building your skills

CHAPTER 13FINANCIAL STATEMENT ANALYSISIMUS INSTITUTECOLLEGE OF ACCOUNTANCYNUENO AVE., IMUS CITY CAVITE

BUILDING YOUR SKILLS

Submitted to:Dr. Emmanuel D. Magsino

Submitted by:

Charlie Magne G. SantiaguelANALYTICAL THINKING

1. Plot the janitorial labor cost and units produced in a scattergraph. (Place cost on the vertical axis and units produced on the horizontal axis).

2. Plot the janitorial labor cost and number of workdays on a scattergraph. (Place cost on the vertical axis and the number of janitorial workdays on the horizontal axis).

3. Which measure of activity number of units produced or janitorial workdays should be used as the activity base for explaining janitorial labor cost?

The more appropriate activity base for explaining janitorial labor cost would be the number of janitorial workdays because it has applies the cause-and-effect principle more properly compared to the number of units produced. As the number of janitorial workdays increase, the total janitorial labor cost also increases. If compared to the having the number of units produced as an activity base, it would not be consistent because the number of units produced has no direct relationship with the increase in janitorial labor cost.

ETHICS CHALLENGE

1. Are Mr. Richarts actions ethical? Explain why they are or are not ethical.Since the warehouse clerk had already ordered the cellular telephone parts but has not yet paid for it, the division should have recorded this transaction as an expense with the accompanying liability in accordance with the GAAP. In which case, the company did the opposite and delayed the recognition of the transaction of the expense in order to reflect a falsified higher amount of income which is an unethical act.

2. Do the general philosophy and accounting policies at General Electronics encourage or discourage ethical behavior? Explain.

CHAPTER 1MANAGERIAL ACCOUNTING AND COST CONCEPTSThe general management philosophy and accounting policies at General Electronics encourage unethical behavior. From the CEOs statement, I wont interfere with operations in the divisions. I am available for advice, but the divisions vice presidents are free to do anything they want so long as they hit the target profits for the year, it can be observed that the CEO is giving the division vice presidents the freedom to do anything, whether ethical or unethical, it takes to reach the target profits. Although the CEO expressed that she is available for advice, the vice presidents would still tend to resort to unethical actions due to the freedom that they are given.CASE1. Assuming the use of a plantwide overhead rate:a. Compute the rate for the current year.Estimated total plant manufacturing overhead $ 1,440,000

Total direct labor cost 900,000

Plantwide overhead rate $ 1.60

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.Actual direct labor cost $ 21,200

Plantwide overhead rate 1.60

Total applied overhead $ 33,920

2. Suppose that instead of using a plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under the conditions:a. Compute the rate for each department for the current year. Cutting MachiningAssembly

Estimated manufacturing overhead $ 540,000 $ 800,000 $ 100,000

Estimated direct labor cost 300,000 200,000 400,000

Departmental overhead rate $ 1.80 $ 4.00 $ 0.25

b. Determine the amount of manufacturing overhead cost that would have been applied to the Hastings job.

Cutting MachiningAssemblyTotal

Actual direct labor cost $ 6,500 $ 1,700 $ 13,000 $ 21,200

Departmental overhead rate1.804.000.25 6.05

Applied overhead $ 11,700 $ 6,800 $ 3,250 $ 21,750

3. Explain the difference between the manufacturing overhead cost that would have been applied to the Hastings job using the plantwide rate in question 1(b) and using the departmental rates in question 2(b)?

The difference in the applied overhead between the two answers lies within the differences in overhead rates that are used. The plantwide overhead rate is based on the estimated overall manufacturing overhead that will be incurred while the departmental overhead rate is based on the estimated manufacturing overhead rates of each department giving each department separate rates, on the other hand, giving the plantwide rate only a single rate to apply. The departmental overhead rates provide more accurate application of the overhead rate because it reflects how the manufacturing overhead is applied and incurred across the departments.

4. Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost. What was the companys bid price on the Hastings job? What would be the bid price if departmental overhead rates had been used to apply overhead cost?

PLANTWIDE OVERHEAD RATE IS USED

Total direct material cost $ 18,500

Total direct labor cost 21,200

Applied manufacturing overhead 33,920

Total manufacturing costs $ 73,620

Mark-up150%

Bid price $ 110,430

DEPARTMENTAL OVERHEAD RATES ARE USED


Total direct material cost $ 12,000 $ 900 $ 5,600 $ 18,500

Total direct labor cost 6,500 1,700 13,000 21,200

Applied manufacturing overhead 11,700 6,800 3,250 21,750

Total manufacturing costs $ 30,200 $ 9,400 $ 21,850 $ 61,450

Mark-up150%

Bid price $ 92,175

5. Compute for the underapplied or overapplied overhead for the year (a) assuming that a plantwide rate is used, and (b) assuming that departmental overhead rates are used.

a.PLANTWIDE OVERHEAD RATE IS USED

Total actual manufacturing overhead $ 1,482,000

Less: Applied manufacturing overhead

Total actual direct labor cost $ 870,000

Plantwide overhead rate1.60 $ 1,392,000

Underapplied manufacturing overhead $ 90,000

b.DEPARTMENTAL OVERHEAD RATES ARE USED


Actual manufacturing overhead $ 560,000 $ 830,000 $ 92,000 $ 1,482,000

Less: Applied overhead

Total direct labor cost $ 320,000 $ 210,000 $ 340,000

Departmental overhead rates1.804.000.25

Applied overhead $ 576,000 $ 840,000 $ 85,000 $ 1,501,000

(Over) Underapplied manufacturing overhead $ (16,000) $ 10,000) $ 7,000 $ (19,000)

ETHICS CHALLENGE

1. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year.

