Cain Components manufactures and distributes various plumbing products used in homes and other buildings. Over time, the production staff has noticed that products they considered easy to make were difficult to sell at margins considered reasonable, while products that seemed to take a lot of staff time were selling well despite recent price increases. A summer intern has suggested that the cost system might be providing misleading information.
The controller decided that a good summer project for the intern would be to develop, in one self-contained area of the plant, an alternative cost system with which to compare the current system. The intern identified the following cost pools and, after discussion with some plant personnel, appropriate cost drivers for each pool. There were:
In this particular area, Cain produces two of its many products: Standard and Deluxe. The following are data for production for the latest full year of operations:
Required
- a. The current cost accounting system charges overhead to products based on machine-hours. What unit product costs will be reported for the two products if the current cost system continues to be used?
- b. The intern suggests an ABC system using the cost drivers identified above. What unit product costs will be reported for the two products if the ABC system is used?
- c. Would you recommend that Cain Components adopt the intern’s ABC system? Explain.
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Fundamentals Of Cost Accounting (6th Edition)
- Anderson Company has the following departmental manufacturing structure for one of its products: After some study, the production manager of Anderson recommended the following revised cellular manufacturing approach: Required: 1. Calculate the total time it takes to produce a batch of 20 units using Andersons traditional departmental structure. 2. Using cellular manufacturing, how much time is saved producing the same batch of 20 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. What if the processing times of molding, welding, and assembly are all reduced to six minutes each? What is the production rate now, and how long will it take to produce a batch of 20 units?arrow_forwardKagle design engineers are in the process of developing a new green product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed 550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit-and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system: Variable conversion activity rate: 100 per direct labor hour Material usage rate: 20 per part ABC system: Labor usage: 15 per direct labor hour Material usage (direct materials): 20 per part Machining: 75 per machine hour Purchasing activity: 150 per purchase order Setup activity: 3,000 per setup hour Warranty activity: 500 per returned unit (usually requires extensive rework) Customer repair cost: 25 per repair hour (average) Required: 1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis? 2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis. 3. What if the post-purchase cost was an environmental contaminant and amounted to 10 per unit for Design A and 40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design?arrow_forwardLeather Works is a family-owned maker of leather travel bags and briefcases located in the northeastern part of the United States. Foreign competition has forced its owner, Heather Gray, to explore new ways to meet the competition. One of her cousins, Wallace Hayes, who recently graduated from college with a major in accounting, told her about the use of cost variance analysis to learn about efficiencies of production. In May of last year, Heather asked Matt Jones, chief accountant, and Alfred Prudest, production manager, to implement a standard costing system. Matt and Alfred, in turn, retained Shannon Leikam, an accounting professor at Hardings College, to set up a standard costing system by using information supplied to her by Matts and Alfreds staff. To verify that the information was accurate, Shannon visited the plant and measured workers output using time and motion studies. During those visits, she was not accompanied by either Matt or Alfred, and the workers knew about Shannons schedule in advance. The cost system was implemented in June of last year. Recently, the following dialogue took place among Heather, Matt, and Alfred: HEATHER: How is the business performing? ALFRED: You know, we are producing a lot more than we used to, thanks to the contract that you helped obtain from Lean, Inc., for laptop covers. (Lean is a national supplier of computer accessories.) MATT: Thank goodness for that new product. It has kept us from sinking even more due to the inroads into our business made by those foreign suppliers of leather goods. HEATHER: What about the standard costing system? MATT: The variances are mostly favorable, except for the first few months when the supplier of leather started charging more. HEATHER: How did the union members take to the standards? ALFRED: Not bad. They grumbled a bit at first, but they have taken it in stride. Weve consistently shown favorable direct labor efficiency variances and direct materials usage variances. The direct labor rate variance has been flat. MATT: It should be since direct labor rates are negotiated by the union representative at the start of the year and remain the same for the entire year. HEATHER: Matt, would you send me the variance report for laptop covers immediately? The following chart summarizes the direct materials and direct labor variances from November of last year through April of this year (extracted from the report provided by Matt). Standards for each laptop cover are as follows: a. Three feet of direct materials at 7.50 per foot b. Forty-five minutes of direct labor at 14 per hour In addition, the data for May of this year, but not the variances for the month, are as follows: Actual direct labor cost per hour exceeded the budgeted rate by 0.10 per hour. Required: 1. For May of this year, calculate the price and quantity variances for direct labor and direct materials. 