exercises module.ex02.04 basic cost flows: raw materials...

M2-1C h a p t e r 2 : P r o d u c t C o s t i n g : M a n u f a c t u r i n g P r o c e s s e s , C o s t T e r m i n o l o g y , a n d C o s t F l o w s

exercisesModule.ex02.01 Direct and indirect Labor

LO3 ComfortQuiltsmanufacturesdecorativequiltsand

incurredthefollowingwageandsalaryexpensesforthemostrecentyear.Machine operators $100,000Quality control supervisors 50,000Fabric cutters 25,000Factory janitor 8,000Company president 100,000

Required Determinetheamountofdirectlaborincurreddur-

ingtheyear.

Module.ex02.02 raw Material Used LO3 FunCentralproducesavarietyofpopularboard

games.Thecompanyhasdecidedtostrategicallypo-sitionitselfintheindustrywithuniquehandcraftedgameboardsandgamepieces.Thecompany’scon-trollerhasaccumulatedthefollowingdataregard-ingrawmaterialsusedinproduction.Pounds of laminated corrugated material purchased 15,000Board games produced 10,000Average pounds of laminated corrugated material per board 0.80Average cost per pound of laminated corrugated material $ 1.24Board games sold during the period 7,850

Required Assumingthecompanydidnothaveanylaminated

corrugatedboardatthebeginningoftheperiod,calculatetheamountofrawmaterialcostthatisincludedinproductcostfortheperiod.

Module.ex02.03 Manufacturing vs. Nonmanufacturing costs LO3

Thefollowingcostswereincurredbyamanufac-turerofbreakfastcereals.a. Heat,water,andpowerusedinthefactoryb. Costofrepairingmixingmachinesandovensc. Wheat,sweetener,andcoloringusedinproduc-

tiond. Leasepaymentsforsalespersons’companycarse. Waxpaperusedtopackagecerealsf. Cardboardboxesusedtoshippackagedcereals

togrocerystoresg. Overtimepaidtoofficeemployees

Required Indicatewhethereachoftheabovecostsisamanu-

facturingcostoranonmanufacturingcost.

Module.ex02.04 Basic cost Flows: raw Materials Used LO4

Atthebeginningofthemonth,ChateoInc.hadrawmaterialsof$54,000.Duringthemonth,thecompanypurchasedanadditional$38,000ofrawmaterials.Ifthecompanyused$63,000oftherawmaterialsforthemonth’sproductionneeds,whatisthecompany’sendingrawmaterialsinventorybalance?

Module.ex02.05 Basic cost Flows: raw Materials Used LO4

BMVAutomotiveManufacturershadthefollow-inginformationavailableforthemonthofJanuaryrelatedtotheircurrentproductionofsportscars. Beginning EndingRaw materials inventory $20,000 $37,000Work in process inventory 55,000 80,000Finished goods inventory 10,000 3,000

DuringthemonthofJanuary,BMVpurchased$140,000ofrawmaterials.HowmuchrawmaterialwasusedinJanuary?

Module.ex02.06 cost of Goods Manufactured LO4

Shelly’sBakeryhadthefollowinginformationavail-ableforthemonthofJanuary: Beginning EndingRaw materials inventory $30,000 $20,000Work in process inventory 20,000 15,000Finished goods inventory 15,000 20,000Raw materials purchased 80,000Direct labor (2,500 hrs @ $12) 30,000Overhead 60,000

Required Calculatethecostofgoodsmanufacturedforthe

month.

Module.ex02.07 cost of Goods sold LO4 BellComputers,whichproducesmade-to-orderlap-

tops,hadthefollowingsummarycostinformation:Direct materials used $18,000Direct labor 21,000Factory rent 5,000Equipment depreciation 7,500Marketing expense 12,000Administrative expense 16,000Shipping charges 4,500Number of units produced 20,000

Required Calculatethecostofgoodssoldif18,000unitsare

sold.

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CostsIncurredRaw materials purchased $100,000Direct labor 50,000Indirect labor 35,000Equipment maintenance 9,000Insurance on factory 11,000Rent on factory 40,000Equipment depreciation 20,000Factory supplies 12,000Advertising expenses 18,000Selling and administrative expenses 25,000Net revenue 350,000 Beginning EndingInventories Balance BalanceRaw materials $15,000 $18,000Work in process 20,000 29,000Finished goods 35,000 30,000

RequiredA.Calculatethecostofgoodsmanufactured.B. Calculatethecostofgoodssold.C. Calculategrossmarginandoperatingincome.

Module.Prob02.12 Decision Focus: service company LO3, 5

Mead&Lawson,LLP,isalocalCPAfirmthatpre-paresapproximately1,000taxreturnseachyearforitsclients.Themanagingpartnerofthefirmhasaskedforinformationconcerningthecostsofpre-paringtaxreturns.Hehasbeenprovidedwiththefollowingdata:Average wage per hour of tax preparation staff $35Average wage per hour of clerical staff $12Average number of hours per return (preparation) 10Average number of hours per return (clerical) 2

RequiredA.WhatisMead&Lawson’saveragedirectlabor

costofpreparingataxreturn?B. Thinkcreativelyaboutoptionsthatmightbe

usedtoreducethecostofpreparingtaxreturns.Whataretheimplicationsoftheoptionsyousuggest?

C. Mead&Lawsonhasanopportunitytopurchasetaxpreparationsoftwarefor$5,000peryear.Ifthesoftwareisused,thehoursneededtopre-parethereturnwoulddecreasetothreehoursperreturnandtheclericaltimewouldincreasetofourhoursbecauseofadditionalcomputeroperatortime.Howwouldthepurchaseaffectthecostoflaboronapertaxreturnbasis?

D.Doesitappeartobeagoodbusinessdecisiontopurchasethesoftware?Whatothercostsmustbeconsidered?

E. Whatarethequalitativeaspectsoftheprecedingdecision?

Module.ex02.08 cost of Goods sold and Merchandise Available for sale in a Merchandising company LO4

DashDepartmentStorefeatureswomen’sfashions.Atthebeginningoftheyear,thestorehad$514,000inmerchandise.Totalpurchasesfortheyearwere$463,000.

RequiredA.Calculatecostofgoodssoldfortheyear,assum-

ingtheyear-endinventorywas$488,000.B. Whatwasthetotalamountofmerchandiseavail-

ableforsaleduringtheyear?

Module.ex02.09 cost of Goods sold and sales for a Merchandising company LO4

Roy’sSelectionisalocalmen’sclothingstore.Roy’sbuysclothingandaccessoriesfrommanufacturersandmarksthemupby55percent.Roy’sbegantheyearwith$155,000worthofitems($240,250retailvalue)andbought$350,000(retailvalue$542,500)worthofitemsduringtheyear.Endinginventoryis$95,000(retailvalue$147,250).

RequiredA.CalculateRoy’scostofgoodssoldfortheyear.B. CalculateRoy’ssalesfortheyear.

Module.ex02.10 Product vs. Period cost LO5

ColumbiaBrick,amanufacturingcompany,prepaysitsinsurancecoverageforathree-yearperiod.Thepremiumforthethreeyearsis$21,000andispaidatthebeginningofthefirstyear.Three-fourthsofthepremiumrelatestofactoryoperationsandone-fourthrelatestosellingandadministrativeactivities.

RequiredA.Calculatetheamountofthepremiumthat

shouldberecordedasaproductcosteachyear.B. Calculatetheamountofthepremiumthat

shouldberecordedasaperiodcosteachyear.

ProBLeMsModule.Prob02.11 cost of Goods

Manufactured and cost of Goods sold LO3, 4, 5

TheaccountinginformationsystemofTextbookCo.reportedthefollowingcostandinventorydatafortheyear.


