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All Textbook Solutions for Managerial Accounting: The Cornerstone of Business Decision-Making
What are value-added activities? Value-added costs?What are nonvalue-added activities? Nonvalue-added costs? Give an example of each.Identify and define four different ways to manage activities so that costs can be reduced.15DQA batch-level driver is consumed by a product each and every time that a. a batch of products is produced. b. a unit is produced. c. a purchase order is issued. d. a customer complains. e. None of these.Which of the following is a nonunit-level driver? a. Direct labor hours b. Machine hours c. Direct materials d. Setup hours e. Assembly hours3MCQUse the following information for Multiple-Choice Questions 5-3 and 5-4: Consider the information given on two products and their activity usage: Refer to the information above. Suppose that machine hours are used to assign all overhead costs to the two products. Select the best answer from the following: a. Laser printers are overcosted, and inkjet printers are undercosted. b. Laser printers and inkjet printers are accurately costed. c. Laser printers are undercosted, and inkjet printers are overcosted. d. Using inspection hours to assign overhead costs is the most accurate approach. e. None of these.The first stage of ABC entails the assignment of a. resource costs to departments. b. activity costs to products or customers. c. resource costs to a plantwide pool. d. resource costs to distribution channels. e. resource costs to individual activities.The second stage of ABC entails the assignment of a. activity costs to products or customers. b. resource costs to departments. c. resource costs to a plantwide pool. d. resource costs to individual activities. e. resource costs to distribution channels.Interview questions are asked to determine a. what activities are being performed. b. who performs the activities. c. the relative amount of time spent on each activity by individual workers. d. possible activity drivers for assigning costs to products. e. All of these.8MCQAssume that the moving activity has an expected cost of 80,000. Expected direct labor hours are 20,000, and expected number of moves is 40,000. The best activity for moving is a. 4 per move. b. 1.33 per hour-move. c. 4 per hour. d. 2 per move. e. e None of these.Which of the following is a true statement about activity-based customer costing? a. Customer diversity requires multiple drivers to trace costs accurately to customers. b. Customers consume customer-driven activities in the same proportions. c. It seldom produces changes in the companys customer mix. d. It never improves profitability. e. None of these.11MCQThis year, Lambert Company will ship 1,500,000 pounds of goods to customers at a cost of 1,200,000. If a customer orders 10,000 pounds and produces 200,000 of revenue (total revenue is 20 million), the amount of shipping cost assigned to the customer by using ABC would be a. unable to be determined. b. 8,000 (0.80 per pound shipped). c. 24,000 (2% of the shipping cost). d. 12,000 (1% of the shipping cost). e. None of these.13MCQA forklift and its driver used for moving materials are examples of a. activity inputs. b. activity output measures. c. resource drivers. d. activity outputs. e. root causes.Which of the following are nonvalue-added activities? a. Moving goods b. Storing goods c. Inspecting finished goods d. Reworking a defective product e. All of these.Suppose that a company is spending 60,000 per year for inspecting, 30,000 for purchasing, and 40,000 for reworking products. A good estimate of nonvalue-added costs would be a. 70,000. b. 130,000. c. 40,000. d. 90,000. e. 100,000.17MCQThom Company produces 60 units in 10 hours. The cycle time for Thom a. is 6 units per hour. b. is 10 hours per unit. c. is 10 minutes per unit. d. is 6 minutes per unit. e. cannot be calculated.Thom Company produces 60 units in 10 hours. The velocity for Thom a. is 6 units per hour. b. is 10 hours per unit. c. is 10 minutes per unit. d. is 6 minutes per unit. e. cannot be calculated.Striving to produce the same activity output with lower costs for the input used is concerned with which of the following dimensions of activity performance? a. Quality b. Time c. Activity sharing d. Effectiveness e. EfficiencyUse the following information for Brief Exercises 5-21 and 5-22: Zapato Company produces two types of boots: vaquero and vaquera. There are four activities associated with the two products. Drives for the four activities are as follows: 5-21 Consumption Ratios Refer to the information for Zapato Company given above. Required: 1. Calculate the consumption ratios for the four drivers (round to two decimal places). 2. Is there evidence of product diversity? Explain.Use the following information for Brief Exercises 5-21 and 5-22: Zapato Company produces two types of boots: vaquero and vaquera. There are four activities associated with the two products. Drives for the four activities are as follows: 5-22 Activity Rates Refer to the information for Zapato Company given above. The following activity data have been collected: Required: Calculate the activity rates that would be used to assign costs to each product.Calculating ABC Unit Costs Perkins National Bank has collected the following information for four activities and two types of credit cards: There are 7,500 holders of Classic cards and 30,000 holders of Gold cards. Required: Calculate the unit cost (rounded to the nearest cent) for Classic and Gold credit cards.Assigning Costs to Activities McCourt Company produces small engines for lawnmower producers. The accounts payable department at McCourt has 10 clerks who process and pay supplier invoices. The total cost of their salaries is 500,000. The work distribution for the activities that they perform is as follows: Required: Assign the cost of labor to each of the three activities in the accounts payable department.Activity-Based Customer Costing Sleepeze Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mattresses in approximately equal quantities, where the orders are about the same size. Data concerning Sleepezes customer activity are as follows: Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver. Required: Assign costs to customers by using an ABC approach. Round activity rates and activity costs to the nearest dollar.Activity-Based Supplier Costing Clearsound uses Alpha Electronics and La Paz Company to buy two electronic components used in the manufacture of its cell phones: Component 125X and Component 30Y. Consider two activities: testing components and reordering components. After the two components are inserted, testing is done to ensure that the two components in the phones are working properly. Reordering occurs because one or both of the components have failed the test and it is necessary to replenish component inventories. Activity cost information and other data needed for supplier costing are as follows: I. Activity Costs Caused by Suppliers (testing failures and reordering as a result) II. Supplier Data Required: Determine the cost of each supplier by using ABC. Round unit costs to two decimal places.27BEAVelocity and Cycle Time Kolby Company takes 36,000 hours to produce 144,000 units of a product. Required: What is the velocity? Cycle time?Use the following information for Brief Exercises 5-29 and 5-30: Cinturas Company produces two types of mens shirts: casual and formal. There are four activities associated with the two products. Drivers for the four activities are as follows: 5-29 Consumption Ratios Refer to the information for Cinturas Company given above. Required: 1. Calculate the consumption ratios for the four drivers. 2. Is there evidence of product diversity? Explain.Use the following information for Brief Exercises 5-29 and 5-30: Cinturas Company produces two types of mens shirts: casual and formal. There are four activities associated with the two products. Drivers for the four activities are as follows: 5-30 Activity Rates Refer to the information above for Cinturas Company. The following activity data have been collected: Required: Calculate the activity rates that would be used to assign costs to each product.31BEBAssigning Costs to Activities Craig Company produces electronic components for cell phone producers. The receiving department at Craig has eight clerks who process incoming goods. The total cost of their salaries is 440,000. The work distribution for the activities that they perform is as follows: Required: Assign the cost of labor to each of the three activities in the receiving department.Activity-Based Customer Costing Limpio Company produces dishwashers for 36 retail outlets. Of the 36 retail outlets, 34 are small, separately owned appliance stores and two are large retail chains. The two large retailers buy 80% of the dishwashers produced. The 34 smaller customers purchase dishwashers in approximately equal quantities, where the orders are about the same size. Data concerning Limpios customer activity are as follows: Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver. Required: Assign costs to customers by using an ABC approach. Round activity rates and activity costs to the nearest dollar.Activity-Based Supplier Costing Blackburn Inc. uses Otavalo Manufacturing and Piura Company to buy two precision- machined parts used in the manufacture of its permanent-magnet motors: Part #625 and Part #827. Consider two activities: testing parts and reordering parts. After the two parts are inserted, testing is done to ensure that the two parts work as intended. Reordering occurs because one or both of the parts have failed the test and it is necessary to replenish part inventories. Activity cost information and other data needed for supplier costing are as follows: I. Activity Costs Caused by Suppliers (testing failures and reordering as a result) II. Supplier Data Required: Determine the cost of each supplier by using ABC. Round unit costs to two decimal places.Nonvalue-Added Costs Evans Inc. has the following two activities: (1) Reworking products, cost: 740,000. The reworking cost of the most efficient similar-sized competitor is 200,000. (2) Purchasing parts, cost: 900,000 (45,000 purchasing hours). A benchmarking study reveals that the most efficient level for Evans would use 24,000 purchasing hours and entail a cost of 450,000. Required: Determine the nonvalue-added cost of each activity.Velocity and Cycle Time Tara Company takes 8,000 hours to produce 40,000 units of a product. Required: What is the velocity? Cycle time?Consumption Ratios; Activity Rates Saludable Company produces two types of get-well cards: scented and regular. Drivers for the four activities are as follows: The following activity data have been collected: Required: 1. Calculate the consumption ratios for the four drivers (round to two decimal places). 2. CONCEPTUAL CONNECTION Is there evidence of product diversity? Explain the significance of product diversity for decision making if the company chooses to use machine hours to assign all overhead. 3. Calculate the activity rates that would be used to assign costs to each product (round to two decimal places). 4. Suppose that the activity rate for inspecting products is 20 per inspection hour. How many hours of inspection are expected for the coming year?Activity Rates Patten Company uses activity-based costing (ABC). Patten manufactures toy cars using two activities: plastic injection molding and decal application. Pattens 20X1 total budgeted overhead costs for these two activities are 675,000 (80% for injection molding and 20% for decal application). Molding overhead costs are driven by the number of pounds of plastic that are molded together. Decal application overhead costs are driven by the number of decals applied to toys. The budgeted activity data for 20X1 are as follows: Required: 1. Calculate the activity rate for the plastic injection molding activity (round to two decimal places). 2. Calculate the activity rate for the decal application activity (round to two decimal places).Comparing ABC and Plantwide Overhead Cost Assignments Wellington Chocolate Company uses activity-based costing (ABC). The controller identified two activities and their budgeted costs: Setting up equipment is based on setup hours, and other overhead is based on oven hours. Wellington produces two products, Fudge and Cookies. Information on each product is as follows: Required: (Note: Round answers to two decimal places.) 1. Calculate the activity rate for (a) setting up equipment and (b) other overhead. 2. How much total overhead is assigned to Fudge using ABC? 3. What is the unit overhead assigned to Fudge using ABC? 4. Now, ignoring the ABC results, calculate the plantwide overhead rate, based on oven hours. 5. How much total overhead is assigned to Fudge using the plantwide overhead rate? 6. CONCEPTUAL CONNECTION Explain why the total overhead assigned to Fudge is different under the ABC system (i.e., using the activity rates) than under the non-ABC system (i.e., using the plantwide rate).Activity-Based Product Costing Suppose that a surgical ward has gathered the following information for four nursing activities and two types of patients: Required: 1. Determine the total nursing costs assigned to each patient category. 2. Output is measured in patient days. Assuming that the normal patient category uses 8,000 patient days and the intensive patient category uses 6,400 patient days, calculate the nursing cost per patient day for each type of patient. (Round to two decimal places.) 3. CONCEPTUAL CONNECTION The supervisor of the surgical ward has suggested that patient days is the only driver needed to assign nursing costs to each type of patient. Calculate the charge per patient day (rounded to the nearest cent) using this approach and then explain to the supervisor why this would be a bad decision.Assigning Costs to Activities, Resource Drivers The receiving department has three activities: unloading, counting goods, and inspecting. Unloading uses a forklif that is leased for 15,000 per year. The forklif is used only for unloading. The fuel for the forklif is 3,600 per year. Other operating costs (maintenance) for the forklif total 1,500 per year. Inspection uses some special testing equipment that has depreciation of 1,200 per year and an operating cost of 750. Receiving has three employees who have an average salary of 50,000 per year. The work distribution matrix for the receiving personnel is as follows: No other resources are used for these activities. Required: 1. Calculate the cost of each activity. 2. CONCEPTUAL CONNECTION Explain the two methods used to assign costs to activities.Activity-Based Customer-Driven Costs Suppose that Stillwater Designs has two classes of distributors: JIT distributors and non -JIT distributors. The JIT distributor places small, frequent orders, and the non -JIT distributor tends to place larger, less frequent orders. Both types of distributors are buying the same product. Stillwater Designs provides the following information about customer-related activities and costs for the most recent quarter: Required: 1. Calculate the total revenues per distributor category, and assign the customer costs to each distributor type by using revenues as the allocation base. Selling price for one unit is 150. 2. CONCEPTUAL CONNECTION Calculate the customer cost per distributor type using activity-based cost assignments. Discuss the merits of offering the non -JIT distributors a 2 price decrease (assume that they are agitating for a price concession). 3. CONCEPTUAL CONNECTION Assume that the JIT distributors are simply imposing the frequent orders on Stillwater Designs. No formal discussion has taken place between JIT customers and Stillwater Designs regarding the supply of goods on a JIT basis. The sales pattern has evolved over time. As an independent consultant, what would you suggest to Stillwater Designs management?Activity-Based Supplier Costing Bowman Company manufactures cooling systems. Bowman produces all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Manzer Inc. and Buckner Company. Both suppliers are reliable and seldom deliver late; however, Manzer sells the component for 89 per unit, while Buckner sells the same component for 86. Bowman purchases 80% of its components from Buckner because of its lower price. The total annual demand is 4,000,000 components. To help assess the cost effect of the two components, the following data were collected for supplier-related activities and suppliers: I. Activity Data II. Supplier Data Required: 1. Calculate the cost per component for each supplier, taking into consideration the costs of the supplier-related activities and using the current prices and sales volume. (Note: Round the unit cost to two decimal places.) 2. Suppose that Bowman loses 4,000,000 in sales per year because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier. By how much would this change the cost of each suppliers component? (Round to two decimal places.) 