2. Discuss the trend of the direct materials and labor variances. 3. What type of actions must the workers have taken during the period they were being observed for the setting of standards? 4. What can be done to ensure that the standards are set correctly? (CMA adapted)arrow_forward
- 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_forwardQuincy Farms is a producer of items made from farm products that are distributed to supermarkets. For many years, Quincys products have had strong regional sales on the basis of brand recognition. However, other companies have been marketing similar products in the area, and price competition has become increasingly important. Doug Gilbert, the companys controller, is planning to implement a standard costing system for Quincy and has gathered considerable information from his coworkers on production and direct materials requirements for Quincys products. Doug believes that the use of standard costing will allow Quincy to improve cost control and make better operating decisions. Quincys most popular product is strawberry jam. The jam is produced in 10-gallon batches, and each batch requires six quarts of good strawberries. The fresh strawberries are sorted by hand before entering the production process. Because of imperfections in the strawberries and spoilage, one quart of strawberries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct labor time required for sorting strawberries in order to obtain one quart of strawberries. The acceptable strawberries are then processed with the other ingredients: processing requires 12 minutes of direct labor time per batch. After processing, the jam is packaged in quart containers. Doug has gathered the following information from Joe Adams, Quincys cost accountant, relative to processing the strawberry jam. a. Quincy purchases strawberries at a cost of 0.80 per quart. All other ingredients cost a total of 0.45 per gallon. b. Direct labor is paid at the rate of 9.00 per hour. c. The total cost of direct material and direct labor required to package the jam is 0.38 per quart. Joe has a friend who owns a strawberry farm that has been losing money in recent years. Because of good crops, there has been an oversupply of strawberries, and prices have dropped to 0.50 per quart. Joe has arranged for Quincy to purchase strawberries from his friends farm in hopes that the 0.80 per quart will put his friends farm in the black. Required: 1. Discuss which coworkers Doug probably consulted to set standards. What factors should Doug consider in establishing the standards for direct materials and direct labor? 2. Develop the standard cost sheet for the prime costs of a 10-gallon batch of strawberry jam. 3. Citing the specific standards of the IMA Statement of Ethical Professional Practice described in Chapter 1, explain why Joes behavior regarding the cost information provided to Doug is unethical. (CMA adapted)arrow_forwardPhono 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?arrow_forward
- Big Mikes, a large hardware store, has gathered data on its overhead activities and associated costs for the past 10 months. Nizam Sanjay, a member of the controllers department, believes that overhead activities and costs should be classified into groups that have the same driver. He has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity, since these three activities are all driven by the number of receiving orders. The 10 months of data shown below have been gathered for the receiving activity. Required: 1. Prepare a scattergraph, plotting the receiving costs against the number of purchase orders. Use the vertical axis for costs and the horizontal axis for orders. 2. Select two points that make the best fit, and compute a cost formula for receiving costs. 3. Using the high-low method, prepare a cost formula for the receiving activity. 4. Using the method of least squares, prepare a cost formula for the receiving activity. What is the coefficient of determination?arrow_forwardRandy Harris, controller, has been given the charge to implement an advanced cost management system. As part of this process, he needs to identify activity drivers for the activities of the firm. During the past four months, Randy has spent considerable effort identifying activities, their associated costs, and possible drivers for the activities costs. Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an R2 of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the activity of inspecting finished goods produced an R2 of less than 80 percent for any single activity driver. Randy believes, however, that a satisfactory cost formula can be developed using two activity drivers: the number of batches and the number of inspection hours. Data collected for a 14-month period are as follows: Required: 1. Calculate the cost formula for inspection costs using the two drivers, inspection hours and number of batches. Are both activity drivers useful? What does the R2 indicate about the formula? 