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Module.Prob02.13 Decision Focus: impact on Financial statements LO3, 4, 5

B&BManufacturingCo.wasorganizedonJanuary1ofthecurrentyear.Outsideinvestorswhofinancedthebusinessstipulatedthatthecompanymustshowaprofitbythesixthmonthorthefinancingwillbestopped.B&Breportedlossesforthefirstfourmonths,butexpectedtoshowaprofitinthefifth(thecurrent)month.Afterreviewingtheincomestatementforthefifthmonth(May),thepresident,Craig,wasdisappointedwiththeperformanceandcalledanemployeemeeting.Atthemeeting,Craiginformedtheemployeesthatbasedontheperfor-manceforthefirstfivemonthsandinparticularthemonthofMay,hesawverylittlehopeofaprofitbythesixthmonth.Healsoinformedtheemployeesthattheyshouldpreparetoclosethebusiness.Afterthemeeting,thecontrollerquit,leavingyouinchargeoftheaccountingfunction.Thelatestfinan-cialinformationisasfollows:

B&BManufacturingCo.IncomeStatement

FortheMonthEndedMay31Sales $325,000Less: Raw materials purchased $140,000 Direct labor 75,000 Indirect labor 10,000 Utilities 25,000 Depreciation 30,000 Insurance 15,000 Rent 12,000 Selling & administrative 30,000 Advertising 25,000

362,000

Net loss $ (37,000)

Other Information May1 May31Inventory Balance BalanceRaw materials $10,000 $30,000Work in process 15,000 22,000Finished goods 50,000 70,000

Seventy-fivepercentofutilities,depreciation,insur-ance,andrentarerelatedtoproductionoperations,whereas25percentofthosecostsarerelatedtosellingandadministrativeactivities.

RequiredA.PreparetheincomestatementforMaybasedon

theinformationprovidedpreviously.(Includeastatementofcostofgoodsmanufacturedandastatementofcostofgoodssold.)

B. Doyouagreewiththepresident’sassessmentofthesituation?Whyorwhynot?

C. Howwillyouexplaintotheinvestorswhyyourincomestatementisdifferentfromtheonepre-paredbythecontroller?

Module.Prob02.14 Basic cost Flows LO4, 5 HomeCabinetsmanufacturesandsellscustom-

orderedkitchenandbathroomcabinets.Thecom-panysellsprimarilytobuildingcontractorsbutocca-sionallydealsdirectlywithhomeowners.Followingisasummaryofinventoryandcostinformationfortheyear: Beginning Ending Balance BalanceRaw materials inventory $10,000 $15,000Work in process inventory 15,000 12,000Finished goods inventory 30,000 32,000

Duringtheyear,rawmaterialpurchasestotaled$350,000.HomeCabinetsincurred$200,000inlaborcostsinthefactoryand$175,000inmanufacturingoverheadfortheyear.

RequiredA.Calculatetheamountofdirectmaterialstrans-

ferredtoworkinprocessduringtheyear.B. Calculatetotalmanufacturingcostsfortheyear.C. Calculatetotalcostofgoodsmanufacturedfor

theyear.D.Calculatecostofgoodssoldfortheyear.

Module.Prob02.15 Basic cost Flows, income statement LO4, 5

Businessmanagersfrequentlyoperateinaworldwheredataarenotreadilyavailable.Twoindepen-dentsituationsfollow: Company1 Company2Direct materials used $10,000 $20,000Direct labor 5,000 13,000Manufacturing overhead 12,000 ?

Total manufacturing costs ? 35,000Beginning work in process ? 15,000Ending work in process 6,000 17,500

Cost of goods manufactured $23,000 ?

Sales $35,000 $50,000

Beginning finished goods 10,000 ?inventoryCost of goods manufactured ? ?

Goods available for sale ? ?Ending finished goods 12,000 15,000inventoryCost of goods sold ? 26,000

Gross margin ? ?Selling and administrative 9,500 ?expenses

Net income $ ? $17,000

RequiredA.Basedontheinformationgivenabove,recon-

structtheaccountingdataforeachcompany.B. Prepareanincomestatementforeachcompany.


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Module.Prob02.16 Basic cost Flows, income statement LO4, 5

VenusCorporation’saccountingmanagerrecentlyleftthecompanywithoutcompletingthecompany’sscheduleofcostofgoodsmanufactured.Thecom-pany’spresidentisunsurewhattodo.Heisunabletocompletethescheduleandhasturnedtoyouforhelp.

VenusCorporationScheduleofCostofGoodsManufacturedFortheMonthEndedDecember31,2009

Direct Materials: Beginning raw materials $ 16,000 Raw material purchases ?

Raw materials available 164,000 Ending raw materials ?

Raw materials used in production $154,500Direct Labor ?Manufacturing Overhead: Indirect labor $ ? Glue and fasteners 1,080 Equipment depreciation 11,210 Factory depreciation 4,300 Factory insurance 2,420 Property taxes 3,600 Utilities 2,100

Total manufacturing overhead 52,010

Total manufacturing costs $269,760

Add: Beginning work in process ?

$288,590Deduct: Ending work in process 12,940

Cost of goods manufactured $ ?

Beginning EndingInventories Balance BalanceRaw materials $ 16,000 $ ?Work in process 12,940Finished goods 23,000 17,830

RequiredA.Supplythemissingdata.B. Prepareanincomestatementforthemonth.

Salestotaled$415,000forDecember,andsellingandadministrativeexpenseswere$31,900.

Module.Prob02.17 cost Flows and Financial statements LO4, 5

NewRiverComputerCompanybeganmanufac-turingpersonalcomputersforsmallbusinessesatthebeginningof2009.Duringtheyear,NewRiverpurchased30,000mousepadswiththecompany’snameandlogoatacostof$2.50each.Themarket-ingmanagerused2,500ofthepadsasanadvertis-inggimmickatalocaltradeshow,and25,000ofthepadswerepackagedwithcomputersthatweremanufacturedduring2009.Eightypercentofthecomputerswerefinishedduringtheyear;ofthatamount,90percentweresold.

RequiredA.Determinethecostofthemousepadsthat

wouldbeincludedinthefollowingaccountsasofDecember31,2009:

a. Rawmaterials b. Workinprocess c. Finishedgoods d. Costofgoodssold e. AdvertisingexpenseB. Onwhichbasicfinancialstatementdotheac-

countsinquestionAappear?Whydoesitmatteronwhichbasicfinancialstatementtheamountsassociatedwithpurchasingthecomputermousepadsappear?


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M3-1C h a p t e r 3 : C o s t B e h a v i o r

exercisesModule.ex03.01 Mixed costs and the cost

equation LO1 CarlaJanesandAssociatesincurredtotalcostsof

$10,000toproduce500custommirrors.Atotalof550hourswererequiredfortheproductionofthemir-rors.Directlaborisvariableandcosts$10perhour.

Required HowmuchfixedcostdidCarlaJanesandAssociates

incur?

Module.ex03.02 cost Behavior: step costs LO1

SaraOuellettehasleasedanewautomobileunderaspecialleaseplan.Ifshedrivesthecar1,000milesorlessduringaone-monthperiod,theleasepaymentis$250.Ifthemileagerangesbetween1,001and1,500miles,theleasepaymentbecomes$300.Ifthemileagerangesbetween1,501and2,000miles,theleasepaymentrisesto$350.

RequiredA.Whattypeofcostisthelease?B. IfSaraonlydrivesthecarbetween1,200and

1,400milespermonth,thenwhattypeofcostdoestheleaseeffectivelybecome?

Module.ex03.03 Fixed and Variable cost Behavior LO1

Killy’sBasketshasthefollowingcurrentyearcosts:Variable costs $6 per unitFixed costs $7,000

KillyandakeysupplierhaveenteredintoanarrangementthatwillresultinaperunitdecreaseinKilly’svariablecostof$0.50nextyear.Rentalspacewillalsobereduced,therebydecreasingfixedcostsby10percent.

RequiredA.Ifthecompanymakesthesechanges,whatisthe

newcostequation?B. Giventhenewcostequation,determineestimated

totalcostsifproductionremainsat12,000units.

Module.ex03.04 Mixed costs Using High/Low Method LO2

PGPhonesaccumulatedthefollowingproductionandoverheadcostdataforthepastfivemonthsrelatedtoitsproductionofcellphones. Production(cellphones) OverheadCostJanuary 13,600 $34,500February 11,500 29,500March 12,750 30,100April 14,300 35,900May 13,250 32,650

RequiredA.Usethehigh/lowmethodtocalculatethevari-

ablecostperunitandfixedcostsforPGPhones.B. Whatareestimatedtotalcostsforproductionof

13,000cellphones?