3. CONCEPTUAL CONNECTION Based on the analysis in Requirements 1 and 2, discuss the importance of activity-based supplier costing for internal decision making.Use the following information for Exercises 5-44 through 5-46: The following six situations at Diviney Manufacturing Inc. are independent. a. A manual insertion process takes 30 minutes and 8 pounds of material to produce a product. Automating the insertion process requires 15 minutes of machine time and 7.5 pounds of material. The cost per labor hour is 12, the cost per machine hour is 8, and the cost per pound of materials is 10. b. With its original design, a gear requires 8 hours of setup time. By redesigning the gear so that the number of different grooves needed is reduced by 50%, the setup time is reduced by 75%. The cost per setup hour is 50. c. A product currently requires 6 moves. By redesigning the manufacturing layout, the number of moves can be reduced from 6 to 0. The cost per move is 20. d. Inspection time for a plant is 16,000 hours per year. The cost of inspection consists of salaries of 8 inspectors, totaling 320,000. Inspection also uses supplies costing 5 per inspection hour. The company eliminated most defective components by eliminating low-quality suppliers. The number of production errors was reduced dramatically by installing a system of statistical process control. Further quality improvements were realized by redesigning the products, making them easier to manufacture. The net effect was to achieve a close to zero-defect state and eliminate the need for any inspection activity. e. Each unit of a product requires 6 components. The average number of components is 6.5 due to component failure, requiring rework and extra components. Developing relations with the right suppliers and increasing the quality of the purchased component can reduce the average number of components to 6 components per unit. The cost per component is 500. f. A plant produces 100 different electronic products. Each product requires an average of 8 components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 100 products so that they all have 4 components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are 900,000 per year. 5-44 Nonvalue-Added Costs Refer to the information for Diviney Manufacturing on the previous page. Required: Estimate the nonvalue-added cost for each situation.Use the following information for Exercises 5-44 through 5-46: The following six situations at Diviney Manufacturing Inc. are independent. a. A manual insertion process takes 30 minutes and 8 pounds of material to produce a product. Automating the insertion process requires 15 minutes of machine time and 7.5 pounds of material. The cost per labor hour is 12, the cost per machine hour is 8, and the cost per pound of materials is 10. b. With its original design, a gear requires 8 hours of setup time. By redesigning the gear so that the number of different grooves needed is reduced by 50%, the setup time is reduced by 75%. The cost per setup hour is 50. c. A product currently requires 6 moves. By redesigning the manufacturing layout, the number of moves can be reduced from 6 to 0. The cost per move is 20. d. Inspection time for a plant is 16,000 hours per year. The cost of inspection consists of salaries of 8 inspectors, totaling 320,000. Inspection also uses supplies costing 5 per inspection hour. The company eliminated most defective components by eliminating low-quality suppliers. The number of production errors was reduced dramatically by installing a system of statistical process control. Further quality improvements were realized by redesigning the products, making them easier to manufacture. The net effect was to achieve a close to zero-defect state and eliminate the need for any inspection activity. e. Each unit of a product requires 6 components. The average number of components is 6.5 due to component failure, requiring rework and extra components. Developing relations with the right suppliers and increasing the quality of the purchased component can reduce the average number of components to 6 components per unit. The cost per component is 500. f. A plant produces 100 different electronic products. Each product requires an average of 8 components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 100 products so that they all have 4 components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are 900,000 per year. 5-45 Driver Analysis Refer to the information for Diviney Manufacturing on the previous page. Required: CONCEPTUAL CONNECTION For each situation, identify the possible root cause(s) of the activity cost (such as plant layout, process design, and product design).Use the following information for Exercises 5-44 through 5-46: The following six situations at Diviney Manufacturing Inc. are independent. a. A manual insertion process takes 30 minutes and 8 pounds of material to produce a product. Automating the insertion process requires 15 minutes of machine time and 7.5 pounds of material. The cost per labor hour is 12, the cost per machine hour is 8, and the cost per pound of materials is 10. b. With its original design, a gear requires 8 hours of setup time. By redesigning the gear so that the number of different grooves needed is reduced by 50%, the setup time is reduced by 75%. The cost per setup hour is 50. c. A product currently requires 6 moves. By redesigning the manufacturing layout, the number of moves can be reduced from 6 to 0. The cost per move is 20. d. Inspection time for a plant is 16,000 hours per year. The cost of inspection consists of salaries of 8 inspectors, totaling 320,000. Inspection also uses supplies costing 5 per inspection hour. The company eliminated most defective components by eliminating low-quality suppliers. The number of production errors was reduced dramatically by installing a system of statistical process control. Further quality improvements were realized by redesigning the products, making them easier to manufacture. The net effect was to achieve a close to zero-defect state and eliminate the need for any inspection activity. e. Each unit of a product requires 6 components. The average number of components is 6.5 due to component failure, requiring rework and extra components. Developing relations with the right suppliers and increasing the quality of the purchased component can reduce the average number of components to 6 components per unit. The cost per component is 500. f. A plant produces 100 different electronic products. Each product requires an average of 8 components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 100 products so that they all have 4 components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are 900,000 per year. 5-46 Type of Activity Management Refer to the information for Diviney Manufacturing on the previous page. Required: For each situation, identify the cost reduction measure: activity elimination, activity reduction, activity sharing, or activity selection.Cycle Time and Velocity In the first quarter of operations, a manufacturing cell produced 80,000 stereo speakers, using 20,000 production hours. In the second quarter, the cycle time was 10 minutes per unit with the same number of production hours as were used in the first quarter. Required: 1. Compute the velocity (per hour) for the first quarter. 2. Compute the cycle time for the first quarter (minutes per unit produced). 3. How many units were produced in the second quarter?Product-Costing Accuracy, Consumption Ratios Plata Company produces two products: a mostly handcrafted soft leather briefcase sold under the label Maletin Elegant and a leather briefcase produced largely through automation and sold under the label Maletin Fina. The two products use two overhead activities, with the following costs: The controller has collected the expected annual prime costs for each briefcase, the machine hours, the setup hours, and the expected production. Required: 1. CONCEPTUAL CONNECTION Do you think that the direct labor costs and direct materials costs are accurately traced to each briefcase? Explain. 2. Calculate the consumption ratios for each activity. Round to two decimal places. 3. Calculate the overhead cost per unit for each briefcase by using a plantwide rate based on direct labor costs. Round rates to the nearest cent. Comment on this approach to assigning overhead. 4. CONCEPTUAL CONNECTION Calculate the overhead cost per unit for each briefcase by using overhead rates based on machine hours and setup hours. Explain why these assignments are more accurate than those using the direct labor costs.Product-Costing Accuracy, Consumption Ratios, Activity Rates, Activity Costing Tristar Manufacturing produces two types of battery-operated toy soldiers: infantry and special forces. The soldiers are produced by using one continuous process. Four activities have been identified: machining, setups, receiving, and packing. Resource drivers have been used to assign costs to each activity. The overhead activities, their costs, and the other related data are as follows: Required: 1. Calculate the total overhead assigned to each product by using only machine hours to calculate a plantwide rate. 2. Calculate consumption ratios for each activity. (Round to two decimal places.) 3. Calculate a rate for each activity by using the associated driver. (Round to two decimal places.) 4. Assign the overhead costs to each product by using the activity rates computed in Requirement 3. 5. CONCEPTUAL CONNECTION Comment on the difference between the assignment in Requirement 1 and the activity-based assignment.Formation of an Activity Dictionary A hospital is in the process of implementing an ABC system. A pilot study is being done to assess the effects of the costing changes on specific products. Of particular interest is the cost of caring for patients who receive in-patient recovery treatment for illness, surgery (noncardiac), and injury. These patients are housed on the third and fourth floors of the hospital. The floors are dedicated to patient care and have only nursing stations and patient rooms. A partial transcript of an interview with the hospitals nursing supervisor is as follows: 1. How many nurses are in the hospital? There are 101 nurses, including me. 2. Of these 100 nurses, how many are assigned to the third and fourth floors? Fifty nurses are assigned to these two floors. 3. What do these nurses do (please describe)? Provide nursing care for patients, which, as you know, means answering questions, changing bandages, administering medicine, changing clothes, etc. 4. And what do you do? I supervise and coordinate all the nursing activity in the hospital. This includes surgery, maternity, the emergency room, and the two floors you mentioned. 5. What other lodging and care activities are done for the third and fourth floors by persons other than the nurses? The patients must be fed. The hospital cafeteria delivers meals. The laundry department picks up dirty clothing and bedding once each shift. The floors also have a physical therapist assigned to provide care on a physician-directed basis. 6. Do patients use any equipment? Yes. Mostly monitoring equipment. 7. Who or what uses the activity output? Patients. But there are different kinds of patients. On these two floors, we classify patients into three categories according to severity: intensive care, intermediate care, and normal care. The more severe the illness, the more activity is used. Nurses spend much more time with intermediate care patients than with normal care. The more severe patients tend to use more of the laundry service as well. Their clothing and bedding need to be changed more frequently. On the other hand, severe patients use less food. They eat fewer meals. Typically, we measure each patient type by the number of days of hospital stay. And you have to realize that the same patient contributes to each type of product. Required: Prepare an activity dictionary with three categories: activity name, activity description, and activity driver.Activity Rates and Activity-Based Product Costing Hammer Company produces a variety of electronic equipment. One of its plants produces two laser printers: the deluxe and the regular. At the beginning of the year, the following data were prepared for this plant: In addition, the following information was provided so that overhead costs could be assigned to each product: Required: 1. Calculate the overhead rates for each activity. (Round to two decimal places.) 2. Calculate the per-unit product cost for each product. (Round to the nearest dollar.)Value- and Nonvalue-Added Costs Waterfun Technology produces engines for recreational boats. Because of competitive pressures, the company was making an effort to reduce costs. As part of this effort, management implemented an activity-based management system and began focusing its attention on processes and activities. Receiving was among the processes (activities) that were carefully studied. The study revealed that the number of receiving orders was a good driver for receiving costs. During the last year, the company incurred fixed receiving costs of 630,000 (salaries of 10 employees). These fixed costs provide a capacity of processing 72,000 receiving orders (7,200 per employee at practical capacity). Management decided that the efficient level for receiving should use 36,000 receiving orders. Required: 1. CONCEPTUAL CONNECTION Explain why receiving would be viewed as a value-added activity. List all possible reasons. Also, list some possible reasons that explain why the demand for receiving is more than the efficient level of 36,000 orders. 2. Break the cost of receiving into its value-added and nonvalue-added components.Functional-Based versus Activity-Based Costing For years, Tamarindo Company produced only one product: backpacks. Recently, Tamarindo added a line of duffel bags. With this addition, the company began assigning overhead costs by using departmental rates. (Prior to this, the company used a predetermined plantwide rate based on units produced.) Surprisingly, after the addition of the duffel-bag line and the switch to departmental rates, the costs to produce the backpacks increased, and their profitability dropped. Josie, the marketing manager, and Steve, the production manager, both complained about the increase in the production cost of backpacks. Josie was concerned because the increase in unit costs led to pressure to increase the unit price of backpacks. She was resisting this pressure because she was certain that the increase would harm the companys market share. Steve was receiving pressure to cut costs also, yet he was convinced that nothing different was being done in the way the backpacks were produced. After some discussion, the two managers decided that the problem had to be connected to the addition of the duffel-bag line. Upon investigation, they were informed that the only real change in product-costing procedures was in the way overhead costs are assigned. A two-stage procedure was now in use. First, overhead costs are assigned to the two producing departments, Patterns and Finishing. Second, the costs accumulated in the producing departments are assigned to the two products by using direct labor hours as a driver (the rate in each department is based on direct labor hours). The managers were assured that great care was taken to associate overhead costs with individual products. So that they could construct their own example of overhead cost assignment, the controller provided them with the information necessary to show how accounting costs are assigned to products: The controller remarked that the cost of operating the accounting department had doubled with the addition of the new product line. The increase came because of the need to process additional transactions, which had also doubled in number. During the first year of producing duffel bags, the company produced and sold 100,000 backpacks and 25,000 duffel bags. The 100,000 backpacks matched the prior years output for that product. Required: (Note: Round rates and unit cost to the nearest cent.) 1. CONCEPTUAL CONNECTION Compute the amount of accounting cost assigned to a backpack before the duffel-bag line was added by using a plantwide rate approach based on units produced. Is this assignment accurate? Explain. 2. Suppose that the company decided to assign the accounting costs directly to the product lines by using the number of transactions as the activity driver. What is the accounting cost per unit of backpacks? Per unit of duffel bags? 3. Compute the amount of accounting cost assigned to each backpack and duffel bag by using departmental rates based on direct labor hours. 4. CONCEPTUAL CONNECTION Which way of assigning overhead does the best jobthe functional-based approach by using departmental rates or the activity-based approach by using transactions processed for each product? Explain. Discuss the value of ABC before the duffel-bag line was added.Plantwide versus Departmental Rates, Product-Costing Accuracy: Activity-Based Costing Ramsey Company produces speakers (Model A and Model B). Both products pass through two producing departments. Model As production is much more labor-intensive than that of Model B. Model B is also the more popular of the two speakers. The following data have been gathered for the two products: Required: 1. Compute the overhead cost per unit for each product by using a plantwide rate based on direct labor hours. (Note: Round to two decimal places.) 2. Compute the overhead cost per unit for each product by using ABC. (Note: Round rates and unit overhead cost to two decimal places.) 3. Suppose that Ramsey decides to use departmental overhead rates. There are two departments: Department 1 (machine intensive) with a rate of 3.50 per machine hour and Department 2 (labor intensive) with a rate of 0.90 per direct labor hour. The consumption of these two drivers is as follows: Compute the overhead cost per unit for each product by using departmental rates. (Note: Round to two decimal places.) 4. CONCEPTUAL CONNECTION Using the activity-based product costs as the standard, comment on the ability of departmental rates to improve the accuracy of product costing. Did the departmental rates do better than the plantwide rate?Production-Based Costing versus Activity-Based Costing, Assigning Costs to Activities, Resource Drivers Willow Company produces lawnmowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant: Additionally, the following overhead activity costs are reported: Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Receiving and materials handling use three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of 40,000 each. The operators spend 25% of their time on the receiving activity and 75% on moving goods (materials handling). Gasoline costs 3 per move. Depreciation amounts to 8,000 per forklift per year. Required: (Note: Round answers to two decimal places.) 1. Calculate the cost of the materials handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers. 2. Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs. 3. Calculate activity rates, and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2. 4. Calculate consumption ratios for each activity. 