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All Textbook Solutions for Managerial Accounting: The Cornerstone of Business Decision-Making

Calculating Price Using a Markup Percentage of Cost Lake McDonald Gift Shop has decided to price the National Parks Memory Card Game that it sells at cost plus 65%. The National Parks Memory Card Game costs 20 each, and another one, the Guess This Animal Track Game, costs 40 each. Required: 1. What price will Lake McDonald Gift Shop charge for each National Parks Memory Card Game? 2. What price will Lake McDonald Gift Shop charge for each Guess This Animal Track Game? 3. CONCEPTUAL CONNECTION Briefly explain two specific challenges that the financial manager of Lake McDonald Gift Shop might encounter in employing this cost-plus pricing approach.Target Costing H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market. The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and oversized bagels. The target price is 60. Banks requires that new products be priced such that 20% of the price is profit. Required: 1. Calculate the amount of desired profit per unit of the new toaster. 2. Calculate the target cost per unit of the new toaster.Keep or Buy, Sunk Costs Heather Alburty purchased a previously owned, 2004 Grand Am for 8,900. Since purchasing the car, she has spent the following amounts on parts and labor: Unfortunately, the new stereo doesnt completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following: In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for 9,400. Heather has advertised and found that she can sell the Grand Am for only 6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am. Required: 1. CONCEPTUAL CONNECTION In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent 11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern? 2. CONCEPTUAL CONNECTION Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am?Use the following information for Exercises 8-52 and 8-53: Blasingham Company is currently manufacturing Part Q108, producing 35,000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows: 8-52 Make or Buy Refer to the information for Blasingham Company above. Of the total fixed overhead assigned to Q108, 77,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisorneither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for 11. There is no alternative use for the facilities currently used to produce the part. Required: 1. CONCEPTUAL CONNECTION Should Blasingham Company make or buy Part Q108? 2. What is the most that Blasingham would be willing to pay an outside supplier? 3. If Blasingham buys the part, by how much will income increase or decrease?Use the following information for Exercises 8-52 and 8-53: Blasingham Company is currently manufacturing Part Q108, producing 35,000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows: 8-53 Make or Buy Refer to the information for Blasingham Company on the previous page. All of the fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for 11. There is no alternative use for the facilities currently used to produce the part. Required: 1. CONCEPTUAL CONNECTION Should Blasingham Company make or buy Part Q108? 2. What is the most Blasingham would be willing to pay an outside supplier? 3. If Blasingham buys the part, by how much will income increase or decrease?54P 55P Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows: Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTimes vice president of marketing. Required: 1. CONCEPTUAL CONNECTION Jim believes that by increasing advertising by 1,000 (250 for the scented line and 750 for the musical line), sales of those two lines would increase by 30%. If you were Kathy, how would you react to this information? 2. CONCEPTUAL CONNECTION Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Given this information, would it be profitable to eliminate the scented and musical lines? 3. CONCEPTUAL CONNECTION Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? Identify the best combination for the firm.Make or Buy, Qualitative Considerations Hetrick Dentistry Services operates in a large metropolitan area. Currently, Hetrick has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows: Fixed overhead is detailed as follows: Overhead is applied on the basis of direct labor hours. These rates were computed by using 5,500 direct labor hours. A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is 125 for porcelain crowns and 150 for gold crowns; however, the offer is conditional on supplying both types of crownsit will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hetricks laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hetrick uses 2,000 porcelain crowns and 600 gold crowns per year. Required: 1. CONCEPTUAL CONNECTION Should Hetrick continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing? 2. CONCEPTUAL CONNECTION What qualitative factors should Hetrick consider in making this decision? 3. CONCEPTUAL CONNECTION Suppose that the lab facility is owned rather than rented and that the 32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? 4. CONCEPTUAL CONNECTION Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 600 gold. Should Hetrick make or buy the crowns? Explain the outcome.Sell or Process Further Zanda Drug Corporation buys three chemicals that are processed to produce two types of analgesics used as ingredients for popular over-the-counter drugs. The purchased chemicals are blended for 2 to 3 hours and then heated for 15 minutes. The results of the process are two separate analgesics, depryl and pencol, which are sent to a drying room until their moisture content is reduced to 6 to 8%. For every 1,300 pounds of chemicals used, 600 pounds of depryl and 600 pounds of pencol are produced. After drying, depryl and pencol are sold to companies that process them into their final form. The selling prices are 12 per pound for depryl and 30 per pound for pencol. The costs to produce 600 pounds of each analgesic are as follows: The analgesics are packaged in 20-pound bags and shipped. The cost of each bag is 1.30. Shipping costs 0.10 per pound. Zanda could process depryl further by grinding it into a fine powder and then molding the powder into tablets. The tablets can be sold directly to retail drug stores as a generic brand. If this route were taken, the revenue received per bottle of tablets would be 4.00, with 10 bottles produced by every pound of depryl. The costs of grinding and tableting total 2.50 per pound of depryl. Bottles cost 0.40 each. Bottles are shipped in boxes that hold 25 bottles at a shipping cost of 1.60 per box. Required: 1. CONCEPTUAL CONNECTION Should Zanda sell depryl at split-off, or should depryl be processed and sold as tablets? 2. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits if depryl is processed further?Keep or Drop AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that have radios, tape players, and speakers. System A, of slightly higher quality than System B, costs 20 more. With rare exceptions, the store also sells a headset when a system is sold. The headset can be used with either system. Variable-costing income statements for the three products follow: The owner of the store is concerned about the profit performance of System B and is considering dropping it. If the product is dropped, sales of System A will increase by 30%, and sales of headsets will drop by 25%. (Note: Round all answers to the nearest whole number.) Required: 1. Prepare segmented income statements for the three products, using a better format. 2. CONCEPTUAL CONNECTION Prepare segmented income statements for System A and the headsets assuming that System B is dropped. Should B be dropped? 3. CONCEPTUAL CONNECTION Suppose that a third system, System C, with a similar quality to System B, could be acquired. Assume that with C the sales of A would remain unchanged; however, C would produce only 80% of the revenues of B, and sales of the headsets would drop by 10%. The contribution margin ratio of C is 50%, and its direct fixed costs would be identical to those of B. Should System B be dropped and replaced with System C?Accept or Reject a Special Order Steve Murningham, manager of an electronics division, was considering an offer by Pat Sellers, manager of a sister division. Pats division was operating below capacity and had just been given an opportunity to produce 8,000 units of one of its products for a customer in a market not normally served. The opportunity involves a product that uses an electrical component produced by Steves division. Each unit that Pats division produces requires two of the components. However, the price that the customer is willing to pay is well below the price that is usually charged. To make a reasonable profit on the order, Pat needs a price concession from Steves division. Pat had offered to pay full manufacturing cost for the parts. So Steve would know that everything was above board, Pat supplied the following unit cost and price information concerning the special order, excluding the cost of the electrical component: The normal selling price of the electrical component is 2.30 per unit. Its full manufacturing cost is 1.85 (1.05 variable and 0.80 fixed). Pat argued that paying 2.30 per component would wipe out the operating profit and result in her division showing a loss. Steve was interested in the offer because his division was also operating below capacity. (The order would not use all the excess capacity.) Required: 1. CONCEPTUAL CONNECTION Should Steve accept the order at a selling price of 1.85 per unit? By how much will his divisions profits be changed if the order is accepted? By how much will the profits of Pats division change if Steve agrees to supply the part at full cost? 2. CONCEPTUAL CONNECTION Suppose that Steve offers to supply the component at 2. In offering this price, Steve says that it is a firm offer, not subject to negotiation. Should Pat accept this price and produce the special order? If Pat accepts the price, what is the change in profits for Steves division? 3. CONCEPTUAL CONNECTION Assume that Steves division is operating at full capacity and that Steve refuses to supply the part for less than the full price. Should Pat still accept the special order? Explain.Cost-Based Pricing Decision Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires 1,800 of direct materials, 1,600 of direct labor, and 800 of overhead. Jeremy normally applies a standard markup based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressure). Last years income statement is as follows: Required: 1. Calculate the markup that Jeremy will use. 2. What is Jeremys initial bid price?Product Mix Decision, Single Constraint Sealing Company manufactures three types of DVD storage units. Each of the three types requires the use of a special machine that has a total operating capacity of 15,000 hours per year. Information on the three types of storage units is as follows: Sealings marketing director has assessed demand for the three types of storage units and believes that the firm can sell as many units as it can produce. Required: 1. How many of each type of unit should be produced and sold to maximize the companys contribution margin? What is the total contribution margin for your selection? 2. Now suppose that Sealing Company believes that it can sell no more than 12,000 of the deluxe model but up to 50,000 each of the basic and standard models at the selling prices estimated. What product mix would you recommend, and what would be the total contribution margin?Special-Order Decision, Qualitative Aspects Randy Stone, manager of Specialty Paper Products Company, was agonizing over an offer for an order requesting 5,000 boxes of calendars. Specialty Paper Products was operating at 70% of its capacity and could use the extra business. Unfortunately, the orders offering price of 4.20 per box was below the cost to produce the calendars. The controller, Louis Barns, was opposed to taking a loss on the deal. However, the personnel manager, Yatika Blaine, argued in favor of accepting the order even though a loss would be incurred. It would avoid the problem of layoffs and would help to maintain the companys community image. The full cost to produce a box of calendars follows: Later that day, Louis and Yatika met over coffee. Louis sympathized with Yatiks concerns and suggested that the two of them rethink the special-order decision. He offered to determine relevant costs if Yatika would list the activities that would be affected by a layoff. Yatika eagerly agreed and came up with the following activities: an increase in the state unemployment insurance rate from 1% to 2% of total payroll, notification costs to lay off approximately 20 employees, and increased costs of rehiring and retraining workers when the downturn was over. Louis determined that these activities would cost the following amounts: Total payroll is 1,460,000 per year. Layoff paperwork is 25 per laid-off employee. Rehiring and retraining is 150 per new employee. Required: 1. CONCEPTUAL CONNECTION Assume that the company will accept the order only if it increases total profits (without taking the potential layoffs into consideration). Should the company accept or reject the order? Provide supporting computations. 2. CONCEPTUAL CONNECTION Consider the new information on activity costs associated with the layoff. Should the company accept or reject the order? Provide supporting computations.Sell or Process Further, Basic Analysis Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow: The revenues from each product are as follows: Alpha, 100,000; Beta, 93,000; Gamma, 30,000; and Delta, 40,000. Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to 75,000. However, to process Delta further means that the company must rent some special equipment that costs 15,400 per quarter. Additional materials and labor also needed will cost 8,500 per quarter. Required: 1. What is the operating profit earned by the four products for one quarter? 2. CONCEPTUAL CONNECTION Should the division process Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit?Product Mix Decision, Single Constraint Norton Company produces two products (Juno and Hera) that use the same material input. Juno uses two pounds of the material for every unit produced, and Hera uses five pounds. Currently, Norton has 16,000 pounds of the material in inventory. All of the material is imported. For the coming year, Norton plans to import an additional 8,000 pounds to produce 2,000 units of Juno and 4,000 units of Hera. The unit contribution margin is 30 for Juno and 60 for Hera. Also, assume that Nortons marketing department estimates that the company can sell a maximum of 2,000 units of Juno and 4,000 units of Hera. Norton has received word that the source of the material has been shut down by embargo. Consequently, the company will not be able to import the 8,000 pounds it planned to use in the coming years production. There is no other source of the material. Required: 1. Compute the total contribution margin that the company would earn if it could manufacture 2,000 units of Juno and 4,000 units of Hera. 2. Determine the optimal usage of the companys inventory of 16,000 pounds of the material. Compute the total contribution margin for the product mix that you recommend.Sell at Split-Off or Process Further Eunice Company produces two products from a joint process. Joint costs are 70,000 for one batch, which yields 1,000 liters of germain and 4,000 liters of hastain. Germain can be sold at the split-off point for 24 or be processed further, into geraiten, at a manufacturing cost of 4,100 (for the 1,000 liters) and sold for 33 per liter. If geraiten is sold, additional distribution costs of 0.80 per liter and sales commissions of 10% of sales will be incurred. In addition, Eunices legal department is concerned about potential liability issues with geraitenissues that do not arise with germain. Required: 1. CONCEPTUAL CONNECTION Considering only gross profit, should germain be sold at the split-off point or processed further? 2. CONCEPTUAL CONNECTION Taking a value-chain approach (by considering distribution, marketing, and after-the-sale costs), determine whether or not germain should be processed into geraiten.Differential Costing As pointed out earlier in Heres the Real Kicker, Kicker changed banks a couple of years ago because the loan officer at its bank moved out of state. Kicker saw that as an opportunity to take bids for its banking business and to fine-tune the banking services it was using. This problem uses that situation as the underlying scenario but uses three banks: FirstBank, Community Bank, and RegionalOne Bank. A set of representative data was presented to each bank for the purpose of preparing a bid. The data are as follows: Checking accounts needed: 6 Checks per month: 2,000 Foreign debits/credits on checking accounts per month: 200 Deposits per month: 300 Returned checks: 25 per month Credit card charges per month: 4,000 Wire transfers per month: 100, of which 60 are to foreign bank accounts Monthly credit needs (line of credit availability and cost): 100,000 average monthly usage These are overall totals for the six accounts during a month. Internet banking services? Knowledgeable loan officer? Responsiveness of bank? FirstBank Bid: Checking accounts: 5 monthly maintenance fee per account 0.10 foreign debit/credit 0.50 earned for each deposit 3 per returned check Credit card fees: 0.50 per item Wire transfers: 15 to domestic bank accounts, 50 to foreign bank accounts Line of credit: Yes, this amount is available, interest charged at prime plus 2%, subject to a 6% minimum interest rate Internet banking services? Yes, full online banking available: 15 one-time setup fee for each account 20 monthly fee for software module The loan officer assigned to the potential Kicker account had 10 years of experience with medium to large business banking and showed an understanding of the audio industry. Community Bank Bid: Checking accounts: No fees for the accounts, and no credits earned on deposits 2.00 per returned check Credit card fees: 0.50 per item, 7 per batch processed. Only manual processing was available, and Kicker estimated 20 batches per month Wire transfers: 30 per wire transfer Line of credit: Yes, this amount is available: interest charged at prime plus 2% subject to a 7% minimum interest rate Internet banking services? Not currently, but within the next 6 months The loan officer assigned to the potential Kicker account had 4 years of experience with medium to large business banking, none of which pertained to the audio industry. RegionalOne Bank Bid: Checking accounts: 5 monthly maintenance fee per account to be waived for Kicker 0.20 foreign debit/credit 0.30 earned for each deposit 3.80 per returned check Credit card fees: 0.50 per item Wire transfers: 10 to domestic bank accounts, 55 to foreign bank accounts Line of credit: Yes, this amount is available: interest charged at prime plus 2% subject to a 6.5% minimum interest rate Internet banking services? Yes, full online banking available: one-time setup fee for each account waived for Kicker 20 monthly fee for software module The loan officer assigned to the potential Kicker account had 2 years of experience with large business banking. Another branch of the bank had expertise in the audio industry and would be willing to help as needed. This bank was the first one to submit a bid. Required: 1. Calculate the predicted monthly cost of banking with each bank. Round answers to the nearest dollar. 