2. Using the formula developed in Requirement 1, calculate the inspection cost when 300 inspection hours are used and 30 batches are produced. Prepare a 90 percent confidence interval for this prediction.arrow_forwardMott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi Burrows, president of the company, wanted to compare product cost under the JIT system with product cost under the old system. Motts two products are weed eaters and lawn edgers. The unit prime costs under the old system are as follows: Under the old manufacturing system, the company operated three service centers and two production departments. Overhead was applied using departmental overhead rates. The direct overhead costs associated with each department for the year preceding the installation of JIT are as follows: Under the old system, the overhead costs of the service departments were allocated directly to the producing departments and then to the products passing through them. (Both products passed through each producing department.) The overhead rate for the Machining Department was based on machine hours, and the overhead rate for assembly was based on direct labor hours. During the last year of operations for the old system, the Machining Department used 80,000 machine hours, and the Assembly Department used 20,000 direct labor hours. Each weed eater required 1.0 machine hour in Machining and 0.25 direct labor hour in Assembly. Each lawn edger required 2.0 machine hours in Machining and 0.5 hour in Assembly. Bases for allocation of the service costs are as follows: Upon implementing JIT, a manufacturing cell for each product was created to replace the departmental structure. Each cell occupied 40,000 square feet. Maintenance and materials handling were both decentralized to the cell level. Essentially, cell workers were trained to operate the machines in each cell, assemble the components, maintain the machines, and move the partially completed units from one point to the next within the cell. During the first year of the JIT system, the company produced and sold 20,000 weed eaters and 30,000 lawn edgers. This output was identical to that for the last year of operations under the old system. The following costs have been assigned to the manufacturing cells: Required: 1. Compute the unit cost for each product under the old manufacturing system. 2. Compute the unit cost for each product under the JIT system. 3. Which of the unit costs is more accurate? Explain. Include in your explanation a discussion of how the computational approaches differ. 4. Calculate the decrease in overhead costs under JIT, and provide some possible reasons that explain the decrease.arrow_forward
- Communications Jamarcus Bradshaw, plant manager of Georgia Paper Companys papermaking mill, was looking over the cost of production reports for July and August for the Papermaking Department. The reports revealed the following: Jamarcus was concerned about the increased cost per ton from the output of the department. As a result, he asked the plant controller to perform a study to help explain these results. The controller, Leann Brunswick, began the analysis by performing some interviews of key plant personnel in order to understand what the problem might be. Excerpts from an interview with Len Tyson, a paper machine operator, follow: Len: We have two papermaking machines in the department. I have no data, but I think paper machine No. 1 is applying too much pulp and, thus, is wasting both conversion and materials resources. We haven't had repairs on paper machine No. 1 in a while. Maybe this is the problem. Leann: How does too much pulp result in wasted resources? Len: Well, you see, if too much pulp is applied, then we will waste pulp material. The customer will not pay for the extra product; we just use more material to make the product. Also, when there is too much pulp, the machine must be slowed down in order to complete the drying process. This results in additional conversion costs. Leann: Do you have any other suspicions? Len: Well, as you know, we have two productsgreen paper and yellow paper. They are identical except for the color. The color is added to the papermaking process in the paper machine. I think that during August these two color papers have been behaving very differently. I don't have any data, but it just seems as though the amount of waste associated with the green paper has increased. Leann: Why is this? Len: I understand that there has been a change in specifications for the green paper, starting near the beginning of August. This change could be causing the machines to run poorly when making green paper. If this is the case, the cost per ton would increase for green paper. Leann also asked for a database printout providing greater detail on Augusts operating results. September 9 Requested by: Leann Brunswick Papermaking DepartmentAugust detail Prior to preparing a report, Leann resigned from Georgia Paper Company to start her own business. You have been asked to take the data that Leann collected, and write a memo to Jamarcus Bradshaw with a recommendation to management. Your memo should include analysis of the August data to determine whether the paper