5. CONCEPTUAL CONNECTION Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.56PCustomers as a Cost Object Morrisom National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are as follows: Additional data concerning the usage of the activities by the various customers are also provided: Required: (Note: Round answers to two decimal places.) 1. Calculate a cost per account per year by dividing the total cost of processing and maintaining checking accounts by the total number of accounts. What is the average fee per month that the bank should charge to cover the costs incurred because of checking accounts? 2. Calculate a cost per account by customer category by using activity rates. 3. Currently, the bank offers free checking to all of its customers. The interest revenues average 90 per account; however, the interest revenues earned per account by category are 80, 100, and 165 for the low-, medium-, and high-balance accounts, respectively. Calculate the average profit per account (average revenue minus average cost from Requirement 1). Then calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement 2. 4. CONCEPTUAL CONNECTION After the analysis in Requirement 3, a vice president recommended eliminating the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross-sales. He presented a survey that showed that 50% of the customers would switch banks if a checking fee were imposed. Explain how you could verify the presidents argument by using ABC.Grundvig Manufacturing produces several types of bolts used in aircraft. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into three categories, corresponding to the product family that they purchase. The number of units sold to each customer class is the same. The selling prices for the three product families range from 0.50 to 0.80 per unit. Historically, the costs of order entry, processing, and handling were expensed and not traced to individual customer groups. These costs are not trivial and totaled 9,000,000 for the most recent year. Recently, the company started emphasizing a cost reduction strategy with an emphasis on creating a competitive advantage. Upon investigation, management discovered that order-filling costs were driven by the number of customer orders processed with the following cost behavior: Step-fixed cost component: 50,000 per step (2,000 orders define a step) Variable cost component: 20 per order Grundvig currently has sufficient steps to process 200,000 orders. The expected customer orders for the year total 200,000. The expected usage of the order-filling activity and the average size of an order by customer category follow: As a result of cost behavior analysis, the marketing manager recommended the imposition of a charge per customer order. The charge was implemented by adding the cost per order to the price of each order (computed by using the projected ordering costs and expected orders). This ordering cost was then reduced as the size of the order increased and was eliminated as the order size reached 2,000 units. Within a short period of communicating this new price information to customers, the average order size for all three product families increased to 2,000 units. Required: 1. CONCEPTUAL CONNECTION Grundvig traditionally has expensed order-filling costs. What is the most likely reason for this practice? 2. Calculate the cost per order for each customer category. (Note: Round to two decimal places.) 3. CONCEPTUAL CONNECTION Calculate the reduction in order-filling costs produced by the change in pricing strategy (assuming that resource spending is reduced as much as possible and that the total units sold remain unchanged). Explain how exploiting customer activity information produced this cost reduction. Would any other internal activities benefit from this pricing strategy?Activity-Based Supplier Costing Levy Inc. manufactures tractors for agricultural usage. Levy purchases the engines needed for its tractors from two sources: Johnson Engines and Watson Company. The Johnson engine has a price of 1,000. The Watson engine is 900 per unit. Levy produces and sells 22,000 tractors. Of the 22,000 engines needed for the tractors, 4,000 are purchased from Johnson Engines, and 18,000 are purchased from Watson Company. The production manager, Jamie Murray, prefers the Johnson engine. However, Jan Booth, purchasing manager, maintains that the price difference is too great to buy more than the 4,000 units currently purchased. Booth also wants to maintain a significant connection with the Johnson source just in case the less expensive source cannot supply the needed quantities. Jamie, however, is convinced that the quality of the Johnson engine is worth the price difference. Frank Wallace, the controller, has decided to use activity costing to resolve the issue. The following activity cost and supplier data have been collected: Required: 1. CONCEPTUAL CONNECTION Calculate the activity-based supplier cost per engine (acquisition cost plus supplier-related activity costs). (Round to the nearest cent.) Which of the two suppliers is the low-cost supplier? Explain why this is a better measure of engine cost than the usual purchase costs assigned to the engines. 2. CONCEPTUAL CONNECTION Consider the supplier cost information obtained in Requirement 1. Suppose further that Johnson can only supply a total of 20,000 units. What actions would you advise Levy to undertake with its suppliers?Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing report that she had just received. According to Larry Savage, marketing manager, a price decrease for the coming year was again needed to maintain the companys annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of 18 per unit was producing a 2-per-unit profithalf the customary 4-per-unit profit. Foreign competitors kept reducing their prices. To match the latest reduction would reduce the price from 18 to 14. This would put the price below the cost to produce and sell it. How could these firms sell for such a low price? Determined to find out if there were problems with the companys operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produced and sold. After two weeks, the consultant had identified the following activities and costs: The consultant indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least 7. Since the marketing manager had indicated that the market share (sales volume) for the boards could be increased by 50% if the price could be reduced to 12, Danna became quite excited. Required: 1. CONCEPTUAL CONNECTION What is activity-based management? What phases of activity analysis did the consultant provide? What else remains to be done? 2. CONCEPTUAL CONNECTION Identify as many nonvalue-added costs as possible. Compute the cost savings per unit that would be realized if these costs were eliminated. Was the consultant correct in the preliminary cost reduction assessment? Discuss actions that the company can take to reduce or eliminate the nonvalue-added activities. 3. Compute the unit cost required to maintain current market share, while earning a profit of 4 per unit. Now compute the unit cost required to expand sales by 50%, assuming a per-unit profit of 4. How much cost reduction would be required to achieve each unit cost? 4. Assume that further activity analysis revealed the following: switching to automated insertion would save 60,000 of engineering support and 90,000 of direct labor. Now, what is the total potential cost reduction per unit available from activity analysis? With these additional reductions, can Mays achieve the unit cost to maintain current sales? To increase it by 50%? What form of activity analysis is this: reduction, sharing, elimination, or selection? 5. CONCEPTUAL CONNECTION Calculate income based on current sales, prices, and costs. Then calculate the income by using a 14 price and a 12 price, assuming that the maximum cost reduction possible is achieved (including Requirement 4s reduction). What price should be selected?John Thomas, vice president of Mallett Company (a producer of a variety of plastic products), has been supervising the implementation of an ABC management system. John wants to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, John has decided to focus on two processes: production and customer service. Within each process, one activity will be selected for improvement: materials usage for production and sustaining engineering for customer service (sustaining engineers are responsible for redesigning products based on customer needs and feedback). Value-added standards are identified for each activity. For materials usage, the value-added standard calls for six pounds per unit of output (the products differ in shape and function, but their weight is uniform). The value-added standard is based on the elimination of all waste due to defective molds. The standard price of materials is 5 per pound. For sustaining engineering, the standard is 58% of current practical activity capacity. This standard is based on the fact that about 42% of the complaints have to do with design features that could have been avoided or anticipated by the company. Current practical capacity (at the end of 20X1) is defined by the following requirements: 6,000 engineering hours for each product group that has been on the market or in development for 5 years or less and 2,400 hours per product group of more than 5 years. Four product groups have less than 5 years experience, and 10 product groups have more. Each of the 24 engineers is paid a salary of 60,000. Each engineer can provide 2,000 hours of service per year. No other significant costs are incurred for the engineering activity. Actual materials usage for 20X1 was 25% above the level called for by the value-added standard; engineering usage was 46,000 hours. A total of 80,000 units of output were produced. John and the operational managers have selected some improvement measures that promise to reduce nonvalue-added activity usage by 40% in 20X2. Selected actual results achieved for 20X2 are as follows: The actual prices paid for materials and engineering hours are identical to the standard or budgeted prices. Required: 1. For 20X1, calculate the nonvalue-added usage and costs for materials usage and sustaining engineering. 2. CONCEPTUAL CONNECTION Using the budgeted improvements, calculate the expected activity usage levels for 20X2. Now, compute the 20X2 usage variances (the difference between the expected and actual values), expressed in both physical and financial measures, for materials and engineering. Comment on the companys ability to achieve its targeted reductions. In particular, discuss what measures the company must take to capture any realized reductions in resource usage.Cycle Time, Velocity, Product Costing Goldman Company has a JIT system in place. Each manufacturing cell is dedicated to the production of a single product or major subassembly. One cell, dedicated to the production of telescopes, has four operations: machining, finishing, assembly, and qualifying (testing). For the coming year, the telescope cell has the following budgeted costs and cell time (both at theoretical capacity): During the year, the following actual results were obtained: Required: (Note: Round answers to two decimal places.) 1. Compute the velocity (number of telescopes per hour) that the cell can theoretically achieve. Now, compute the theoretical cycle time (number of hours or minutes per telescope) that it takes to produce one telescope. 2. Compute the actual velocity and the actual cycle time. 3. CONCEPTUAL CONNECTION Compute the budgeted conversion costs per minute. Using this rate, compute the conversion costs per telescope if theoretical output is achieved. Using this measure, compute the conversion costs per telescope for actual output. Does this product-costing approach provide an incentive for the cell manager to reduce cycle time? Explain.63CConsider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firms controller. Leonard: Chuck, as you know, our firm has been losing market share over the past 3 years. We have been losing more and more bids, and I dont understand why. At first, I thought that other firms were undercutting simply to gain business, but after examining some of the public financial reports, I believe that they are making a reasonable rate of return. I am beginning to believe that our costs and costing methods are at fault. Chuck: I cant agree with that. We have good control over our costs. Like most firms in our industry, we use a normal job-costing system. I really dont see any significant waste in the plant. Leonard: After talking with some other managers at a recent industrial convention, Im not so sure that waste by itself is the issue. They talked about activity-based management, activity-based costing, and continuous improvement. They mentioned the use of something called activity drivers to assign overhead. They claimed that these new procedures can help to produce more efficiency in manufacturing, better control of overhead, and more accurate product costing. A big deal was made of eliminating activities that added no value. Maybe our bids are too high because these other firms have found ways to decrease their overhead costs and to increase the accuracy of their product costing. Chuck: I doubt it. For one thing, I dont see how we can increase product-costing accuracy. So many of our costs are indirect costs. Furthermore, everyone uses some measure of production activity to assign overhead costs. I imagine that what they are calling activity drivers is just some new buzzword for measures of production volume. Fads in costing come and go. I wouldnt worry about it. Ill bet that our problems with decreasing sales are temporary. You might recall that we experienced a similar problem about 12 years agoit was 2 years before it straightened out. Required: 1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard Bryner? Explain. 2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed? Explain your reasoning. 3. Do you think that Chuck was well informedthat he was aware of the accounting implications of ABC and that he knew what was meant by cost drivers? Should he have been well informed? Review (in Chapter 1) the first category of the Statement of Ethical Professional Practice for management accountants. Do any of these standards apply in Chucks case?Describe the differences between process costing and job-order costing.2DQWhat are the similarities in and differences between the manufacturing cost flows for job-order firms and process firms?4DQHow would process costing for services differ from process costing for manufactured goods?How does the adoption of a JIT approach to manufacturing affect process costing?What are equivalent units? Why are they needed in a process-costing system?Under the weighted average method, how are prior-period costs and output treated? How are they treated under the FIFO method?9DQ10DQ11DQHow is the equivalent unit calculation affected when materials are added at the beginning or end of the process rather than uniformly throughout the process?13DQ14DQProcess costing works well whenever a. heterogeneous products pass through a series of processes and receive different doses of materials, labor, and overhead. b. material cost is accumulated by process and conversion cost is accumulated by process. c. homogeneous products pass through a series of processes and receive similar doses of conversion inputs and different doses of material inputs. d. homogeneous products pass through a series of processes and receive similar amounts of materials, labor, and overhead. e. None of these.Job-order costing works well whenever a. homogeneous products pass through a series of processes and receive similar doses of conversion inputs and different doses of material inputs. b. homogeneous products pass through a series of processes and receive similar doses of materials, labor, and overhead. c. heterogeneous products pass through a series of processes and receive different doses of materials, labor, and overhead. d. material cost is accumulated by process and conversion cost is accumulated by process.3MCQTo record the transfer of costs from a prior process to a subsequent process, the following entry would be made: a. debit Finished Goods and credit Work in Process. b. debit Work in Process (subsequent department) and credit Transferred-In Materials. c. debit Work in Process (prior department) and credit Work in Process (subsequent department). d. debit Work in Process (subsequent department) and credit Work in Process (prior department) e. None of these.The costs transferred from a prior process to a subsequent process are a. treated as another type of materials cost for the receiving department. b. referred to as transferred-in costs (for the receiving department). c. referred to as the cost of goods transferred out (for the transferring department). d. All of these. e. None of these.During the month of May, the grinding department produced and transferred out 2,300 units. EWIP had 500 units, 40% complete. There was no BWIP. The equivalent units of output for May are a. 2,000. b. 2,500. c. 2,300. d. 2,800. e. None of these.Use the following information for Multiple-Choice Questions 6-7 through 6-9: The mixing department incurred 46,000 of manufacturing costs during the month of September. The department transferred out 2,300 units and had 500 units in EWIP, 40% complete. There was no BWIP. 6-7 The unit cost for the month of September is a. 20. b. 18.40. c. 16.43. d. 200. e. 184.Use the following information for Multiple-Choice Questions 6-7 through 6-9: The mixing department incurred 46,000 of manufacturing costs during the month of September. The department transferred out 2,300 units and had 500 units in EWIP, 40% complete. There was no BWIP. 6-8 The cost of goods transferred out is a. 42,320. b. 46,000. c. 37,789. d. 460,000. e. None of these.Use the following information for Multiple-Choice Questions 6-7 through 6-9: The mixing department incurred 46,000 of manufacturing costs during the month of September. The department transferred out 2,300 units and had 500 units in EWIP, 40% complete. There was no BWIP. 6-9 The cost of