2. CONCEPTUAL CONNECTION Suppose Kicker felt that full online Internet banking was critical. How would that affect your analysis from Requirement 1? How would you incorporate the subjective factors (e.g., experience, access to expertise)?68C Keep or Drop a Division Jan Shumard, president and general manager of Danbury Company, was concerned about the future of one of the companys largest divisions. The divisions most recent quarterly income statement follows: Jan is giving serious consideration to shutting down the division because this is the ninth consecutive quarter that it has shown a loss. To help him in his decision, the following additional information has been gathered: The division produces one product at a selling price of 100 to outside parties. The division sells 50% of its output to another division within the company for 83 per unit (full manufacturing cost plus 25%). The internal price is set by company policy. If the division is shut down, the user division will buy the part externally for 100 per unit. The fixed overhead assigned per unit is 20. There is no alternative use for the facilities if shut down. The facilities and equipment will be sold and the proceeds invested to produce an annuity of 100,000 per year. Of the fixed selling and administrative expenses, 30% represent allocated expenses from corporate headquarters. Variable selling expenses are 5 per unit sold for units sold externally. These expenses are avoided for internal sales. No variable administrative expenses are incurred. Required: 1. Prepare an income statement that more accurately reflects the divisions profit performance. 2. Should the president shut down the division? What will be the effect on the companys profits if the division is closed?Define the term budget. How are budgets used in planning?2DQ Explain how both small and large organizations can benefit from budgeting.4DQ What is a master budget? An operating budget? A financial budget?Explain the role of a sales forecast in budgeting. What is the difference between a sales forecast and a sales budget?All budgets depend on the sales budget. Is this true? Explain.Why is goal congruence important?Why is it important for a manager to receive frequent feedback on his or her performance?What is participative budgeting? Discuss some of its advantages.A budget too easily achieved will lead to diminished performance. Do you agree? Explain.Explain why a manager has an incentive to build slack into the budget.Discuss the differences between static and flexible budgets.Explain why mixed costs must be broken down into their fixed and variable components before a flexible budget can be developed.What is the purpose of a before-the-fact flexible budget? What is the purpose of an after-the-fact flexible budget?1MCQ Which of the following is part of the control process? a. Monitoring of actual activity b. Comparison of actual with planned activity c. Investigating d. Taking corrective action e. All of these.Which of the following is not an advantage of budgeting? a. It forces managers to plan. b. It provides information for decision making. c. It guarantees an improvement in organizational efficiency. d. It provides a standard for performance evaluation. e. It improves communication and coordination.The budget committee a. reviews the budget. b. resolves differences that arise as the budget is prepared. c. approves the final budget. d. is directed (typically) by the controller. e. All of these.A moving, 12-month budget that is updated monthly is a. not used by manufacturing firms. b. a waste of time and effort. c. a master budget. d. a continuous budget. e. always used by firms that prepare a master budget.Which of the following is not part of the operating budget? a. The direct labor budget b. The cost of goods sold budget c. The production budget d. The capital budget e. The selling and administrative expenses budget Before a direct materials purchases budget can be prepared, you should first a. prepare a sales budget. b. prepare a production budget. c. decide on the desired ending inventory of materials. d. obtain the expected price of each type of material. e. All of these.The first step in preparing the sales budget is to a. prepare a sales forecast. b. review the production budget carefully. c. assess the desired ending inventory of finished goods. d. talk with past customers. e. increase sales beyond the forecast level.Which of the following is needed to prepare the production budget? a. Direct materials needed for production b. Direct labor needed for production c. Expected unit sales d. Units of materials in ending inventory e. None of these.A company requires 100 pounds of plastic to meet the production needs of a small toy. It currently has 10 pounds of plastic inventory. The desired ending inventory of plastic is 30 pounds. How many pounds of plastic should be budgeted for purchasing during the coming period? a. 80 pounds b. 110 pounds c. 120 pounds d. 130 pounds e. None of these.A company plans to sell 220 units. The selling price per unit is 24. There are 50 units in beginning inventory, and the company would like to have 20 units in ending inventory. How many units should be produced for the coming period? a. 250 b. 200 c. 230 d. 220 e. None of these.Select the one budget below that is not an operating budget. a. Cost of goods sold budget b. Cash budget c. Production budget d. Overhead budget e. All of these.A company has the following collection pattern: month of sale, 40%; month following sale, 60%. If credit sales for January and February are 100,000 and 200,000, respectively, the cash collections for February are a. 140,000. b. 300,000. c. 120,000. d. 160,000. e. 80,000.The percentage of accounts receivable that is uncollectible can be ignored for cash budgeting because a. no cash is received from an account that defaults. b. it is included in cash sales. c. it appears on the budgeted income statement. d. for most companies, it is not a material amount. e. None of these.Which of the following is not an advantage of participative budgeting? a. It encourages budgetary slack. b. It tends to lead to a higher level of performance. c. It fosters a sense of responsibility. d. It encourages greater goal congruence. e. It fosters a sense of creativity in managers.16MCQ For performance reporting, it is best to compare actual costs with budgeted costs using a. short-term budgets. b. static budgets. c. flexible budgets. d. master budgets. e. None of these.To create a meaningful performance report, actual costs and expected costs should be compared a. at the actual level of activity. b. weekly. c. at the budgeted level of activity. d. at the average level of activity. e. hourly.To help assess performance, managers should use a a. static budget. b. master budget. c. continuous budget. d. before-the-fact flexible budget. e. None of these.A firm comparing the actual variable costs of producing 10,000 units with the total variable costs of a static budget based on 9,000 units would probably see a. no variances. b. small favorable variances. c. large unfavorable variances. d. large favorable variances. e. small unfavorable variances.Preparing a Sales Budget Patrick Inc. sells industrial solvents in 5-gallon drums. Patrick expects the following units to be sold in the first 3 months of the coming year: The average price for a drum is 35. Required: Prepare a sales budget for the first 3 months of the coming year, showing units and sales revenue by month and in total for the quarter.Preparing a Production Budget Patrick Inc. makes industrial solvents. In the first 4 months of the coming year, Patrick expects the following unit sales: Patricks policy is to have 25% of next months sales in ending inventory. On January 1, it is expected that there will be 6,700 drums of solvent on hand. Required: Prepare a production budget for the first quarter of the year. Show the number of drums that should be produced each month as well as for the quarter in total.Preparing a Direct Materials Purchases Budget Patrick Inc. makes industrial solvents sold in 5-gallon drums. Planned production in units for the first 3 months of the coming year is: Each drum requires 5.5 gallons of chemicals and one plastic drum. Company policy requires that ending inventories of raw materials for each month be 15% of the next months production needs. That policy was met for the ending inventory of December in the prior year. The cost of one gallon of chemicals is 2.00. The cost of one drum is 1.60. (Note: Round all unit amounts to the nearest unit. Round all dollar amounts to the nearest dollar.) Required: 1. Calculate the ending inventory of chemicals in gallons for December of the prior year and for January and February. What is the beginning inventory of chemicals for January? 2. Prepare a direct materials purchases budget for chemicals for the months of January and February. 3. Calculate the ending inventory of drums for December of the prior year and for January and February. 4. Prepare a direct materials purchases budget for drums for the months of January and February.Preparing a Direct Labor Budget Patrick Inc. makes industrial solvents. Planned production in units for the first 3 months of the coming year is: Each drum of industrial solvent takes 0.3 direct labor hour. The average wage is 18 per hour. Required: Prepare a direct labor budget for the months of January, February, and March, as well as the total for the first quarter.Preparing an Overhead Budget Patrick Inc. makes industrial solvents. Budgeted direct labor hours for the first 3 months of the coming year are: The variable overhead rate is 0.70 per direct labor hour. Fixed overhead is budgeted at 2,750 per month. Required: Prepare an overhead budget for the months of January, February, and March, as well as the total for the first quarter. (Note: Round all dollar amounts to the nearest dollar.)Preparing an Ending Finished Goods Inventory Budget Andrews Company manufactures a line of office chairs. Each chair takes 14 of direct materials and uses 1.9 direct labor hours at 16 per direct labor hour. The variable overhead rate is 1.20 per direct labor hour, and the fixed overhead rate is 1.60 per direct labor hour. Andrews expects to have 675 chairs in ending inventory. There is no beginning inventory of office chairs. Required: 1. Calculate the unit product cost. (Note: Round to the nearest cent.) 2. Calculate the cost of budgeted ending inventory. (Note: Round to the nearest dollar.)Preparing a Cost of Goods Sold Budget Andrews Company manufactures a line of office chairs. Each chair takes 14 of direct materials and uses 1.9 direct labor hours at 16 per direct labor hour. The variable overhead rate is 1.20 per direct labor hour, and the fixed overhead rate is 1.60 per direct labor hour. Andrews expects to produce 20,000 chairs next year and expects to have 675 chairs in ending inventory. There is no beginning inventory of office chairs. Required: Prepare a cost of goods sold budget for Andrews Company.Preparing a Selling and Administrative Expenses Budget Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of 19,730,000. There is a 3% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following: Required: Prepare a selling and administrative expenses budget for Fazel Company for the coming year.Preparing a Budgeted Income Statement Oliver Company provided the following information for the coming year: Required: Prepare a budgeted income statement for Oliver Company for the coming year. (Note: Round all income statement amounts to the nearest dollar.)Preparing a Schedule of Cash Collections on Accounts Receivable Kailua and Company is a legal services firm. All sales of legal services are billed to the client (there are no cash sales). Kailua expects that, on average, 20% will be paid in the month of billing, 50% will be paid in the month following billing, and 25% will be paid in the second month following billing. For the next 5 months, the following sales billings are expected: Required: Prepare a schedule showing the cash expected in payments on accounts receivable in August and in September.Preparing an Accounts Payable Schedule Wight Inc. purchases raw materials on account for use in production. The direct materials purchases budget shows the following expected purchases on account: Wight typically pays 20% on account in the month of billing and 80% the next month. Required: 1. How much cash is required for payments on account in May? 2. How much cash is expected for payments on account in June?Preparing a Cash Budget La Famiglia Pizzeria provided the following information for the month of October: a. Sales are budgeted to be 157,000. About 85% of sales is cash; the remainder is on account. b. La Famiglia expects that, on average, 70% of credit sales will be paid in the month of sale, and 28% will be paid in the following month. c. Food and supplies purchases, all on account, are expected to be 116,000. La Famiglia pays 25% in the month of purchase and 75% in the month following purchase. d. Most of the work is done by the owners, who typically withdraw 6,000 a month from the business as their salary. (Note: The 6,000 is a payment in total to the two owners, not per person.) Various part-time workers cost 7,300 per month. They are paid for their work weekly, so on average 90% of their wages is paid in the month incurred and the remaining 10% in the next month. e. Utilities average 5,950 per month. Rent on the building is 4,100 per month. f. Insurance is paid quarterly; the next payment of 1,200 is due in October. g. September sales were 181,500 and purchases of food and supplies in September equaled 130,000. h. The cash balance on October 1 is 2,147. Required: 1. Calculate the cash receipts expected in October. (Hint: Remember to include both cash sales and payments from credit sales.) 2. Calculate the cash needed in October to pay for food purchases. 3. Prepare a cash budget for the month of October.Flexible Budget with Different Levels of Production Bowling Company budgeted the following amounts: Required: Prepare a flexible budget for 2,500 units, 3,000 units, and 3,500 units.Performance Report Based on Budgeted and Actual Levels of Production Bowling Company budgeted the following amounts: At the end of the year, Bowling had the following actual costs for production of 3,800 units: Required: 1. Calculate the budgeted amounts for each cost category listed above for the 4,000 budgeted units. 2. Prepare a performance report using a budget based on expected production of 4,000 units. 3. Prepare a performance report using a budget based on the actual level of production of 3,800 units.Preparing a Sales Budget Tulum Inc. sells powdered Mexican chocolate to restaurants. Its basic unit is a 4-pound box of the spiced chocolate mixture. Tulum expects the following units to be sold in the first 3 months of the coming year: The average price for a box is 20. Required: Prepare a sales budget for the first 3 months of the coming year, showing units and sales revenue by month and in total for the quarter.Preparing a Production Budget Tulum Inc. makes a Mexican chocolate mix. In the first 4 months of the coming year, Tulum expects the following unit sales: Tulums policy is to have 20% of next months sales in ending inventory. On January 1, it is expected that there will be 1,300 boxes of the chocolate mixture on hand. Required: Prepare a production budget for the first quarter of the year. Show the boxes that should be produced each month as well as for the quarter in total.Preparing a Direct Materials Purchases Budget Tulum Inc. makes a Mexican chocolate mix sold in 4-pound boxes. Planned production in units for the first 3 months of the coming year is: Each box requires 4.2 pounds of chocolate mix and one box. Company policy requires that ending inventories of raw materials for each month be 10% of the next months production needs. That policy was met for the ending inventory of December in the prior year. The cost of 1 pound of chocolate mix is 1.50. The cost of one box is 0.10. (Note: Round all unit amounts to the nearest unit. Round all dollar amounts to the nearest dollar.) Required: 1. Calculate the ending inventory of chocolate mix in pounds for December of the prior year and for January and February. What is the beginning inventory of chocolate mix for January? 2. Prepare a direct materials purchases budget for chocolate mix for the months of January and February. 3. Calculate the ending inventory of boxes for December of the prior year and for January and February. 