By shaving 5% off of the estimated direct labor-hours, it would increase the amount of predetermined manufacturing overhead rate. In that case, the increase in the overhead rate would then result in a large increase of applied overhead with an accompanying overapplied overhead which would be adjusted to the cost of goods sold, decreasing it and thus, increasing the amount of net income.

2. Should Cristin Madsen go along with the general managers request to reduce the direct labor-hours in the predetermined overhead rate computation to 105,000 direct labor-hours?

CHAPTER 2JOB-ORDER COSTINGI think not, because in reducing the direct labor-hours just to have an overapplied overhead with would result to boost in the net income for their own benefit is unethical.ETHICS CHALLENGE

The more equitable manner of dividing the bill is to determine the cost of each individual and divide the bill accordingly in order to avoid some of the costs to be absorbed by the other group members, although this method is a bit time consuming as compared to dividing the bill equally. Although equally dividing the bill is easier, it can be unfair for the other members to pay for the cost of what others have consumed in which they should not pay for. The issue relates to the material covered in this chapter by distributing the costs based on the activities that are involved which is activity-based costing.

CASE

1. Using direct labor-hours as the base for assigning manufacturing overhead costs to the products:a. Determine the predetermined overhead rate that will be used during the year.Estimated manufacturing overhead cost $ 3,000,000

Expected direct labor hours50,000

Manufacturing overhead per DLH $ 60.00 per DLH

b. Determine the unit product cost.Mona LoaMalaysian

Direct materials$ 4.20$ 3.20

Direct labor0.300.30

Manufacturing overhead*1.501.50

Total unit product cost$ 6.00$ 5.00

*$60 0.025 hours per bag

2. Using activity-based costing as the base for assigning manufacturing overhead costs to the products:a. Determine the total amount of manufacturing overhead cost assigned

b. Compute the amount of manufacturing overhead cost per pound.Mona LoaMalaysian

Assigned overhead$32,900$7,300

Expected sales (pounds)100,000 2,000

Manufacturing overhead per pound$0.33$3.65

c. Determine the unit product cost.Mona LoaMalaysian

Direct materials $ 4.20 $ 3.20

Direct labor0.30 0.30

Manufacturing overhead0.33 3.65

Total unit product cost $ 4.83 $ 7.15

3. Write a brief memo to the president of CBI to explain the results.To whom it may concern:

As indicated by the computations shown above, it would be much better to use activity-based costing in allocating the cost of manufacturing overhead to the products. Activity-based costing properly matches how the products activities reflect on the products cost thus providing much more accurate data as compared to the traditional costing which uses direct labor-hours.

ANALYTICAL THINKING

1. Using activity-based costing, determine the amount of manufacturing overhead cost that would be assigned to each standard and each specialty briefcase

Standard Briefcase

Activity Cost PoolNo. of ActivityEst. ActivityEstimated Overhead CostAllocated Overhead

Purchasing120300$ 15,000 $ 6,000

Material handling15540016,000 6,200

Production orders and setups10,00015,0006,000 4,000

Inspection20060018,000 6,000

Frame assembly7001,50012,000 5,600

Machine-related5,0008,00032,000 20,000

Total$ 44,800

Specialty Briefcase

Activity Cost PoolNo. of ActivityEst. ActivityEstimated Overhead CostAllocated Overhead

Purchasing 180 300 $ 15,000 $ 9,000

Material handling 245 400 16,000 9,800

Production orders and setups 5,000 15,000 6,000 2,000

Inspection 400 600 18,000 12,000

Frame assembly 800 1,500 12,000 6,400

Machine-related 3,000 8,000 32,000 12,000

Total $ 54,200

2. Determine the unit product cost of each product line from the perspective of the activity based costing system.Standard BriefcaseSpecialty Briefcase

Direct materials

Leather $ 8.00 $ 12.00

Fabric 2.00 1.00

Synthetic - 7.00

Total materials $ 10.00 $ 20.00

Direct labor 6.00 4.80

Manufacturing over head

Standard: ($44,80010,000) 4.48

Specialty: ($54,2002,500) 21.8

Unit product cost $ 20.48 $ 46.48

3. Would you recommend that the company shift its resources entirely to the production of specialty briefcases? Explain.

No, because as observed in the computations above, the actual cost of each specialty briefcases is $46.48 which is more than the selling price of $42.50, giving the company losses for each product that is sold.

4. Why do you suppose the competition hasnt been able to touch FirstLine Cases price?

It is because that the cost of specialty briefcases based on the traditional costing is low, giving the company a high gross margin for each product sold. When in reality, the cost of each specialty briefcases is higher than the selling price per unit, in which case of the traditional costing, the cost is absorbed by the standard briefcases.

CHAPTER 3ACTIVITY-BASED COSTING

ANALYTICAL THINKING

1. Prepare a report for the Forming Department for October.

Durall Company

Cost of Production Report Forming Department

For the Month of October

Physical

Production DataUnitsTrans. InDMCC

Beginning inventory8000

Units started97000

Total units to account for105000

Beginning inventory8000800080008000

Units started and completed92000920009200092000

Total units completed100000

Ending inventory5000500002000

Total units accounted for105000105000100000102000

Total

Cost DataCostsTrans. InDMCC

Cost of beginning inventory $ 22,420 $ 8,820 $ 3,400 $ 10,200

Current period cost 205,980 81,480 27,600 96,900

Total costs to account for $ 228,400 $ 90,300 $ 31,000 $ 107,100

EUP105000100000102000

Cost per EUP $ 2.22 $ 0.86 $ 0.31 $ 1.05

Cost Assignment

Units transferred out(100,000$2.22) $ 222,000

Ending inventory

Trans. In(5,000$0.86) $ 4,300

Conversion(2000$1.05) 2,100 6,400

Total cost accounted for $ 228,400

2. Explain to the president why the unit cost appearing on the report prepared by the accountant is so high.

The unit cost prepared by the accountant is higher compared to what is computed above is because of (1) the accountant did not consider the number of equivalent units of production for each cost component and treating each product as if they are completed as a singular one; (2) the accountant did not assign any cost to the ending work in process inventory; and (3) the total cost that was accumulated were all allocated on the number of units that are completed.