EWIP is a. 9,200. b. 10,000. c. 3,680. d. 3,286. e. None of these.During May, Kimbrell Manufacturing completed and transferred out 100,000 units. In EWIP, there were 25,000 units, 40% complete. Using the weighted average method, the equivalent units are a. 100,000 units. b. 125,000 units. c. 105,000 units. d. 110,000 units. e. 120,000 units.During June, Kimbrell Manufacturing completed and transferred out 100,000 units. In EWIP, there were 25,000 units, 80% complete. Using the weighted average method, the equivalent units are a. 100,000 units. b. 125,000 units. c. 105,000 units. d. 110,000 units. e. 120,000 units.For August, Kimbrell Manufacturing has costs in BWIP equal to 112,500. During August, the cost incurred was 450,000. Using the weighted average method, Kimbrell had 125,000 equivalent units for August. There were 100,000 units transferred out during the month. The cost of goods transferred out is a. 500,000. b. 400,000. c. 450,000. d. 360,000. e. 50,000.For September, Murphy Company has manufacturing costs in BWIP equal to 100,000. During September, the manufacturing costs incurred were 550,000. Using the weighted average method, Murphy had 100,000 equivalent units for September. The equivalent unit cost for September is a. 1.00. b. 7.50. c. 6.50. d. 6.00. e. 6.62.During June, Faust Manufacturing started and completed 80,000 units. In BWIP, there were 25,000 units, 80% complete. In EWIP, there were 25,000 units, 60% complete. Using FIFO, the equivalent units are a. 80,000 units. b. 95,000 units. c. 85,000 units. d. 115,000 units. e. 100,000 units.During July, Faust Manufacturing started and completed 80,000 units. In BWIP, there were 25,000 units, 20% complete. In EWIP, there were 25,000 units, 80% complete. Using FIFO, the equivalent units are a. 80,000 units. b. 120,000 units. c. 65,000 units. d. 85,000 units. e. 100,000 units.Assume for August that Faust Manufacturing has manufacturing costs in BWIP equal to 80,000. During August, the cost incurred was 720,000. Using the FIFO method, Faust had 120,000 equivalent units for August. The cost per equivalent unit for August is a. 6.12. b. 6.50. c. 5.60. d. 6.00. e. 6.67.For August, Lanny Company had 25,000 units in BWIP, 40% complete, with costs equal to 36,000. During August, the cost incurred was 450,000. Using the FIFO method, Lanny had 125,000 equivalent units for August. There were 100,000 units transferred out during the month. The cost of goods transferred out is a. 500,000. b. 360,000. c. 450,000. d. 400,000. e. 50,000.When materials are added either at the beginning or the end of the process, a unit cost should be calculated for the a. materials and conversion categories. b. materials category only. c. materials and labor categories. d. conversion category only. e. labor category only.With nonuniform inputs, the cost of EWIP is calculated by a. adding the materials cost to the conversion cost. b. subtracting the cost of goods transferred out from the total cost of materials. c. multiplying the unit cost in each input category by the equivalent units of each input found in EWIP. d. multiplying the total unit cost by the units in EWIP. e. None of these.Transferred-in goods are treated by the receiving department as a. units started for the period. b. a material added at the beginning of the process. c. a category of materials separate from conversion costs. d. All of these. e. None of these.Basic Cost Flows Gardner Company produces 18-ounce boxes of a wheat cereal in three departments: mixing, cooking, and packaging. During August, Gardner produced 250,000 boxes with the following costs: Required: 1. Calculate the costs transferred out of each department. 2. Prepare journal entries that reflect these cost transfers.Equivalent Units, No Beginning Work in Process Frankle Manufacturing produces cylinders used in internal combustion engines. During June, Frankles welding department had the following data: Required: Calculate Junes output for the welding department in equivalent units of production.Unit Cost, Valuing Goods Transferred Out and EWIP During April, the grinding department of Tranx Inc. completed and transferred out 315,000 units. At the end of April, there were 112,500 units in process, 60% complete. Tranx incurred manufacturing costs totaling 2,295,000. Required: 1. Calculate the unit cost. 2. Calculate the cost of goods transferred out and the cost of EWIP.Weighted Average Method, Unit Cost, Valuing Inventories Applegate Enterprises produces premier raspberry jam. Output is measured in pints. Applegate uses the weighted average method. During January, Applegate had the following production data: Required: 1. Using the weighted average method, calculate the equivalent units for January. 2. Calculate the unit cost for January. 3. Assign costs to units transferred out and EWIPPhysical Flow Schedule Golding Inc. just finished its second month of operations. Golding mass-produces integrated circuits. The following production information is provided for December: Required: Prepare a physical flow schedule.Production Report, Weighted Average Manzer Inc. manufactures bicycle frames in two departments: cutting and welding. Manzer uses the weighted average method. Manufacturing costs are added uniformly throughout the process. The following are cost and production data for the cutting department for October: Required: Prepare a production report for the cutting department.Nonuniform Inputs, Weighted Average Carter Inc. had the following production and cost information for its fabrication department during April (with materials added at the beginning of the fabrication process): Carter uses the weighted average method. Required: 1. Prepare an equivalent units schedule. 2. Calculate the unit cost. (Note: Round answers to two decimal places.) 3. Calculate the cost of units transferred out and the cost of EWIP.Transferred-In Cost Powers Inc. produces a protein drink. The product is sold by the gallon. The company has two departments: mixing and bottling. For August, the bottling department had 70,000 gallons in beginning inventory (with transferred-in costs of 283,000) and completed 262,500 gallons during the month. Further, the mixing department completed and transferred out 240,000 gallons at a cost of 957,000 in August. Required: 1. Prepare a physical flow schedule for the bottling department. 2. Calculate equivalent units for the transferred-in category. 3. Calculate the unit cost for the transferred-in category.Use the following information for Brief Exercises 6-29 and 6-30: Aztec Inc. produces soft drinks. Mixing is the first department, and its output is measured in gallons. Aztec uses the FIFO method. All manufacturing costs are added uniformly. For July, the mixing department provided the following information: 6-29 (Appendix 6A) First-In, First-Out Method; Equivalent Units Refer to the information for Aztec Inc. on the previous page. Required: 1. Calculate the equivalent units for July. 2. Calculate the unit cost. (Note: Round to two decimal places.) 3. Assign costs to units transferred out and EWIP using the FIFO method.Use the following information for Brief Exercises 6-29 and 6-30: Aztec Inc. produces soft drinks. Mixing is the first department, and its output is measured in gallons. Aztec uses the FIFO method. All manufacturing costs are added uniformly. For July, the mixing department provided the following information: 6-30 (Appendix 6A) FIFO; Production Report Refer to the information for Aztec Inc. on the previous page. Required: Prepare a production report.Basic Cost Flows Hardy Company produces 18-ounce boxes of a rolled oat cereal in three departments: mixing, cooking, and packaging. During September, Hardy produced 200,000 boxes with the following costs: Required: 1. Calculate the costs transferred out of each department. 2. Prepare journal entries that reflect these cost transfers.Equivalent Units, No Beginning Work in Process Cardenas Pharmaceutical produces antibiotics. During April, Cardenass tableting department had the following data: Required: Calculate Aprils output for the tableting department in equivalent units of production.Unit Cost, Valuing Goods Transferred Out and EWIP During August, the drilling department of Arenal Inc. completed and transferred out 190,000 units. At the end of August, there were 42,700 units in process, 70% complete. Arenal incurred manufacturing costs totaling 1,759,120. Required: 1. Calculate the unit cost. 2. Calculate the cost of goods transferred out and the cost of EWIP.Weighted Average Method, Unit Cost, Valuing Inventories Polson Enterprises produces strawberry gelato. Output is measured in quarts. Polson uses the weighted average method. During July, Polson had the following production data: Required: 1. Using the weighted average method, calculate the equivalent units for July. 2. Calculate the unit cost for July. 3. Assign costs to units transferred out and EWIP.Physical Flow Schedule Craig Inc. just finished its third month of operations. Craig mass-produces carburetors used in motorcycle engines. The following production information is provided for December: Required: Prepare a physical flow schedule.Production Report, Weighted Average Washburn Inc. manufactures precision tools in two departments: molding and finishing. Washburn uses the weighted average method. Manufacturing costs are added uniformly throughout the process. The following are cost and production data for the molding department for June: Required: Prepare a production report for the molding department.Nonuniform Inputs, Weighted Average Ming Inc. had the following production and cost information for its blending department during February (with materials added at the beginning of the process): Ming uses the weighted average method. Required: 1. Prepare an equivalent units schedule. 2. Calculate the unit cost. (Note: Round answers to two decimal places.) 3. Calculate the cost of units transferred out and the cost of EWIP.Transferred-In Cost Vigor Inc. produces an energy drink. The product is sold by the quart. The company has two departments: mixing and bottling. For May, the bottling department had 30,000 quarts in beginning inventory (with transferred-in costs of 63,000) and completed 140,000 quarts during the month. Further, the mixing department completed and transferred out 120,000 gallons at a cost of 237,000 in May. Required: 1. Prepare a physical flow schedule for the bottling department. 2. Calculate equivalent units for the transferred-in category. 3. Calculate the unit cost for the transferred-in category.Use the following information for Brief Exercises 6-39 and 6-40: Saludable Inc. produces a freeze-dried kale powder. Drying is the first department, and its output is measured in pounds. Saludable uses the FIFO method. All manufacturing costs are added uniformly. For November, the drying department provided the following information: 6-39 (Appendix 6A) First-In, First-Out Method; Equivalent Units Refer to the information for Saludable Inc. above. Required: 1. Calculate the equivalent units for November. 2. Calculate the unit cost. (Note: Round to two decimal places.) 3. Assign costs to units transferred out and EWIP using the FIFO method.Use the following information for Brief Exercises 6-39 and 6-40: Saludable Inc. produces a freeze-dried kale powder. Drying is the first department, and its output is measured in pounds. Saludable uses the FIFO method. All manufacturing costs are added uniformly. For November, the drying department provided the following information: 6-40 (Appendix 6A) FIFO; Production Report Refer to the information for Saludable Inc. on the previous page. Required: Prepare a production report.Basic Cost Flows Linsenmeyer Company produces a common machine component for industrial equipment in three departments: molding, grinding, and finishing. The following data are available for September: During September, 18,000 components were completed. There is no beginning or ending WIP in any department. Required: 1. Prepare a schedule showing, for each department, the cost of direct materials, direct labor, applied overhead, product transferred in from a prior department, and total manufacturing cost. 2. Calculate the unit cost. (Note: Round the unit cost to two decimal places.)Journal Entries, Basic Cost Flows In December, Davis Company had the following cost flows: Required: 1. Prepare the journal entries to transfer costs from (a) Molding to Grinding, (b) Grinding to Finishing, and (c) Finishing to Finished Goods. 2. CONCEPTUAL CONNECTION Explain how the journal entries differ from a job-order cost system.Equivalent Units, Unit Cost, Valuation of Goods Transferred Out and Ending Work in Process The blending department had the following data for the month of March: Required: 1. What is the output in equivalent units for March? 2. What is the unit manufacturing cost for March? 3. Compute the cost of goods transferred out for March. 4. Calculate the value of Marchs EWIP.Weighted Average Method, Equivalent Units Goforth Company produces a product where all manufacturing inputs are applied uniformly. Goforth produced the following physical flow schedule for April: Required: Prepare a schedule of equivalent units using the weighted average method.Cassien Inc. manufactures products that pass through two or more processes. During June, equivalent units were computed using the weighted average method: Required: 1. Calculate the unit cost for June using the weighted average method. 2. Using the weighted average method, determine the cost of EWIP and the cost of the goods transferred out. 3. CONCEPTUAL CONNECTION Cassien had just finished implementing a series of measures designed to reduce the unit cost to 2.00 and was assured that this had been achieved and should be realized for Junes production. Yet, upon seeing the unit cost for June, the president of the company was disappointed. Can you explain why the full effect of the cost reductions may not show up in June? What can you suggest to overcome this problem?Weighted Average Method, Unit Costs, Valuing Inventories Byford Inc. produces a product that passes through two processes. During November, equivalent units were calculated using the weighted average method: The costs that Byford had to account for during the month of November were as follows: Required: 1. Using the weighted average method, determine unit cost. 2. Under the weighted average method, what is the total cost of units transferred out? What is the cost assigned to units in ending inventory? 3. CONCEPTUAL CONNECTION Bill Johnson, the manager of Byford, is considering switching from weighted average to FIFO. Explain the key differences between the two approaches and make a recommendation to Bill about which method should be used.Physical Flow Schedule The following information was obtained for the grinding department of Harlan Company for May: a. BWIP had 91,500 units, 30% complete with respect to manufacturing costs. b. EWIP had 25,200 units, 25% complete with respect to manufacturing costs. c. Started 99,000 units in May. Required: Prepare a physical flow schedule.Physical Flow Schedule Nelrok Company manufactures fertilizer. Department 1 mixes the chemicals required for the fertilizer. The following data are for the year: Required: Prepare a physical flow schedule.Production Report, Weighted Average Mino Inc. manufactures chocolate syrup in three departments: cooking, mixing, and bottling. Mino uses the weighted average method. The following are cost and production data for the cooking department for April (Note: Assume that units are measured in gallons.): Required: Prepare a production report for the cooking department.Nonuniform Inputs, Equivalent Units Terry Linens Inc. manufactures bed and bath linens. The bath linens department sews terry cloth into towels of various sizes. Terry uses the weighted average method. All materials are added at the beginning of the process. The following data are for the bath linens department for August: Required: Calculate equivalent units of production for the bath linens department for August.Unit Cost and Cost Assignment, Nonuniform Inputs Loran Inc. had the following equivalent units schedule and cost for its fabrication department during September: Required: 1. Calculate the unit cost for materials, for conversion, and in total for the fabrication department for September. 2. Calculate the cost of units transferred out and the cost of EWIP.Nonuniform Inputs, Transferred-In Cost Drysdale Dairy produces a variety of dairy products. In Department 12, cream (transferred in from Department 6) and other materials (sugar and flavorings) are mixed at the beginning of the process and churned to make ice cream. The following data are for Department 12 for August: Required: 1. Prepare a physical flow schedule for the month. 2. Using the weighted average method, calculate equivalent units for the following categories: transferred-in, materials, and conversion.Transferred-In Cost Goldings finishing department had the following data for July: Required: 1. Calculate unit costs for the following categories: transferred-in, materials, and conversion. 2. Calculate total unit cost.(Appendix 6A) First-In, First-Out Method; Equivalent Units Lawson Company produces a product where all manufacturing inputs are applied uniformly. Lawson produced the following physical flow schedule for March: Required: Prepare a schedule of equivalent units using the FIFO method.(Appendix 6A) First-In, First-Out Method; Unit Cost; Valuing Inventories Loren Inc. manufactures products that pass through two or more processes. During April, equivalent units were computed using the FIFO method: Required: 1. Calculate the unit cost for April using the FIFO method. (Note: Round to two decimal places.) 2. Using the FIFO method, determine the cost of EWIP and the cost of the goods transferred out.Basic Flows, Equivalent Units Thayn Company produces an arthritis medication that passes through two departments: mixing and tableting. Thayn uses the weighted average method. Data for February for mixing are as follows: BWIP was zero; EWIP had 36,000 units, 50% complete: and 420,000 units were started. Tabletings data for February are as follows: BWIP was 24,000 units, 20% complete; and 12,000 units were in EWIP, 40% complete. Required: 1. For mixing, calculate the (a) number of units transferred to tableting and (b) equivalent units of production. 