4. Prepare a direct materials purchases budget for boxes for the months of January and February.Preparing a Direct Labor Budget Tulum Inc. makes a Mexican chocolate mix. Planned production in units for the first 3 months of the coming year is: Each box of chocolate mix takes 0.4 direct labor hour. The average wage is 17 per hour. Required: Prepare a direct labor budget for the months of January, February, and March, as well as the total for the first quarter.Preparing an Overhead Budget Tulum Inc. makes a Mexican chocolate mix. Budgeted direct labor hours for the first 3 months of the coming year are: The variable overhead rate is 0.50 per direct labor hour. Fixed overhead is budgeted at 3,140 per month. Required: Prepare an overhead budget for the months of January, February, and March, as well as the total for the first quarter. (Note: Round all dollar amounts to the nearest dollar.)40BEB Preparing a Cost of Goods Sold Budget Lazlo Company manufactures a line of table lamps. Each lamp takes 5.00 of direct materials and uses 0.9 direct labor hour at 18.00 per direct labor hour. The variable overhead rate is 1.00 per direct labor hour and the fixed overhead rate is 2.00 per direct labor hour. Lazlo expects to produce 16,000 lamps next year and expects to have 830 lamps in ending inventory. There is no beginning inventory of table lamps. Required: Prepare a cost of goods sold budget for Lazlo Company.Preparing a Selling and Administrative Expenses Budget Elwood Company makes and sells plastic trash bags. In the coming year, Elwood expects total sales of 18,620,000. There is a 4% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following: Required: Prepare a selling and administrative expenses budget for Elwood Company for the coming year.Preparing a Budgeted Income Statement Jameson Company provided the following information for the coming year: Required: Prepare a budgeted income statement for Jameson Company for the coming year. (Note: Round all income statement amounts to the nearest dollar.)Preparing a Schedule of Cash Collections on Accounts Receivable Weiland and Company is a medical billing services firm. All sales of billing services are billed to the client (there are no cash sales). Weiland expects that, on average, 15% will be paid in the month of billing, 40% will be paid in the month following billing, and 42% will be paid in the second month following billing. For the next 5 months, the following sales billings are expected: Required: Prepare a schedule showing the cash expected in payments on accounts receivable in August and in September.Pilsner Inc. purchases raw materials on account for use in production. The direct materials purchases budget shows the following expected purchases on account: Pilsner typically pays 25% on account in the month of billing and 75% the next month. Required: 1. How much cash is required for payments on account in May? 2. How much cash is expected for payments on account in June?Preparing a Cash Budget Olivers Bistro provided the following information for the month of October: a. Sales are budgeted to be 395,000. About 80% of sales is cash; the remainder is on account. b. Olivers Bistro expects that, on average, 70% of credit sales will be paid in the month of sale, and 28% will be paid in the following month. c. Food and supplies purchases, all on account, are expected to be 285,000. Oliver pays 35% in the month of purchase and 65% in the month following purchase. d. Most of the work is done by Oliver and his wife, who typically withdraw 18,500 a month from the business as their salary. (Note: The 18,500 is a payment in total to the two owners, not per person.) Various part-time workers cost 29,300 per month. They are paid for their work weekly, so on average 90% of their wages is paid in the month incurred and the remaining 10% in the next month. e. Utilities and insurance average 8,750 per month. Rent on the building is 14,000 per month. f. In September, a freezer had to be replaced for 39,000. That amount is due in total in October. g. September sales were 390,000, and purchases of food and supplies in September equaled 275,000. h. The cash balance on October 1 is 1,916. Required: 1. Calculate the cash receipts expected in October. (Hint: Remember to include both cash sales and payments from credit sales.) 2. Calculate the cash needed in October to pay for food purchases. 3. Prepare a cash budget for the month of October.Flexible Budget with Different Levels of Production Balboa Company budgeted the following amounts: Required: Prepare a flexible budget for 4,000 units, 4,500 units, and 5,000 units.Performance Report Based on Budgeted and Actual Levels of Production Balboa Company budgeted production of 4,500 units with the following amounts: At the end of the year, Balboa had the following actual costs for production of 4,700 units: Required: 1. Calculate the budgeted amounts for each cost category listed above for the 4,500 budgeted units. 2. Prepare a performance report using a budget based on expected (budgeted) production of 4,500 units. 3. Prepare a performance report using a budget based on the actual level of production of 4,700 units.Planning and Control a. Dr. Jones, a dentist, wants to increase the size and profitability of his business by building a reputation for quality and timely service. b. To achieve this, he plans on adding a dental laboratory to his building so that crowns, bridges, and dentures can be made in-house. c. To add the laboratory, he needs additional money, which he decides must be obtained by increasing revenues. After some careful calculation, Dr. Jones concludes that annual revenues must be increased by 10%. d. Dr. Jones finds that his fees for fillings and crowns are below the average in his community and decides that the 10% increase can be achieved by increasing these fees. e. He then identifies the quantity of fillings and crowns expected for the coming year, the new per-unit fee, and the total fees expected. f. As the year unfolds (on a month-by-month basis), Dr. Jones compares the actual revenues received with the budgeted revenues. For the first 3 months, actual revenues were less than planned. g. Upon investigating, he discovered that he had some reduction in the number of patients because he had also changed his available hours of operation. h. He returned to his old schedule and found out that the number of patients was restored to the original expected levels. i. However, to make up the shortfall, he also increased the price of some of his other services. Required: Match each statement with the following planning and control elements. (Note: A letter may be matched to more than one item.) 1. Corrective action 2. Budgets 3. Feedback 4. Investigation 5. Short-term plan 6. Comparison of actual with planned 7. Monitoring of actual activity 8. Strategic plan 9. Short-term objectives 10. Long-term objectives Use the following information for Exercises 9-50 and 9-51: Assume that Stillwater Designs produces two automotive subwoofers: S12L7 and S12L5. The S12L7 sells for 475, and the S12L5 sells for 300. Projected sales (number of speakers) for the coming 5 quarters are as follows: The vice president of sales believes that the projected sales are realistic and can be achieved by the company. Exercise 9-50 Sales Budget Refer to the information regarding Stillwater Designs above. Required: 1. Prepare a sales budget for each quarter of 20X1 and for the year in total. Show sales by product and in total for each time period. 2. CONCEPTUAL CONNECTION How will Stillwater Designs use this sales budget?51E Production Budget and Direct Materials Purchases Budgets Peanut Land Inc. produces all-natural organic peanut butter. The peanut butter is sold in 12-ounce jars. The sales budget for the first 4 months of the year is as follows: Company policy requires that ending inventories for each month be 25% of next months sales. At the beginning of January, the inventory of peanut butter is 9,300 jars. Each jar of peanut butter needs two raw materials: 24 ounces of peanuts and one jar set (a glass jar and lid). Company policy requires that ending inventories of raw materials for each month be 10% of the next months production needs. That policy was met on January 1. Required: 1. Prepare a production budget for the first quarter of the year. Show the number of jars that should be produced each month as well as for the quarter in total. 2. Prepare separate direct materials purchases budgets for jars and for peanuts for the months of January and February.Production Budget Aqua-Pro Inc. produces submersible water pumps for ponds and cisterns. The unit sales for selected months of the year are as follows: Company policy requires that ending inventories for each month be 25% of next months sales. However, at the beginning of April, due to greater sales in March than anticipated, the beginning inventory of water pumps is only 21,000. Required: Prepare a production budget for the second quarter of the year. Show the number of units that should be produced each month as well as for the quarter in total.Direct Materials Purchases Budget Langer Company produces plastic items, including plastic housings for humidifiers. Each housing requires about 15 ounces of plastic costing 0.08 per ounce. Langer molds the plastic into the proper shape. Langer has budgeted production of the housings for the next 4 months as follows: Inventory policy requires that sufficient plastic be in ending monthly inventory to satisfy 20% of the following months production needs. The inventory of plastic at the beginning of July equals exactly the amount needed to satisfy the inventory policy. Required: Prepare a direct materials purchases budget for July, August, and September, showing purchases in units and in dollars for each month and in total.Direct Labor Budget Evans Company produces asphalt roofing materials. The production budget in bundles for Evans most popular weight of asphalt shingle is shown for the following months: Each bundle produced requires (on average) 0.40 direct labor hour. The average cost of direct labor is 20 per hour. Required: Prepare a direct labor budget for March, April, and May, showing the hours needed and the direct labor cost for each month and in total.Sales Budget Alger Inc. manufactures six models of leaf blowers and weed eaters. Algers budgeting team is finalizing the sales budget for the coming year. Sales in units and dollars for last year follow: In looking over the previous years sales figures, Algers sales budgeting team recalled the following: a. Model LB-1 is a newer version of the leaf blower with a gasoline engine. The LB-1 is mounted on wheels instead of being carried. This model is designed for the commercial market and did better than expected in its first year. As a result, the number of units of Model LB-1 to be sold was forecast at 250% of the previous years units. b. Models WE-8 and WE-9 were introduced on July 1 of last year. They are lighter versions of the traditional weed eater and are designed for smaller households or condo units. Alger estimates that demand for both models will continue at the previous years rate. c. A competitor has announced plans to introduce an improved version of model WE-6, Algers traditional weed eater. Alger believes that the model WE-6 price must be cut 30% to maintain unit sales at the previous years level. d. It was assumed that unit sales of all other models would increase by 5%, prices remaining constant. Required: Prepare a sales budget by product and in total for Alger Inc. for the coming year.Production Budget and Direct Materials Purchases Budget Jani Subramanian, owner of Janis Flowers and Gifts, produces gift baskets for various special occasions. Each gift basket includes fruit or assorted small gifts (e.g., a coffee mug, deck of cards, novelty cocoa mixes, scented soap) in a basket that is wrapped in colorful cellophane. Jani has estimated the following unit sales of the standard gift basket for the rest of the year and for January of next year. Jani likes to have 5% of the next months sales needs on hand at the end of each month. This requirement was met on August 31. Two materials are needed for each fruit basket: The materials inventory policy is to have 5% of the next months fruit needs on hand and 30% of the next months production needs of small gifts. (The relatively low inventory amount for fruit is designed to prevent spoilage.) Materials inventory on August 31 met this company policy. Required: 1. Prepare a production budget for September, October, November, and December for gift baskets. (Note: Round all answers to the nearest whole unit.) 2. Prepare a direct materials purchases budget for the two types of materials used in the production of gift baskets for the months of September, October, and November. (Note: Round answers to the nearest whole unit.) 3. CONCEPTUAL CONNECTION Why do you think there is such a big difference in budgeted units from November to December? Why did Jani budget fewer units in January than in December?Schedule of Cash Collections on Accounts Receivable and Cash Budget Bennett Inc. found that about 15% of its sales during the month were for cash. Bennett has the following accounts receivable collection experience: Bennetts anticipated sales for the next few months are as follows: (Note: Round all amounts to the nearest dollar.) Required: 1. Calculate credit sales for May, June, July, and August. 2. Prepare a schedule of cash receipts for July and August.Schedule of Cash Collections on Accounts Receivable and Cash Budget Roybal Inc. sells all of its product on account. Roybal has the following accounts receivable collection experience: To encourage payment in the month of sale, Roybal gives a 2% cash discount. Roybals anticipated sales for the next few months are as follows: Required: 1. Prepare a schedule of cash receipts for July. 2. Prepare a schedule of cash receipts for August.Cash Payments Schedule Fein Company provided the following information relating to cash payments: a. Fein purchased direct materials on account in the following amounts: b. Fein pays 20% of accounts payable in the month of purchase and the remaining 80% in the following month. c. In July, direct labor cost was 32,300. August direct labor cost was 35,400. The company finds that typically 90% of direct labor cost is paid in cash during the month, with the remainder paid in the following month. d. August overhead amounted to 71,200, including 6,350 of depreciation. e. Fein had taken out a 4-month loan of 15,000 on May 1. Interest, due with payment of principal, accrued at the rate of 9% per year. The loan and all interest were repaid on August 31. (Note: Use whole months to compute interest payment.) Required: Prepare a schedule of cash payments for Fein Company for the month of August.Cash Budget The owner of a building supply company has requested a cash budget for June. After examining the records of the company, you find the following: a. Cash balance on June 1 is 736. b. Actual sales for April and May are as follows: c. Credit sales are collected over a 3-month period: 40% in the month of sale, 30% in the second month, and 20% in the third month. The sales collected in the third month are subject to a 2% late fee, which is paid by those customers in addition to what they owe. The remaining sales are uncollectible. d. Inventory purchases average 64% of a months total sales. Of those purchases, 20% are paid for in the month of purchase. The remaining 80% are paid for in the following month. e. Salaries and wages total 11,750 per month, including a 4,500 salary paid to the owner. f. Rent is 4,100 per month. g. Taxes to be paid in June are 6,780. The owner also tells you that he expects cash sales of 18,600 and credit sales of 54,000 for June. No minimum cash balance is required. The owner of the company doesnt have access to short-term loans. Required: 1. Prepare a cash budget for June. Include supporting schedules for cash collections and cash payments. (Round all amounts to the nearest dollar.) 2. CONCEPTUAL CONNECTION Did the business show a negative cash balance for June? Suppose that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for dealing with a negative cash balance?Flexible Budget for Various Levels of Production Budgeted amounts for the year: Required: 1. Prepare a flexible budget for 3,500, 4,000, and 4,500 units. 2. CONCEPTUAL CONNECTION Calculate the unit cost at 3,500, 4,000, and 4,500 units. (Note: Round unit costs to the nearest cent.) What happens to unit cost as the number of units produced increases?Use the following information for Exercises 9-63 and 9-64: Palladium Inc. produces a variety of household cleaning products. Palladiums controller has developed standard costs for the following four overhead items: Next year, Palladium expects production to require 90,000 direct labor hours. Exercise 9-63 Flexible Budget for Various Levels of Activity Refer to the information for Palladium Inc. above. Required: 1. Prepare an overhead budget for the expected level of direct labor hours for the coming year. 2. Prepare an overhead budget that reflects production that is 15% higher than expected and for production that is 15% lower than expected.Use the following information for Exercises 9-63 and 9-64: Palladium Inc. produces a variety of household cleaning products. Palladiums controller has developed standard costs for the following four overhead items: Next year, Palladium expects production to require 90,000 direct labor hours. Exercise 9-64 Performance Report Based on Actual Production Refer to the information for Palladium Inc. above. Assume that actual production required 93,000 direct labor hours at standard. The actual overhead costs incurred were as follows: Required: Prepare a performance report for the period based on actual production.65P Operating Budget, Comprehensive Analysis Allison Manufacturing produces a subassembly used in the production of jet aircraft engines. The assembly is sold to engine manufacturers and aircraft maintenance facilities. Projected sales in units for the coming 5 months follow: The following data pertain to production policies and manufacturing specifications followed by Allison Manufacturing: a. Finished goods inventory on January 1 is 32,000 units, each costing 166.06. The desired ending inventory for each month is 80% of the next months sales. b. The data on materials used are as follows: Inventory policy dictates that sufficient materials be on hand at the end of the month to produce 50% of the next months production needs. This is exactly the amount of material on hand on December 31 of the prior year. c. The direct labor used per unit of output is 3 hours. The average direct labor cost per hour is 14.25. d. Overhead each month is estimated using a flexible budget formula. (Note: Activity is measured in direct labor hours.) e. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Note: Activity is measured in units sold.) f. The unit selling price of the subassembly is 205. g. All sales and purchases are for cash. The cash balance on January 1 equals 400,000. The firm requires a minimum ending balance of 50,000. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is the interest due (cash borrowed at the end of the quarter is repaid at the end of the following quarter). The interest rate is 12% per annum. No money is owed at the beginning of January. Required: 1. Prepare a monthly operating budget for the first quarter with the following schedules. (Note: Assume that there is no change in work-in-process inventories.) a. Sales budget b. Production budget c. Direct materials purchases budget d. Direct labor budget e. Overhead budget f. Selling and administrative expenses budget g. Ending finished goods inventory budget h. Cost of goods sold budget i. Budgeted income statement j. Cash budget 2. CONCEPTUAL CONNECTION Form a group with two or three other students. Locate a manufacturing plant in your community that has headquarters elsewhere. Interview the controller for the plant regarding the master budgeting process. Ask when the process starts each year, what schedules and budgets are prepared at the plant level, how the controller forecasts the amounts, and how those schedules and budgets fit in with the overall corporate budget. Is the budgetary process participative? Also, find out how budgets are used for performance analysis. Write a summary of the interview.Use the following information for Problems 9-67 through 9-69: Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The two dog foods use common raw materials in different proportions. The company expects to produce 80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hour per bag, and SpecialDiet requires 0.30 direct labor hour per bag. Ladan has developed the following fixed and variable costs for each of the four overhead items: Problem 9-67 Overhead Budget for a Particular Level of Activity Refer to the information for Healthy Pet Company above. Required: 1. Calculate the total direct labor hours required for the production of 80,000 bags of BasicDiet and 80,000 bags of SpecialDiet. 2. Prepare an overhead budget for the expected activity level (calculated in Requirement 1) for the coming year.Use the following information for Problems 9-67 through 9-69: Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The two dog foods use common raw materials in different proportions. The company expects to produce 80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hour per bag, and SpecialDiet requires 0.30 direct labor hour per bag. Ladan has developed the following fixed and variable costs for each of the four overhead items: Problem 9-68 Flexible Budget for Various Production Levels Refer to the information for Healthy Pet Company on the previous page. Required: 1. Calculate the direct labor hours required for production that is 10% higher than expected. Calculate the direct labor hours required for production that is 20% lower than expected. 2. Prepare an overhead budget that reflects production that is 10% higher than expected and for production that is 20% lower than expected. (Hint: Use total direct labor hours calculated in Requirement 1.)Use the following information for Problems 9-67 through 9-69: Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The two dog foods use common raw materials in different proportions. The company expects to produce 80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hour per bag, and SpecialDiet requires 0.30 direct labor hour per bag. Ladan has developed the following fixed and variable costs for each of the four overhead items: Problem 9-69 Performance Report Based on Actual Production Refer to the information for Healthy Pet Company on the previous page. Assume that Healthy Pet actually produced 100,000 bags of BasicDiet and 90,000 bags of SpecialDiet. The actual overhead costs incurred were as follows: Required: 1. Calculate the number of direct labor hours budgeted for actual production of the two products. 2. Prepare a performance report for the period based on actual production. 3. CONCEPTUAL CONNECTION Based on the report, would you judge any of the variances to be significant? Can you think of some possible reasons for the variances?Ryan Richards, controller for Grange Retailers, has assembled the following data to assist in the preparation of a cash budget for the third quarter of the year: a. Sales: b. Each month, 30% of sales are for cash and 70% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale. c. Each month, the ending inventory exactly equals 50% of the cost of next months sales. The markup on goods is 25% of cost. d. Inventory purchases are paid for in the month following the purchase. e. Recurring monthly expenses are as follows: f. Property taxes of 15,000 are due and payable on July 15. g. Advertising fees of 6,000 must be paid on August 20. h. A lease on a new storage facility is scheduled to begin on September 2. Monthly payments are 5,000. i. The company has a policy to maintain a minimum cash balance of 10,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of a month. The annual interest rate is 9%. The company must borrow in multiples of 1,000. j. A partially completed balance sheet as of June 30 follows. (Note: Accounts payable is for inventory purchases only.) Required: 1. Complete the balance sheet given in Item j. 2. Prepare a cash budget for each month in the third quarter and for the quarter in total (the third quarter begins on July 1). Prepare a supporting schedule of cash collections. 3. Prepare a pro forma balance sheet as of September 30. 4. CONCEPTUAL CONNECTION Form a group with two or three other students. Discuss why a bank might require a cash budget for businesses that are seeking short-term loans. Determine what other financial reports might be useful for a loan decision. Also, discuss how the reliability of cash budgets and other financial information can be determined.Participative Budgeting, Not-for-Profit Setting Dwight D. Eisenhower was the 34th president of the United States and the Supreme Commander of the Allied Forces during World War II. Much of his army career was spent in planning. He once said that planning is everything; the plan is nothing. Required: CONCEPTUAL CONNECTION What do you think he meant by this? Consider his comment with respect to the master budget. Do you agree or disagree? Be sure to include the impact of the master budget on planning and control.Cash Budget The controller of Feinberg Company is gathering data to prepare the cash budget for July. He plans to develop the budget from the following information: a. Of all sales, 40% are cash sales. b. Of credit sales, 45% are collected within the month of sale. Half of the credit sales collected within the month receive a 2% cash discount (for accounts paid within 10 days). Thirty percent of credit sales are collected in the following month; remaining credit sales are collected the month thereafter. There are virtually no bad debts. c. Sales for the second two quarters of the year follow. (Note: The first 3 months are actual sales, and the last 3 months are estimated sales.) d. The company sells all that it produces each month. The cost of raw materials equals 26% of each sales dollar. The company requires a monthly ending inventory of raw materials equal to the coming months production requirements. Of raw materials purchases, 50% is paid for in the month of purchase. The remaining 50% is paid for in the following month. e. Wages total 105,000 each month and are paid in the month incurred. f. Budgeted monthly operating expenses total 376,000, of which 45,000 is depreciation and 6,000 is expiration of prepaid insurance (the annual premium of 72,000 is paid on January 1). g. Dividends of 130,000, declared on June 30, will be paid on July 15. h. Old equipment will be sold for 25,200 on July 4. i. On July 13, new equipment will be purchased for 173,000. j. The company maintains a minimum cash balance of 20,000. k. The cash balance on July 1 is 27,000. Required: Prepare a cash budget for July. Give a supporting schedule that details the cash collections from sales.Optima Company is a high-technology organization that produces a mass-storage system. The design of Optimas system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarters activity and the activity for the year in total. The master budget will be based on the following information: a. Fourth-quarter sales for 20X0 are 55,000 units. b. Unit sales by quarter (for 20X1) are projected as follows: The selling price is 400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts. c. There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter: d. Each mass-storage unit uses 5 hours of direct labor and three units of direct materials. Laborers are paid 10 per hour, and one unit of direct materials costs 80. e. There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarters unit sales. Optima will end the year with the same amount of direct materials found in this years beginning inventory. f. Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month. g. Fixed overhead totals 1 million each quarter. Of this total, 350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the years total fixed overhead by the years budgeted production in units. h. Variable overhead is budgeted at 6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred. i. Fixed selling and administrative expenses total 250,000 per quarter, including 50,000 depreciation. j. Variable selling and administrative expenses are budgeted at 10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred. k. The balance sheet as of December 31, 20X0, is as follows: l. Optima will pay quarterly dividends of 300,000. At the end of the fourth quarter, 2 million of equipment will be purchased. Required: Prepare a master budget for Optima Company for each quarter of 20X1 and for the year in total. The following component budgets must be included: 1. Sales budget 2. Production budget 3. Direct materials purchases budget 4. Direct labor budget 5. Overhead budget 6. Selling and administrative expenses budget 7. Ending finished goods inventory budget 8. Cost of goods sold budget (Note: Assume that there is no change in work-in-process inventories.) 9. Cash budget 10. Pro forma income statement (using absorption costing) (Note: Ignore income taxes.) 11. Pro forma balance sheet (Note: Ignore income taxes.)Direct Materials and Direct Labor Budgets Willison Company produces stuffed toy animals; one of these is Betty Rabbit. Each rabbit takes 0.2 yard of fabric and 6 ounces of polyfiberfill. Fabric costs 3.50 per yard, and polyfiberfill is 0.05 per ounce. Willison has budgeted production of stuffed rabbits for the next 4 months as follows: Inventory policy requires that sufficient fabric be in ending monthly inventory to satisfy 15% of the following months production needs and sufficient polyfiberfill be in inventory to satisfy 30% of the following months production needs. Inventory of fabric and polyfiberfill at the beginning of October equals exactly the amount needed to satisfy the inventory policy. Each rabbit produced requires (on average) 0.10 direct labor per hour. The average cost of direct labor is 15.50 per hour. Required: 1. Prepare a direct materials purchases budget of fabric for the last quarter of the year, showing purchases in units and in dollars for each month and for the quarter in total. 2. Prepare a direct materials purchases budget of polyfiberfill for the last quarter of the year, showing purchases in units and in dollars for each month and for the quarter in total. 3. Prepare a direct labor budget for the last quarter of the year, showing the hours needed and the direct labor cost for each month and for the quarter in total.75P 76C 77C Budgetary Performance, Rewards, Ethical Behavior Linda Ellis, division manager, is evaluated and rewarded on the basis of budgetary performance. Linda, her assistants, and the plant managers are all eligible to receive a bonus if actual divisional profits are between budgeted profits and 120% of budgeted profits. The bonuses are based on a fixed percentage of actual profits. Profits above 120% of budgeted profits earn a bonus at the 120% level (in other words, there is an upper limit on possible bonus payments). If the actual profits are less than budgeted profits, no bonuses are awarded. Consider the following actions taken by Linda: a. Linda tends to overestimate expenses and underestimate revenues. This approach facilitates the ability of the division to attain budgeted profits. Linda believes that the action is justified because it increases the likelihood of receiving bonuses and helps to keep the morale of the managers high. b. Suppose that toward the end of the fiscal year, Linda saw that the division would not achieve budgeted profits. Accordingly, she instructed the sales department to defer the closing of a number of sales agreements to the following fiscal year. She also decided to write off some inventory that was nearly worthless. Deferring revenues to next year and writing off the inventory in a no-bonus year increased the chances of a bonus for next year. c. Assume that toward the end of the year, Linda saw that actual profits would likely exceed the 120% limit and that she took actions similar to those described in Item b. Required: 1. Comment on the ethics of Lindas behavior. Are her actions right or wrong? What role does the company play in encouraging her actions? 2. Suppose that you are the marketing manager for the division, and you receive instructions to defer the closing of sales until the next fiscal year. What would you do? 3. Suppose that you are a plant manager, and you know that your budget has been padded by the division manager. Further, suppose that the padding is common knowledge among the plant managers, who support it because it increases the ability to achieve the budget and receive a bonus. What would you do? 4. Suppose that you are the division controller, and you receive instructions from the division manager to accelerate the recognition of some expenses that legitimately belong to a future period. What would you do?Discuss the dirrerence between budgets and standard costs.Describe the relationship that unit standards have with flexible budgeting.Why is historical experience often a poor basis for establishing standards?4DQ Explain why standard costing systems adopted.How does standard costing improve the control function?Discuss the differences among actual costing, normal costing, and standard costing.8DQ The budget variance for variable production costs is broken down into quantity and price variances. Explain why the quantity variance is more useful for control purposes than the price variance.When should a standard cost variance be investigated?What are control limits, and how are they set?Explain why the materials price variance is often computed at the point of purchase rather than at the point of issuance.The materials usage variance is always the responsibility of the production supervisor. Do you agree or disagree? Why?The labor rate variance is never controllable. Do you agree or disagree? Why?15DQ What is kaizen costing? On which part of the value chain does kaizen costing focus?What is target costing? Describe how costs are reduced so that the target cost can be met.18DQ The variable overhead efficiency variance has nothing to do with efficient use of variable overhead. Do you agree or disagree? Why?Describe the difference between the variable overhead efficiency variance and the labor efficiency variance.What is the cause of an unfavorable volume variance?Does the volume variance convey any meaningful information to managers?Which do you think is more important for control of fixed overhead costs: the spending variance or the volume variance? Explain.1MCQ A currently attainable standard is one that a. relies on maximum efficiency. b. uses only historical experience. c. is based on ideal operating conditions. d. can be easily achieved. e. None of these.An ideal standard is one that a. uses only historical experience. b. relies on maximum efficiency. c. can be achieved under efficient operating conditions. d. makes allowances for normal breakdowns, interruptions, less than perfect skill, and soon. e. None of these.The underlying details for the standard cost per unit are provided in a. the standard work-in-process account. b. the standard production budget. c. the standard cost sheet. d. the balance sheet. e. None of these.The standard quantity of materials allowed is computed as a. Unit Quantity Standard Standard Output. b. Unit Quantity Standard Normal Output. c. Unit Quantity Standard Practical Output. d. Unit Quantity Standard Actual Output. e. None of these.The standard direct labor hours allowed is computed as a. Unit Labor Standard Actual Output. b. Unit Labor Standard Practical Output. c. Unit Labor Standard Standard Output. d. Unit Labor Standard Normal Output. e. Unit Labor Standard Theoretical Output.Investigating variances from standard is a. always done. b. done if the variance is inside an acceptable range. c. not done if the variance is expected to recur. d. done if the variance is outside the control limits. e. None of these.8MCQ The materials price variance is usually computed a. when goods are finished. b. when materials are issued to production. c. when materials are purchased. d. after suppliers are paid. e. None of these.Responsibility for the materials usage variance is usually assigned to a. the chief executive officer (CEO). b. marketing. c. purchasing. d. personnel. e. production.Responsibility for the labor rate variance typically is assigned to a. production. b. labor markets. c. personnel. d. labor unions. e. engineering.Responsibility for the labor efficiency variance typically is assigned to a. labor unions. b. personnel. c. engineering. d. production. e. outside trainers.(Appendix 10A) Which of the following items describes practices surrounding the recording of variances? a. All inventories are typically carried at standard. b. Unfavorable variances appear as debits. c. Favorable variances appear as credits. d. Immaterial variances are typically closed to Cost of Goods Sold. e. All of these.