Borealis Manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the company’s 10 QC inspectors were charged as direct labor to the operation or job. In an effort to improve efficiency and quality, a computerized video QC system was purchased for $250,000. The system consists of a minicomputer, 15 video cameras, other peripheral hardware, and software. The new system uses cameras stationed by QC engineers at key points in the production process. Each times an operation changes or there is a new operation, the cameras are moved, and a new master picture is loaded into the computer by a QC engineer. The camera takes pictures of the units in process, and the computer compares them to the picture of a “good” unit. Any differences are sent to a QC engineer, who removes the bad units and discusses the flaws with the production supervisors. The new system has replaced the 10 QC inspectors with two QC engineers.
The operating costs of the new QC system, including the salaries of the QC engineers, have been included as factory
“Three hundred percent,” lamented the president. “How can we compete with such a high overhead rate?”
Required:
- 1. a.
Define “manufacturing overhead.” and cite three examples of typical costs that would be included in manufacturing overhead.
b. Explain why companies develop predetermined overhead rates.
- 2. Explain why the increase in the overhead rate should not have a negative financial impact on Borealis Manufacturing.
- 3. Explain how Borealis Manufacturing could change its overhead application system to eliminate confusion over product costs.
- 4. Discuss how an activity-based costing system might benefit Borealis Manufacturing.
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Managerial Accounting: Creating Value in a Dynamic Business Environment
- Emery Manufacturing Company produces component parts for the farm equipment industry and has recently undergone a major computer system conversion. Jake Murray, the controller, has established a troubleshooting team to alleviate accounting problems that have occurred since the conversion. Jake has chosen Gus Swanson, assistant controller, to head the team that will include Linda Wheeler, cost accountant; Cindy Madsen, financial analyst; Randy Lewis, general accounting supervisor; and Max Crandall, financial accountant. The team has been meeting weekly for the last month. Gus insists on being part of all the team conversations in order to gather information, to make the final decision on any ideas or actions that the team develops, and to prepare a weekly report for Jake. He has also used this team as a forum to discuss issues and disputes about him and other members of Emerys top management team. At last weeks meeting, Gus told the team that he thought a competitor might purchase the common stock of Emery, because he had overheard Jake talking about this on the telephone. As a result, most of Emerys employees now informally discuss the sale of Emerys common stock and how it will affect their jobs. Required: Is Gus Swansons discussion with the team about the prospective sale of Emery unethical? Discuss, citing specific standards from the code of ethical conduct to support your position. (CMA adapted)arrow_forwardRecently, Ulrich Company received a report from an external consulting group on its quality costs. The consultants reported that the companys quality costs total about 21 percent of its sales revenues. Somewhat shocked by the magnitude of the costs, Rob Rustin, president of Ulrich Company, decided to launch a major quality improvement program. For the coming year, management decided to reduce quality costs to 17 percent of sales revenues. Although the amount of reduction was ambitious, most company officials believed that the goal could be realized. To improve the monitoring of the quality improvement program, Rob directed Pamela Golding, the controller, to prepare monthly performance reports comparing budgeted and actual quality costs. Budgeted costs and sales for the first two months of the year are as follows: The following actual sales and actual quality costs were reported for January: Required: 1. Reorganize the monthly budgets so that quality costs are grouped in one of four categories: appraisal, prevention, internal failure, or external failure. (Essentially, prepare a budgeted cost of quality report.) Also, identify each cost as variable (V) or fixed (F). (Assume that no costs are mixed.) 2. Prepare a performance report for January that compares actual costs with budgeted costs. Comment on the companys progress in improving quality and reducing its quality costs.arrow_forwardRenslen, Inc., a truck manufacturing conglomerate, has recently purchased two divisions: Meyers Service Company and Wellington Products, Inc. Meyers provides maintenance service on large truck cabs for 10-wheeler trucks, and Wellington produces air brakes for the 10-wheeler trucks. The employees at Meyers take pride in their work, as Meyers is proclaimed to offer the best maintenance service in the trucking industry. The management of Meyers, as a group, has received additional compensation from a 10 percent bonus pool based on income before income taxes and bonus. Renslen plans to continue to compensate the Meyers management team on this basis as it is the same incentive plan used for all other Renslen divisions, except for the Wellington division. Wellington offers a high-quality product to the trucking industry and is the premium choice even when compared to foreign competition. The management team at Wellington strives for zero defects and minimal scrap costs; current scrap levels