2. For tableting, calculate the number of units transferred out to Finished Goods. 3. CONCEPTUAL CONNECTION Suppose that the units in the mixing department are measured in ounces, while the units in tableting are measured in bottles of 100 tablets, with a total weight of eight ounces (excluding the bottle). Decide how you would treat units that are measured differently and then repeat Requirement 2 using this approach.Steps in Preparing a Production Report Recently, Stillwater Designs expanded its market by becoming an original equipment supplier to Jeep Wrangler. Stillwater Designs produces factory upgraded speakers specifically for Jeep Wrangler. The Kicker components and speaker cabinets are outsourced with assembly remaining in house. Stillwater Designs assembles the product by placing the speakers and other components in cabinets that define an audio package upgrade and that can be placed into the Jeep Wrangler, producing the desired factory-installed appearance. Speaker cabinets and associated Kicker components are added at the beginning of the assembly process. Assume that Stillwater Designs uses the weighted average method to cost out the audio package. The following are cost and production data for the assembly process for April: Required: 1. Prepare a physical flow analysis for the assembly department for the month of April. 2. Calculate equivalent units of production for the assembly department for the month of April. 3. Calculate unit cost for the assembly department for the month of April. 4. Calculate the cost of units transferred out and the cost of EWIP inventory. 5. Prepare a cost reconciliation for the assembly department for the month of April.Recently, Stillwater Designs expanded its market by becoming an original equipment supplier to Jeep Wrangler. Stillwater Designs produces factory upgraded speakers specifically for Jeep Wrangler. The Kicker components and speaker cabinets are outsourced with assembly remaining in house. Stillwater Designs assembles the product by placing the speakers and other components in cabinets that define an audio package upgrade and that can be placed into the Jeep Wrangler, producing the desired factory-installed appearance. Speaker cabinets and associated Kicker components are added at the beginning of the assembly process. Assume that Stillwater Designs uses the weighted average method to cost out the audio package. The following are cost and production data for the assembly process for April: Required: 1. Prepare a production report for the assembly department for the month of April. 2. CONCEPTUAL CONNECTION Write a one-page report that compares the purpose and content of the production report with the job-order cost sheet.Equivalent Units, Unit Cost, Weighted Average Refer to the information for Alfombra Inc. on the previous page. Required: 1. Prepare a physical flow analysis for the throw rug department for August. 2. Calculate equivalent units of production for the throw rug department for August. 3. Calculate the unit cost for the throw rug department for August. 4. Show that the cost per unit calculated in Requirement 3 is a weighted average of the FIFO cost per equivalent unit in BWIP and the FIFO cost per equivalent unit for August. (Hint: The weights are in proportion to the number of units from each source.) Use the following information for Problems 6-59 and 6-60: Alfombra Inc. manufactures throw rugs. The throw rug department weaves cloth and yarn into throw rugs of various sizes. Alfombra uses the weighted average method. Materials are added uniformly throughout the weaving process. In August, Alfombra switched from FIFO to the weighted average method. The following data are for the throw rug department for August:Production Report Refer to the information for Alfombra Inc. on the previous page. The owner of Alfombra insisted on a formal report that provided all the details of the weighted average method. In the manufacturing process, all materials are added uniformly throughout the process. Required: Prepare a production report for the throw rug department for August using the weighted average method.Mimasca Inc. manufactures various holiday masks. Each mask is shaped from a piece of rubber in the molding department. The masks are then transferred to the finishing department, where they are painted and have elastic bands attached. Mimasca uses the weighted average method. In May, the molding department reported the following data: a. BWIP consisted of 15.000 units, 20% complete. Cost in beginning inventor) totaled 1,656. b. Costs added to production during the month were 26,094. c. At the end of the month, 45.000 units were transferred out to finishing. Then, 5,000 units remained in EWIP, 25% complete. Required: 1. Prepare a physical flow schedule. 2. Calculate equivalent units of production. 3. Compute unit cost. 4. Calculate the cost of goods transferred to finishing at the end of the month. Calculate the cost of ending inventor). 5. CONCEPTUAL CONNECTION Assume that the masks are inspected at the end of the molding process. Of the 45,000 units inspected, 2,500 are rejected as faulty and are discarded. Thus, only 42,500 units are transferred to the finishing department. The manager of Mimasca considers all such spoilage as abnormal and does not want to assign any of this cost to the 42.500 good units produced and transferred to finishing. Your task is to determine the cost of this spoilage of 2,500 units and then to discuss how you would account for this spoilage cost. Now suppose that the manager feels that this spoilage cost is just part of the cost of producing the good units transferred out. Therefore, he wants to assign this cost to the good production. Explain how this would be handled. (Hint: Spoiled units are a type of output, and equivalent units of spoilage can be calculated.)Use the following information for Problems 6-62 and 6-63: Millie Company produces a product that passes through an assembly process and a finishing process. All manufacturing costs are added uniformly for both processes. The following information was obtained for the assembly department for June: a. WIP, June 1, had 24,000 units (60% completed) and the following costs: b. During June, 70,000 units were completed and transferred to the finishing department, and the following costs were added to production: c. On June 30, there were 10,000 partially completed units in process. These units were 70% complete. 6-62 Weighted Average Method, Single-Department Analysis Refer to the information for Millie Company above. Required: Prepare a production report for the assembly department for June using the weighted average method of costing. The report should disclose the physical flow of units, equivalent units, and unit costs and should track the disposition of manufacturing costs.Use the following information for Problems 6-62 and 6-63: Millie Company produces a product that passes through an assembly process and a finishing process. All manufacturing costs are added uniformly for both processes. The following information was obtained for the assembly department for June: a. WIP, June 1, had 24,000 units (60% completed) and the following costs: b. During June, 70,000 units were completed and transferred to the finishing department, and the following costs were added to production: c. On June 30, there were 10,000 partially completed units in process. These units were 70% complete. 6-63 (Appendix 6A) First-In, First-Out Method; Single-Department Analysis; One Cost Category Refer to the information for Millie Company above. Required: Prepare a production report for the assembly department for June using the FIFO method of costing. The report should disclose the physical flow of units, equivalent units, and unit costs and should track the disposition of manufacturing costs. (Note: Carry the unit cost computation to four decimal places.)Weighted Average Method, Separate Materials Cost Janbo Company produces a variety of stationery products. One product, sealing wax sticks, passes through two processes: blending and molding. The weighted average method is used to account for the costs of production. After blending, the resulting product is sent to the molding department, where it is poured into molds and cooled. The following information relates to the blending process for August: a. WIP, August 1, had 30,000 pounds, 20% complete. Costs associated with partially completed units were: b. WIP, August 31, had 50,000 pounds, 40% complete. c. Units completed and transferred out totaled 480,000 pounds. Costs added during the month were (all inputs are added uniformly): Required: 1. Prepare (a) a physical flow schedule and (b) an equivalent unit schedule. 2. Calculate the unit cost. (Note: Round to three decimal places.) 3. Compute the cost of EWIP and the cost of goods transferred out. 4. Prepare a cost reconciliation. 5. Suppose that the materials added uniformly in blending are paraffin and pigment and that the manager of the company wants to know how much each of these materials costs per equivalent unit produced. The costs of the materials in BWIP are as follows: The costs of the materials added during the month are also given: Prepare an equivalent unit schedule with cost categories for each material. Calculate the cost per unit for each type of material.Seacrest Company uses a process-costing system. The company manufactures a product that is processed in two departments: A and B. As work is completed, it is transferred out. All inputs are added uniformly in Department A. The following summarizes the production activity and costs for November: Required: 1. Using the weighted average method, prepare the following for Department A: (a) a physical flow schedule, (b) an equivalent unit calculation, (c) calculation of unit costs (Note: Round to four decimal places.), (d) cost of EWIP and cost of goods transferred out, and (e) a cost reconciliation. 2. CONCEPTUAL CONNECTION Prepare journal entries that show the flow of manufacturing costs for Department A. Use a conversion cost control account for conversion costs. Many firms are now combining direct labor and overhead costs into one category. They are not tracking direct labor separately. Offer some reasons for this practice.Required: 1. Using the FIFO method, prepare the following for Department A: (a) a physical flow schedule, (b) an equivalent unit calculation, (c) calculation of unit costs (Note: Round to three decimal places.), (d) cost of EWIP and cost of goods transferred out, and (e) a cost reconciliation. 2. CONCEPTUAL CONNECTION Prepare journal entries that show the flow of manufacturing costs for Department A. Use a conversion cost control account for conversion costs. Many firms are now combining direct labor and overhead costs into one category. They are not tracking direct labor separately. Offer some reasons for this practice.Benson Pharmaceuticals uses a process-costing system to compute the unit costs of the over-the-counter cold remedies that it produces. It has three departments: mixing, encapsulating, and bottling. In mixing, the ingredients for the cold capsules are measured, sifted, and blended (with materials assumed to be uniformly added throughout the process). The mix is transferred out in gallon containers. The encapsulating department takes the powdered mix and places it in capsules (which are necessarily added at the beginning of the process). One gallon of powdered mix converts into 1,500 capsules. After the capsules are filled and polished, they are transferred to bottling, where they are placed in bottles that are then affixed with a safety seal, lid, and label. Each bottle receives 50 capsules. During March, the following results are available for the first two departments: Overhead in both departments is applied as a percentage of direct labor costs. In the mixing department, overhead is 200% of direct labor. In the encapsulating department, the overhead rate is 150% of direct labor. Required: 1. Prepare a production report for the mixing department using the weighted average method. Follow the five steps outlined in the chapter. (Note: Round to two decimal places for the unit cost.) 2. Prepare a production report for the encapsulating department using the weighted average method. Follow the five steps outlined in the chapter. (Note: Round to four decimal places for the unit cost.) 3. CONCEPTUAL CONNECTION Explain why the weighted average method is easier to use than FIFO. Explain when weighted average will give about the same results as FIFO.(Appendix 6A) First-In, First-Out Method Refer to Problem 6-67. Required: Prepare a production report for the mixing and encapsulating departments using the FIFO method. (Note: Round the unit cost to four decimal places.) (Hint: For the second department, you must convert gallons to capsules.)Golding Manufacturing, a division of Farnsworth Sporting Inc., produces two different models of bows and eight models of knives. The bow-manufacturing process involves the production of two major subassemblies: the limbs and the handles. The limbs pass through four sequential processes before reaching final assembly: layup, molding, fabricating, and finishing. In the layup department, limbs are created by laminating layers of wood. In the molding department, the limbs are heat-treated, under pressure, to form strong resilient limbs. In the fabricating department, any protruding glue or other processing residue is removed. Finally, in the finishing department, the limbs are cleaned with acetone, dried, and sprayed with the final finishes. The handles pass through two processes before reaching final assembly: pattern and finishing. In the pattern department, blocks of wood are fed into a machine that is set to shape the handles. Different patterns are possible, depending on the machines setting. After coming out of the machine, the handles are cleaned and smoothed. They then pass to the finishing department, where they are sprayed with the final finishes. In final assembly, the limbs and handles are assembled into different models using purchased parts such as pulley assemblies, weight-adjustment bolts, side plates, and string. Golding, since its inception, has been using process costing to assign product costs. A predetermined overhead rate is used based on direct labor dollars (80% of direct labor dollars). Recently, Golding has hired a new controller, Karen Jenkins. After reviewing the product-costing procedures, Karen requested a meeting with the divisional manager, Aaron Suhr. The following is a transcript of their conversation: Karen: Aaron, I have some concerns about our cost accounting system. We make two different models of bows and are treating them as if they were the same product. Now I know that the only real difference between the models is the handle. The processing of the handles is the same, but the handles differ significantly in the amount and quality of wood used. Our current costing does not reflect this difference in material input. Aaron: Your predecessor is responsible. He believed that tracking the difference in material cost wasnt worth the effort. He simply didnt believe that it would make much difference in the unit cost of either model. Karen: Well, he may have been right, but I have my doubts. If there is a significant difference, it could affect our views of which model is more important to the company. The additional bookkeeping isnt very stringent. All we have to worry about is the pattern department. The other departments fit what I view as a process-costing pattern. Aaron: Why dont you look into it? If there is a significant difference, go ahead and adjust the costing system. After the meeting, Karen decided to collect cost data on the two models: the Deluxe model and the Econo model. She decided to track the costs for one week. At the end of the week, she had collected the following data from the pattern department: a. There were a total of 2,500 bows completed: 1,000 Deluxe models and 1,500 Econo models. b. There was no BWIP; however, there were 300 units in EWIP: 200 Deluxe and 100 Econo models. Both models were 80% complete with respect to conversion costs and 100% complete with respect to materials. c. The pattern department experienced the following costs: d. On an experimental basis, the requisition forms for materials were modified to identify the dollar value of the materials used by the Econo and Deluxe models: Required: 1. Compute the unit cost for the handles produced by the pattern department, assuming that process costing is totally appropriate. Round unit cost to two decimal places. 2. Compute the unit cost of each handle, using the separate cost information provided on materials. Round unit cost to two decimal places. 3. Compare the unit costs computed in Requirements 1 and 2. Is Karen justified in her belief that a pure process-costing relationship is not appropriate? Describe the costing system that you would recommend. 