(Appendix 10A) Which of the following is true concerning labor variances that are not material in amount? a. They are closed to Cost of Goods Sold. b. They are prorated among Work in Process, Finished Goods, and Cost of Goods Sold. c. They are prorated among Materials, Work in Process, Finished Goods, and Cost of Goods Sold. d. They are reported on the balance sheet at the end of the year. e. All of these.The total variable overhead variance is the difference between a. the budgeted variable overhead and the actual variable overhead. b. the actual variable overhead and the applied variable overhead. c. the budgeted variable overhead and the applied variable overhead. d. the applied variable overhead and the budgeted total overhead. e. None of these.A variable overhead spending variance can occur because a. prices for individual overhead items have increased. b. prices for individual overhead items have decreased. c. more of an individual overhead item was used than expected. d. less of an individual overhead item was used than expected. e. All of these.The total variable overhead variance can be expressed as the sum of a. the underapplied variable overhead and the spending variance. b. the efficiency variance and the overapplied variable overhead. c. the spending, efficiency, and volume variances. d. the spending and efficiency variances. e. None of these.The total fixed overhead variance is a. the difference between actual and applied fixed overhead costs. b. the difference between budgeted and applied fixed overhead costs. c. the difference between budgeted fixed and variable overhead costs. d. the difference between actual and budgeted fixed overhead costs. e. None of these.The total fixed overhead variance can be expressed as the sum of a. the spending and efficiency variances. b. the efficiency and volume variances. c. the spending and volume variances. d. the flexible budget and the volume variances. e. None of these.An unfavorable volume variance can occur because a. too much finished goods inventory was held. b. the company overproduced. c. the actual output was less than expected or practical capacity. d. the actual output was greater than expected or practical capacity. e. All of these.21BEA Control Limits During the last 6 weeks, the actual costs of materials for Brennen Company were as follows: The standard materials cost for each week was 60,000 with an allowable deviation of 6,000. Required: Plot the actual costs over time against the upper and lower limits. Comment on whether or not there is a need to investigate any of the variances. Use the following information to complete Brief Exercises 10-23 and 10-24: Krumple Inc. produces aluminum cans. Production of 12-ounce cans has a standard unit quantity of 4.7 ounces of aluminum per can. During the month of April, 450,000 cans were produced using 1,875,000 ounces of aluminum. The actual cost of aluminum was 0.10 per ounce and the standard price was 0.08 per ounce. There are no beginning or ending inventories of aluminum.Use the following information to complete Brief Exercises 10-23 and 10-24: Krumple Inc. produces aluminum cans. Production of 12-ounce cans has a standard unit quantity of 4.7 ounces of aluminum per can. During the month of April, 450,000 cans were produced using 1,875,000 ounces of aluminum. The actual cost of aluminum was 0.10 per ounce and the standard price was 0.08 per ounce. There are no beginning or ending inventories of aluminum. 10-23 Total Materials Variance Refer to the information for Krumple Inc. above. Required: Calculate the total variance for aluminum for the month of April.Use the following information to complete Brief Exercises 10-23 and 10-24: Krumple Inc. produces aluminum cans. Production of 12-ounce cans has a standard unit quantity of 4.7 ounces of aluminum per can. During the month of April, 450,000 cans were produced using 1,875,000 ounces of aluminum. The actual cost of aluminum was 0.10 per ounce and the standard price was 0.08 per ounce. There are no beginning or ending inventories of aluminum. 10-24 Materials Variances Refer to the information for Krumple Inc. above. Required: Calculate the materials price and usage variances using the columnar and formula approaches.Use the following information to complete Brief Exercises 10-25 and 10-26: Tico Inc. produces plastic bottles. Each bottle has a standard labor requirement of 0.03 hour. During the month of April, 900,000 bottles were produced using 25,200 labor hours @ 15.00. The standard wage rate is 13.50 per hour. 10-25 Total Labor Variance Refer to the information for Tico Inc. on the previous page. Required: Calculate the total variance for production labor for the month of April.Use the following information to complete Brief Exercises 10-25 and 10-26: Tico Inc. produces plastic bottles. Each bottle has a standard labor requirement of 0.03 hour. During the month of April, 900,000 bottles were produced using 25,200 labor hours @ 15.00. The standard wage rate is 13.50 per hour. 10-26 Labor Rate and Efficiency Variances Refer to the information above for Tico Inc. on the previous page Required: Calculate the labor rate and efficiency variances using the columnar and formula approaches.Rath Company showed the following information for the year: Required: 1. Calculate the standard direct labor hours for actual production. 2. Calculate the applied variable overhead. 3. Calculate the total variable overhead variance.Variable Overhead Spending and Efficiency Variances, Columnar and Formula Approaches Rath Company provided the following information: Required: 1. Using the columnar approach, calculate the variable overhead spending and efficiency variances. 2. Using the formula approach, calculate the variable overhead spending variance. 3. Using the formula approach, calculate the variable overhead efficiency variance. 4. Calculate the total variable overhead variance.Performance Report for Variable Variances Humo Company provided the following information: Required: Prepare a performance report that shows the variances for each variable overhead item (inspection and power).Total Fixed Overhead Variance Bradshaw Company provided the following data: Required: 1. Calculate the standard hours allowed for actual production. 2. Calculate the applied fixed overhead. 3. Calculate the total fixed overhead variance.Fixed Overhead Spending and Volume Variances, Columnar and Formula Approaches Branch Company provided the following information: Required: 1. Using the columnar approach, calculate the fixed overhead spending and volume variances. 2. Using the formula approach, calculate the fixed overhead spending variance. 3. Using the formula approach, calculate the fixed overhead volume variance. 4. Calculate the total fixed overhead variance.32BEB Control Limits During the last 6 weeks, the actual costs of labor for Solsana Company were as follows: The standard materials cost for each week was 40,000 with an allowable deviation of 5,000. Required: Plot the actual costs over time against the upper and lower limits. Comment on whether or not there is a need to investigate any of the variances. Use the following information to complete Brief Exercises 10-34 and 10-35: Young Inc. produces plastic bottles. Production of 16-ounce bottles has a standard unit quantity of 0.45 ounce of plastic per bottle. During the month of June, 240,000 bottles were produced using 110,000 ounces of plastic. The actual cost of plastic was 0,042 per ounce, and the standard price was 0,045 per ounce. There is no beginning or ending inventories of plastic.34BEB Use the following information to complete Brief Exercises 10-34 and 10-35: Young Inc. produces plastic bottles. Production of 16-ounce bottles has a standard unit quantity of 0.45 ounce of plastic per bottle. During the month of June, 240,000 bottles were produced using 110,000 ounces of plastic. The actual cost of plastic was 0,042 per ounce, and the standard price was 0,045 per ounce. There is no beginning or ending inventories of plastic. 10-35 Materials Variances Refer to the information for Young Inc. above. Required: Calculate the materials price and usage variances using the columnar and formula approaches.Use the following information to complete Brief Exercises 10-36 and 10-37: Ambient Inc. produces aluminum cans. Each can has a standard labor requirement of 0.03 hour. During the month of May, 500,000 cans were produced using 14,000 labor hours @ 15.00. The standard wage rate is 14.50 per hour. 10-36 Total Labor Variance Refer to the information for Ambient Inc. above. Required: Calculate the total variance for production labor for the month of May.Use the following information to complete Brief Exercises 10-36 and 10-37: Ambient Inc. produces aluminum cans. Each can has a standard labor requirement of 0.03 hour. During the month of May, 500,000 cans were produced using 14,000 labor hours @ 15.00. The standard wage rate is 14.50 per hour. 10-37 Labor Rate and Efficiency Variances Refer to the information for Ambient Inc. above. Required: Calculate the labor rate and efficiency variances using the columnar and formula approaches.Mulliner Company showed the following information for the year: Required: 1. Calculate the standard direct labor hours for actual production. 2. Calculate the applied variable overhead. 3. Calculate the total variable overhead variance.Variable Overhead Spending and Efficiency Variances, Columnar and Formula Approaches Aretha Company provided the following information: Required: 1. Using the columnar approach, calculate the variable overhead spending and efficiency variances. 2. Using the formula approach, calculate the variable overhead spending variance. 3. Using the formula approach, calculate the variable overhead efficiency variance. 4. Calculate the total variable overhead variance.Performance Report for Variable Variances Potter Company provided the following information: Required: Prepare a performance report that shows the variances for each variable overhead item (inspection and power).Bulger Company provided the following data: Required: 1. Calculate the standard hours allowed for actual production. 2. Calculate the applied fixed overhead. 3. Calculate the total fixed overhead variance.Fixed Overhead Spending and Volume Variances, Columnar and Formula Approaches Corey Company provided the following information: Required: 1. Using the columnar approach, calculate the fixed overhead spending and volume variances. 2. Using the formula approach, calculate the fixed overhead spending variance. 3. Using the formula approach, calculate the fixed overhead volume variance. 4. Calculate the total fixed overhead variance.Standard Quantities of Labor and Materials Stillwater Designs rebuilds defective units of its S12L7 Kicker speaker model. During the year, Stillwater rebuilt 15,000 units. Materials and labor standards for performing the repairs are as follows: Required: Compute the standard hours allowed for a volume of 15,000 rebuilt units. Compute the standard number of kits and cabinets allowed for a volume of 15,000 rebuilt units. Suppose that during the first month of the year, 15,000 standard hours were allowed for the units rebuilt. How many units were rebuilt during the first month?Sommers Company uses the following rule to determine whether materials usage variances should be investigated: A materials usage variance will be investigated anytime the amount exceeds the lesser of 12,000 or 10% of the standard cost. Reports for the past 5 weeks provided the following information: Required: 1. Using the rule provided, identify the cases that will be investigated. 2. CONCEPTUAL CONNECTION Suppose investigation reveals that the cause of an unfavorable materials usage variance is the use of lower-quality materials than are normally used. Who is responsible? What corrective action would likely be taken? 3. CONCEPTUAL CONNECTION Suppose investigation reveals that the cause of a significant unfavorable materials usage variance is attributable to a new approach to manufacturing that takes less labor time but causes more material waste. Examination of the labor efficiency variance reveals that it is favorable and larger than the unfavorable materials usage variance. Who is responsible? What action should be taken?Use the following information for Exercises 10-45 through 10-47: Cinturon Corporation produces high-quality leather belts. The companys plant in Boise uses a standard costing system and has set the following standards for materials and labor: During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 287,500 strips at 3.60 per strip. There was no beginning or ending inventories of leather. Actual direct labor was 78,200 hours at 12.50 per hour. Exercise 10-45 Budget Variances, Materials and Labor Refer to the information for Cinturon Corporation above. Required: 1. Compute the costs of leather and direct labor that should be incurred for the production of 92,000 leather belts. 2. Compute the total budget variances for materials and labor. 3. CONCEPTUAL CONNECTION Would you consider these variances material with a need for investigation? Explain.Refer to the information for Cinturon Corporation on the previous page. Required: 1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches. 2. CONCEPTUAL CONNECTION Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price standard be updated to reflect this new, less expensive source of leather strips. Should the plant manager update the materials price standard as suggested? Why or why not?Refer to the information for Cinturon Corporation on the previous page. Required: 1. Break down the total variance for labor into a rate variance and an efficiency variance using the columnar and formula approaches. 2. CONCEPTUAL CONNECTION As part of the investigation of the unfavorable variances, the plant manager interviews the production manager. The production manager complains strongly about the quality of the leather strips. He indicates that the strips are of lower quality than usual and that workers have to be more careful to avoid a belt with cracks and more time is required. Also, even with extra care, many belts have to be discarded and new ones produced to replace the rejects. This replacement work has also produced some overtime demands. What corrective action should the plant manager take?Materials Variances Manzana Company produces apple juice sold in gallons. Recently, the company adopted the following material standard for 1 gallon of its apple juice: During the first week of operation, the company experienced the following results: a. Gallon units produced: 20,000. b. Ounces of materials purchased and used: 2,650,000 ounces at 0.045. c. No beginning or ending inventories of raw materials. Required: 1. Compute the materials price variance. 2. Compute the materials usage variance. 3. During the second week, the materials usage variance was 4,000 unfavorable and the materials price variance was 20,000 unfavorable. The company purchased and used 2,000,000 ounces of material during this week. How many gallons of juice were produced, and what was the actual price paid per ounce of materials?Labor Variances Verde Company produces wheels for bicycles. During the year, 660,000 wheels were produced. The actual labor used was 360,000 hours at 9.50 per hour. Verde has the following labor standard: 0.5 hour at 10.00. Required: Compute the labor rate variance. Compute the labor efficiency variance.At the beginning of the year, Craig Company had the following standard cost sheet for one of its plastic products: The actual results for the year are as follows: a. Units produced: 400,000. b. Materials purchased: 2,060,000 pounds @ 3.95. c. Materials used: 2,100,000 pounds. d. Direct labor: 825,000 hours @ 14.85. Required: 1. Compute price and usage variances for materials. 2. Compute the labor rate and labor efficiency variances, using both the formula and columnar approaches.Jackie Iverson was furious. She was about ready to fire Tom Rich, her purchasing agent. Just a month ago, she had given him a salary increase and a bonus for his performance. She had been especially pleased with his ability to meet or beat the price standards. But now, she found out that it was because of a huge purchase of raw materials. It would take months to use that inventory, and there was hardly space to store it. In the meantime, space had to be found for the other materials supplies that would be ordered and processed on a regular basis. Additionally, it was a lot of capital to tie up in inventorymoney that could have been used to help finance the cash needs of the new product just coming online. Her interview with Tom was frustrating. He was defensive, arguing that he thought she wanted those standards met and that the means were not that important. He also pointed out that quantity purchases were the only way to meet the price standards. Otherwise, an unfavorable variance would have been realized. Required: 1. CONCEPTUAL CONNECTION Why did Tom Rich purchase the large quantity of raw materials? Do you think that this behavior was the objective of the price standard? If not, what is the objective(s)? 2. CONCEPTUAL CONNECTION Suppose that Tom is right and that the only way to meet the price standards is through the use of quantity discounts. Also, assume that using quantity discounts is not a desirable practice for this company. What would you do to solve this dilemma? 3. CONCEPTUAL CONNECTION Should Tom be fired? Explain.10-52 Materials and Labor Variances Refer to the information for Deporte Company above. Required: Compute the materials and labor variances associated with the changeover activity, labeling each variance as favorable or unfavorable. Use the following information for Exercises 10-52 and 10-53: Deporte Company produces single-colored T-shirts. Materials for the shirts are dyed in large vats. After dying the materials for a given color, the vats must be cleaned and prepared for the next batch of materials to be colored. The following standards for changeover for a given batch have been established: During the year, 79,500 pounds of material were purchased and used for the changeover activity. There were 30,000 batches produced, with the following actual prime costs:Refer to the information for Deporte Company above. Required: 1. Prepare a journal entry for the purchase of raw materials. 2. Prepare a journal entry for the issuance of raw materials. 3. Prepare a journal entry for the addition of labor to Work in Process. 4. Prepare a journal entry for the closing of variances to Cost of Goods Sold.Esteban Products produces instructional aids, including white boards, which use colored markers instead of chalk. These are particularly popular for conference rooms in educational institutions and executive offices of large corporations. The standard cost of materials for this product is 12 pounds at 8.25 per pound. During the first month of the year, 3,200 boards were produced. Information concerning actual costs and usage of materials follows: Required: 1. Compute the materials price and usage variances. 2. Prepare journal entries for all activities relating to materials.Escuchar Products, a producer of DVD players, has established a labor standard for its productdirect labor: 2 hrs at 9.65 per hour. During January, Escuchar produced 12,800 DVD players. The actual direct labor used was 25,040 hours at a total cost of 245,392. Required: 1. Compute the labor rate and efficiency variances. 