Module.ex03.05 calculate Variable cost Using High/Low Method LO2

Delia,Inc.,ispreparingabudgetfornextyearandrequiresabreakdownofthecostofsteamusedinitsfactoryintofixedandvariablecomponents.Thefollowingdataonthecostofsteamusedanddirectlaborhoursworkedareavailableforthelastsixmonths: CostofSteam DirectLaborHoursJuly $ 15,850 3,000August 13,400 2,050September 16,370 2,900October 19,800 3,650November 17,600 2,670December 18,500 2,650

$101,520 16,920

RequiredA.Usethehigh/lowmethodtocalculatetheesti-

matedvariablecostofsteamperdirectlaborhour.

B. Prepareagraphofthecostofsteamandthedirectlaborhours.Showlaborhoursonthex-axisandcostsonthey-axis.Whatcanyouobservefromthegraphyouprepared?(Hint:Settheminimumy-axisvalueto$11,000.)

Module.ex03.06 impact of income Taxes LO4

BarnettCorporationanticipatesnetincomeof$1,200,000thisyear.Thecompanyisconsideringsigninganequipmentleasethatwouldresultina$175,000deductibleexpensethisyear.Thecom-pany’staxrateis35percent.

RequiredA.Whatarethetaxexpenseandnetincomeafter

taxesfortheanticipatednetincomewithouttheleaseoftheequipment?

B. Whatarethetaxexpenseandnetincomeaftertaxesiftheequipmentisleased?

Module.ex03.07 Variable costing: calculation of Unit Variable cost LO4, 5

YankeeDoodleDandyCandyCompanymanufac-turesasingleproduct,anawesomechocolatebar.Lastyear,thecompanyproduced4,000barsandsold3,500ofthem.Theyhadnocandybarsatthebegin-ningoftheyear.Thecompanyhasthefollowingcosts:

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Module.ex03.10 Absorption costing: calculation of Net income LO5

RefertothedatainExercise9.

Required CalculateBostockBoutique’snetincome,assuming

thatthecompanyusesabsorptioncosting.

Module.ex03.11 Absorption vs. Variable costing: calculation of Net income LO5, 6

SimmonsProductshasthefollowingcostinforma-tionavailablefor2010:Direct materials $4.00 per unitDirect labor $3.00 per unitVariable manufacturing overhead $2.00 per unitVariable S&A costs $1.00 per unitFixed manufacturing overhead $25,000Fixed S&A costs $10,000

During2009,Simmonsproduced5,000units,outofwhich4,600unitsweresoldfor$30each.

RequiredA.CalculateSimmons’snetincome,assumingthe

companyusesvariablecosting.B. CalculateSimmons’snetincome,assumingthe

companyusesabsorptioncosting.

Module.ex03.12 Variable costing and Absorption costing: calculation of Net income LO7, 8

GrahamWarnerstartedWarner’sWatchesfouryearsago.Hisbusinesshasgrownhandsomely,andhenowproducesandsellsthousandsofwatcheseachyear.Selectedoperationalandfinancialdataareshownbelow.Units in beginning inventory 0Units produced 25,000Units sold 20,000Sellingpriceperunit $ 100Variablecostsperunit:Direct materials $ 10.00Direct labor 30.00Manufacturing overhead 4.00Selling and administrative 1.00Fixedcostsintotal:Manufacturing overhead $400,000Selling and administrative $300,000

RequiredA.CalculateWarner’sWatches’netincomeusing

variablecosting.B. CalculateWarner’sWatches’netincomeusing

absorptioncosting.

Variablecostsperunit:Production $ 4.00Selling and administrative $ 1.00Fixedcostsintotal:Production $12,000Selling and administrative $ 8,000

Required Calculatetheunitproductcost,assumingthatthe

companyusesvariablecosting.

Module.ex03.08 Absorption costing: calculation of Unit Variable cost LO5

LuLu’sLocketsmanufacturesasingleproduct,adia-mondlocket.Lastyear,thecompanyproduced4,000locketsandsold3,500ofthem.Theyhadnolocketsatthebeginningoftheyear.Thecompanyhasthefollowingcosts:Variablecostsperunit:Production $ 4.00Selling and administrative $ 1.00Fixedcostsintotal:Production $12,000Selling and administrative $ 8,000

Required Calculatetheunitproductcost,assumingthatthe

companyusesabsorptioncosting.

Module.ex03.09 Variable costing: calculation of Net income LO5

KristiBostockstartedBostockBoutiquethreeyearsago.Herbusinesshasgrownhandsomelyandshenowproducesandsellsthousandsofitemseachyear.Selectedoperationalandfinancialdataareshownbelow:Units in beginning inventory 0Units produced 20,000Units sold 19,000Sellingpriceperunit $ 100Variablecostsperunit:Direct materials $ 12.00Direct labor 25.00Manufacturing overhead 3.00Selling and administrative 2.00Fixedcostsintotal:Manufacturing overhead $500,000Selling and administrative $600,000

Required CalculateBostockBoutique’snetincome,assuming

thatthecompanyusesvariablecosting.


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Gumby’sGumproduceslargeamountsofgumeachyear.Thisyear,Gumby’sproduced45,000packsofgumbutonlysold42,000ofthepacks.Eachpacksellsfor$1.50.Selectedoperationalandfinancialdataareshownbelow.Variablecostsperunit:Production $ 0.50S&A 0.10Fixedcostsintotal:Production $6,000S&A $3,000

RequiredA.CalculateGumby’snetincomeusingvariablecost-

ing.B. Willincomebehigherorlowerifcalculatedusing

absorptioncosting?C. Byhowmuch?


EntelCorporationcreatesanaccountingcomputerprogram.Thisyear,EntelCorporationproduced20,000unitsoftheirprogramandsold22,000units.Eachunitsellsfor$250.Selectedoperationalandfinancialdataareshownbelow.Variablecostsperunit:Direct materials $ 15.00Direct labor 40.00Manufacturing overhead 5.00Selling and administrative 2.00Fixedcostsperunit:Manufacturing overhead $200,000Selling and administrative $150,000

RequiredA.CalculateEntel’snetincomeusingabsorption

costing.B. Willincomebehigherorlowerifcalculated

usingvariablecosting?C. Byhowmuch?

Module.ex03.15 Absorption vs. Variable costing LO4, 5

McIntyreManufacturingproducesasingleproduct.Lastyear,thecompanyproduced20,000units,outofwhich18,000weresold.Therewerenounitsinbeginninginventory.Thecompanyhadthefollow-ingcosts:

Variablecostsperunit:Production $ 10.00S&A $ 4.00Fixedcosts(total):Production $40,000S&A $20,000

RequiredA.CalculateMcIntyre’stotalproductcost,assuming

thecompanyusesvariablecosting.B. CalculateMcIntyre’stotalproductcost,assuming

thecompanyusesabsorptioncosting.C. CalculateMcIntyre’stotalperiodcost,assuming

thecompanyusesvariablecosting.D.CalculateMcIntyre’stotalperiodcost,assuming

thecompanyusesabsorptioncosting.E. Explainthedifferencesinproductandperiod

costsbetweenthetwocostingmethods.

Module.ex03.16 Absorption vs. Variable costing: Benefits and calculation of Net income LO5, 6

HammondTireManufacturingproducestrucktires.Currentmarketconditionsindicateasignifi-cantincreaseindemandin2009fortheirtires.Inanticipationofthatincrease,theCEOhasorderedtheproductionplantstoincreaseproductionby25percentin2008.Sincesalesareprojectedtore-mainstablein2008,thatwillresultina25percentincreaseininventorylevelsbytheendof2008.

Required Discusstheimpactonoperatingincomein2008

usingvariableandabsorptioncosting.Whatcausesthedifference?HammondTireisrequiredtoprovidethebankwithfinancialstatementsattheendofeachyear.Whatdoyouthinkthebankwillthinkofthe2008incomestatement?Ifthemarketprojectionsprevailandsalesincreaseby25percentin2009,whatwillbetheimpactonthe2009incomestatementusingbothcostingmethods?

proBLeMsModule.prob03.17 Basic cost Behavior,

High/Low Method LO1, 2 SimonandGarfunkeloperateseparate,butrelated,

businessesinthesametown.Thetwohavebeende-batingwhichofthemhastheleastamountoffixedcosts.Simon,becausehehasalwayscomefirst,be-lieveshisbusinesshaslowerfixedcoststhanGarfun-kel’sbusiness.Ofcourse,Garfunkeldisagrees,sayingthathisbusinesshaslowerfixedcosts.Thetwohaveaccumulatedthefollowingactivityandcostdataandhaveaskedthatyouhelpthemresolvetheirdebate.