4. In the past, the marketing manager has requested more money for advertising the Econo line. Aaron has repeatedly refused to grant any increase in this products advertising budget because its per-unit profit (selling price minus manufacturing cost) is so low. Given the results in Requirements 1 through 3, was Aaron justified in his position?AKL Foundry manufactures metal components for different kinds of equipment used by the aerospace, commercial aircraft, medical equipment, and electronic industries. The company uses investment casting to produce the required components. Investment casting consists of creating, in wax, a replica of the final product and pouring a hard shell around it. After removing the wax, molten metal is poured into the resulting cavity. What remains after the shell is broken is the desired metal object ready to be put to its designated use. Metal components pass through eight processes: gating, shell creating, foundry work, cutoff, grinding, finishing, welding, and strengthening. Gating creates the wax mold and clusters the wax pattern around a sprue (a hole through which the molten metal will be poured through the gates into the mold in the foundry process), which is joined and supported by gates (flow channels) to form a tree of patterns. In the shell-creating process, the wax molds are alternately dipped in a ceramic slurry and a fluidized bed of progressively coarser refractory grain until a sufficiently thick shell (or mold) completely encases the wax pattern. After drying, the mold is sent to the foundry process. Here, the wax is melted out of the mold, and the shell is fired, strengthened, and brought to the proper temperature. Molten metal is then poured into the dewaxed shell. Finally, the ceramic shell is removed, and the finished product is sent to the cutoff process, where the parts are separated from the tree by the use of a band saw. The parts are then sent to the grinding process, where the gates that allowed the molten metal to flow into the ceramic cavities are ground off using large abrasive grinders. In the finishing process, rough edges caused by the grinders are removed by small handheld pneumatic tools. Parts that are flawed at this point are sent to welding for corrective treatment. The last process uses heat to treat the parts to bring them to the desired strength. In 20X1, the two partners who owned AKL Foundry decided to split up and divide the business. In dissolving their business relationship, they were faced with the problem of dividing the business assets equitably. Since the company had two plantsone in Arizona and one in New Mexicoa suggestion was made to split the business on the basis of geographic location. One partner would assume ownership of the plant in New Mexico, and the other would assume ownership of the plant in Arizona. However, this arrangement had one major complication: the amount of WIP inventory located in the Arizona plant. The Arizona facilities had been in operation for more than a decade and were full of WIP. The New Mexico facility had been operational for only 2 years and had much smaller WIP inventories. The partner located in New Mexico argued that to disregard the unequal value of the WIP inventories would be grossly unfair. Unfortunately, during the entire business history of AKL Foundry, WIP inventories had never been assigned any value. In computing the cost of goods sold each year, the company had followed the policy of adding depreciation to the out-of-pocket costs of direct labor, direct materials, and overhead. Accruals for the company are nearly nonexistent, and there are hardly ever any ending inventories of materials. During 20X1, the Arizona plant had sales of 2,028,670. The cost of goods sold is itemized as follows: Upon request, the owners of AKL provided the following supplementary information (percentages are cumulative): Gating had 10,000 units in BWIP, 60% complete. Assume that all materials are added at the beginning of each process. During the year, 50,000 units were completed and transferred out. The ending inventory had 11,000 unfinished units, 60% complete. Required: 1. The partners of AKL want a reasonable estimate of the cost of WIP inventories. Using the gating departments inventory as an example, prepare an estimate of the cost of the EWIP. What assumptions did you make? Did you use the FIFO or weighted average method? Why? (Note: Round unit cost to two decimal places.) 2. Assume that the shell-creating process has 8,000 units in BWIP, 20% complete. During the year, 50,000 units were completed and transferred out. (Note: All 50,000 units were sold; no other units were sold.) The EWIP inventory had 8,000 units, 30% complete. Compute the value of the shell-creating departments EWIP. What additional assumptions had to be made?Consider the following conversation between Gary Means, manager of a division that produces industrial machinery, and his controller, Donna Simpson, a certified management accountant and certified public accountant: Gary: Donna, we have a real problem. Our operating cash is too low, and we are in desperate need of a loan. As you know, our financial position is marginal, and we need to show as much income as possibleand our assets need bolstering as well. Donna: I understand the problem, but I dont see what can be done at this point. This is the last week of the fiscal year, and it looks like well report income just slightly above breakeven. Gary: I know all this. What we need is some creative accounting. I have an idea that might help us, and I wanted to see if you would go along with it. We have 200 partially finished machines in process, about 20% complete. That compares with the 1,000 units that we completed and sold during the year. When you computed the per-unit cost, you used 1,040 equivalent units, giving us a manufacturing cost of 1,500 per unit. That per-unit cost gives us cost of goods sold equal to 1.5 million and ending work in process worth 60,000. The presence of the work in process gives us a chance to improve our financial position. If we report the units in work in process as 80% complete, this will increase our equivalent units to 1,160. This, in turn, will decrease our unit cost to about 1,345 and cost of goods sold to 1.345 million. The value of our work in process will increase to 215,200. With those financial stats, the loan would be a cinch. Donna: Gary, I dont know. What youre suggesting is risky. It wouldnt take much auditing skill to catch this one. Gary: You dont have to worry about that. The auditors wont be here for at least 6 to 8 more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labor cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be reported. And, as you know, bonuses come out of the corporate budget and are assigned to overheadnext years overhead. Donna, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we dont do this, we could lose our jobs. Required: 1. Should Donna agree to Garys proposal? Why or why not? To assist in deciding, review the corporate code of ethics standards described in Chapter 1. Do any apply? 2. Assume that Donna refuses to cooperate and that Gary accepts this decision and drops the matter. Does Donna have any obligation to report the divisional managers behavior to a superior? Explain. 3. Assume that Donna refuses to cooperate; however, Gary insists that the changes be made. Now what should she do? What would you do? 4. Suppose that Donna is 63 and that the prospects for employment elsewhere are bleak. Assume again that Gary insists that the changes be made. Donna also knows that his supervisor, the owner of the company, is his father-in-law. Under these circumstances, would your recommendations for Donna differ?1DQDescribe the difference between the units sold approach to CVP analysis and the sales revenue approach.Define the term break-even point.4DQWhat is the variable cost ratio? The contribution margin ratio? How are the two ratios related?6DQDefine the term sales mix. Give an example to support your definition.Explain how CVP analysis developed for single products can be used in a multiple-product setting.9DQHow does targeted profit enter into the break-even units equation?Explain how a change in sales mix can change a companys break-even point.Define the term margin of safety. Explain how it can be used as a crude measure of operating risk.Explain what is meant by the term operating leverage. What impact does increased leverage have on risk?How can sensitivity analysis be used in conjunction with CVP analysis?Why is a declining margin of safety over a period of time an issue of concern to managers?If the variable cost per unit goes down,The amount of revenue required to earn a targeted profit is equal to a. total fixed cost divided by contribution margin. b. total fixed cost divided by the contribution margin ratio. c. targeted profit divided by the contribution margin ratio. d. total fixed cost plus targeted profit divided by contribution margin ratio. e. targeted profit divided by the variable cost ratio.3MCQ4MCQAn important assumption of cost-volume-profit analysis is that a. both costs and revenues are linear functions. b. all cost and revenue relationships are analyzed within the relevant range. c. there is no change in inventories. d. the sales mix remains constant. e. All of these.The use of fixed costs to extract higher percentage changes in profits as sales activity changes involves a. margin of safety. b. unit contribution margin. c. degree of operating leverage. d. sensitivity analysis. e. variable cost reduction.7MCQThe contribution margin is the a. amount by which sales exceed total fixed cost. b. difference between sales and total cost. c. difference between sales and operating income. d. difference between sales and total variable cost. e. difference between variable cost and fixed cost.Dartmouth Company produces a single product with a price of 12, variable cost per unit of 3, and total fixed cost of 7,200. Refer to the information for Dartmouth above. Dartmouths break-even point in units a. is 600. b. is 480. c. is 1,000. d. is 800. e. cannot be determined from the information given.Dartmouth Company produces a single product with a price of 12, variable cost per unit of 3, and total fixed cost of 7,200. Refer to the information for Dartmouth above. The variable cost ratio and the contribution margin ratio for Dartmouth areIf a companys total fixed cost decreases by 10,000, which of the following will be true? a. The break-even point will increase. b. The variable cost ratio will increase. c. The break-even point will be unchanged. d. The variable cost ratio will be unchanged. e. The contribution margin ratio will increase.12MCQVariable Cost, Fixed Cost, Contribution Margin Income Statement Head-First Company plans to sell 5,000 bicycle helmets at 75 each in the coming year. Product costs include: Variable selling expense is a commission of 3 per helmet; fixed selling and administrative expense totals 29,500. Required: 1. Calculate the total variable cost per unit. 2. Calculate the total fixed expense for the year. 3. Prepare a contribution margin income statement for Head-First Company for the coming year.14BEAVariable Cost Ratio, Contribution Margin Ratio Head-First Company plans to sell 5,000 bicycle helmets at 75 each in the coming year. Unit variable cost is 45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is 20,000, and fixed selling and administrative expense is 29,500. Required: 1. Calculate the variable cost ratio. 2. Calculate the contribution margin ratio. 3. Prepare a contribution margin income statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable cost, and total contribution margin.16BEAUnits to Earn Target Income Head-First Company plans to sell 5,000 bicycle helmets at 75 each in the coming year. Unit variable cost is 45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 49,500 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the number of helmets Head-First must sell to earn operating income of 81,900. 2. Check your answer by preparing a contribution margin income statement based on the number of units calculated.Sales Needed to Earn Target Income Head-First Company plans to sell 5,000 bicycle helmets at 75 each in the coming year. Variable cost is 60% of the sales price; contribution margin is 40% of the sales price. Total fixed cost equals 49,500 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the sales revenue that Head-First must make to earn operating income of 81,900 by using the point in sales equation. 2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.Break-Even Point in Units for a Multiple-Product Firm Suppose that Head-First Company now sells both bicycle helmets and motorcycle helmets. The bicycle helmets are priced at 75 and have variable costs of 45 each. The motorcycle helmets are priced at 220 and have variable costs of 140 each. Total fixed cost for Head-First as a whole equals 58,900 (includes all fixed factory overhead and fixed selling and administrative expense). Next year, Head-First expects to sell 5,000 bicycle helmets and 2,000 motorcycle helmets. Required: 1. Form a package of bicycle and motorcycle helmets based on the sales mix expected for the coming year. 2. Calculate the break-even point in units for bicycle helmets and for motorcycle helmets. 3. Check your answer by preparing a contribution margin income statement.20BEAMargin of Safety Head-First Company plans to sell 5,000 bicycle helmets at 75 each in the coming year. Unit variable cost is 45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 49,500 (includes fixed factory overhead and fixed selling and administrative expense). Break-even units equal 1,650. Required: 1. Calculate the margin of safety in terms of the number of units. 2. Calculate the margin of safety in terms of sales revenue.Degree of Operating Leverage Head-First Company plans to sell 5,000 bicycle helmets at 75 each in the coming year. Unit variable cost is 45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is 100,500. Required: Calculate the degree of operating leverage. (Note: Round answer to the nearest tenth.)Impact of Increased Sales on Operating Income Using the Degree of Operating Leverage Head-First Company had planned to sell 5,000 bicycle helmets at 75 each in the coming year. Unit variable cost is 45 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 49,500 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 5,000 units sold is 100,500. The degree of operating leverage is 1.5. Now Head-First expects to increase sales by 10% next year. Required: 1. Calculate the percent change in operating income expected. 2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.Variable Cost, Fixed Cost, Contribution Margin Income Statement Chillmax Company plans to sell 3,500 pairs of casual shoes at 60 each in the coming year. Product costs include: Variable selling expense is a commission of 3 per pair; fixed selling and administrative expense totals 48,000. Required: 1. Calculate the total variable cost per unit. 2. Calculate the total fixed expense for the year. 3. Prepare a contribution margin income statement for Chillmax Company for the coming year.25BEBVariable Cost Ratio, Contribution Margin Ratio Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Unit variable cost is 21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Fixed factory overhead is 30,000 and fixed selling and administrative expense is 48,000. Required: 1. Calculate the variable cost ratio. 2. Calculate the contribution margin ratio. 3. Prepare a contribution margin income statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable cost, and total contribution margin.27BEBUnits to Earn Target Income Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Unit variable cost is 21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the number of pairs of shoes Chillmax must sell to earn operating income of 81,900. 2. Check your answer by preparing a contribution margin income statement based on the number of units calculated.Sales Needed to Earn Target Income Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Variable cost is 35% of the sales price; contribution margin is 65% of the sales price. Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Required: 1. Calculate the sales revenue that Chillmax must make to earn operating income of 81,900 by using the point in sales equation. 2. Check your answer by preparing a contribution margin income statement based on the sales dollars calculated in Requirement 1.30BEB31BEBMargin of Safety Chillmax Company plans to sell 3,500 pairs of shoes at 60 each in the coming year. Unit variable cost is 21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Break-even units equal 2,000. Required: 1. Calculate the margin of safety in terms of the number of units. 2. Calculate the margin of safety in terms of sales revenue.33BEBImpact of Increased Sales on Operating Income Using the Degree of Operating Leverage Chillmax Company had planned to sell 3,500 pairs of shoes at 60 each in the coming year. Unit variable cost is 21 (includes direct materials, direct labor, variable factory overhead, and variable selling expense). Total fixed cost equals 78,000 (includes fixed factory overhead and fixed selling and administrative expense). Operating income at 3,500 units sold is 58,500. The degree of operating leverage is 2.3. Now Chillmax expects to increase sales by 10% next year. Required: 1. Calculate the percent change in operating income expected. 2. Calculate the operating income expected next year using the percent change in operating income calculated in Requirement 1.Basic Break-Even Calculations Suppose that Larimer Company sells a product for 24. Unit costs are as follows: Total fixed factory overhead is 26,500 per year, and total fixed selling and administrative expense is 15,260. Required: 1. Calculate the variable cost per unit and the contribution margin per unit. 2. Calculate the contribution margin ratio and the variable cost ratio. 3. Calculate the break-even units. 4. Prepare a contribution margin income statement at the break-even number of units.Price, Variable Cost per Unit, Contribution Margin, Contribution Margin Ratio, Fixed Expense For each of the following independent situations, calculate the amount(s) required. Required: 1. At the break-even point, Jefferson Company sells 115,000 units and has fixed cost of 349,600. The variable cost per unit is 4.56. What price does Jefferson charge per unit? 2. Sooner Industries charges a price of 120 and has fixed cost of 458,000. Next year, Sooner expects to sell 15,600 units and make operating income of 166,000. What is the variable cost per unit? What is the contribution margin ratio? (Note: Round answer to four decimal places.) 3. Last year, Jasper Company earned operating income of 22,500 with a contribution margin ratio of 0.25. Actual revenue was 235,000. Calculate the total fixed cost. 4. Laramie Company has a variable cost ratio of 0.56. The fixed cost is 103,840 and 23,600 units are sold at break-even. What is the price? What is the variable cost per unit? The contribution margin per unit?Contribution Margin Ratio, Variable Cost Ratio, Break-Even Sales Revenue The controller of Ashton Company prepared the following projected income statement: Required: 1. Calculate the contribution margin ratio. 