ETHICS CHALLENGE

1. If the estimate of the percentage of completion is used, what would be the cost of goods sold for the year?Physical UnitsTrans. InConversion

Started and Completed250,000 250000250000

Ending Inventory20,000 20,000 5,000

Total units accounted for270,000 270,000 255,000

Total CostTrans. InConversion

Current period cost $ 5,541,000 $49,221,000 $ 6,320,000

EUP 270000 255000

Cost per EUP $ 246.30 $ 182.30 $ 64.00

No. of Units Sold 250,000

Total cost per unit 246.30

Cost of goods sold $ 61,575,000

2. Does Thad Kostowski want the estimated percentage completion to be increased or decreased?

Thad Kostowski would want the estimated percentage of completion to be increased because it would later create a decrease in the cost of goods sold and subsequently to the net income.

3. What percentage completion figure would result in increasing the reported net operating income by $62,500 over the net operating income that would be reported if the 25% figure were used?

Let X = Percentage Completed

250,000{182.30+[16,320,000(250,000+20000X]}=61,575,000 62500

250,000{182.30+[16,320,000(250,000+20000X]}=61,512,000

250,000250,000

182.30+[16,320,000 (250,000+20,000X)]=246.05

16,320,000 (250,000+20,000X)=63.75

16,320,000=15,937,500+1,275,000X

1,275,000X=382,500

X=30%

4. Do you think Carol Lee should go along with the request to alter estimates of the percentage completion? Why or why not?

No, because it would be unethical to alter the estimate to manipulate the earnings for the sake of getting the additional bonus.CHAPTER 4PROCESS COSTING

CASE

1. Assuming sales of $30,000,000, construct a budgeted contribution format income statement for the upcoming year.a. The independent sales agents commission rate remains unchanged at 18%.

Marston Corporation

Budgeted Contribution Income Statement

Sales $ 30,000,000

Variable Expenses:

Cost of Goods Sold $ 17,400,000

Commission5,400,000 22,800,000

Contribution Margin $ 7,200,000

Fixed Expenses:


Advertising800,000

Administrative3,200,000 6,800,000

Net Operating Income$ 400,000

b. The independent sales agents commission rate increases to 20%.

Marston Corporation


Sales $ 30,000,000

Variable Expenses:


Commission6,000,000 23,400,000

Contribution Margin $ 6,600,000

Fixed Expenses:


Advertising800,000

Administrative3,200,000 6,800,000

Net Operating Income $ (200,000)

c. The company employs its own sales force.

Marston Corporation


Sales$ 30,000,000

Variable Expenses:

Cost of Goods Sold$ 17,400,000

Commission3,000,00020,400,000

Contribution Margin$ 9,600,000

Fixed Expenses:

Cost of Goods Sold$ 2,800,000

Advertising1,300,000

Administrative3,200,000

Selling1,300,0008,600,000

Net Operating Income$ 1,000,000

2. Calculate the break-even point in sales dollars for the upcoming year.a. The independent sales agents commission rate remains unchanged at 18%.

BEP Sales =$ 6,800,000

(7,200,00030,000,000)

=$ 28,333,333.33

b. The independent sales agents commission rate increases to 20%.

BEP Sales =$ 6,800,000

(6,600,00030,000,000)

=$ 30,909,090.91

c. The company employs its own sales force.

BEP Sales =$ 8,600,000

(9,600,00030,000,000)

=$ 26,875,000.00

3. Refer to your answer to (1) (b) above. If the company employs its own sales force, what volume of sales would be necessary to generate the net operating income the company would realize if sales are $ 30,000, 000 and the company continues to sell through agents (at a 20% commission rate)?

Sales =($200,000) + 6,800,000

(9,600,00030,000,000)

=$ 20,625,000

4. Determine the volume of sales at which net operating income would be equal regardless of whether Marston Corporation sells through agents (at a 20% commission rate) or employs its own sales force.

Let X = Sales

X (0.20X+0.58X) 6,800,000=X (0.10X+0.58X) 8,600,000

X 0.78X 6,800,000=X 0.68X 8,600,000

0.22X 6,800,000=0.32X 8,600,000

8,600,000 6,800,000=0.32X 0.22X

1,800,000=0.10X

X=$18,000,000

5. Prepare a graph on which you plot the profits for both of the following alternatives.a. The independent sales agents commission rate increases to 20%.

b. The company employs its own sales force.

6. Write a memo to the president of Marston Corporation in which you make a recommendation as to whether the company should continue to use independent sales agents (at a 20% commission rate) or employ its own sales force. Fully explain the reasons for your recommendation in the memo.

To whom it may concern:

I would like to recommend that the company should employ its own sales force as it would result in a higher net operating income compared to the companys sales commissions remaining at 18% with a lesser income and the companys sales commission increased to 20% which would result in a net operating loss.

ANALYTICAL THINKING

1. What is the companys overall break-even point in total sales dollars?

FrogMinnowWormTotal

Sales$200,000$280,000$240,000$720,000

Variable expenses120,000160,000150,000430,000

Contribution margin80,000120,00090,000290,000

CM Ratio40.00%42.86%37.50%40.28%

BEP Sales =$282,000

40.28%

=$700,137.93

2. Of the total fixed costs of $282,000, $18,000 could be avoided if the Frog lure product were dropped, $96,000 if the Minnow lure product were dropped, and $60,000 if the Worm lure product were dropped. The remaining fixed expenses of $108,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely.a. What is the break-even point in units for each product?