2. Prepare journal entries for all activities relating to labor.Use the following information for Exercises 10-56 and 10-57: Rostand Inc. operates a delivery service for over 70 restaurants. The corporation has a fleet of vehicles and has invested in a sophisticated, computerized communications system to coordinate its deliveries. Rostand has gathered the following actual data on last years delivery operations: Rostand employs a standard costing system. During the year, a variable overhead rate of 5.10 per hour was used. The labor standard requires 0.80 hour per delivery. Exercise 10-56 Variable Overhead Variances, Service Company Refer to the information for Rostand Inc. above. Required: 1. Compute the standard hours allowed for actual deliveries made last year. 2. Compute the variable overhead spending and efficiency variances.Refer to the information for Rostand Inc. above. Assume that the actual fixed overhead was 403,400. Budgeted fixed overhead was 400,000, based on practical capacity of 32,000 direct labor hours. Required: 1. Calculate the standard fixed overhead rate based on budgeted fixed overhead and practical capacity. 2. Compute the fixed overhead spending and volume variances.At the beginning of the year, Lopez Company had the following standard cost sheet for one of its chemical products: Lopez computes its overhead rates using practical volume, which is 80,000 units. The actual results for the year are as follows: (a) Units produced: 79,600; (b) Direct labor: 158,900 hours at 18.10; (c) FOH: 831,000; and (d) VOH: 112,400. Required: 1. Compute the variable overhead spending and efficiency variances. 2. Compute the fixed overhead spending and volume variances.Zepol Company is planning to produce 600,000 power drills for the coming year. The company uses direct labor hours to assign overhead to products. Each drill requires 0.75 standard hour of labor for completion. The total budgeted overhead was 1,777,500. The total fixed overhead budgeted for the coming year is 832,500. Predetermined overhead rates are calculated using expected production, measured in direct labor hours. Actual results for the year are: Required: 1. Compute the applied fixed overhead. 2. Compute the fixed overhead spending and volume variances. 3. Compute the applied variable overhead. 4. Compute the variable overhead spending and efficiency variances.Last year, Gladner Company had planned to produce 140,000 units. However, 143,000 units were actually produced. The company uses direct labor hours to assign overhead to products. Each unit requires 0.9 standard hour of labor for completion. The fixed overhead rate was 11 per direct labor hour, and the variable overhead rate was 6.36 per direct labor hour. The following variances were computed: Required: 1. Calculate the total applied fixed overhead. 2. Calculate the budgeted fixed overhead. 3. Calculate the actual fixed overhead. 4. Calculate the total applied variable overhead. 5. Calculate the number of actual direct labor hours. 6. Calculate the actual variable overhead.Anker Company had the data below for its most recent year, ended December 31: Required: Prepare a performance report that shows the variances on an item-by-item basis.Cabanarama Inc. designs and manufactures easy-to-set-up beach cabanas that families can set up for picnicking, protection from the sun, and so on. The cabanas come in a kit that includes canvas, lacing, and aluminum support poles. Cabanarama has expanded rapidly from a 2-person operation to one involving over a hundred employees. Cabanaramas founder and owner, Frank Love, understands that a more formal approach to standard setting and control is needed to ensure that the consistent quality for which the company is known continues. Frank and Annette Wilson, his financial vice president, divided the company into departments and designated each department as a cost center. Sales, Quality Control, and Design report directly to Frank. Production, Shipping, Finance, and Accounting report to Annette. In the production department, one of the supervisors was assigned the materials purchasing function. The job included purchasing all raw materials, overseeing inventory handling (receiving, storage, etc.), and tracking materials purchases and use. Frank felt that control would be better achieved if there were a way for his employees to continue to perform in such a way that quality was maintained and cost reduction was achieved. Annette suggested that Cabanarama institute a standard costing system. Variances for materials and labor could then be calculated and reported directly to her, and she could alert Frank to any problems or opportunities for improvement. Required: 1. a. CONCEPTUAL CONNECTION When Annette designs the standard costing system for Cabanarama, who should be involved in setting the standards for each cost component? b. CONCEPTUAL CONNECTION What factors should be considered in establishing the standards for each cost component? 2. CONCEPTUAL CONNECTION Assume that Cabanarama develops the standards for materials use, materials price, labor use, and labor wages. Who will be assigned responsibility for each and for any resulting variances? Why?Basuras Waste Disposal Company has a long-term contract with several large cities to collect garbage and trash from residential customers. To facilitate the collection, Basuras places a large plastic container with each household. Because of wear and tear, growth, and other factors, Basuras places about 200,000 new containers each year (about 20% of the total households). Several years ago, Basuras decided to manufacture its own containers as a cost-saving measure. A strategically located plant involved in this type of manufacturing was acquired. To help ensure cost efficiency, a standard cost system was installed in the plant. The following standards have been established for the products variable inputs: During the first week in January, Basuras had the following actual results: The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly higher level of skilled labor. The higher- quality material has no effect on labor utilization. However, the new manufacturing process was expected to reduce materials usage by 0.25 pound per container. Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assume that the 0.25 pound per container reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. Would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new processs materials reduction effect as well. Explain. 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new process should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 9,000 and the labor cost was 99,000. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 6,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.)Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite installations. Recently, building contractors have insisted on up-front bid prices for a house rather than the cost-plus system that Tom and Tony had been using. They worry because natural flaws in the granite make it impossible to tell in advance exactly how much granite will be used on a particular job. In addition, granite can be easily broken, meaning that Tom or Tony could ruin a slab and would need to start over with a new one. Sometimes the improperly cut pieces could be used for smaller installations, sometimes not. All their accounting is done by a local certified public accounting firm headed by Charlene Davenport. Charlene listened to their concerns and suggested that it might be time to implement tighter controls by setting up a standard costing system. Charlene reviewed the invoices pertaining to a number of Tom and Tonys previous jobs to determine the average amount of granite and glue needed per square foot. She then updated prices on both materials to reflect current conditions. The standards she developed for 1 square foot of counter installed were as follows: These standards assumed that one seamless counter requires one sink cut (the space into which the sink will fit) as well as cutting the counter to fit the space available. Charlene tracked the actual costs incurred by Tom and Tony for granite installation for the next 6 months. She found that they completed 50 jobs with an average of 32 square feet of granite installed in each one. The following information on actual amounts used and cost was gathered: The actual wage rate for cutting and installation labor remained unchanged from the standard rate. Required: 1. Calculate the materials price variances and materials usage variances for granite and glue for the past 6 months. 2. Calculate the labor rate variances and labor efficiency variances for cutting labor and installation labor for the past 6 months. 3. CONCEPTUAL CONNECTION Would it be worthwhile for Charlene to establish standards for atypical jobs (such as those with more than one sink cut or a wider than normal sink)?Mantenga Company provides routine maintenance services for heavy moving and transportation vehicles. Although the vehicles vary, the maintenance services provided follow a fairly standard pattern. Recently, a potential customer has approached the company, requesting a new maintenance service for a radically different type of vehicle. New servicing equipment and some new labor skills will be needed to provide the maintenance service. The customer is placing an initial order to service 150 vehicles and has indicated that if the service is satisfactory, several additional orders of the same size will be placed every 3 months over the next 3 to 5 years. Mantenga uses a standard costing system and wants to develop a set of standards for the new vehicle. The usage standards for direct materials such as oil, lubricants, and transmission fluids were easily established. The usage standard is 25 quarts per servicing, with a standard cost of 4 per quart. Management has also decided on standard rates for labor and overhead. The standard labor rate is 15 per direct labor hour, the standard variable overhead rate is 8 per direct labor hour, and the standard fixed overhead rate is 12 per direct labor hour. The only remaining decision is the standard for labor usage. To assist in developing this standard, the engineering department has estimated the following relationship between units serviced and average direct labor hours used: As the workers learn more about servicing the new vehicles, they become more efficient, and the average time needed to service one unit declines. Engineering estimates that all of the learning effects will be achieved by the time that 320 units are produced. No further improvement will be realized past this level. Required: 1. Assume that the average labor time is 0.768 hour per unit after the learning effects are achieved. Using this information, prepare a standard cost sheet that details the standard service cost per unit. (Note: Round costs to two decimal places.) 2. CONCEPTUAL CONNECTION Given the per-unit labor standard set, would you expect a favorable or an unfavorable labor efficiency? Explain. Calculate the labor efficiency variance for servicing the first 320 units. 3. CONCEPTUAL CONNECTION Assuming no further improvement in labor time per unit is possible past 320 units, explain why the cumulative average time per unit at 640 units is lower than the time at 320 units. Show that the standard labor time should be 0.768 hour per unit. Explain why this value is a good choice for the per-unit labor standard.Buenolorl Company produces a well-known cologne. The standard manufacturing cost of the cologne is described by the following standard cost sheet: Management has decided to investigate only those variances that exceed the lesser of 10% of the standard cost for each category or 20,000. During the past quarter, 250,000 four-ounce bottles of cologne were produced. Descriptions of actual activity for the quarter follow: a. A total of 1.35 million ounces of liquids was purchased, mixed, and processed. Evaporation was higher than expected. (No inventories of liquids are maintained.) The price paid per ounce averaged 0.42. b. Exactly 250,000 bottles were used. The price paid for each bottle was 0.048. c. Direct labor hours totaled 48,250, with a total cost of 733,000. Normal production volume for Buenolorl is 250,000 bottles per quarter. The standard overhead rates are computed by using normal volume. All overhead costs are incurred uniformly throughout the year. (Note: Round unit costs to the nearest cent and total amounts to the nearest dollar.) Required: 1. Calculate the upper and lower control limits for materials and labor. 2. Compute the total materials variance, and break it into price and usage variances. Would these variances be investigated? 3. Compute the total labor variance, and break it into rate and efficiency variances. Would these variances be investigated?The management of Golding Company has determined that the cost to investigate a variance produced by its standard cost system ranges from 2,000 to 3,000. If a problem is discovered, the average benefit from taking corrective action usually outweighs the cost of investigation. Past experience from the investigation of variances has revealed that corrective action is rarely needed for deviations within 8% of the standard cost. Golding produces a single product, which has the following standards for materials and labor: Actual production for the past 3 months follows, with the associated actual usage and costs for materials and labor. There were no beginning or ending raw materials inventories. Required: 1. What upper and lower control limits would you use for materials variances? For labor variances? 2. Compute the materials and labor variances for April, May, and June. Identify those that would require investigation by comparing each variance to the amount of the limit computed in Requirement 1. Compute the actual percentage deviation from standard. Round all unit costs to four decimal places. Round variances to the nearest dollar. Round variance rates to three decimal places so that percentages will show to one decimal place. 3. CONCEPTUAL CONNECTION Let the horizontal axis be time and the vertical axis be variances measured as a percentage deviation from standard. Draw horizontal lines that identify upper and lower control limits. Plot the labor and material variances for April, May, and June. Prepare a separate graph for each type of variance. Explain how you would use these graphs (called control charts) to assist your analysis of variances.Phono Company manufactures a plastic toy cell phone. The following standards have been established for the toys materials and labor inputs: During the first week of July, the company had the following results: The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in July. Also, a new manufacturing layout was implemented on a trial basis. The new layout required a slightly higher level of skilled labor. The higher-quality material has no effect on labor utilization. Similarly, the new manufacturing approach has no effect on material usage. (Note: Round all variances to the nearest dollar.) Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assuming that the materials variances are essentially attributable to the higher quality of materials, would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing layout, should it be continued or discontinued? Explain. 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new layout should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 13,200 and the labor cost was 132,000. Should the new layout be adopted? Assume the variances are attributable to the new layout. If so, what would be the projected annual savings?Botella Company produces plastic bottles. The unit for costing purposes is a case of 18 bottles. The following standards for producing one case of bottles have been established: During December, 78,000 pounds of materials were purchased and used in production. There were 15,000 cases produced, with the following actual prime costs: Required: 1. Compute the materials variances. 2. Compute the labor variances. 3. CONCEPTUAL CONNECTION What are the advantages and disadvantages that can result from the use of a standard costing system?The Lubbock plant of Morrils Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawnmowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows: During the year, the Lubbock plant had the following actual production activity: a. Production of subassemblies totaled 50,000 units. b. A total of 260,000 pounds of raw materials was purchased at 4.70 per pound. c. There were 60,000 pounds of raw materials in beginning inventory (carried at 5 per lb.) There was no ending inventory. d. The company used 82,000 direct labor hours at a total cost of 1,066,000. The Lubbock plants practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours. Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Of the two materials variances, which is viewed as the more controllable? To whom would you assign responsibility for the usage variance in this case? Explain. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Who is usually responsible for the labor efficiency variance? What are some possible causes for this variance? 3. CONCEPTUAL CONNECTION Assume that the purchasing agent for the small motors plant purchased a lower-quality raw material from a new supplier. Would you recommend that the plant continue to use this cheaper raw material? If so, what standards would likely need revision to reflect this decision? Assume that the end products quality is not significantly affected. 4. Prepare all possible journal entries.Moleno Company produces a single product and uses a standard cost system. The normal production volume is 120,000 units; each unit requires 5 direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhead for the coming year is as follows: At normal volume. During the year, Moleno produced 118,600 units, worked 592,300 direct labor hours, and incurred actual fixed overhead costs of 2,150,400 and actual variable overhead costs of 1,422,800. Required: 1. Calculate the standard fixed overhead rate and the standard variable overhead rate. 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance? 3. CONCEPTUAL CONNECTION Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each. 4. CONCEPTUAL CONNECTION Compute the variable overhead spending and efficiency variances. Discuss the significance of each.The Lubbock plant of Morrils Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows: During the year, the Lubbock plant had the following actual production activity: (a) Production of motors totaled 50,000 units, (b) The company used 82,000 direct labor hours at a total cost of 1,066,000. (c) Actual fixed overhead totaled 556,000. (d) Actual variable overhead totaled 860,000. The Lubbock plants practical activity is 60,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours. Required: 1. Compute the variable overhead spending and efficiency variances. 