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Simon’s Business Data Units IndirectProduced Utilities Rent Labor 1,000 $10,000 $15,000 $13,000 1,500 12,500 15,000 15,600

Garfunkel’s Business Data Units Maintenance IndirectProduced Expense Rent Labor 2,000 $24,250 $21,000 $22,000 8,000 66,250 21,000 88,000

RequiredA.ClassifyeachofSimon’sandGarfunkel’sexpenses

asafixed,variable,ormixedcost.B. Calculatethetotalcostformulaforeachbusiness.

Whichbusinesshaslowerfixedcosts?C. IfSimonproduces1,300units,whatwouldhis

totalcostsbe?D.IfGarfunkelproduces9,000units,whatwouldhis

totalcostsbe?

Module.prob03.18 regression Analysis LO1, 2

SameDayDeliverywantstodeterminethecostbehaviorpatternofmaintenancecostsforitsdeliv-eryvehicles.Thecompanyhasdecidedtouselinearregressiontoexaminethecosts.Theprioryear’sdataregardingmaintenancehoursandcostsareasfollows: HoursofActivity MaintenanceCostsJanuary 480 $4,200February 320 3,000March 400 3,600April 300 2,820May 500 4,350June 310 2,960July 320 3,030August 520 4,470September 490 4,260October 470 4,050November 350 3,300December 340 3,160

RequiredA.Performaregressionanalysisontheabovedata.

Whatmaintenancecostsshouldbebudgetedforamonthinwhich420maintenancehourswillbeworked?

B. Whatisthepercentageofthetotalvariancethatcanbeexplainedbyyouranalysis?

C. Usethehigh/lowmethodtoestimateacostfor-mulaforSameDay.Howsimilarisyourhigh/lowsolutiontotheregressionsolution?

Module.prob03.19 regression Analysis LO1, 2

PineViewHospitalwantstodeterminethecostbehaviorpatternofmaintenancecostsforitsX-ray

machines.Thehospitalhasdecidedtouselinearregressiontoexaminethecosts.Theprioryear’sdataregardingmaintenancehoursandcostsareasfollows: HoursofActivity MaintenanceCostsJanuary 500 $3,950February 450 3,800March 300 3,220April 375 3,380May 425 3,700June 520 4,000July 410 3,650August 380 3,400September 440 3,780October 390 3,470November 400 3,590December 330 3,310

RequiredA.Performaregressionanalysisontheabovedata.

Whatmaintenancecostsshouldbebudgetedforamonthinwhich430maintenancehourswillbeworked?

B. Whatisthepercentageofthetotalvariancethatcanbeexplainedbyyouranalysis?

C. Usethehigh/lowmethodtoestimateacostfor-mulaforPineView.Howsimilarisyourhigh/lowsolutiontotheregressionsolution?

Module.prob03.20 regression Analysis: impact of outliers LO1, 2

ChrisGillfoundedGill’sGrillover20yearsago.ThebusinesshasgrownsomuchandbeensosuccessfulthatChrisisnowconsideringsellingfranchises.Chrisknowsthatpotentialfranchiseeswillwantaccesstocertainoperationaldata.Gill’sGrillisprobablybestknownforitsincredible“potatoflats,”afrenchfry-likeitemservedwithaspecialsecretsauce.Chrisisconcernedthatsomeofthepotatoflatsdataareunusualandoutoftheordinary.Thefollowingproductiondatarelatedto“potatoflats”havebeencompiled. Pounds Food ofPotatoes PreparationCostsJanuary 20,000 $17,000February 25,000 11,000March 27,000 27,000April 22,000 18,000May 24,000 30,000June 30,000 24,000July 22,000 18,000August 23,000 18,500September 34,000 26,000RegressionOutputCoefficient of intercept 4,104.372R square 0.244367X coefficient 0.672073


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RequiredA.ShouldChrisremovesomeofthedata?Inother

words,areanyofthemonthsunusualrelativetotheothers?Ifso,identifylikelyoutliersfromthedataandstatereasonswhyyouwouldremovethem.

B. Doyouthinkremovingthedatapointswouldchangetheregressionoutput?Performaregres-sionanalysistofindoutthecorrectanswer.

Module.prob03.21 cost Behavior, High/Low Method LO1, 2

UllrichFramingiswellknownforthequalityofitspic-tureframing.LucindaUllrich,thecompany’spresident,believesthatthelinearfeetofframingusedisthebestpredictorofframingcostsforhercompany.Sheaskedherassistanttoaccumulatethefollowingdata: LinearFeet Number Framing ofFraming ofMats CostsJanuary 20,000 7,100 $17,000February 25,000 8,120 19,500March 27,000 8,500 21,000April 22,000 8,400 18,000May 24,000 8,300 19,000June 30,000 10,600 24,000

RequiredA.Usethehigh/lowmethodtodevelopatotalcost

formulaforUllrichFraming.Youwillneedtoperformtwoseparatecalculations,oneforfeetofframingandonefornumberofmats.

B. ComparethecostformulasdevelopedinquestionA.Whyaretheredifferences?

C. OnwhatbasisshouldUllrichselectaformulatopredictframingcosts?WouldyourecommendthatUllrichrelyontheresultsofthehigh/lowmethod?

Module.prob03.22 relevant vs. irrelevant costs LO1, 2

AstridEnterpriseshasfivestores,threeofwhichareveryprofitableandtwoofwhicharelosingmoney.Thecompany’spresident,AstridMoore,istryingtodecidewhethertocloseoneorbothofthestores.Thefollowingincomestatementsarepresentedforthetwostores: StoreOne StoreTwo (inlocalmall) (instripmall)Sales $1,250,000 Sales $1,000,000 Cost of sales 800,000 Cost of sales 700,000

Gross margin $ 450,000 Gross margin $ 300,000 Rent 250,000 Rent 200,000 Advertising 50,000 Advertising 50,000 Corporate expense 75,000 Corporate expense 75,000 Salaries 125,000 Salaries 90,000

Net income $ (50,000) Net income $ (115,000)

Ifthetwostoresareclosed,thecorporateexpensewillbeallocatedtotheotherthreestores,andthesalariesforthestoremanagerswillbeeliminated.Theadvertisingexpenseisspecifictoeachstore,sothatexpensewouldbeeliminatedaswell.TherentforStoreOneis$125,000peryearplus10percentofthesalesdollars.Thelease,signedsixmonthsago,isforfiveyearsandcannotbecanceled.TherentforStoreTwois$16,666.67permonthandcanbecanceledwith30-daysnotice.

RequiredA.Whatitemsoneachincomestatementarerel-

evanttothedecisiontocloseeachstore?B. Whatwouldyourecommendthatmanagement

do?Why?

Module.prob03.23 Absorption vs. Variable costing: Benefits & calculation of Net income LO4, 5, 6

OliverInc.producesanoakrockingchairthatisdesignedtoeasebackproblems.Thechairssellfor$200each.Resultsfromlastyear’soperationsareasfollows:Inventoryandproductiondata:Units in beginning inventory 0Units produced during the year 20,000Units sold during the year 18,000Variablecosts(unit):Direct materials $ 70.00Direct labor 20.00Variable manufacturing overhead 15.00Variable selling and administrative 10.00Fixedcosts:Fixed manufacturing overhead $500,000Fixed selling and administrative $530,000

RequiredA.Computetheunitproductcostforonerocking

chair,assumingthecompanyusesvariablecost-ing.

B. Prepareanincomestatementbasedonvariablecosting.

C. Computetheunitproductcostforonerockingchair,assumingthecompanyusesabsorptioncosting.

D.Prepareanincomestatementbasedonabsorp-tioncosting.

E. Comparethetwoincomestatements.Whatcausesthenetincometodiffer?

F. Ifthecompanyproduced18,000chairsandsold20,000chairs(assumethattheadditional2,000chairswereinthebeginninginventory),whatwouldbetheimpactonthetwoincomestate-ments?Inotherwords,whichmethodprovidesthehighernetincome?