FrogMinnowWorm

Fixed expenses $ 18,000 $ 96,000 $ 60,000

Contribution margin per unit0.80 0.60 0.30

BEP Units22,500 160,000 200,000

b. If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? Explain this result.

FrogMinnowWormTotal

Sales $ 45,000 $ 224,000 $ 160,000 $ 429,000

Variable expenses 27,000 128,000 100,000 255,000

Contribution margin $ 18,000 $ 96,000 $ 60,000 174,000

Traceable fixed expenses 18,000 96,000 60,000 174,000

Product margin $ - $ - $ - $ -

Common fixed expenses108,000

Net operating loss$(108,000)

CHAPTER 5COST-VOLUME-PROFIT RELATIONSHIPSThe company incurred a net operating loss because if the company were able to sell each product at break-even, it would only cover up the fixed expenses that are traceable to each product which doesnt include the common fixed expenses that are not directly traceable to each product.ANALYTICAL THINKING

1. Prepare contribution format income statements.

Reston Company

Contribution Income Statement

For the Month Ended May 31

Total Sales Territory

Company%Central%Eastern%

Sales$900,000 100.0% $400,000 100.0% $500,000 100.0%

Variable expenses408,000 45.3%208,000 52.0%200,000 40.0%

Contribution margin$492,000 54.7% $192,000 48.0% $300,000 60.0%

Traceable fixed expenses 290,000 32.2% 160,000 40.0% 130,000 26.0%

Divisional segment margin $202,000 22.4% $ 32,000 8.0% $170,000 34.0%

Common fixed expenses175,000 19.4%

Net operating income $ 27,000 3.0%

Segments Defined as Product Lines of the Central Sales Territory

Central Products

Territory%Awls%Pows%

Sales $400,000 100.0% $100,000 100.0% $300,000 100.0%

Variable expenses208,000 52.0%25,000 25.0%183,000 61.0%

Contribution margin$192,000 48.0% $ 75,000 75.0% $117,000 39.0%

Traceable fixed expenses 114,000 28.5% 60,000 60.0% 54,000 18.0%

Product margin $ 78,000 19.5% $ 15,000 15.0% $ 63,000 21.0%

Common fixed expenses46,000 11.5%

Divisional segment margin $ 32,000 8.0%

2. Look at the statement you have prepared showing the total company segmented sales by territory. What points revealed by this statement should be brought to managements attention?

As it can be observed in the statement, although the amount of sales in the central sales territory is less than the sales in the eastern sales territory, its fixed and variable expenses combined are greater compared to the eastern sales territory.3. Look at the statement you have prepared showing the Central Territory segmented by product lines. What points revealed by this statement should be brought to managements attention?

Although the amount of sales in for the awls product is less than the sales of pows product, the amount of traceable fixed expenses for awls is greater than pows.

ETHICS CHALLENGE

1. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year?

Required Production =Expected Sales + Desired ending inventory Beginning inventory

=18,000 + 1, 500 12,000

=7,500 units

No, because in a variable costing environment, the number of scheduled number of units to be produced does not affect the net income for the year because under variable costing, units produced do not affect the income.

2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on the divisions net operating income. If Mr. Constantinos wants to maximize his divisions net operating income for the year, how many units should be scheduled for production during the last quarter? Explain.

Required Production =Expected Sales + Desired ending inventory Beginning inventory

=22,000 + 1, 500 12,000

=11,500 units

If the company is using variable costing, the company should have more number of units produced than the number of units sold in order to stock the cost of inventory in the ending inventory, decreasing cost of goods sold and thus, increasing net income.

3. Identify the ethical issues involved in the decision of Mr. Constantinos must make about the level of production for the last quarter of the year.

The ethical issues in the decision of Mr. Constantinos would involve questioning about the integrity and objectivity of his decisions. If he is given an annual bonus based on the divisions net operating income, he may become reluctant as to whether do ethical or unethical actions to earn the said bonus.

CASE

1. Prepare a contribution format segmented income statement for the American Association of Acupuncturists for last year.

TOTAL COMPANYPRODUCTS

MEMBERSHIP SERVICEJOURNALBOOKS & REPORTSCONTINUING EDUCATION

Sales$970,000$433,750$236,250$70,000$230,000

Variable expenses$374,250210,00071,25033,00060,000

Contribution margin$595,750$223,750$165,000$37,000$170,000

Traceable fixed expenses410,000220,00070,00050,00070,000

Product segment margin$185,750$3,750$95,000-$13,000$100,000

Common fixed cost178,750

Net operating income$7,000

2. Give arguments for and against allocating all costs of the association to the four programs.

There are no allocated costs of printing and mailing in the membership service program although it may be possible that there are printing and mailing activities in the said program.

CHAPTER 6VARIABLE COSTING AND SEGMENT REPORTING: TOOLS FOR MANAGEMENT

ANALYTICAL THINKING

1. Identify the problems that exist in Ferguson & Son manufacturing Companys budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

The main problem that can be observed from the statements is that there is too much reinforcement in of the budgets that are prepared by the higher management. The higher management only considers on the overall goal of the company in preparing the budgets without giving consideration from the lower levels of management. Since the budgets imposed are too tight for the managers to handle, the costs of products might have been reduced on the other hand, the quality of the products are the ones suffering.

2. Explain how Ferguson & Son Manufacturing Companys budgetary control system could be revised to improve its effectiveness.

One way to improve the effectiveness of the budgets is to have the higher and lower levels of management be involved in a participative budget in which they will organize altogether. That way, the budgets that will be imposed will be more accurate due to the lower managers knowledge of the day-to-day operations of their departments and will recognize their value to the company where they may strive harder to meet those budgets.

CASE

Prepare a master budget for the three-month period ending June 30.1. a. A sales budget by month and in total.