2. Calculate the variable cost ratio. 3. Calculate the break-even sales revenue for Ashton. 4. CONCEPTUAL CONNECTION How could Ashton increase projected operating income without increasing the total sales revenue?38E39EMargin of Safety Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for 8.12 per string. The variable costs per string are as follows: Fixed manufacturing cost totals 245,650 per year. Administrative cost (all fixed) totals 297,606. Comer expects to sell 225,000 strings of lights next year. Required: 1. Calculate the break-even point in units. 2. Calculate the margin of safety in units. 3. Calculate the margin of safety in dollars. 4. CONCEPTUAL CONNECTION Suppose Comer actually experiences a price decrease next year, while all other costs and the number of units sold remain the same. Would this increase or decrease risk for the company? (Hint: Consider what would happen to the number of break-even units and to the margin of safety.)41ESales Revenue Approach, Variable Cost Ratio, Contribution Margin Ratio Arberg Companys controller prepared the following budgeted income statement for the coming year: Required: 1. What is Arbergs variable cost ratio? What is its contribution margin ratio? 2. Suppose Arbergs actual revenues are 30,000 more than budgeted. By how much will operating income increase? Give the answer without preparing a new income statement 3. How much sales revenue must Arberg earn to break even? Prepare a contribution margin income statement to verify the accuracy of your answer. 4. What is Arbergs expected margin of safety? 5. What is Arbergs margin of safety if sales revenue is 380,000?43ECherry Blossom Products Inc. produces and sells yoga-training products: how-to DVDs and a basic equipment set (blocks, strap, and small pillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500 equipment sets. Information on the two products is as follows: Total fixed cost is 84,920. Refer to the information for Cherry Blossom Products on the previous page. Suppose that in the coming year, the company plans to produce an extra-thick yoga mat for sale to health clubs. The company estimates that 9,000 mats can be sold at a price of 15 and a variable cost per unit of 9. Total fixed cost must be increased by 28,980 (making total fixed cost 113,900). Assume that anticipated sales of the other products, as well as their prices and variable costs, remain the same. Required: 1. What is the sales mix of DVDs, equipment sets, and yoga mats? 2. Compute the break-even quantity of each product. 3. Prepare an income statement for Cherry Blossom Products for the coming year. What is the overall contribution margin ratio? Use the contribution margin ratio to compute overall break-even sales revenue. (Note: Round the contribution margin ratio to four decimal places; round the break-even sales revenue to the nearest dollar.) 4. Compute the margin of safety for the coming year in sales dollars.45ELotts Company produces and sells one product. The selling price is 10, and the unit variable cost is 6. Total fixed cost is 10,000. Required: 1. Prepare a CVP graph with Units Sold as the horizontal axis and Dollars as the vertical axis. Label the break-even point on the horizontal axis. 2. Prepare CVP graphs for each of the following independent scenarios: (a) Fixed cost increases by 5,000, (b) Unit variable cost increases to 7, (c) Unit selling price increases to 12, and (d) Fixed cost increases by 5,000 and unit variable cost is 7.Klamath Company produces a single product. The projected income statement for the coming year is as follows: Required: 1. Compute the unit contribution margin and the units that must be sold to break even. 2. Suppose 10,000 units are sold above break-even. What is the operating income? 3. Compute the contribution margin ratio. Use the contribution margin ratio to compute the break-even point in sales revenue. (Note: Round the contribution margin ratio to four decimal places, and round the sales revenue to the nearest dollar.) Suppose that revenues are 200,000 more than expected for the coming year. What would the total operating income be?Margin of Safety and Operating Leverage Medina Company produces a single product. The projected income statement for the coming year is as follows: (Note: Round all dollar answers to the nearest dollar. Round contribution margin ratio and degree of operating leverage to two decimal places.) Required: 1. Compute the break-even sales dollars. 2. Compute the margin of safety in sales dollars. 3. Compute the degree of operating leverage. (Note: Round answer to two decimal places.) 4. Compute the new operating income if sales are 20% higher than expected. (Note: Round answer to the nearest dollar.)Parker Pottery produces a line of vases and a line of ceramic figurines. Each line uses the same equipment and labor; hence, there are no traceable fixed costs. Common fixed cost equals 30,000. Parkers accountant has begun to assess the profitability of the two lines and has gathered the following data for last year: Required: 1. Compute the number of vases and the number of figurines that must be sold for the company to break even. 2. Parker Pottery is considering upgrading its factory to improve the quality of its products. The upgrade will add 5,260 per year to total fixed cost. If the upgrade is successful, the projected sales of vases will be 1,500, and figurine sales will increase to 1,000 units. What is the new break-even point in units for each of the products?Jellico Inc.s projected operating income (based on sales of 450,000 units) for the coming year is as follows: Required: 1. Compute: (a) variable cost per unit, (b) contribution margin per unit, (c) contribution margin ratio, (d) break-even point in units, and (e) break-even point in sales dollars. 2. How many units must be sold to earn operating income of 296,400? 3. Compute the additional operating income that Jellico would earn if sales were 50,000 more than expected. 4. For the projected level of sales, compute the margin of safety in units, and then in sales dollars. 5. Compute the degree of operating leverage. (Note: Round answer to two decimal places.) 6. Compute the new operating income if sales are 10% higher than expected.Break-Even Units, Contribution Margin Ratio, Margin of Safety Khumbu Companys projected profit for the coming year is as follows: Required: 1. Compute the break-even point in units. 2. How many units must be sold to earn a profit of 240,000? 3. Compute the contribution margin ratio. Using that ratio, compute the additional profit that Khumbu would earn if sales were 160,000 more than expected. 4. For the projected level of sales, compute the margin of safety in units.52PAldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The divisions projected income statement for the coming year is: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. (Note: Round answer to the nearest unit.) Calculate the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round contribution margin ratio to four decimal places, and round the break-even sales revenue to the nearest dollar.) 2. The divisional manager has decided to increase the advertising budget by 250,000. This will increase sales revenues by 1 million. By how much will operating income increase or decrease as a result of this action? 3. Suppose sales revenues exceed the estimated amount on the income statement by 1,500,000. Without preparing a new income statement, by how much are profits underestimated? 4. Compute the margin of safety based on the original income statement. 5. Compute the degree of operating leverage based on the original income statement. If sales revenues are 8% greater than expected, what is the percentage increase in operating income? (Note: Round operating leverage to two decimal places.)Basu Company produces two types of sleds for playing in the snow: basic sled and aerosled. The projected income for the coming year, segmented by product line, follows: The selling prices are 30 for the basic sled and 60 for the aerosled. (Round break-even packages and break-even units to the nearest whole unit.) Required: 1. Compute the number of units of each product that must be sold for Basu to break even. 2. Assume that the marketing manager changes the sales mix of the two products so that the ratio is five basic sleds to three aerosleds. Repeat Requirement 1. 3. CONCEPTUAL CONNECTION Refer to the original data. Suppose that Basu can increase the sales of aerosleds with increased advertising. The extra advertising would cost an additional 195,000, and some of the potential purchasers of basic sleds would switch to aerosleds. In total, sales of aerosleds would increase by 12,000 units, and sales of basic sleds would decrease by 5,000 units. Would Basu be better off with this strategy?Cost-Volume-Profit Equation, Basic Concepts, Solving for Unknowns Legrand Company produces hand cream in plastic jars. Each jar sells for 3.40. The variable cost for each jar (materials, labor, and overhead) totals 2.55. The total fixed cost is 58,140. During the most recent year, 81,600 jars were sold. Required: 1. What is the break-even point in units for Legrand? What is the margin of safety in units for the most recent year? 2. Prepare an income statement for Legrands most recent year. 3. How many units must be sold for Legrand to earn a profit of 25,500? 4. What is the level of sales dollars needed for Legrand to earn operating income of 10% of sales?Contribution Margin Ratio, Break-Even Sales, Operating Leverage Elgart Company produces plastic mailboxes. The projected income statement for the coming year follows: Required: 1. Compute the contribution margin ratio for the mailboxes. 2. How much revenue must Elgart earn in order to break even? 3. What is the effect on the contribution margin ratio if the unit selling price and unit variable cost each increase by 15%? 4. CONCEPTUAL CONNECTION Suppose that management has decided to give a 4% commission on all sales. The projected income statement does not reflect this commission. Recompute the contribution margin ratio, assuming that the commission will be paid. What effect does this have on the break-even point? 5. CONCEPTUAL CONNECTION If the commission is paid as described in Requirement 4, management expects sales revenues to increase by 80,000. How will this affect operating leverage? Is it a sound decision to implement the commission? Support your answer with appropriate computations.57PPolaris Inc. manufactures two types of metal stampings for the automobile industry: door handles and trim kits. Fixed cost equals 146,000. Each door handle sells for 12 and has variable cost of 9; each trim kit sells for 8 and has variable cost of 5. Required: 1. What are the contribution margin per unit and the contribution margin ratio for door handles and for trim kits? 2. If Polaris sells 20,000 door handles and 40,000 trim kits, what is the operating income? 3. How many door handles and how many trim kits must be sold for Polaris to break even? 4. CONCEPTUAL CONNECTION Assume that Polaris has the opportunity to rearrange its plant to produce only trim kits. If this is done, fixed costs will decrease by 35,000, and 70,000 trim kits can be produced and sold. Is this a good idea? Explain.Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?Abraham Company had revenues of 830,000 last year with total variable costs of 647,400 and fixed costs of 110,000. Required: 1. What is the variable cost ratio for Abraham? What is the contribution margin ratio? 2. What is the break-even point in sales revenue? 3. What was the margin of safety for Abraham last year? 4. CONCEPTUAL CONNECTION Abraham is considering starting a multimedia advertising campaign that is supposed to increase sales by 12,000 per year. The campaign will cost 4,500. Is the advertising campaign a good idea? Explain.61P62P63PSuppose that Kicker had the following sales and cost experience (in thousands of dollars) for May of the current year and for May of the prior year: In May of the prior year, Kicker started an intensive quality program designed to enable it to build original equipment manufacture (OEM) speaker systems for a major automobile company. The program was housed in research and development. In the beginning of the current year, Kickers accounting department exercised tighter control over sales commissions, ensuring that no dubious (e.g., double) payments were made. The increased sales in the current year required additional warehouse space that Kicker rented in town. (Round ratios to four decimal places. Round sales dollars computations to the nearest dollar.) Required: 1. Calculate the contribution margin ratio for May of both years. 2. Calculate the break-even point in sales dollars for both years. 3. Calculate the margin of safety in sales dollars for both years. 4. CONCEPTUAL CONNECTION Analyze the differences shown by your calculations in Requirements 1, 2, and 3.Danna Lumus, the marketing manager for a division that produces a variety of paper products, is considering the divisional managers request for a sales forecast for a new line of paper napkins. The divisional manager has been gathering data so that he can choose between two different production processes. The first process would have a variable cost of 10 per case produced and total fixed cost of 100,000. The second process would have a variable cost of 6 per case and total fixed cost of 200,000. The selling price would be 30 per case. Danna had just completed a marketing analysis that projects annual sales of 30,000 cases. Danna is reluctant to report the 30,000 forecast to the divisional manager. She knows that the first process would be labor intensive, whereas the second would be largely automated with little labor and no requirement for an additional production supervisor. If the first process is chosen, Jerry Johnson, a good friend, will be appointed as the line supervisor. If the second process is chosen, Jerry and an entire line of laborers will be laid off. After some consideration, Danna revises the projected sales downward to 22,000 cases. She believes that the revision downward is justified. Since it will lead the divisional manager to choose the manual system, it shows a sensitivity to the needs of current employeesa sensitivity that she is afraid her divisional manager does not possess. He is too focused on quantitative factors in his decision making and usually ignores the qualitative aspects. Required: 1. Compute the break-even point in units for each process. 2. Compute the sales volume for which the two processes are equally profitable. Identify the range of sales for which the manual process is more profitable than the automated process. Identify the range of sales for which the automated process is more profitable than the manual process. Why does the divisional manager want the sales forecast? 3. Discuss Dannas decision to alter the sales forecast. Do you agree with it? Is she acting ethically? Is her decision justified since it helps a number of employees retain their employment? Should the impact on employees be factored into decisions? In fact, is it unethical not to consider the impact of decisions on employees?Cost-Volume-Profit Analysis, Single-Product Setting Use CVP analysis to calculate the break-even point in units for a. The canoe product line only (i.e., single-product setting) b. The paddle product line only (i.e., single-product setting)Cost-Volume-Profit Analysis, Single-Product Setting Use CVP analysis to calculate the break-even point in units for a. The canoe product line only (i.e., single-product setting) b. The paddle product line only (i.e., single-product setting) Cost-Volume-Profit Analysis, Multiple-Product Setting3MTC4MTCSensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple-Product Setting If both the variable and fixed production costs (refer to your answer to Requirement 1) associated with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how many canoes and paddles would need to be sold in order to earn a target income of 96,000? Assume the same sales mix and additional fixed costs as in Requirement 3.Calculate the hotels margin of safety (both in units and in sales dollars) for Many Glacier Hotel, assuming the same facts as in Requirement 3, and assuming that it sells 700 canoes and 2,500 paddles next year.What is the difference between tactical and strategic decisions?2DQWhat role do past costs play in relevant costing decisions?Explain why depreciation on an existing asset is always irrelevant.Give an example of a future cost that is not relevant.Can direct materials ever be irrelevant in a make-or-buy decision? Explain.Why would a firm ever offer a price on a product that is below its full cost?What is a segment?9DQDiscuss the importance of complementary effects in a keep-or-drop decision.11DQSuppose that a product can be sold at split-off for 5,000 or processed further at a cost of 1,000 and then sold for 6,400. Should the product be processed further?13DQWhich of the following is not a step in the short-run decision-making model? a. Defining the problem. b. Identifying alternatives. c. Identifying the costs and benefits of feasible alternatives. d. Assessing qualitative factors. e. All of these.Costs that cannot be affected by any future action are called a. differential costs. b. sunk costs. c. inventory costs. d. relevant costs. e. joint costs.Use the following information for Multiple-Choice Questions 8-3 through 8-5: Sandy is considering moving from her apartment into a small house with a fenced yard. The apartment is noisy, and she has difficulty studying. In addition, the fenced yard would be great for her dog. The distance from school is about the same from the house and from the apartment. The apartment costs 750 per month, and she has 2 months remaining on her lease. The lease cannot be broken, so Sandy must pay the last 2 months of rent whether she lives there or not. The rent for the house is 450 per month, plus utilities, which should average 100 per month. The apartment is furnished; the house is not. If Sandy moves into the house, she will need to buy a bed, dresser, desk, and chair immediately. She thinks that she can pick up some used furniture for a good price. 