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exercises

Module.ex04.01 Direct Labor vs. indirect Labor LO2, 3

JimWilsonisatypicalmanufacturingemployeewhocommonlyworks40hoursperweekandispaid$14perhour.Duringthelastpayperiod,Jimperformedthefollowingactivities:Product assembly 29.5 hoursCleaning his work area 5.0Attending a workplace safety meeting 2.5Talking with a supervisor about football 1.0Giving a tour of the plant to schoolchildren 2.0

Required Jim’semployerusesjobcostingtomeasureandtrack

productioncosts.Thecompanyisveryconcernedwithmaintainingaccuratecostdata.Determinetheamountoflaborcoststhatshouldbeallocatedtodirectlaborandindirectlaborasmanufacturingoverhead.

Module.ex04.02 identification of cost Drivers LO3

Overheadcostsarerarelydirectlylinkedtotheproductionofaspecificproductorgroupofprod-ucts.Generally,overheadcostsareonlyindirectlylinkedtoproduction,andsotheymustbeallocated.Understandingtherelationshipbetweenoverheadcostsandproductionactivitiesischallengingformostbusinesses.Considerthefollowing:a. Architecturaldesignfirm:designerhours,

___________b. Catererandpartyconsultancyfirm:numberof

partyguests,___________c. Furnituremanufacturer:directlaborhours,

___________d. Printerandcopyshop:sizeofprintorcopyjob,

___________e. Textbookbinder:machinehours,___________f. Automobilerepairshop:technicianlaborhours,

___________g. Winemaker:poundsofgrapesused,___________

Required Identifyoneadditionalpotentialcostdriverthat

eachoftheorganizationsin“a”through“g”couldusetoallocateoverheadtoitsproductsorservices.

Module.ex04.03 Predetermined Overhead rate and Applied Overhead LO4

Bostock’sBuildingBlocksusesnumberofminutesinitsfiringoventoallocateoverheadcoststoprod-ucts.Inatypicalmonth,5,000firingminutesareexpected,andaveragemonthlyoverheadcostsare$3,500.DuringJanuary,4,800firingminuteswereusedandtotaloverheadcostswere$2,750.

Required ComputeBostock’spredeterminedoverheadrate

andtheamountofappliedoverheadforJanuary.

Module.ex04.04 Applied Overhead and Predetermined Overhead rate LO4, 5

EnriqueMaresEnterprisesappliesoverheadusingdirectlaborhours.Thefollowingdataareavailablefortheyear:Expected direct labor hours 600,000Actual direct labor hours 545,000Overhead applied $2,937,550Actual overhead $2,800,000

Required WhatpredeterminedoverheadratedidEnrique

Maresuse?

Module.ex04.05 Predetermined Overhead rate and Applied Overhead LO4, 5

SpeedyShoeFactorymanufacturesrunningshoes.Overheadisappliedtotheshoesbasedondirectlaborhours.Lastyear,totaloverheadcostswereex-pectedtobe$72,000.Actualoverheadcoststotaled$80,000for8,000actualhours.Attheendoftheyear,overheadwasunderappliedby$5,000.

RequiredA.Calculatethepredeterminedoverheadrate.B. Howmuchoverheadshouldbeappliedtoajob

thatwascompletedinthreedirectlaborhours?

Module.ex04.06 Process costing: equivalent Units Using FiFO Method LO6, 7

O’CallahanSnackCompanyproducesgourmetchipsandothersnackfoods.Oneofthecompany’smostpopularsnacksisacombinationofseveralvarietiesoforganicpotatoes.Thesnackfoodgoesthroughseveralprocessesincludingapotatopeelingopera-tion.CostsforoperationsduringAprilareshownbelow.(Note:Productioncostsincludedirectmateri-alsandconversioncostsforthedepartment.) Number Production ofBags CostsBeginning work in process (10% complete) 3,000 $10,000Current period production 20,000 70,240Ending work in process(85% complete) 5,000

O’CallahanSnackCompanyusesthefirst-in,first-outmethodofcomputingequivalentunitsandassign-ingproductcosts.

RequiredA.HowmanyequivalentunitsdidO’Callahancom-

pleteduringApril?B. Calculatethecostoftheendingworkinprocess

inventory.


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Module.ex04.07 Process costing: equivalent Units Using Weighted Average Method LO6, 7

UsingtheinformationprovidedinexerciseModule.Ex04.06,ifO’CallahanSnackCompanyusedtheweightedaveragemethodofprocesscosting,howwouldyouranswerstothefollowingtwoquestionschange?

RequiredA.HowmanyequivalentunitsdidO’Callahancom-

pleteduringApril?B. Calculatethecostoftheendingworkinprocess

inventory.

Module.ex04.08 Process costing: equivalent Units Using Weighted Average Method LO6, 7

MikeAliscadiswidelyknownasanexceptionalwinemaker.Hehasdevelopedaproductionprocessthathasseveraldistinctprocessesincluding“speedcrushing,”whichinvolvesthebreakingdownofthegrapes’skinandpulverizingofthegrapefruittoproduceajuice-likeproduct.Thefollowingdatare-latetoAliscad’scrushingprocessforOctober.(Note:Productioncostsincludedirectmaterialandconver-sioncostsforthedepartment.) Pounds Production ofGrapes CostsBeginning work in process(15% complete) 2,000 $ 8,040Current period production 11,000 22,960Ending work in process(60% complete) 3,000

Aliscadusestheweightedaveragemethodofcom-putingequivalentunitsandassigningproductcosts.

Required Howmanyequivalentunitswereproducedduring

October?

Module.ex04.09 Process costing: cost per equivalent Unit Using Weighted Average LO6, 7

ArnspargerOutdoorsproducesclimbinggearspeciallydesignedtoweatherthetoughestcondi-tions.Arnspargerhasdevelopedandpatentedaprocessthatleadstoasubstantiallystrongerropethanitscompetitors.Thestrengtheningprocessiscomplicatedandhasincreasedthetimerequiredtoproducerope,butArnspargerbelievestheaddi-tionaltimeisworththeeffort.ThefollowingdatarelatetotheprocessforthemonthofJune.(Note:Productioncostsincludedirectmaterialsandconver-sioncostsforthedepartment.)

Feet Production ofRope CostsBeginning work in process (10% complete) 4,000 $ 4,000Current period production 13,000 26,000Ending work in process (50% complete) 4,000

ArnspargerOutdoorsusestheweightedaveragemethodofcomputingequivalentunitsandassign-ingproductcosts.

RequiredA.Calculatethenumberofequivalentunitspro-

ducedduringJune.B. Whatistheproductioncostperequivalentunit?

Module.ex04.10 service Department cost Allocation LO8

KenanMortgageCompanyhastwoservicedepart-ments(humanresourcesandaccounting)andtwoproductiondepartments(commerciallendingandconsumerlending)thatrelatetoitsmortgagewrit-ingandservicingbusiness.Thefollowingdataareavailablefromlastyear. Service Production

Departments Departments HR AccountingCommercialConsumerDepartmentcosts $300,000 $240,000 $800,000 $600,000Number ofemployees 5 3 19 11Number of transactions 800 200 1,200 2,000

ThecostsoftheHRdepartmentareallocatedonthebasisofthenumberofemployeesineachdepart-ment,whilethecostsoftheaccountingdepartmentareallocatedonthebasisofthenumberoffinancialtransactionsprocessedineachdepartment.

RequiredA.AssumingthatKenanMortgageCompanyallo-

catesservicedepartmentcostsbythedirectmethod,howmuchoverheadwouldbeallocatedfromeachservicedepartmenttoeachproducingdepartment?

B. AssumingthatKenanMortgageCompanyallocatesservicedepartmentcostsbythestep-downmethod,startingwiththeHRDepartment,howmuchoverheadwouldbeallocatedfromeachservicedepartmenttoeachproducingdepartment?