Cravat Sales Company

Sales Budget

For the Quarter Ended June 30

Month

AprilMayJuneQuarter

Budgeted sales in units 35,000 45,000 60,000 140,000

Selling price per unit$8 $8 $8 $8

Total sales$280,000 $360,000 $480,000 $1,120,000

b. A schedule of expected cash collections from sales, by month and in total.

Schedule of Expected Cash Collections

Month

AprilMayJuneQuarter

Accounts receivable, beginning balance:

February sales $ 48,000 $ 48,000

March sales112,000 $ 56,000 168,000

April sales7000014000070000280,000

May sales90000180000270,000

June sales120000120,000

Total $230,000 $286,000 $370,000 $ 886,000

c. A merchandise purchases budget in units and in dollars.


Merchandise Purchases Budget


Month

AprilMayJuneQuarter

Budgeted sales350004500060000140000

Add desired ending inventory40500540003600036000

Total needs755009900096000176000

Less beginning inventory31500405005400031500

Required purchases440005850042000144500

Cost per tie$5 $5 $5 $5

Cost of purchases$220,000 $292,500 $210,000 $722,500

d. A schedule of expected cash disbursements for merchandise purchases.

Schedule of Expected Cash Disbursements for Purchases

Month

AprilMayJuneQuarter

Beginning accounts payable: $ 85,750 $ 85,750

April purchases110,000 $ 110,000 220,000

May purchases146250 $ 146,250 292,500

June purchases105,000 105,000

Total $ 195,750 $ 256,250 $ 251,250 $ 703,250

2. A cash budgetCravat Sales Company

Cash Budget


Month

AprilMayJuneQuarter

Cash balance, beginning $ 14,000 $ 10,250 $ 10,000 $ 34,250

Add receipts:

Collections from customers230,000 286,000 370,000 886,000

Total cash available $244,000 $296,250 $380,000 $920,250

Less disbursements:

Purchases $195,750 $256,250 $251,250 703,250

Selling and administrative740008400099000257,000

Land purchase025000025,000

Dividends120000012,000

Total disbursements $281,750 $365,250 $350,250 $997,250

Excess (deficiency) of cash available over disbursements $(37,750) $(69,000) $ 29,750 $(77,000)

Financing:

Borrowings$48000$79000$127,000

Repayments$1600016,000

Interest30203,020

Total financing480007900019020146,020

Cash balance, ending $ 10,250 $ 10,000 $ 10,730 $ 30,980

3. A budgeted income statement.


Budgeted Income Statement


Sales$1,120,000

Cost of goods sold 700,000

Gross margin$420,000

Selling and administrative expenses 265,100

Net operating income$154,900

Interest expense 3,020

Net income$151,880

4. A budgeted balance sheet.


Budgeted Balance Sheet


Assets

Cash $ 10,730

Accounts Receivable 450,000

Inventory 180,000

Prepaid insurance 10,800

Fixed assets, net of depreciation 168,200

Land 25,000

Total assets $ 844,730

LIABILITIES and Stockholder's Equity

Accounts payable $ 105,000

Dividends payable 12,000

Loans payable 111,000

Common stock 300,000

Retained earnings 316,730

Total liabilities and stockholders' equity $ 844,730

ETHICS CHALLENGE

1. Is Granger Stokes using budgets as a planning and control too?

No, he is not using budgets as a planning and control tool, because if he intends to use budgets as a planning and control tool, he would consider not only the increase in the sales volume but also the increase in costs related to the increase of sales. Hes only using those budgets to impose what he wants to achieve in the company.

2. What are the behavioral consequences of the way budgets are being used at PrimeDrive?

The employees of PrimeDrive would tend to quit their jobs because they may feel invaluable to company due to the current management. Stokes does not listen to whatever the employees may suggest even though that the employees are the ones with knowledge of the day-to-day operations. If it keeps up, the company would go bankrupt in no time.

3. What, if anything do you think Keri Kalani should do?

Kalani should stand up against Stokes and make him realize that what he is doing isnt beneficial to the company. She may need the help of the other employees to support her. In doing so, she should still comply with professional ethics in order that she would not be in harm in standing up against him.CHAPTER 7PROFIT PLANNING

ETHICS CHALLENGE

Prating should include the additional $16,000 unfavorable variance and he needs to not only look at the aggregate amount of variances included in the report. He should perform a variance analysis by observing the components of each item. First, he should separate the total direct labor variance into labor rate variance and labor efficiency variance. And, he should also separate the overhead components into variable and fixed overhead. The total variable overhead variance should be separated into variable overhead rate and variable overhead efficiency variances while the fixed overhead should be separated into budget variance and volume variances. In doing so, it can be discovered who should be held responsible for the unfavorable variances depending on which department does the variance belong to.

ANALYTICAL THINKING

1. What was the total standard cost of the materials used during August?

Total standard cost per kit$ 42

Number of kits produced 500

Total standard cost$21,000

Standard direct labor cost(1,600)

Standard VOH(8,000)

Standard material cost$11,400

2. How many yards of material are required at standard per kit?

Standard material cost$11,400

Number of kits produced 500

Stardard material cost per kit $ 22.80

Standard price of material 6

Standard quantity of material 3.80 yards

3. What was the materials price variance for August if there were no beginning or ending inventories of materials?

AQ x APAQ x SPSQ x SP

$ 10,000 $12,000 $ 11,400

$2,000 F$600 U

Material Price VarianceMaterial Quantity Variance

4. What is the standard direct labor rate per hour?

Standard VOH cost $1,600 Standard cost per kit $ 42.00

Number of kits producedStandard material cost per kit22.80

Standard VOH cost per kit $ 3.20 Standard VOH cost per kit3.20

Standard VOH rate2 Standard direct labor cost per kit $ 16.00

Standard hours1.6 hours Standard hours1.6

Standard direct labor rate $ 10.00

5. What was the labor efficiency variance for August? The direct labor rate variance?

Standard cost per kit $ 42.00 Actual direct labor hours 900

Total unfavorable variance0.14 Standard direct labor rate $ 10

Actual cost per kit $ 42.14 Standard direct labor cost for actual labor

Number of kits produced 500 hours$9,000

Total manufacturing costs$21,070

Actual materials cost(10,000)