2. CONCEPTUAL CONNECTION Compute the fixed overhead spending and volume variances. Interpret the volume variance. What can be done to reduce this variance?Extrim Company produces monitors. Extrims plant in San Antonio uses a standard costing system. The standard costing system relies on direct labor hours to assign overhead costs to production. The direct labor standard indicates that 4 direct labor hours should be used for every monitor produced. (The San Antonio plant produces only one model.) The normal production volume is 120,000 units. The budgeted overhead for the coming year is as follows: At normal volume. Extrim applies overhead on the basis of direct labor hours. During the year, Extrim produced 119,000 units, worked 487,900 direct labor hours, and incurred actual fixed overhead costs of 1.3 million and actual variable overhead costs of 927,010. Required: 1. Calculate the standard fixed overhead rate and the standard variable overhead rate. 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance? 3. CONCEPTUAL CONNECTION Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each. 4. CONCEPTUAL CONNECTION Compute the variable overhead spending and efficiency variances. Discuss the significance of each.Lynwood Company produces surge protectors. To help control costs, Lynwood employs a standard costing system and uses a flexible budget to predict overhead costs at various levels of activity. For the most recent year, Lynwood used a standard overhead rate of 18 per direct labor hour. The rate was computed using practical activity. Budgeted overhead costs are 396,000 for 18,000 direct labor hours and 540,000 for 30,000 direct labor hours. During the past year Lynwood generated the following data: (a) Actual production: 100,000 units: (b) Fixed overhead volume variance: 20,000 U; (c) Variable overhead efficiency variance: 18,000 F; (d) Actual fixed overhead costs: 200,000; and (e) Actual variable overhead costs: 310,000. Required: 1. Calculate the fixed overhead rate. 2. Determine the fixed overhead spending variance. 3. Determine the variable overhead spending variance. 4. Determine the standard hours allowed per unit of product.Shumaker Company manufactures a line of high-top basketball shoes. At the beginning of the year, the following plans for production and costs were revealed: During the year, a total of 50,000 units were produced and sold. The following actual costs were incurred: There were no beginning or ending inventories of raw materials. In producing the 50,000 units 63,000 hours were worked, 5% more hours than the standard allowed for the actual output. Overhead costs are applied to production using direct labor hours. Required: 1. Using a flexible budget, prepare a performance report comparing expected costs for the actual production with actual costs. 2. Determine the following: (a) Fixed overhead spending and volume variances and (b) Variable overhead spending and efficiency variances.Paul Golding and his wife, Nancy, established Crunchy Chips in 1938. Over the past 60 years, the company has established distribution channels in 11 western states, with production facilities in Utah, New Mexico, and Colorado. In 1980, Pauls son, Edward, took control of the business. By 2017, it was clear that the companys plants needed to gain better control over production costs to stay competitive. Edward hired a consultant to install a standard costing system. To help the consultant establish the necessary standards, Edward sent her the following memo: The manufacturing process for potato chips begins when the potatoes are placed into a large vat in which they are automatically washed. After washing, the potatoes flow directly to an automatic peeler. The peeled potatoes then pass by inspectors, who manually cut out deep eyes or other blemishes. After inspection, the potatoes are automatically sliced and dropped into the cooking oil. The frying process is closely monitored by an employee. After the chips are cooked, they pass under a salting device and then pass by more inspectors, who sort out the unacceptable finished chips (those that are discolored or too small). The chips then continue on the conveyor belt to a bagging machine that bags them in 1-pound bags. After bagging, the bags are placed in a box and shipped. The box holds 15 bags. The raw potato pieces (eyes and blemishes), peelings, and rejected finished chips are sold to animal feed producers for 0.16 per pound. The company uses this revenue to reduce the cost of potatoes. We would like this reflected in the price standard relating to potatoes. Crunchy Chips purchases high-quality potatoes at a cost of 0.245 per pound. Each potato averages 4.25 ounces. Under efficient operating conditions, it takes four potatoes to produce one 16-ounce bag of plain chips. Although we label bags as containing 16 ounces, we actually place 16.3 ounces in each bag. We plan to continue this policy to ensure customer satisfaction. In addition to potatoes, other raw materials are the cooking oil, salt, bags, and boxes. Cooking oil costs 0.04 per ounce, and we use 3.3 ounces of oil per bag of chips. The cost of salt is so small that we add it to overhead. Bags cost 0.11 each and boxes 0.52 each. Our plant produces 8.8 million bags of chips per year. A recent engineering study revealed that we would need the following direct labor hours to produce this quantity if our plant operates at peak efficiency: Im not sure that we can achieve the level of efficiency advocated by the study. In my opinion, the plant is operating efficiently for the level of output indicated if the hours allowed are about 10% higher. The hourly labor rates agreed upon with the union are: Overhead is applied on the basis of direct labor dollars. We have found that variable overhead averages about 116% of our direct labor cost. Our fixed overhead is budgeted at 1,135,216 for the coming year. Required: 1. Discuss the benefits of a standard costing system for Crunchy Chips. 2. Discuss the presidents concern about using the result of the engineering study to set the labor standards. What standard would you recommend? 3. Form a group with two or three other students. Develop a standard cost sheet for Crunchy Chips plain potato chips. Round all computations to four decimal places. 4. Suppose that the level of production was 8.8 million bags of potato chips for the year as planned. If 9.5 million pounds of potatoes were used, compute the materials usage variance for potatoes.79C 1MTC The Two Cost Systems Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service linesthe Emergency Room (ER) and the Operating Room (OR). SHHs current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal 300,000. The table below shows expected patient volume for both lines. Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR.3MTC 4MTC The Two Cost Systems Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service linesthe Emergency Room (ER) and the Operating Room (OR). SHHs current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal 300,000. The table below shows expected patient volume for both lines. After discussion with several experienced nurses, Jack Bauer (SHHs accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR based on the number of times nurses check patients vital signs. This system is referred to as the vital-signs costing system. The earlier table also shows data for vital signs checks for lines. Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR.6MTC 7MTC 8MTC 9MTC Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service linesthe Emergency Room (ER) and the Operating Room (OR). SHHs current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal 300,000. The table below shows expected patient volume for both lines. After discussion with several experienced nurses, Jack Bauer (SHHs accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR based on the number of times nurses check patients vital signs. This system is referred to as the vital-signs costing system. The earlier table also shows data for vital signs checks for lines. In an effort to better plan for and control OR costs, SHH management asked Jack to calculate the flexible budget variance (i.e., flexible budget costs - actual costs) for OR nursing costs, including the price variance and efficiency variance. Given that Jack is interested in comparing the reported costs of both systems, he decided to prepare the requested OR variance analysis for both the current cost system and the vital-signs costing system. In addition, Jack chose to use each cost systems estimate of the cost per OR nursing hour as the standard cost per OR nursing hour. Jack collected the following additional information for use in preparing the flexible budget variance for both systems: Actual number of surgeries performed = 950 Standard number of nursing hours allowed for each OR surgery = 5 Actual number of OR nursing hours used = 5,000 Actual OR nursing costs = 190,000 What does each of the calculated variances suggest to Jack regarding actions that he should or should not take with respect to investigating and improving each variance? Also, briefly explain why the variances differ between the two cost systems.Discuss the differences between centralized and decentralized decision making.2DQ Explain why firms choose to decentralize.What are margin and turnover? Explain how these concepts can improve the evaluation of an investment center.What are the three benefits of ROI? Explain how each benefit can lead to improved profitability.What is residual income? What is EVA? How does EVA differ from the general definition of residual income?Can residual income or EVA ever be negative? What is the meaning of negative residual income or EVA?What is transfer price?9DQ (Appendix 11A) What is the Balanced Scorecard?(Appendix 11A) Describe the four perspectives of the Balanced Scorecard.The practice of delegating authority to division-level managers by top management is a. decentralization. b. good business practice. c. centralization. d. autonomy. e. never done in business today.Which of the following is not a reason for decentralizing? a. Training and motivating managers b. Unmasking inefficiencies in subdivisions of an overall profitable company c. Allowing top management to focus on strategic decision making d. Allowing top management to make all key operating decisions throughout the company e. All of these.A responsibility center in which a manager is responsible only for costs is a(n) a. investment center. b. revenue center. c. profit center. d. cost center.A responsibility center in which a manager is responsible for revenues, costs, and investments is a(n) a. investment center. b. revenue center. c. profit center. d. cost center.If sales and average operating assets for Year 2 are identical to their values in Year 1, yet operating income is higher, Year 2 return on investment (compared with Year 1 ROI) will a. decrease. b. increase. c. stay the same. d. The direction of change in ROI cannot be determined by this information.If sales and average operating assets for Year 2 are identical to their values in Year 1, yet operating income is higher, Year 2 turnover (compared with Year 1 turnover) will a. decrease. b. increase. c. stay the same. d. The direction of change in turnover cannot be determined by this information.The key difference between residual income and EVA is that EVA a. uses the actual cost of capital for the company rather than a minimum required cost of capital. b. uses the minimum required cost of capital for a company rather than the actual percentage cost of capital. c. is a ratio rather than an absolute dollar amount. d. cannot be negative. e. There is no difference between residual income and EVA.It ROI for a division is 15% and the company's minimum required cost of capital is 18%, then a. residual income for the division is negative. b. residual income for the division takes on a value between 0 and +1. c. residual income cannot be computed. d. EVA must be negative. e. residual income is positive.9MCQ 10MCQ (Appendix 11A) Which of the following is a perspective of the Balanced Scorecard? a. Learning and growth (infrastructure) b. Internal business process c. Customer d. Financial e. All of these.(Appendix 11A) The length of time it takes to produce a unit of output from the time raw materials are received until the good is delivered to finished goods inventory is called a. velocity. b. cycle time. c. manufacturing cycle efficiency. d. theoretical cycle time. e. theoretical MCE.Use the following information for Brief Exercises 11-13 through 11-15: East Mullett Manufacturing earned operating income last year as shown in the following income statement: At the beginning of the year, the value of operating assets was 1,600,000. At the end of the year, the value of operating assets was 1,400,000. Calculating Average Operating Assets, Margin, Turnover, and Return on Investment Refer to the information for East Mullett Manufacturing above. Round answers to two decimal places. Required: Calculate (1) average operating assets, (2) margin, (3) turnover, and (4) return on investment.Use the following information for Brief Exercises 11-13 through 11-15: East Mullett Manufacturing earned operating income last year as shown in the following income statement: At the beginning of the year, the value of operating assets was 1,600,000. At the end of the year, the value of operating assets was 1,400,000. Calculating Residual Income Refer to the information for East Mullett Manufacturing above. East Mullett requires a minimum rate of return of 5%. Required: Calculate (1) average operating assets and (2) residual income.Use the following information for Brief Exercises 11-13 through 11-15: East Mullett Manufacturing earned operating income last year as shown in the following income statement: At the beginning of the year, the value of operating assets was 1,600,000. At the end of the year, the value of operating assets was 1,400,000. Calculating Economic value added Refer to the information for East Mullett Manufacturing above. Total capital employed equaled 1,200,000. East Mulletts actual cost of capital is 4%. Required: Calculate the EVA for East Mullett Manufacturing.16BEA Use the following information for Brief Exercises 11-17and 11-18: Indy Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 250,000 units Actual units produced in a quarter (3-month period): 200,000 units Productive hours in one quarter: 25,000 hours 11-17 (Appendix 11A) Calculating Cycle Time and Velocity Refer to the information for Indy Company above. Required: Compute the (1) theoretical cycle time (in minutes), (2) actual cycle time (in minutes), (3) theoretical velocity in units per hour, and (4) actual velocity in units per hour.Use the following information for Brief Exercises 11-17and 11-18: Indy Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 250,000 units Actual units produced in a quarter (3-month period): 200,000 units Productive hours in one quarter: 25,000 hours 11-18 (Appendix 11A) Calculating Manufacturing Cycle Efficiency Refer to the information of Indy Company above. The actual cycle time for Indy Company is 7.5 minutes, and the theoretical cycle time is 6 minutes. Required: 1. Calculate the amount of processing time and the amount of nonprocessing time. 2. Calculate the MCE. (Round to one decimal place.)Use the following information for Brief Exercises 11-19 through 11-21: Barnard Manufacturing earned operating income last year as shown in the following income statement: At the beginning of the year, the value of operating assets was 2,700,000. At the end of the year, the value of operating assets was 2,300,000. Brief Exercise 11-19 Calculating Average Operating Assets, Margin, Turnover, and Return on Investment Refer to the information for Barnard Manufacturing on the previous page. Round answers to two decimal places. Required: Calculate (1) average operating assets, (2) margin, (3) turnover, and (4) return on investment.Use the following information for Brief Exercises 11-19 through 11-21: Barnard Manufacturing earned operating income last year as shown in the following income statement: At the beginning of the year, the value of operating assets was 2,700,000. At the end of the year, the value of operating assets was 2,300,000. Brief Exercise 11-20 Calculating Residual Income Refer to the information for Barnard Manufacturing on the previous page. Barnard requires a minimum rate of return of 15%. Required: Calculate (1) average operating assets and (2) residual income.21BEB Calculating Transfer Price Teslum Inc. has a number of divisions, including the Machina Division, a producer of high-end espresso makers, and the Java Division, a chain of coffee shops. Machina Division produces the EXP-100 model espresso maker that can be used by Java Division to create various coffee drinks. The market price of the EXP-100 model is 950, and the full cost of the EXP-100 model is 475. Required: 1. If Teslum has a transfer pricing policy that requires transfer at full cost, what will the transfer price be? Do you suppose that Machina and Java divisions will choose to transfer at that price? 2. If Teslum has a transfer pricing policy that requires transfer at market price, what would the transfer price be? Do you suppose that Machina and Java divisions would choose to transfer at that price? 