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Module.Prob04.11 Job costing LO1, 2, 3 TheOrvilleHabermanCompany,asmallmanufac-

turer,usesajobcostingsystemtomeasureandtrackproductcostsforitslineofspecialtyoutdoorcloth-ingandusesnormalcostingtoallocateoverheadcoststoitsproducts.Forthecomingyear,KristinGeorge,Haberman’scontroller,estimatestotaloverheadcoststobe$100,000.ProductionmanagerPortiaKablertoldKristinthatherbestestimatefortotalproductiontimefortheyearis20,000hours.Productiondataforthefirstquarteroftheyearisshownbelow: Parkas Shirts Pants ShoesDirect materials used $16,000 $12,000 $9,500 $11,500Direct labor cost 13,000 10,000 7,000 9,500Direct labor hours 1,500 1,250 850 950

RequiredA.CalculateHaberman’spredeterminedoverhead

ratebasedondirectlaborhours.B. Calculatetheoverheadcosttobeassignedto

parkas,shirts,pants,andshoes.C. Calculatethetotalmanufacturingcostofparkas,

shirts,pants,andshoes.D.Basedonyourknowledgeofcostingsystems

describedinthechapter,whichothermethod(s)mightHabermanconsidertomeasureandtrackthecostofitsproducts?Whywouldthecompanychoosetocontinueusingjobcostingasitcur-rentlydoes?

Module.Prob04.12 comprehensive Job costing LO2, 4, 5

MoodyBluesChocolateFactoryusesjobcostingtocostitsproducts.Initsfirstquarterofoperations,thecompanyincurredthefollowingmaterialandlaborcostsinmanufacturingabatchofitschocolatecandies.Thecompanyappliesoverheadtoproductsusingnormalcostingandusesmachinehoursasthecostdriver.Materials data: Direct material purchases $100,000 Direct materials used in production (cost) 85,000Labor data: Direct labor costs 60,000Manufacturing overhead data: Overhead application rate per machine hour 9.00 Machine hours used 10,000Inventory data: Transferred to finished goods 210,000 Cost of goods sold during quarter 190,000

RequiredA.Calculatethedirectmaterialsendinginventory.B. Calculatetheworkinprocessendinginventory.

C. Calculatethefinishedgoodsendinginventory.D.Attheendofthequarter,MoodyBlues’actual

manufacturingoverheadcoststotaled$80,000.Calculatetheover-orunderappliedoverheadfortheperiod.

Module.Prob04.13 comprehensive Job costing LO2, 4, 5

GordonHammockCompanyproducesavarietyofhammocksandotheroutdoorproducts.Thecompanyusesjobcostingandappliesoverheadtoworkinprocessusingapredeterminedoverheadrate,withdirectlaborhoursasthecostdriver.Atthebeginningoftheyear,thecompanyestimateditsoverheadforthenextyeartobe$66,000andestimatedthatitwouldincur4,800directlaborhours.Thecompanyhadnobeginninginventoriesofrawmaterials,WIP,orfinishedgoods,anditex-periencedthefollowingeventsduringtheyear:Purchased $100,000 of raw materialsDirect materials used in production amounted to $70,000Production employees worked 4,500 labor hoursProduction employees’ pay averaged $11 per hour$180,000 of completed products were transferred to finished goodsProducts costing $160,000 were sold

RequiredA.Calculatetheendingbalanceofdirectmaterials

inventory.B. Calculatetheendingbalanceofworkinprocess

inventory.C. Calculatetheendingbalanceoffinishedgoods

inventory.D.Attheendoftheyear,theGordonHammock

Companyhadincurredactualoverheadcostsof$65,000.Didthecompanyover-orunderapplyoverheadfortheyear?Isthecostofgoodssoldtoohighortoolow?

Module.Prob04.14 comprehensive Job costing LO2, 3, 4, 5

Geoff’sGolfClubsproducescustomgolfclubs,whicharesoldnationwide.Thecompanyaddsoverheadcoststojobsattherateof$8.00perdirectlaborhour.Itaccumulatesoverheadcostsinaseparatemanufacturingoverheadaccountandusesnormalcostingtoassignoverhead.Thefollowingdatapro-videdetailsofthecompany’sactivityandbalancesduringthelasthalfoftheyear: July1 December1Direct materials inventory $62,250 $63,750Work in process inventory 46,000 45,500Finished goods inventory 26,150 25,000Monthly production data: Direct materials purchased $157,000 Direct labor costs ($17/hr.) 272,000


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RequiredA.Calculatethecostofdirectmaterialsusedduring

theperiod.B. Calculatethecostofgoodsmanufacturedduring

theperiod.C. AttheendofDecember,Geoff’sfoundthatit

hadactuallyincurredoverheadcostsof$123,000.IfGeoff’sadjustsover-orunderappliedoverheadtocostofgoodssoldattheendoftheyear,whatisGeoff’scostofgoodssoldafteradjustment?

Module.Prob04.15 Plantwide vs. Departmental Overhead rates LO3, 4

MollieSchluestartedMollie’sMagnetssevenyearsago.Thissmallcompanycreatesspecial-ordermagnetswithvaryinglogosanddesigns,andfordif-ferentpurposes.Mollieestimatesheroverheadcoststobe$12,000permonth.Inaddition,sheexpectsemployeestowork2,000hours,andthereareusu-ally1,500machinehoursinagivenmonth.Mollie’sMagnetshastwodepartments.Theassemblyde-partmentgivesriseto1,800ofthelaborhours,andthefinishingdepartmentrequires1,200ofthema-chinehours.The$12,000inoverheadisallocatedasfollows:$9,000istracedtotheassemblydepartmentand$3,000istracedtothefinishingdepartment.DuringJanuary,thefollowingjobswerecompleted: Job101 Job102Direct materials used $1,100 $1,450Direct labor cost 2,300 1,250Direct labor hours 150 25Machine hours 25 230

RequiredA.Whatisthecompany’splantwidepredetermined

overheadrateusingdirectlaborhoursasthebase?

B. Whatisthecompany’splantwidepredeterminedoverheadrateusingmachinehoursasthebase?

C. Howmuchoverheadwouldbeappliedtoeachjobifdirectlaborhourswereusedasthecostdriverforoverhead?

D.Howmuchoverheadwouldbeappliedtoeachjobifmachinehourswereusedasthecostdriverforoverhead?

E. IfMollie’sMagnetsdecidedtousedepartmentoverheadrates,whatwouldtheoverheadratesbeforeachdepartment?Theassemblydepart-mentallocatesoverheadbasedondirectlaborhoursandthefinishingdepartmentallocatesoverheadbasedonmachinehours.

F. ExplainwhyitisimportantforMollie’scompanytousedepartmentalratesasopposedtoasingleplantwideratetoallocateoverheadcosts.

Module.Prob04.16 Process costing using the FiFO Method LO6, 7

Timmy’sT-Shirtsmanufacturestie-dyedt-shirtsforcollegesportingevents.Eachbatchofshirtsisidenticalandthecostsofabatcharedeterminedusingprocesscosting.ThefollowinginformationisrelatedtotheproductionprocessforthemonthofFebruary. Number Production ofShirts CostsBeginning work in process(25% complete) 20,000 $ 42,776Current period production 85,000 160,024Ending work in process(70% complete) 12,000

Timmy’sT-ShirtsusestheFIFOmethodofcomput-ingequivalentunitsandassigningproductcosts.Productioncostsincludebothrawmaterialandconversioncosts,whichareincurreduniformlyintheproductionprocess.

RequiredA.Howmanyt-shirtswerecompletedduring

February?B. Ofthet-shirtscompleted,howmanywere

startedandcompletedduringthemonth?C. Howmanyequivalentfinishedunitsdidthecom-

panycompleteinFebruary?D.Whatisthecostperequivalentunit?E. Calculatethecostoftheendingworkinprocess

inventoryandthecostofgoodsmanufacturedinFebruary.

Module.Prob04.17 Process costing Using the Weighted Average Method LO6, 7

HowwouldyouranswersinModule.Prob04.16changeifTimmy’susestheweightedaveragemethodofprocesscosting?

Module.Prob04.18 Process costing Using the FiFO Method LO6, 7

Riley’spapercompanymanufacturescomputerpaperforlaserprinters.Thefollowinginformationisrelatedtoproductioncostsincurredinthemanufac-turingprocessduringthemonthofMarch. Reamsof Production Paper CostsBeginning work in process(40% complete) 35,000 $ 89,170Current period production 93,000 394,830Ending work in process(65% complete) 20,000

ThecompanyusestheFIFOmethodofcomput-ingequivalentunitsandassigningproductcosts.Productioncostsincludebothrawmaterialsand


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conversioncoststhatareincurreduniformlyintheproductionprocess.