Actual VOH cost (1,620)

Actual direct labor cost $ 9,450

AH x ARAH x SRSH x SR

$ 9,450 $9,000 $ 8,000

$450 U$1000 U

Labor RateLabor Efficiency

VarianceVariance

6. What was the variable overhead efficiency variance for August? The variable overhead rate variance?

ActualAH x VOH RateSH x VOH Rate

$1,620 $ 1,800 $ 1,600

$180 F$200 U

VOH Rate VarianceVOH Efficiency Variance

7. Complete the standard cost card for one kit shown at the beginning of the problem.

Standard Quantityor HoursStandard Priceor RateStandardCost

Direct materials..3.8 yards$6 per yard$22.80

Direct labor1.6 hours$10 per direct labor-hour16.00

Variable manufacturing overhead..1.6 hours$2 per direct labor-hour3.20

Total standard cost per kit$42.00

CASE

1. Prepare a flexible budget for The Munchkin Theater based on the actual activity of the year.

The Munchkin Theater

Flexible Budget

For the Year Ended December 31

Budgeted numbers of productions4

Budgeted numbers of performances64

Actors' and directors' wages$153,600

Stagehands' wages28,800

Ticket booth personnel and ushers' wages11,520

Scenery, costumes, and props34,400

Theater hall rent48,000

Printed programs11,200

Publicity10,400

Administrative expenses42,192

Total$340,112

2. Prepare a report that summarizes the spending variances for all expense items.

The Munchkin Theater

Spending Variances

For the Year Ended December 31

FlexibleActualVariances

Budgeted numbers of productions44

Budgeted numbers of performances6464

Actors' and directors' wages$153,600$148,000$5,600 F

Stagehands' wages28,80028,600200 F

Ticket booth personnel and ushers' wages11,52012,300780 U

Scenery, costumes, and props34,40039,3004,900 U

Theater hall rent48,00049,6001,600 U

Printed programs11,20010,950250 F

Publicity10,40012,0001,600 U

Administrative expenses42,19241,650542 F

Total$340,112$342,400$2, 288 U

3. If you were on the board of directors of the theater, would you be pleased with how well costs were controlled during the year? Why or why not?

CHAPTER 8FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSISWith regards to the expenses, I would not be satisfied with it because most of the variances are unfavorable which means that the crew were not able to control its costs. But with regards to the number of performance and productions, I would be satisfied because the number of productions were less than planned and the number of performances were more than planned which may indicate that less amount of work was to be done about the production and the number of performances would indicate an increase in demand.CASE

1. Construct the balanced scorecard.

+

Totalprofit

-+

Write-off of accounts receivableTotal sales revenue

+

+Customer Survey:Satisfaction with Accuracy of Charge Account Bills

Sales per square foot of floor space

-

Inventoryunsold-Percentage of charge account bills containing errors

+

++Percentage of suppliers making just-in-time deliveriesPercentage of employees who attended the citys annual diversity workshop Percentage of salesclerks trained to correctly enter data on charge account slips

2. Assume that the company adopts your balanced scorecard. After operating for a year, there are improvements in some parts but not in the others. What should management do next?

I suggest that the company may adopt a new balanced scorecard and determine the performance measures that are potential to eliminate or reduce the problem to a tolerable level. With that, the company would be able to improve the internal aspects as well as the external aspects that are crucial to the entitys survival.

3. a. Suppose that customers express greater satisfaction with the accuracy of their charge account bills, but the performance measures for the average age of accounts receivable and for bad debts do not improve. Explain why might this happen.

Although that the customers are satisfied with the accuracy of the charges in their accounts, the allowance for bad debts have not improve because the companys products are too expensive for the customers to afford. Even having the products on accounts but still it has high prices, the customers might find it difficult to pay off their balances to the company.

b. Suppose that the performance measure for the average age of accounts receivable, bad debts, and unsold inventory improve, but total profits do not. Explain why might this happen. Assume in your answer that the explanation lies within the company.

Since the company decreases the number of unsold inventory, the selling and administrative expenses may be a high resulting in a little or minimal increase. And also, since there are also improvements in the average age of receivables, the company may have hired employees who may be highly paid and trained to cause a minimal amount of errors in charging the customers accounts.

CHAPTER 9PERFORMANCE MEASUREMENT IN DECENTRALIZED ORGANIZATIONS

CASE

1. Given the margins of the two products as indicated in the reports submitted by the accounting department, does it make any sense to even consider producing the mountain bike frames? Explain.

As the company having limited amount of available resources, which is the welding hours, giving consideration to manufacture the mountain bike frames depends on if the manufacture would increase the amount of income without affecting the companys operations and the availability of the resources.

2. Compute the contribution margin per unit fora. Purchased XSX drums.Selling price per drum$154.00

Variable cost per drum:

Purchase price$120.00

Selling and administrative expense0.85 120.85

Contribution margin per drum$ 33.15

b. Manufactured XSX drums.Selling price per drum$154.00


Direct materials$44.50

Manufacturing overhead1.05


Contribution margin per drum$107.60

c. Manufactured mountain bike frames.Selling price per frame$ 65.00

Variable cost per frame:



Selling and administrative expense0.4018.50

Contribution margin per frame$ 46.50

3. Determine the number of XSX drums (if any) that should be purchased and the number of XSX drums and/or mountain bike frames (if any) that should be manufactured. What is the improvement in net income that would result from this plan over current operations?