3. Now suppose that Teslum allows negotiated transfer pricing and that Machina Division can avoid 135 of selling expense by selling to Java Division. Which division sets the minimum transfer price, and what is it? Which division sets the maximum transfer price, and what is it? Do you suppose that Machina and Java divisions would choose to transfer somewhere in the bargaining range?Use the following information for Brief Exercises 11-23 and 11-24: Theta Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 400,000 units Actual units produced in a quarter (3-month period): 375,000 units Productive hours in one quarter: 20,000 hours 11-23 (Appendix 11A) Calculating Cycle Time and Velocity Refer to the information for Theta Company above. Required: Compute the (1) theoretical cycle time (in minutes), (2) actual cycle time (in minutes), (3) theoretical velocity in units per hour, and (4) actual velocity in units per hour. (Round units to the nearest whole unit.)Use the following information for Brief Exercises 11-23 and 11-24: Theta Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 400,000 units Actual units produced in a quarter (3-month period): 375,000 units Productive hours in one quarter: 20,000 hours 11-24 (Appendix 11A) Calculating Manufacturing Cycle Efficiency Refer to the information for Theta Company on the previous page. The actual cycle time for Theta Company is 3.2 minutes, and the theoretical cycle time is 3 minutes. Required: 1. Calculate the amount of processing time and the amount of nonprocessing time. 2. Calculate the MCE. (Round to two decimal places.)Types of Responsibility Centers Consider each of the following independent scenarios: a. Terrin Belson, plant manager for the laser printer factory of Compugear Inc., brushed his hair back and sighed. December had been a bad month. Two machines had broken down, and some factory production workers (all on salary) were idled for part of the month. Materials prices increased, and insurance premiums on the factory increased. No way out of it; costs were going up. He hoped that the marketing vice president would be able to push through some price increases, but that really wasnt his department. b. Joanna Pauly was delighted to see that her ROI figures had increased for the third straight year. She was sure that her campaign to lower costs and use machinery more efficiently (enabling her factories to sell several older machines) was the reason why. Joanna planned to take full credit for the improvements at her semiannual performance review. c. Gil Rodriguez, sales manager for ComputerWorks, was not pleased with a memo from headquarters detailing the recent cost increases for the laser printer line. Headquarters suggested raising prices. Great, thought Gil, an increase in price will kill sales and revenue will go down. Why cant the plant shape up and cut costs like every other company in America is doing? Why turn this into my problem? d. Susan Whitehorse looked at the quarterly profit and loss statement with disgust. Revenue was down, and cost was upwhat a combination! Then she had an idea. If she cut back on maintenance of equipment and let a product engineer go, expenses would decreaseperhaps enough to reverse the trend in income. e. Shonna Lowry had just been hired to improve the fortunes of the Southern Division of ABC Inc. She met with top staff and hammered out a 3-year plan to improve the situation. A centerpiece of the plan is the retiring of obsolete equipment and the purchasing of state-of-the-art, computer-assisted machinery. The new machinery would take time for the workers to learn to use, but once that was done, waste would be virtually eliminated. Required: For each of the above independent scenarios, indicate the type of responsibility center involved (cost, revenue, profit, or investment).Margin, Turnover, Return on Investment Pelak Company had sales of 25,000,000, expenses of 17,500,000, and average operating assets of 10,000,000. Required: Compute the (1) operating income, (2) margin and turnover ratios, and (3) ROI.Margin, Turnover, Return on Investment, Average Operating Assets Elway Company provided the following income statement for the last year: At the beginning of last year, Elway had 28,300,000 in operating assets. At the end of the year, Elway had 23,700,000 in operating assets. Required: 1. Compute average operating assets. 2. Compute the margin and turnover ratios for last year. (Note: Round the answer for margin ratio to two decimal places.) 3. Compute ROI. (Note: Round answer to two decimal places.) 4. CONCEPTUAL CONNECTION Briefly explain the meaning of ROI. 5. CONCEPTUAL CONNECTION Comment on why the ROI for Elway Company is relatively high (as compared to the lower ROI of a typical manufacturing company).Return on Investment, Margin, Turnover Data follow for the Consumer Products Division of Kisler Inc.: (Note: Round all answers to two decimal places.) Required: 1. Compute the margin and turnover ratios for each year. 2. Compute the ROI for the Consumer Products Division for each year.Residual Income The Avila Division of Maldonado Company had operating income last year of 136,400 and average operating assets of 1,900,000. Maldonados minimum acceptable rate of return is 9%. (Note: Round all answers to two decimal places.) Required: 1. Calculate the residual income for the Avila Division. 2. Was the ROI for the Avila Division greater than, less than, or equal to 9%?Economic Value Added Falconer Company had net (after-tax) income last year of 12,375,400 and total capital employed of 111,754,000. Falconers actual cost of capital was 9%. Required: 1. Calculate the EVA for Falconer Company. 2. CONCEPTUAL CONNECTION Is Falconer creating or destroying wealth?Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last years results: Washingtons actual cost of capital was 12%. Exercise 11-31 Economic Value Added Refer to the information for Washington Company above. Required: 1. Calculate the EVA for the Adams Division. 2. Calculate the EVA for the Jefferson Division. 3. CONCEPTUAL CONNECTION Is each division creating or destroying wealth? 4. CONCEPTUAL CONNECTION Describe generally the types of actions that Washingtons management team could take to increase Jefferson Divisions EVA?Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last years results: Washingtons actual cost of capital was 12%. Exercise 11-32 Residual Income Refer to the information for Washington Company above. In addition, Washington Companys top management has set a minimum acceptable rate of return equal to 8%. Required: 1. Calculate the residual income for the Adams Division. 2. Calculate the residual income for the Jefferson Division.33E Use the following information for Exercises 11-33 through 11-35 Aulman Inc. has a number of divisions, including a Furniture Division and a Motel Division. The Motel Division owns and operates a line of budget motels located along major highways. Each year, the Motel Division purchases furniture for the motel rooms. Currently, it purchases a basic dresser from an outside supplier for 40. The manager of the Furniture Division has approached the manager of the Motel Division about selling dressers to the Motel Division. The full product cost of a dresser is 29. The Furniture Division can sell all of the dressers it makes to outside companies for 40. The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year. Exercise 11-34 Transfer Pricing Refer to the information for Aulman Inc. on the previous page. Also, assume that the company policy is that all transfer prices are negotiated by the divisions involved. Required: 1. What is the maximum transfer price? Which division sets it? 2. What is the minimum transfer price? Which division sets it? 3. CONCEPTUAL CONNECTION If the transfer takes place, what will be the transfer price? Does it matter whether or not the transfer takes place?35E (Appendix 11A) Cycle Time and Velocity Prakesh Company has the following data for one of its manufacturing cells: Maximum units produced in a month: 50,000 units Actual units produced in a month: 40,000 units Hours of production labor in 1 month: 10,000 hours Required: Compute the (1) theoretical cycle time (in minutes), (2) actual cycle time (in minutes), (3) theoretical velocity (in units per hour), and (4) actual velocity (in units per hour).(Appendix 11A) Cycle Time and Velocity Lasker Company divided its tool production factory into manufacturing cells. Each cell produces one product. The cordless drill cell had the following data for last quarter: Maximum units produced in a quarter: 90,000 units Actual units produced in a quarter: 75,000 units Hours of cell production labor in a quarter: 30,000 hours Required: Compute the (1) theoretical cycle time (in minutes), (2) actual cycle time (in minutes), (3) theoretical velocity (in units per hour), and (4) actual velocity (in units per hour).(Appendix 11A) Manufacturing Cycle Efficiency Ventris Company found that one of its manufacturing cells had actual cycle time of 15 minutes per unit. The theoretical cycle time for this cell was 9 minutes per unit. Required: 1. Calculate the amount of processing time per unit and the amount of nonprocessing time per unit. 2. Calculate the MCE.(Appendix 11A) Manufacturing Cycle Efficiency Kurena Company provided the following information on one of its factories: Maximum units produced in a quarter: 180,000 units Actual units produced in a quarter: 112,500 units Hours of cell production labor in a quarter: 30,000 hours Theoretical cycle time: 10 minutes per unit Actual cycle time: 16 minutes per unit Required: 1. Calculate the amount of processing time per unit and the amount of nonprocessing time per unit. 2. Calculate the MCE (rounded to three significant digits).Return on Investment and Investment Decisions Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new producta weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was 725,000 with operating assets of 3,625,000. The proposed investment would add income of 640,000 and would require an additional investment in equipment of 4,000,000. The minimum required return on investment for the company is 12%. Round all numbers to two decimal places. Required: 1. Compute the ROI of the: a. division if the radio project is not undertaken. b. radio project alone. c. division if the radio project is undertaken. 2. Compute the residual income of the: a. division if the radio project is not undertaken. b. radio project alone. c. division if the radio project is undertaken. 3. CONCEPTUAL CONNECTION Do you suppose that Leslie will decide to invest in the new radio? Why or why not?Return on Investment, Margin, Turnover Ready Electronics is facing stiff competition from imported goods. Its operating income margin has been declining steadily for the past several years. The company has been forced to lower prices so that it can maintain its market share. The operating results for the past 3 years are as follows: For the coming year, Readys president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70% during the first year of operations, producing a 20% reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to Year 1 levels because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will allow Ready to expand its market share. (Note: Round all numbers to two decimal places.) Required: 1. Compute the ROI, margin, and turnover for Years 1, 2, and 3. 2. CONCEPTUAL CONNECTION Suppose that in Year 4 the sales and operating income were achieved as expected, but inventories remained at the same level as in Year 3. Compute the expected ROI, margin, and turnover. Explain why the ROI increased over the Year 3 level. 3. CONCEPTUAL CONNECTION Suppose that the sales and net operating income for Year 4 remained the same as in Year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and turnover. Explain why the ROI exceeded the Year 3 level. 4. CONCEPTUAL CONNECTION Assume that all expectations for Year 4 were realized. Compute the expected ROI, margin, and turnover. Explain why the ROI increased over the Year 3 level.Return on Investment for Multiple Investments, Residual Income The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of 28.9 million and expected operating income of 4.335 million. The outlay required for each investment and the expected operating incomes are as follows: (Note: Round all numbers to two decimal places.) Required: 1. Compute the ROI for each investment project. 2. Compute the budgeted divisional ROI for each of the following four alternatives: a. The air conditioner investment is made. b. The turbocharger investment is made. c. Both investments are made. d. Neither additional investment is made. 3. CONCEPTUAL CONNECTION Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose? 4. CONCEPTUAL CONNECTION Suppose that the company sets a minimum required rate of return equal to 14%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. b. The turbocharger investment is made. c. Both investments are made. d. Neither additional investment is made. Which option will the manager choose based on residual income? Explain. 5. CONCEPTUAL CONNECTION Suppose that the company sets a minimum required rate of return equal to 10%. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. b. The turbocharger investment is made. c. Both investments are made. d. Neither additional investment is made. Based on residual income, are the investments profitable? Why does your answer differ from your answer in Requirement 3?Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of 310,000 based on sales of 3.45 million. Without any new investments, the division will have average operating assets of 3 million. The division is considering a capital investment projectadding knitting machines to produce gaitersthat requires an additional investment of 600,000 and increases net income by 57,500 (sales would increase by 575,000). If made, the investment would increase beginning operating assets by 600,000 and ending operating assets by 400,000. Assume that the actual cost of capital for the company is 7%. (Note: Round all answers to four decimal places.) Required: 1. Compute the ROI for the division without the investment. 2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. 3. CONCEPTUAL CONNECTION Compute the ROI for the division with the new investment. Do you think the divisional manager will approve the investment? 4. CONCEPTUAL CONNECTION Compute the margin and turnover ratios for the division with the new investment. How do these compare with the old ratios? 5. CONCEPTUAL CONNECTION Compute the EVA of the division with and without the investment. Should the manager decide to make the knitting machine investment?Transfer Pricing GreenWorld Inc. is a nursery products firm. It has three divisions that grow and sell plants: the Western Division, the Southern Division, and the Canadian Division. Recently, the Southern Division of GreenWorld acquired a plastics factory that manufactures green plastic pots. These pots can be sold both externally and internally. Company policy permits each manager to decide whether to buy or sell internally. Each divisional manager is evaluated on the basis of ROI and EVA. The Western Division had bought its plastic pots in lots of 100 from a variety of vendors. The average price paid was 75 per box of 100 pots. However, the acquisition made Rosario Sanchez-Ruiz, manager of the Western Division, wonder whether or not a more favorable price could be arranged. She decided to approach Lorne Matthews, manager of the Southern Division, to see if he wanted to offer a better price for an internal transfer. She suggested a transfer of 3,500 boxes at 70 per box. Lorne gathered the following information regarding the cost of a box of 100 pots: Fixed overhead is based on 200,000/20,000 boxes. Required: 1. CONCEPTUAL CONNECTION Suppose that the plastics factory is producing at capacity and can sell all that it produces to outside customers. How should Lorne respond to Rosarios request for a lower transfer price? 2. CONCEPTUAL CONNECTION Now assume that the plastics factory is currently selling 16,000 boxes. What are the minimum and maximum transfer prices? Should Lorne consider the transfer at 70 per box? 3. CONCEPTUAL CONNECTION Suppose that GreenWorlds policy is that all transfer prices be set at full cost plus 20%. Would the transfer take place? Why or why not?45P 46P (Appendix 11A) Cycle Time, Velocity, Conversion Cost The theoretical cycle time for a product is 30 minutes per unit. The budgeted conversion costs for the manufacturing cell are 2,700,000 per year. The total labor minutes available are 600,000. During the year, the cell was able to produce 1.5 units of the product per hour. Suppose also that production incentives exist to minimize unit product costs. Required: 1. Compute the theoretical conversion cost per unit. 2. Compute the applied conversion cost per unit (the amount of conversion cost actually assigned to the product). 3. CONCEPTUAL CONNECTION Discuss how this approach to assigning conversion costs can improve delivery time performance.(Appendix 11A) Balanced Scorecard The following list gives a number of measures associated with the Balanced Scorecard: a. Number of new customers b. Percentage of customer complaints resolved with one contact c. Unit product cost d. Cost per distribution channel e. Suggestions per employee f. Warranty repair costs g. Consumer satisfaction (from surveys) h. Cycle time for solving a customer problem i. Strategic job coverage ratio j. On-time delivery percentage k. Percentage of revenues from new products Required: 1. Classify each performance measure as belonging to one of the following perspectives: financial, customer, internal business process, or learning and growth. 2. Suggest an additional measure for each of the four perspectives.(Appendix 11A) Cycle Time and Velocity, Manufacturing Cycle Efficiency A company like Kicker performs warranty repair work on speakers in a manufacturing cell. The typical warranty repair involves taking the defective speaker apart, testing the components, and replacing the defective components. The maximum capacity of the cell is 1,000 repairs per month. There are 500 production hours available per month. Required: 1. Compute the theoretical velocity (per hour) and the theoretical cycle time (minutes per unit repaired). 2. Speaker repair uses 4 minutes of move time, 10 minutes of wait time, and 6 minutes of inspection time. Calculate the MCE. 3. Using the information from Requirement 2, calculate the actual cycle time and the actual velocity for speaker repair.50C 1DQ Explain why the timing and quantity of cash flows are important in capital investment decisions.The time value of money is ignored by the payback period and the ARR. Explain why this is a major deficiency in these two models.What is the payback period? Compute the payback period for an investment requiring an initial outlay of 80,000 with expected annual cash inflows of 30,000.Name and discuss three possible reasons that the payback period is used to help make capital investment decisions.6DQ The NPV is the same as the profit of a project expressed in present dollars. Do you agree? Explain.Explain the relationship between NPV and a firms value.9DQ What is the role that the required rate of return plays in the NPV model? In the IRR model?Explain how the NPV is used to determine whether a project should be accepted or rejected.The IRR is the true or actual rate of return being earned by the project. Do you agree or disagree? Discuss.13DQ Explain why NPV is generally preferred over IRR when choosing among competing or mutually exclusive projects. Why would managers continue to use IRR to choose among mutually exclusive projects?Suppose that a firm must choose between two mutually exclusive projects, both of which have negative NPVs. Explain how a firm can legitimately choose between two such projects.

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