are at 2 percent. The incentive compensation plan for Wellington management has been a 1 percent bonus based on gross margin. Renslen plans to continue to compensate the Wellington management team on this basis. The following condensed income statements are for both divisions for the fiscal year ended May 31, 20x1: Renslen, Inc. Divisional Income Statements For the Year Ended May 31, 20x1 Each division has 1,000,000 of management salary expense that is eligible for the bonus pool. Renslen has invited the management teams of all its divisions to an off-site management workshop in July where the bonus checks will be presented. Renslen is concerned that the different bonus plans at the two divisions may cause some heated discussion. Required: 1. Determine the 20x1 bonus pool available for the management team at: a. Meyers Service Company b. Wellington Products, Inc. 2. Identify at least two advantages and disadvantages to Renslen, Inc., of the bonus pool incentive plan at: a. Meyers Service Company b. Wellington Products, Inc. 3. Having two different types of incentive plans for two operating divisions of the same corporation can create problems. a. Discuss the behavioral problems that could arise within management for Meyers Service Company and Wellington Products, Inc., by having different types of incentive plans. b. Present arguments that Renslen, Inc., can give to the management teams of both Meyers and Wellington to justify having two different incentive plans.arrow_forward
- Javier Company has sales of 8 million and quality costs of 1,600,000. The company is embarking on a major quality improvement program. During the next three years, Javier intends to attack failure costs by increasing its appraisal and prevention costs. The right prevention activities will be selected, and appraisal costs will be reduced according to the results achieved. For the coming year, management is considering six specific activities: quality training, process control, product inspection, supplier evaluation, prototype testing, and redesign of two major products. To encourage managers to focus on reducing non-value-added quality costs and select the right activities, a bonus pool is established relating to reduction of quality costs. The bonus pool is equal to 10 percent of the total reduction in quality costs. Current quality costs and the costs of these six activities are given in the following table. Each activity is added sequentially so that its effect on the cost categories can be assessed. For example, after quality training is added, the control costs increase to 320,000, and the failure costs drop to 1,040,000. Even though the activities are presented sequentially, they are totally independent of each other. Thus, only beneficial activities need be selected. Required: 1. Identify the control activities that should be implemented, and calculate the total quality costs associated with this selection. Assume that an activity is selected only if it increases the bonus pool. 2. Given the activities selected in Requirement 1, calculate the following: a. The reduction in total quality costs b. The percentage distribution for control and failure costs c. The amount for this years bonus pool 3. Suppose that a quality engineer complained about the gainsharing incentive system. Basically, he argued that the bonus should be based only on reductions of failure and appraisal costs. In this way, investment in prevention activities would be encouraged, and eventually, failure and appraisal costs would be eliminated. After eliminating the non-value-added costs, focus could then be placed on the level of prevention costs. If this approach were adopted, what activities would be selected? Do you agree or disagree with this approach? Explain.arrow_forwardOtero Fibers, Inc., specializes in the manufacture of synthetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Otero has been in business since 1985 and has been profitable every year since 1993. The company uses a standard cost system and applies overhead on the basis of direct labor hours. Otero has recently received a request to bid on the manufacture of 800,000 blankets scheduled for delivery to several military bases. The bid must be stated at full cost per unit plus a return on full cost of no more than 10 percent after income taxes. Full cost has been defined as including all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and reasonable incremental administrative costs associated with the manufacture and sale of the product. The contractor has indicated that bids in excess of 30 per blanket are not likely to be considered. In order to prepare the bid for the 800,000 blankets, Andrea Lightner, cost accountant, has gathered the following information about the costs associated with the production of the blankets. Direct machine costs consist of items such as special lubricants, replacement of needles used in stitching, and maintenance costs. These costs are not included in the normal overhead rates. Otero recently developed a new blanket fiber at a cost of 750,000. In an effort to recover this cost, Otero has instituted a policy of adding a 0.50 fee to the cost of each blanket using the new fiber. To date, the company has recovered 125,000. Lightner knows that this fee does not fit within the definition of full cost, as it is not a cost of manufacturing the product. Required: 1. Calculate the minimum price per blanket that Otero Fibers could bid without reducing the companys operating income. 2. Using the full-cost criteria and the maximum allowable return specified, calculate Otero Fibers bid price per blanket. 