumes without a preexisting order and only purchases materials to the specifications of the particular job. Any finished goods ending inventory is temporary and is zeroed out as soon as the show producer pays for the order. Overhead is applied on the basis of direct labor cost. During the first quarter of the year, the following activity took place in each of the accounts listed: Job 32 was the only job in process at the end of the first quarter. A total of 1,000 direct labor hours at 10 per hour were charged to Job 32. Required: 1. Assuming that overhead is applied on the basis of direct labor cost, what was the overhead rate used during the first quarter of the year? 2. What was the applied overhead for the first quarter? The actual overhead? The under- or overapplied overhead? 3. What was the cost of goods manufactured for the quarter? 4. Assume that the overhead variance is closed to the cost of goods sold account. Prepare the journal entry to close out the overhead control account. What is the adjusted balance in Cost of Goods Sold? 5. For Job 32, identify the costs incurred for direct materials, direct labor, and overhead.(Appendix 4A) Overhead Application, Journal Entries, Job Cost At the beginning of the year, Smith Company budgeted overhead of 129,600 as well as 13,500 direct labor hours. During the year, Job K456 was completed with the following information: direct materials cost, 2,750; direct labor cost, 5,355. The average wage for Smith Company employees is 17 per hour. By the end of the year, 18,100 direct labor hours had actually been worked, and Smith incurred the following actual overhead costs for the year: Required: 1. Calculate the overhead rate for the year. 2. Calculate the total cost of Job K456. 3. Prepare the journal entries to record actual overhead and to apply overhead to production for the year. 4. Is overhead overapplied or underapplied? By how much? 5. Assuming that the normal cost of goods sold for the year is 635,600, what is the adjusted cost of goods sold?(Appendix 4A) Journal Entries, T-Accounts Lowder Inc. builds custom conveyor systems for warehouses and distribution centers. During the month of July, the following occurred: a. Purchased materials on account for 42,630. b. Requisitioned materials totaling 27,000 for use in production: 12,500 for Job 703 and the remainder for Job 704. c. Recorded direct labor payroll for the month of 26,320 with an average wage of 14 per hour. Job 703 required 780 direct labor hours; Job 704 required 1,100 direct labor hours. d. Incurred and paid actual overhead of 19,950. e. Charged overhead to production at the rate of 10 per direct labor hour. f. Completed Job 703 and transferred it to Finished Goods. g. Kept Job 704, which was started during July, in process at the end of the month. h. Sold Job 700, which had been completed in May, on account for cost plus 30%. Beginning balances as of July 1 were: Required: 1. Prepare the journal entries for transactions a through e. 2. Prepare simple job-order cost sheets for Jobs 703 and 704. 3. Prepare the journal entries for transactions f and h. 4. Calculate the ending balances of the following: (a) Raw Materials, (b) Work in Process, and (c) Finished Goods.(Appendix 4B) Support Department Cost Allocation MedServices Inc. is divided into two operating departments: Laboratory and Tissue Pathology. The company allocates delivery and accounting costs to each operating department. Delivery costs include the costs of a fleet of vans and drivers that drive throughout the state each day to clinics and doctors offices to pick up samples and deliver them to the centrally located laboratory and tissue pathology offices. Delivery costs are allocated on the basis of number of samples. Accounting costs are allocated on the basis of the number of transactions processed. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: Required: 1. Assign the support department costs by using the direct method. (Note: Round allocation ratios to four decimal places.) 2. Assign the support department costs by using the sequential method, allocating accounting costs first. (Note: Round allocation ratios to four decimal places.)(Appendix 4B) Support Department Cost Allocation: Comparison of Methods of Allocation Bender Automotive Works Inc. manufactures a variety of front-end assemblies for automobiles. A front-end assembly is the unified front of an automobile that includes the headlamps, fender, and surrounding metal/plastic. Bender has two producing departments: Drilling and Assembly. Usually, the front-end assemblies are ordered in batches of 100. Two support departments provide support for Benders producing departments: Maintenance and Power. Budgeted data for the coming quarter follow. The company does not separate fixed and variable costs. The predetermined overhead rate for Drilling is computed on the basis of machine hours. Direct labor hours are used for Assembly. Recently, a truck manufacturer requested a bid on a 3-year contract that would supply front-end assemblies to a nearby factory. The prime costs for a batch of 100 front-end assemblies are 1,817. It takes two machine hours to produce a batch in the drilling department and 50 direct labor hours to assemble the 100 front-end assemblies in the assembly department. Benders policy is to bid full manufacturing cost, plus 15%. (Note: Round allocation ratios to four decimal places, allocated support department cost to the nearest dollar, and the job cost components to the nearest cent.) Required: 1. Prepare bids for Bender by using each of the following allocation methods: (a) direct method and (b) sequential method, allocating power costs first. (Note: Round allocation ratios to four decimal places, allocated support department cost to the nearest dollar, and the job cost components to the nearest cent.) 2. CONCEPTUAL CONNECTION Which method most accurately reflects the cost of producing the front-end assemblies? Why?Overhead Assignment: Actual and Normal Activity Compared Reynolds Printing Company specializes in wedding announcements. Reynolds uses an actual job-order costing system. An actual overhead rate is calculated at the end of each month using actual direct labor hours and overhead for the month. Once the actual cost of a job is determined, the customer is billed at actual cost plus 50%. During April, Mrs. Lucky, a good friend of owner Jane Reynolds, ordered three sets of wedding announcements to be delivered May 10, June 10, and July 10, respectively. Reynolds scheduled production for each order on May 7, June 7, and July 7, respectively. The orders were assigned job numbers 115, 116, and 117, respectively. Reynolds assured Mrs. Lucky that she would attend each of her daughters weddings. Out of sympathy and friendship, she also offered a lower price. Instead of cost plus 50%, she gave her a special price of cost plus 25%. Additionally, she agreed to wait until the final wedding to bill for the three jobs. On August 15, Reynolds asked her accountant to bring her the completed job-order cost sheets for Jobs 115, 116, and 117. She also gave instructions to lower the price as had been agreed upon. The cost sheets revealed the following information: Reynolds could not understand why the overhead costs assigned to Jobs 116 and 117 were so much higher than those for Job 115. She asked for an overhead cost summary sheet for the months of May, June, and July, which showed that actual overhead costs were 20,000 each month. She also discovered that direct labor hours worked on all jobs were 500 hours in May and 250 hours each in June and July. Required: 1. How do you think Mrs. Lucky will feel when she receives the bill for the three sets of wedding announcements? 2. Explain how the overhead costs were assigned to each job. 3. Assume that Reynoldss average activity is 500 hours per month and that the company usually experiences overhead costs of 240,000 each year. Can you recommend a better way to assign overhead costs to jobs? Recompute the cost of each job and its price, given your method of overhead cost assignment. Which method do you think is best? Why?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?Describe the two-stage process associated with plantwide overhead rates.Describe the two-stage process for departmental overhead rates.What are nonunit-level overhead activities? Nonunit-based cost drivers? Give some examples.What is product diversity?What is an overhead consumption ratio?What is activity-based product costing?7DQExplain how costs are assigned to activities.Describe the value of activity-based customer costing.Explain how ABC can help a firm identify its true low-cost suppliers.11DQ