Manufactured XSXMountain Bike FramesPurchased XSX

Contribution margin$107.60 $ 46.50 $ 33.15

Welding hours per unit 0.80 0.20

Contribution margin per welding hour$ 134.50$ 232.50

After obtaining the computations above, the company should use 700 welding hours to produce 3,500 bike frames to obtain a contribution margin of $162,750, the remaining 1,300 hours to manufacture 1,625 XSX drums to obtain a contribution margin of $174,850 and purchase 1,375 drums to obtain a contribution margin of $45,581.25. With that, the company would earn a total $383,184.25 contribution margin. With fixed expenses of $43.75 unit totaling $153,125 and fixed expenses per unit $21.15 totaling $34,368.75 for manufactured mountain bike frames and XSX drums respectively, the company would earn a net income of $195,690.50.

4. Redo requirements (2) and (3) above, making the opposite assumption about direct labor from the one you originally made.

(2)PURCHASED XSX DRUMSSelling price per drum$154.00


Purchase price$120.00


Contribution margin per drum$ 33.15

MANUFACTURED XSX DRUMSSelling price per drum$154.00



Direct labor4.50



Contribution margin per drum$103.10

MANUFACTURED MOUNTAIN BIKE FRAMESSelling price per frame $ 65.00

Variable cost per frame:


Direct labor22.50



Contribution margin per frame$ 24.00

(3)Manufactured XSXMountain Bike FramesPurchased XSX

Contribution margin$ 103.10$ 24.00 $ 33.15

Welding hours per unit0.800.20

Contribution margin per welding hour$ 128.88$ 120.00

After obtaining the contribution margin per constrained resource, Storage Systems should use all of its available 2,000 welding hours to manufacture all 2,500 drums to obtain a contribution margin of $257,750 and purchase 500 drums to obtain a contribution margin of $16,575 for a total contribution margin of $274,325. With fixed expenses of $16.65 per manufactured XSX drum totaling $41,625, the net income of the company would be $232,700.

5. What do you think is the correct way to treat direct labor in this situation? Explain.

I think that the direct labor should be treated as a fixed cost because according to the companys policy, the employees are paid for full 40-hour workweeks and the employees are only laid off during major recessions which mean that the employees are still paid full and the cost will only disappear in major recessions.

ETHICS CHALLENGE

1. Should the Ashton processing center be shut down and its work redistributed to the other processing centers in the region?ContinueDiscontinueDifference

Revenues $ 5,000,000 $ - $ (5,000,000)

Operating expenses:

Additional rent - 400,000 (400,000)

Local administrative expense120,000 60,000 60,000

Total operating expenses $ 120,000 $ 460,000 $ (340,000)

Net operating income (loss) $ 4,880,000 $ (460,000) $ (5,340,000)

No, the Ashton processing center should not be discontinued because the amount of revenues that would be lost is greater than the amount of costs that can be avoided and the additional costs if the operations are shifted combined.

2. Do you think Marvin Brauns decision to shut down the Ashton facility is ethical? Explain.

In my opinion, his decision to shut down the operations is unethical because he is making a decision from a view of his own perspective and not for the company as a whole. He intends to discontinue the operations just to avoid having to report a negative result of operations without knowing first the effect to the company if the operations have been shut down.

3. What influence should the depreciation on the facilities at Ashton have on prices charged by Ashton for its services?

ANALYTICAL THINKING

1. Do you agree with the sales manager that the company should discontinue milling flour and use the entire milling capacity to mill cracked wheat if the price of flour remains at $625 per ton? Support your answer with computations and explanations.

Continue Manufacturing FlourDiscontinue and Produce Cracked WheatDifference

Selling price$ 625$490$ (135)

Cost to manufacture:

Raw materials:

Enrichment materials80-80

Cracked wheat470-470

Wheat grain390(390)

Total raw materials550390160

Contribution margin$75$100$ 25

I think I might agree and would consider to discontinue the operations because even though that the revenue to be generated from cracked wheat per ton is $135 less than the revenue per ton of flour, the raw materials cost less which can compensate for the decrease in the revenue.

2. What is the lowest price that the company should accept for a ton of flour?Selling price (squeezed) $ 630

Variable expenses:

Direct materials $ 550

Direct labor20 570

Contribution margin$60

Fixed expense60

Manufacturing profit$0

CHAPTER 10DIFFERENTIAL ANALYSIS: THE KEY TO DECISION MAKINGIt is still tolerable for a company if the realized neither a profit nor loss, in other words, the company can accept a lowest selling price which is equal to the total expenses.ETHICS CHALLENGE

1. What should Amy do?

Amy should act with integrity and credibility. She should not act in the way that the committee might be leading her into and she should communicate her report fairly and objectively. And also, since she is having an ethical dilemma against the committee, she should discuss the matter with the management above the committee.

2. Do you have any suggestions for revising the way in which postaudits are conducted at Hi-Q?

A way to improve the postaudits is that the higher management should accept the opinions of others and have the truth be reported. It can be clearly observed from the statements that the committee only looks from their perspective and does not want the results of the postaudits to be away from their expectations. The committee should learn that not all things will go the way we want.

ANALYTICAL THINKING

1. Using the net present value approach, determine whether Wyndham Stores should lease or buy the new store. Assume that you will be making your presentation before the companys executive committee.BuyYearCash Flows12% FactorPV of Cash Flow

Down paymentNow(6,000,000)1.000 $ (6,000,000)

Installments1 - 4(2,000,000)3.037 (6,074,000)

Operating expenses1 - 20 (200,000)7.469 (1,493,800)

Residual value205,000,000 0.104520,000

Net Present Value$ (13,047,800)

LeaseYearCash Flows12% FactorPV of Cash Flow

Advance lease paymentNow(1,000,000)1.000 $ (1,000,000)

Annual lease payment1 -19(1,000,000)7.366 (7,366,000)

Security depositNow (400,000)1.000 (400,000)

Repairs and maintenance1 - 20 (50,000)7.469 (373,450)

Refund of security deposit20400,000 0.104 41,600

Net Present Value$ (9,097,850)

Net Present Value in favor of Leasing $ (3,949,950)

2. How will you reply in the meeting if Harry Wilson brings up the issue of the buildings future sales value?

The future value of the building is $5,000,000, but if we consider the time value of money at an appropriate discount rate, its value at the end of 20 years is only $520,000. Although the discounted residual value to be recovered at the end of year 20 is greater than the discounted refund of the security deposit, it would only be realized only if the company buys the building but it would be accompanied with much greater costs compared to if the company just leased the building.