3. Without prejudice to your answer to Requirement 2, assume that the price per blanket that Otero Fibers calculated using the cost-plus criteria specified is greater than the maximum bid of 30 per blanket allowed. Discuss the factors that Otero Fibers should consider before deciding whether or not to submit a bid at the maximum acceptable price of 30 per blanket. (CMA adapted)arrow_forwardAt the beginning of the year, Kowalski Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years: Preceding Year Current Year Sales $3,000,000 $3,000,000 Quality training 3,000 4,500 Material inspections 7,500 12,000 Scrap 60,000 45,000 Rework 120,000 75,000 Product inspection 15,000 30,000 Product warranty 105,000 82,500 If quality costs had been reduced to 2.5 percent of sales in the current year, profits would have increased by a.$174,000. b.$91,500. c.$37,500. d.$255,000.arrow_forward
- Roen Company incurred an activity cost of $117,300 for inspecting 46,000 units of production. Management determined that the inspecting objectives could be met without inspecting every unit. Therefore, rather than inspecting 46,000 units of production, the inspection activity was limited to a random selection of 4,600 units out of the 46,000 units of production. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the question below. Open spreadsheet Determine the inspection activity cost per unit on 46,000 units of total production both before and after the improvement. Do not round intermediate calculations. If required, round per unit amounts to the nearest cent. Inspection activity before improvement: $ per unit Inspection activity after improvement: $ per unitarrow_forwardAt the beginning of the year, Devonshire Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years: Preceding Year Current Year Sales $2,400,000 $2,400,000 Quality training 30,000 48,000 Material inspections 7,000 8,000 Scrap 48,000 30,000 Rework 60,000 48,000 Product inspection 10,000 12,000 Product warranty 36,000 24,000 For the current year, appraisal costs are what percentage of sales? a.0.500% b.0.333% c.3.333% d.0.833%arrow_forwardNUBD Company’s quality cost report is to be based on the following data: Quality circles- 57,000 Downtime caused by quality problems- 98,000 Debugging software errors- 92,000 Statistical process control activities- 68,000 Test and inspection of in-process goods- 24,000 Final product testing and inspection- 66,000 Cost of field servicing and handling complaints- 87,000 Product recalls- 72,000 Maintenance of test equipment- 75,000 What would be the total internal failure cost appearing on the quality cost report?arrow_forward
- San Mateo Circuitry manufactures electrical instruments for a variety of purposes. The following costs related to maintaining product quality were incurred in May. Training of quality-control inspectors .................................................. $21,000Tests of instruments before sale ............................................................... 30,000Inspection of electrical components purchased from outside suppliers ........................................................... .................................................................12,000Costs of rework on faulty instruments ................................................ 9,000Replacement of instruments already sold, which were still covered by warranty ............................................ .............................................................16,500Costs of defective parts that cannot be salvaged ........................... 6,100 Required: Prepare a quality-cost report similar to the report shown in…arrow_forwardAn industrial company has (20) machines, and every malfunction that costs the company 180 dinars to be repaired includes repair costs and maintenance services. In addition to (0.10) of the working time for each working day, noting that each delay for one working day costs the company (8000) dinars, and the company responsible for the preventive maintenance program provided it after the daily working hours at a cost of (300) dinars per machine, and thus loss can be avoided. The working day, and the holidays possibilities have been estimated as shown in the following table: Required: 1- Calculating the cost of repairing the malfunction during work (remedial maintenance) 2- Calculating the cost of a preventive maintenance policy or program if it is followed every month, and if it is followed every three months. 3- Determine what is best for the company? Do you choose a curative maintenance policy or preventive maintenance? By the body in charge of this?…arrow_forwardUnited Research Associates (URA) had received a contract to produce two units of a new cruise missile guidance control. The first unit took 4,000 hours to complete and cost $30,000 in materials and equipment usage. The second took 3,200 hours and cost $22,500 in materials and equipment usage. Labor cost is charged at $20 per hour. The company expects “learning” to occur relative to labor and also the pricing of parts from suppliers. The prime contractor has now approached URA and asked to submit a bid for the cost of producing another 20 guidance controls. Use Exhibit 4A.5 and Exhibit 4A.6. a. What will the last unit cost to build? (Round your answer to the nearest dollar amount.) b. What will be the average time for the 20 missile guidance controls? (Round your answer to the nearest whole number.) c. What will the average cost be for guidance control for the 20 in the contract? (Round your answer to the nearest dollar amount.)arrow_forward
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