RequiredA.Howmanyreamsofpaperwerecompletedin

March?B. OfthereamsofpapercompletedinMarch,how

manywerestartedandcompletedduringthemonth?

C. Howmanyequivalentfinishedunitsdidthecom-panycompleteinMarch?

D.Whatisthecostperequivalentunit?E. Calculatethecostoftheendingworkinprocess

inventoryandthecostofgoodsmanufacturedinMarch.

Module.Prob04.19 Process costing Using the Weighted Average Method LO7

HowwouldyouranswersinModule.Prob04.18changeifRiley’susestheweightedaveragemethodofprocesscosting?


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ExErcisEs

Module.Ex05.01 ABc Overhead calculation: Traditional vs. ABc LO3

ThefollowingoverheadcostinformationisavailablefortheChristopherCorporationfortheprioryear: OverheadActivity AllocationBase CostPurchasing Numberofpurchaseorders $400,000Receiving Numberofshipmentsreceived 100,000Machinesetups Numberofsetups 400,000Qualitycontrol Numberofinspections 150,000

Duringtheyear,8,000purchaseorderswereissued;25,000shipmentswerereceived;4,000machinesetupsoccurred;and7,500inspectionswerecon-ducted.Employeesworkedatotalof10,000hoursonproduction.Thecorporatemanagersaretryingtodecidewhethertheyshoulduseatraditionaloverheadallocationmethodbasedondirectlaborhoursorswitchtoanactivity-basedcostingsystem.

RequiredA.Determinetheoverheadrateusingthetradi-

tionaloverheadallocationmethodbasedondirectlaborhours.

B. Determinetheoverheadrateforeachoftheactivitiesassumingthatactivity-basedcostingisused.

Module.Ex05.02 ABc Overhead calculation: Traditional vs. ABc LO3

ThefollowingoverheadcostinformationisavailablefortheBrightLCDCorporation,amanufacturerofcomputermonitors: OverheadActivity AllocationBase CostPurchasing Numberofpurchaseorders $400,000Receiving Numberofshipmentsofmaterial 100,000Machinesetups Numberofsetups 300,000Assembly Directlaborhours 125,000Qualitycontrol Numberofinspections 75,000

Duringtheyear,1,000purchaseorderswereissued;300shipmentsofmaterialwerereceived;600machinesetupsoccurred;and750inspectionswereconducted.Employeesworkedatotalof10,000directlaborhoursonassemblyofthemonitors.Thecorporatemanagersaretryingtodecidewhethertheyshoulduseatraditionaloverheadallocationmethodbasedondirectlabor(assembly)hours,orswitchtoanactivity-basedcostingsystem.Assumethatabatchof200monitorshasresultedinthefol-lowingcostactivity:

Purchaseorders 7Shipmentsofmaterialreceived 12Machinesetups 2Directlaborassemblyhours 50Inspections 3

A.Determinetheoverheadallocationforthebatchof200monitorsunderthetraditionaloverheadallocationbasedondirectlaborhours.

B. Determinetheoverheadallocationforthebatchunderactivity-basedcosting.

PrOBlEMs

Module.Prob05.03 Traditional vs. ABc LO2, 3, 4

ThefollowingcostinformationisavailableforSenkowskiLtd.: Volume OverheadActivity AllocationBase ofActivity CostPurchasing Purchaseorders 30,000 $150,000Receiving Shipmentsreceived 15,000 60,000Machinesetups Setups 2,500 200,000Qualitycontrol Inspections 18,000 90,000

Directmaterialsare$15perunitforluxuryhand-bagsand$11perunitfordeluxehandbags.Therewere12,500directlaborhours,eachofwhichwaschargedtoinventoryat$18perhour.

RequiredA.Managementistryingtodecidebetweenusing

thetraditionalallocationmethodbasedondirectlaborhoursoractivity-basedcosting.Calculatetheoverheadratesbasedoneachmethod.

B. Oneparticularbatchof40luxuryhandbagshadthefollowingspecifications:

Directlaborhours 8Purchaseorders 4Shipmentsreceived 3Setups 2Inspections 12

Calculatetheoverheadtobeallocatedtothebagsundertraditionalandactivity-basedcostingtechniques.

C. Whichcostingmethoddoyouthinkisbetterforthecompany?Why?


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Module.Prob05.04 Traditional vs. ABc: Advantages of ABc LO2, 3, 4

DavidMayes,Inc.,manufacturesplasticandceramicoutdoordinnerware.Thecompany’swesternplanthaschangedfromamanual-laboroperationtoarobotics-intensiveenvironment.Asaresult,manage-mentisconsideringmovingfromadirect-labor-basedoverheadratetoanactivity-basedcostingsystem.Thecontrollerhaschosenthefollowingactivitycostpoolsandcostdriversforfactoryoverhead: DriverOverheadCostInformation CostDriver ActivityPurchaseorders $200,000 Numberoforders 25,000Setupcosts 300,000 Numberofsetups 15,000Testingcosts 420,000 Numberoftests 16,000Machinemaintenance 800,000 Machinehours 50,000

RequiredA.Calculatetheoverheadrateforeachcostdriver.B. Anorderfor50ceramicdishsetshadthefollow-

ingrequirements:Numberofpurchaseorders 3Numberofsetups 20Numberofproducttests 7Machinehours 150

Howmuchoverheadshouldbeassignedtothisorder?

C. Wouldyouexpectthenewactivity-basedsystemtoallocateadifferentamountofoverhead?

D.Discusswhyusinganactivity-basedsystemcouldprovidebetterinformationtodecisionmakersregardingthesettingofsalesprices.WhatotheradvantagesmightDavidMayes,Inc.,realizefromthenewcostingsystem?

Module.Prob05.05 Decision Focus: Traditional vs. ABc LO2, 3, 4

Gramercy,Inc.,manufacturessailboatsandhastwomajorcategoriesofoverhead:materialshandlingandqualityinspection.Thecostsexpectedforthesecategoriesforthecomingyearareasfollows:Materialshandling(basedon500materialmoves) $100,000Qualityinspection(basedon200inspections) $300,000

Theplantcurrentlyappliesoverheadbasedondirectlaborhours.Theestimatedamountofdirectlaborhoursis50,000.PollyRichardson,theplantmanager,hasbeenaskedtosubmitabidandhasassembledthefollowingdataontheproposedjob:Directmaterials $3,700Directlabor(1,000hours) $17,000Overhead ?Numberofmaterialmoves 10Numberofinspections 5

Pollyhasbeentoldthatmanysimilarcompaniesuseanactivity-basedapproachtoassignoverheadtojobs.Beforesubmittingabid,Pollywantstoassesstheeffectsofthisalternativeapproach.

RequiredA.Calculatethetotalcostofthepotentialjobusing

traditionaloverheadapplication.B. Calculatethetotalcostofthejobusingactivity-

basedcostingwiththenewcostdriverstoallo-cateoverhead.

C. Discussthedifferenceinthecostscalculatedunderthetwooverheadallocationmethodsandwhatimpactthechangetoactivity-basedcostingmighthaveonthepricingdecision.

Module.Prob05.06 Decision Focus: ABc LO2, 3, 4

TheHITECCompanymanufacturesmultimediaequipmentdesignedtobesoldtouniversities.Thecompany’ssoutheasternplanthasundergoneproductionchangesthathaveresultedindecreasedusageofdirectlaborandincreasedusageofau-tomatedprocesses.Asaresult,managementnolongerbelievesthatitsoverheadallocationmethodisaccurateandisconsideringchangingfromatraditionaloverheadallocationtoanactivity-basedmethod.Thecontrollerhaschosenthefollowingactivitycentersandcostdriversforoverhead: DriverOverheadCostInformation CostDriver ActivityPurchaseorders $200,000 Numberoforders 25,000Setupcosts 300,000 Numberofsetups 15,000Testingcosts 420,000 Numberoftests 16,000Machinemaintenance 800,000 Machinehours 50,000

RequiredA.Calculatetheoverheadrateforeachcostdriver.B. Anorderfor1,000videoprojectorshadthefol-

lowingrequirements:Numberofpurchaseorders 3Numberofsetups 5Numberofproducttests 20Machinehours 1,500

Howmuchtotaloverheadshouldbeassignedtothisorder?