CASE

1. Which alternative should the company choose?Alternative 118%Present Value

AmountYearsPV Factorof Cash Flows

Cost of new model 2600 (180,000)Now1.000 (180,000)

Market Value of Replacement 100,000 100.191 19,100

Cost of new machine (200,000)60.37 (74,000)

Production Cost (18,000)10.847 (15,246)

Production Cost (27,000)20.718 (19,386)

Production Cost (36,000)30.609 (21,924)

Production Cost (40,500)2.32 (93,960)

Repair and Maintenance (6,000)4.494 (26,964)

Net present value (412,380)

Alternative 218%Present Value

AmountYearsPV Factorof Cash Flows

Cost of new model 5200 (250,000)Now1.000 (250,000)

Production Cost (14,000)10.847 (11,858)

Production Cost (21,000)20.718 (15,078)

Production Cost (28,000)30.609 (17,052)

Production Cost (31,500)2.32 (73,080)

Repair and Maintenance (4,600)4.494(20,672)

Net present value (387,740)

2. Suppose that the cost of direct materials increases by 50%. Would this make the model 5200 machine more or less desirable? Explain

The 50% increase in direct materials would make the model 5200 less desirable because its material would then cost $0.60 per unit compared to the model 2600 having $0.54 of direct materials per unit.

3. Suppose that the cost of direct labor increases by 25%. Would this make the model 5200 machine more or less desirable? Explain.

CHAPTER 11CAPITAL BUDGETING DECISIONSA 25% increase in direct labor would cost $0.625 and $0.275 for model 2600 and model 5200 respectively, making model 5200 more desirable because it costs less than the other.ETHICS CHALLENGE

1. Would the company qualify for the loan?

RequirementPerformanceCriteria met?

Current Ratio> 2.01.77No

Quick Ratio> 1.00.73No

Times Interest Earned 42.50No

Based on the companys current performance, the company doesnt have the qualifications to avail the loan.

2. What advice would you give to Jurgen concerning the machine?

Classifying the equipment as inventory would increase the companys current ratio meeting one of the requirements of the loan. Although that the bank does not require audited financial statements, reclassifying the equipment as inventory even though that the company would still use it in their operations, would be unethical because it would misappropriate the assets which constitutes fraud. If the equipment is sold, it would also meet both current and quick ratio requirements. On the other hand, there would be no means to smooth the operations whenever there is a bottleneck. Whether the equipment is classified as inventory or the company sells it, the financial statements would still not meet the times interest earned criteria, so the company would still not avail the loan.

ANALYTICAL THINKING

Compute for the missing amount on the companys financial statements.

Let CA = Current Assets2.40=CA

$250,000

CA=$600,000

Let QA = Quick Assets1.12=QA

$250,000

QA=$280,000

Let I = Inventory$280,000 + I=$600,000

I=$600,000 280,000

I=$320,000

Let EAR = Ending Accounts Receivable15.0=$2,700,000

($160,000 + EAR) 2

15.0=$2,700,000

$80,000 + EAR/2

$1,200,000 + 7.5EAR=$2,700,000

7.5EAR=$2,700,000 1,200,000

7.5EAR=$1,500,000

EAR=$200,000

Let C = CashC + $200,000 + $320,000=$600,000

C=$600,000 - $200,000 - $320,000

C=$80,000

Let CGS = Cost of Goods Sold6.0=CGS

($280,000 + $320,000) 2

6.0=CGS

$300,000

CGS=$1,800,000

Let GM = Gross MarginGM=$2,700,000 - $1,800,000

GM=$900,000

Let B = Bonds PayableB 10%=$45,000

B=$450,000

Let E = Total Equity0.875=($250,000 + $450,000)

E

0.875E=$700,000

E=$800,000

Let A = Total AssetsA=$700,000 + $800,000

A=$1,500,000

Let PPE = Plant and Equipment, net$1,500,000=$600,000 + PPE

$1,500,000 - $600,000=PPE

PPE=$900,000

Let NI = Net Income14%=NI + ($45,000 60%)

($1,200,000 + $1,500,000) 2

14%=NI + $27,000

$1,350,000

$189,000=NI + $27,000

NI=$162,000

Let NIBT = Net Income Before TaxesNIBT (NIBT 40%)=$162,000

NIBT 0.4NIBT=$162,000

0.6NIBT=$162,000

NIBT=$270,000

Let IT = Income TaxesIT=$270,000 40%

IT=$108,000

Let NOI = Net Operating IncomeNOI - $45,000=$270,000

NOI=$270,000 + $45,000

NOI=$315,000

Let SAE = Selling and Administrative Expense$900,000 - SAE=$315,000

-SAE=$315,000 - $900,000

SAE=$585,000

Let NSO = Number of Shares Outstanding$4.05=$162,000

NSO

$4.05NSO=$162,000

NSO=40,000

Let CS = Common Stock

CS=40,000 $2.50

CS=$100,000

Let RE = Retained Earnings$100,000 + RE=$800,000

RE=$800,000 - $100,000

RE=$700,000

building your skills

Documents

total janitorial labor

number of janitorial

manufacturing overhead

place cost

total direct labor cost

number of workdays

plantwide overhead rate

actual direct labor