machine or the paper color explains the increase in the unit cost from July. Include any supporting schedules that are appropriate. Round any calculations to the nearest cent.arrow_forwardCalen Company manufactures and sells three products in a factory of three departments. Both labor and machine time are applied to the products as they pass through each department. The nature of the machine processing and of the labor skills required in each department is such that neither machines nor labor can be switched from one department to another. Calens management is attempting to plan its production schedule for the next several months. The planning is complicated by the fact that labor shortages exist in the community and some machines will be down several months for repairs. Following is information regarding available machine and labor time by department and the machine hours and direct labor hours required per unit of product. These data should be valid for at least the next six months. Calen believes that the monthly demand for the next six months will be as follows: Inventory levels will not be increased or decreased during the next six months. The unit cost and price data for each product are as follows: Required: 1. Calculate the monthly requirement for machine hours and direct labor hours for producing Products 401, 402, and 403 to determine whether or not the factory can meet the monthly sales demand. 2. Determine the quantities of 401, 402, and 403 that should be produced monthly to maximize profits. Prepare a schedule that shows the contribution to profits of your product mix. 3. Assume that the machine hours available in Department 3 are 1,500 instead of 2,700. Calculate the optimal monthly product mix using the graphing approach to linear programming. Prepare a schedule that shows the contribution to profits from this optimal mix. (CMA adapted)arrow_forwardTonya Martin, CMA and controller or the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the divisions pricing decisions. Their conversation was as follows: Tonya: Doug, as you know, about 25% of our business is based on government contracts, with the other 75% based on jobs from private sources won through bidding. During the last several years, our private business has declined. We have been losing more bids than usual. After some careful investigation, I have concluded that we are overpricing some jobs because of improper assignment of overhead costs. Some jobs are also being underpriced. Unfortunately, the jobs being overpriced are coming from our higher-volume, labor-intensive products, so we are losing business. Dong: I think I understand. Jobs associated with our high-volume products are being assigned more overhead than they should be receiving. Then when we add our standard 40% markup, we end up with a higher price than our competitors, who assign costs more accurately. Tonya: Exactly. We have two producing departments, one labor-intensive and the other machine-intensive. The labor-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labor-intensive. We have been using a plantwide rate based on direct labor hours to assign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive a greater share of the machine-intensive departments overhead than they deserve. This problem can be greatly alleviated by switching to departmental overhead rates. For example, an average high-volume job would be assigned 100,000 of overhead using a plantwide rate and only 70,000 using departmental rates. The change would lower our bidding price on high-volume jobs by an average of 42,000 per job. By increasing the accuracy of our product costing, we can make better pricing decisions and win back much of our private-sector business. Doug: Sounds good. When can you implement the change in overhead rates? Tonya: It wont take long. I can have the new system working within four to six weekscertainly by the start of the new fiscal year. Doug: Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labor-intensive department. This new overhead assignment scheme will push down the cost on the government jobs, and we will lose revenues. They pay us full cost plus our standard markup. This business is not threatened by our current costing procedures, but we cant switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. Tonya: You do have a point. I thought of this issue also. According to my estimates, we will gain more revenues from the private sector than we will lose from our government contracts. Besides, the costs of our government jobs are distorted. In effect, we are overcharging the government. Doug: They dont know that and never would unless we switch our overhead assignment procedures. I think I have the solution. Officially, lets keep our plantwide overhead rate. All of the official records will reflect this overhead costing approach for both our private and government business. Unofficially. I want you to develop a separate set of books that can be used to generate the information we need to prepare competitive bids for our private-sector business. Required: 1. Do you believe that the solution proposed by Doug is ethical? Explain. 2. Suppose that Tonya decides that Dougs solution is not right and objects strongly. Further suppose that, despite Tonyas objections, Doug insists strongly on implementing the action. What should Tonya do?arrow_forward
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