8-3Refer to the information for Sandy above. Which of the following costs is irrelevant to Sandys decision to stay in the apartment or move to the house? a. House rent of 450 per month b. Utilities for the house of 100 per month c. The noise in the apartment house d. The cost of the used furniture e. The last 2 months of rent in the apartmentUse the following information for Multiple-Choice Questions 8-3 through 8-5: Sandy is considering moving from her apartment into a small house with a fenced yard. The apartment is noisy, and she has difficulty studying. In addition, the fenced yard would be great for her dog. The distance from school is about the same from the house and from the apartment. The apartment costs 750 per month, and she has 2 months remaining on her lease. The lease cannot be broken, so Sandy must pay the last 2 months of rent whether she lives there or not. The rent for the house is 450 per month, plus utilities, which should average 100 per month. The apartment is furnished; the house is not. If Sandy moves into the house, she will need to buy a bed, dresser, desk, and chair immediately. She thinks that she can pick up some used furniture for a good price. 8-4Refer to the information for Sandy above. Which of the following is a qualitative factor? a. House rent of 450 per month b. Utilities for the house of 100 per month c. The noise in the apartment house d. The cost of the used furniture e. The last 2 months of rent in the apartmentUse the following information for Multiple-Choice Questions 8-3 through 8-5: Sandy is considering moving from her apartment into a small house with a fenced yard. The apartment is noisy, and she has difficulty studying. In addition, the fenced yard would be great for her dog. The distance from school is about the same from the house and from the apartment. The apartment costs 750 per month, and she has 2 months remaining on her lease. The lease cannot be broken, so Sandy must pay the last 2 months of rent whether she lives there or not. The rent for the house is 450 per month, plus utilities, which should average 100 per month. The apartment is furnished; the house is not. If Sandy moves into the house, she will need to buy a bed, dresser, desk, and chair immediately. She thinks that she can pick up some used furniture for a good price. 8-5Refer to the information for Sandy above. Suppose that the apartment building was within walking distance to campus and the house was five miles away. Sandy does not own a car. How would that affect her decision? a. It would make the house more desirable. b. It would make the apartment more desirable. c. It would make both choices less desirable. d. It would make both choices more desirable. e. It would have no effect on the decision; buying or not buying a car is a separate decision.Which of the following statements is false? a. Fixed costs are never relevant. b. Variable costs are never relevant. c. Usually, variable costs are irrelevant. d. Step costs are irrelevant when a decision alternative requires moving outside of the existing relevant range. e. All of these.7MCQIn a make-or-buy decision, a. the company must choose between expanding or dropping a product line. b. the company must choose between accepting or rejecting a special order. c. the company would consider the purchase price of the externally provided good to be relevant. d. the company would consider all fixed overhead to be irrelevant. e. None of these.Carroll Company, a manufacturer of vitamins and minerals, has been asked by a large drugstore chain to provide bottles of vitamin E. The bottles would be labeled with the name of the drugstore chain, and the chain would pay Carroll 2.30 per bottle rather than the 3.00 regular price. Which type of a decision is this? a. Make-or-buy b. Special-order c. Keep-or-drop d. Economic order quantity e. Markup pricing10MCQGarrett Company provided the following information: Common fixed cost totaled 46,000. Garrett allocates common fixed cost to Product 1 and Product 2 on the basis of sales. If Product 2 is dropped, which of the following is true? a. Sales will increase by 300,000. b. Overall operating income will increase by 2,600. c. Overall operating income will decrease by 25,000. d. Overall operating income will not change. e. Common fixed cost will decrease by 27,600.Jennings Hardware Store marks up its merchandise by 30%. If a part costs 25.00, which of the following is true? a. The price is 7.50. b. The markup is 32.50. c. The price is 32.50. d. The markup is pure profit. e. All of these.13MCQ14MCQIn the sell-or-process-further decision, a. joint costs are always relevant. b. total costs of joint processing and further processing are relevant. c. all costs incurred prior to the split-off point are relevant. d. the most profitable outcome may be to further process some separately identifiable products beyond the split-off point, but sell others at the split-off point. e. None of these.Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for 12 each. Cost information on internal production includes the following: Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. Required: 1. What are the alternatives for Fresh Foods? 2. List the relevant cost(s) of internal production and of external purchase. 3. Which alternative is more cost effective and by how much? 4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much?Structuring a Special-Order Problem Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model IJ5 at a price of 5 each. The new customer is geographically separated from the companys other customers, and existing sales would not be affected. Harrison normally produces 75,000 units of IJ5 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is 12 per unit. Unit cost information for the normal level of activity is as follows: Fixed overhead will not be affected by whether or not the special order is accepted. Required: 1. What are the relevant costs and benefits of the two alternatives (accept or reject the special order)? 2. By how much will operating income increase or decrease if the order is accepted?Segmented Income Statement Gorman Nurseries Inc. grows poinsettias and fruit trees in a green house/nursery operation. The following information was provided for the coming year. A sales commission of 4% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be 146,000 for the poinsettia line and 87,000 for the fruit tree line. Common fixed overhead for the nursery operation was estimated to be 800,000; common selling and administrative expense was estimated to be 450,000. Required: Prepare a segmented income statement for Gorman Nurseries for the coming year, using variable costing.19BEA20BEAStructuring the Sell-or-Process-Further Decision Jacks Lumber Yard receives 8,000 large trees each period that it subsequently processes into rough logs by stripping of the tree bark and leaves (i.e., one tree equals one log). Jacks then must decide whether to sell its rough logs (for use in log cabin construction) at split-of or to process them further into refined lumber (for use in regular construction framing). Jacks normally sells logs for a per-unit price of 495. Alternately, each log can be processed further into 800 board feet of lumber at an additional cost of 0.15 per board foot. Also, lumber can be sold for 0.75 per board foot. Required: 1. What is the contribution to income from selling the logs for log cabin construction? 2. What is the contribution to income from processing the logs into lumber? 3. Should Jacks continue to sell the logs or process them further into lumber?Use the following information for Brief Exercises 8-22 and 8-23: Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of 5 and 15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 20 minutes of machine time. [Note: For all answers that are less than 1.0, round the answer to two decimal places. For all unit answers (e.g., the answer is greater than 1.0), round the answer to the nearest whole number.] 8-22 Determining the Optimal Product Mix with One Constrained Resource Refer to the information for Comfy Fit Company above. Assume that there are no other constraints. Required: 1. What is the contribution margin per hour of machine time for each type of sweatshirt? 2. What is the optimal mix of sweatshirts? 3. What is the total contribution margin earned for the optimal mix?Use the following information for Brief Exercises 8-22 and 8-23: Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of 5 and 15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 20 minutes of machine time. [Note: For all answers that are less than 1.0, round the answer to two decimal places. For all unit answers (e.g., the answer is greater than 1.0), round the answer to the nearest whole number.] 8-23 Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint Refer to the information for Comfy Fit Company on the previous page. Assume that a maximum of 40,000 units of each sweatshirt can be sold. Required: 1. What is the contribution margin per hour of machine time for each type of sweatshirt? 2. What is the optimal mix of sweatshirts? 3. What is the total contribution margin earned for the optimal mix?Calculating Price by Applying a Markup Percentage to Cost Integrity Accounting Firm provides various financial services to organizations. Integrity has decided to price its jobs at the total variable costs of the job plus 15%. The job for a medium-sized dance club client included the following costs: Required: Calculate the price charged by Integrity Accounting to the dance club.Calculating a Target Cost Yuhu manufactures cell phones and is developing a new model with a feature (aptly named Dont Drink and Dial) that prevents the phone from dialing an owner-defined list of phone numbers between the hours of midnight and 6:00 A.M. The new phone model has a target price of 380. Management requires a 25% profit on new product revenues. Required: 1. Calculate the amount of desired profit. 2. Calculate the target cost.Structuring a Make-or-Buy Problem Coed Scents, a national producer of young adult perfumes and colognes, needs to determine if it would be cheaper to produce 100,000 bottles of its most popular perfume, Two AM, for sale in its college town shops or to purchase them from an outside supplier for 25 each. Cost information on internal production includes the following: Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. Required: 1. What are the alternatives for Coed Scents? 2. List the relevant cost(s) of internal production and of external purchase. 3. Which alternative is more cost effective and by how much? 4. Now assume that Coed Scents internal audit team learned through a special data analytics project that intellectual property theft is a significant threat for outsourced production. The team estimates that if Coed Scents outsources its production, it will need to spend 350,000 to manage intellectual property theft of its Two AM brand by competitors operating in the country where the outsourced production occurs. Which alternative is more cost effective and by how much?Structuring a Special-Order Problem Rabbit Foot Motors has been approached by a new customer with an offer to purchase 5,000 units of its hands-free, Wi-Fi-enabled automotive modelthe SMAKat a price of 18,000 per automobile. Rabbit Foots other sales would not be affected by this new customer offer. Rabbit Foot normally produces 100,000 units of its SMAK model per year but only plans to produce and sell 90,000 in the coming year. The normal sales price is 35,000 per SMAK. Unit cost information for the normal level of activity is as follows: Fixed overhead will not be affected by whether or not the special order is accepted. Required: 1. What are the relevant costs and benefits of the two alternatives (accept or reject the special order)? 2. By how much will operating income increase or decrease if the order is accepted?28BEBUse the following information for Brief Exercises 8-29 and 8-30: Shown below is a segmented income statement for Mullett Marinas three main boating service lines: 8-29 Structuring a Keep-or-Drop Product-Line Problem Refer to the information for Mullett Marina above. Mulletts management is deciding whether to keep or drop the Boat Maintenance service line. Mulletts Boat Maintenance service line has a contribution margin of 100,000 (sales of 5,000,000 less total variable costs of 4,900,000). All variable costs are relevant. Relevant fixed costs associated with this line include 60% of Boat Maintenances garage/warehouse rent and 50% of Boat Maintenances supervision salaries. Required: 1. List the alternatives being considered with respect to the Boat Maintenance service line. 2. List the relevant benefits and costs for each alternative. 3. Which alternative is more cost effective and by how much?Use the following information for Brief Exercises 8-29 and 8-30: Shown below is a segmented income statement for Mullett Marinas three main boating service lines: Brief Exercise 8-30 Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects Refer to the information for Mullett Marina above. Relevant fixed costs associated with this line include 60% of Boat Maintenances garage/warehouse rent and 50% of Boat Maintenances supervision salaries. In addition, assume that dropping the Boat Maintenance service line would reduce sales of the Winter Storage line by 20% and sales of the Boat Fuel Concessions line by 10%. All other information remains the same. Required: 1. If the Boat Maintenance service line is dropped, what is the contribution margin for the Boat Fuel Concessions line? For the Winter Storage line? 2. Which alternative (keep or drop the Boat Maintenance line) is now more cost effective and by how much?Structuring the Sell-or-Process-Further Decision Barts Butters receives 1,000,000 containers of raw milk each period that it subsequently processes into consumable milk by adjusting the fat content, adding vitamins, and destroying any potentially harmful bacteria. For Barts, one container equals one gallon of consumable milk. Barts then must decide whether to sell its consumable milk at split-off or to process it further into butter. Barts normally sells consumable milk for a per-gallon price of 3. Alternately, each gallon of milk can be processed further into one-half tub of butter (i.e., one gallon of milk equals 0.5 gallon of butter) at an additional cost of 1.50 per tub of butter. Also, butter can be sold for 6.00 per tub. Required: 1. What is the contribution to income from selling the consumable milk? 2. What is the contribution to income from processing the consumable milk into butter? 3. Should Barts continue to sell the consumable milk or process it further into butter?32BEB33BEB34BEBBrief Exercise 8-35 Calculating a Target Cost Sisters, Inc. manufactures professional-level printers that perform multiple features, such as high-resolution color scanning, printing, faxing, and copying. The new printer model has a target price of 600. Management requires a 20% profit on new product revenues. Required: 1. Calculate the amount of desired profit. 2. Calculate the target cost.Model for Making Tactical Decisions The model for making tactical decisions described in the text has six steps. These steps are listed, out of order, below. Required: Put the steps in the correct order, starting with the step that should be taken first. 1. Select the alternative with the greatest overall benefit. 2. Identify the costs and benefits associated with each feasible alternative. 3. Assess qualitative factors. 4. Recognize and define the problem. 5. Identify alternatives as possible solutions to the problem. 6. Total the relevant costs and benefits for each alternative.37EUse the following information for Exercises 8-38 and 8-39: Zion Manufacturing had always made its components in-hours. However, Bryce Component Works had recently offered to supply one component, K2, at a price of 25 each. Zion uses 10,000 units of Component K2 each year. The cost per unit of this components is as follows: 8-38 Make-or-Buy Decision Refer to the information for Zion Manufacturing above. The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped. Required: 1. What are the alternatives facing Zion Manufacturing with respect to production of Component K2? 2. List the relevant costs for each alternative. If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease? 3. CONCEPTUAL CONNECTION Which alternative is better?39E40E41E42E43E44E45ESell at Split-Off or Process Further Bozo Inc. manufactures two products from a joint production process. The joint process costs 110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for 55 per pound. HS can be sold at split-off for 9 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost 34,000 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for 45 per pound. Required: 1. What is the contribution to income from selling the 14,000 pounds of HS at split-off? 2. CONCEPTUAL CONNECTION What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS? Should Bozo continue to sell the HS at split-off or process it further into CS?Use the following information for Exercises 8-47 and 8-48: Billings Company produces two products, Product Reno and Product Tahoe. Each product goes through its own assembly and finishing departments. However, both of them must go through the painting department. The painting department has capacity of 2,460 hours per year. Product Reno has a unit contribution margin of 120 and requires 5 hours of painting department time. Product Tahoe has a unit contribution margin of 75 and requires 3 hours of painting department time. There are no other constraints. 8-47 Choosing the Optimal Product Mix with One Constrained Resource Refer to the information for Billings Company above. Required: 1. What is the contribution margin per hour of painting department time for each product? 2. What is the optimal mix of products? 3. What is the total contribution margin earned for the optimal mix?48E