C. Whatcouldmanagementdotoreducetheoverheadcostsassignedtothesevideoprojec-tors?Whatwouldbetheimpactoncompanynetincomeofreducingoverheadassignedtothevideoprojectors?

Module.Prob05.07 The impact of ABc and JiT LO2, 4

PritchettEnterprisesmanufactureshikingandoutdoorequipment.Thecompany’splantinwest-ernColoradohasrecentlyseendramaticchangesinmanufacturingprocesses.Managementisconcerned


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thatthecurrentcostsystemnolongercapturestheimpactofthediversityofactivitiesinvolvedinitsproductionprocesses.Asaresult,managementisevaluatingwhetheractivity-basedcostingmayprovidemoreaccurateandmeaningfulcostdata.Theproductionenvironmentincludesthefollowingprimaryactivitiesandcostdrivers: DriverOverheadCostInformation CostDriver ActivityPurchaseorders $200,000 Numberoforders 10,000Receivingorders 25,000 Numberoforders 10,000Setupcosts 25,000 Numberofsetups 5,000Testingcosts 48,000 Numberoftests 6,000Machinemaintenance 350,000 Machinehours 10,000

Thecompanyhasdecidedtoimplementjust-in-timeinventorymanagementtechniques.UsingJITwillre-ducetheamountofinventoryonhandatanypointintimeandsaveapproximately$50,000annuallyoninventorycarryingcosts.Inaddition,therewillbe70percentfewerpurchaseordersforinventoryissued,buttwiceasmanysetupsforproductionruns.Thecompanywillalsobeabletoreceivea2percentdiscountonrawmaterialspurchasesbecauseofthelong-termnatureoftheorders.

RequiredA.Ifrawmaterialspurchasesare$1,000,000per

year(thatis,costbeforetheabovechangesareimplemented),whatquantitativeimpactwillthechangetoJIThaveontheoverallcostsforthecompany?

B. WhatqualitativefactorswillbeimpactedbythechangetoJIT?

C. DoesitappearthatthemovetoJITwillbepositiveornegativeforthecompany?Whyorwhynot?

Module.Prob05.08 ABc LO3 Thefollowingcostinformationisavailableforthe

StuartandHahnCorporation:Directmaterial $14perunitfordeluxepillows $10perunitforregularpillowsDirectlabor $20perhour(includingbenefits)

OverheadActivity AllocationBase CostPurchasing Numberofpurchaseorders $150,000Receiving Numberofshipmentsreceived 50,000Machinesetups Numberofsetups 250,000Qualitycontrol Numberofinspections 125,000

Duringtheyear,30,000purchaseorderswereissued;20,000shipmentswerereceived;machinesetupsnumbered2,500;and25,000inspectionswereconducted.

Acustomerhascontactedthecompanyrequest-ing comparative bids for an order of 100 deluxepillowsand100regularpillows.Thecompanyaddsa20percentmarkupondeluxepillowsand15per-centonregularpillowsforitsprofits.Thecompany’srecords indicate that the followingactivitieswouldberequiredtocompleteanorderof100deluxeandregularpillows: Regular DeluxeDirectlaborhours 7 10Purchaseorders 7 7Shipmentsreceived 10 10Setups 3 4Inspections 3 4

Required Computethebidsfordeluxeandregularpillowson

atotalorderbasis.

Module.Prob05.09 Traditional vs. ABc LO3, 4 Grandma’sRockingChairCompanyproduces

1,000unitseachoftheKennedyRockerandtheBentwoodRocker.Currently,thecompanyusesatraditionalcostsystem,butisconsideringanactivity-basedcostsystem.Thecompanyiscommit-tedtoproducingonlythehighest-qualitychairs.Consequently,themanagementgroupwantstoknowwhatthecostofinspectionwouldbeforbothproductsgiventhefollowingdata:Numberofinspectionsperunit: Kennedy 3 Bentwood 1Inspectioncost(intotal) $50,000Directlaborhours: Kennedy 3,000 Bentwood 2,000

RequiredA.Undertraditionalcosting,howmuchofthe

inspectioncostwouldbeallocatedtoKennedyRockersandBentwoodRockers,respectively?

B. Usingactivity-basedcosting,howmuchoftheinspectioncostwouldbeallocatedtoKennedyRockersandBentwoodRockers,respectively?

C. Discusswhatcausedthedifference.Wouldthisdifferenceaffectmanagementdecisions?How?Whichmethodismoreaccurate?Why?


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Problems

module.Prob06.01 Decision Focus: multi-Product break-even Analysis LO4

CleanSkinCompanysellsbottlesofthreeface-washproducts:DailyWash,MudMask,andFaceCleanser.Thecompanyhasannualfixedcostsof$300,000.Lastyear,thecompanysold7,500bottlesofitsface-washproductsintheratioof2:1:2.CleanSkin’saccountingdepartmenthascompiledthefollowingdatarelatedtothethreeface-washproducts: Daily Mud Face Wash Mask CleanserPrice per bottle $12.00 $20.00 $14.00Variable costs per bottle 2.00 8.00 6.00

A.Calculatethetotalnumberofbottlesthatmustbesoldforthecompanytobreakeven.

B. CalculatethenumberofbottlesofDailyWash,MudMask,andFaceCleanserthatmustbesoldtobreakeven.

C. HowmightCleanSkinCompanyreduceitsbreak-evenpoint?

module.Prob06.02 Decision Focus: break-even and Target Profit LO1, 2, 3

ZIAMotorsisasmallautomobilemanufacturer.ChrisRickard,thecompany’spresident,iscurrentlyevaluatingthecompany’sperformanceandiscon-sideringoptionsthatmightbeeffectiveatincreas-ingZIA’sprofitability.Thecompany’scontroller,HollySmith,haspreparedthefollowingcostandexpenseestimatesfornextyearbasedonasalesforecastof$3,000,000.Direct materials $ 800,000Direct labor 700,000Factory overhead 750,000Selling expenses 300,000Other administrative expenses 100,000

$2,650,000

AfterChrisreceivedandreviewedthecostandexpenseestimates,herealizedthatHollyhadgivenhimallthedatawithoutbreakingitoutintoitsfixedandvariablecomponents.Hecalledherandshetoldhimthefollowing:“Factoryoverheadandsellingexpensesare40percentvariable,butotheradministrativeexpensesare30percentvariable.”

RequiredA.HowmuchrevenuemustZIAgeneratetobreak

even?B. ChrisRickardhassetatargetprofitof$700,000

fornextyear.HowmuchrevenuemustZIAgener-atetoachieveChris’sgoal?

module.Prob06.03 Decision Focus: basic CVP and break-even Analysis LO1, 2, 3

GigiLeBlancfoundedacompanytoproduceaspecialbicyclesuspensionsystemseveralyearsagoafterherson,whoworkedforabicycledeliveryservice,washurtinaridingaccident.Themarket’sresponsehasbeenoverwhelminglyfavorabletothecompany’snewsuspensionsystem.Ridersreportfeelingthattheyexperiencefewer“unpredictable”bumpsthanwithtraditionalsuspensionsystems.Gigimadeaninitialinvestmentof$100,000andhassetatargetofearninga30percentreturnonherinvestment.Gigiexpectshercompanytosellapproximately10,000suspensionsystemsinthecomingyear.Basedonthislevelofactivity,variablemanufacturingcostswillbe$5foreachsuspensionsystem.Fixedsellingandadministrativeexpenseswillbe$2persystemandotherfixedcostswillbe$1persystem.

RequiredA.CalculatethesalespricethatGigiLeBlanc’scom-

panymustchargeforasuspensionsystemifsheistoearna30percentreturnonherinvestment.

B. Calculatethecompany’sbreak-evenpoint.C. AssumingGigi’scompanymaintainsthecurrent

activitylevel,howcansheincreaseherreturnoninvestmentto35percent?


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exercisesModule.ex07.01 special Order Pricing

Decision LO1 RickNicoterasellsspecialterracottatraysthatare

perfectforplantingindryclimates.Thetrayshaveperunitvariableproductioncostsof$15andfixedcostsof$4(basedon8,000units).Rick’scompanyhasexcesscapacitytoacceptaspecialorderofupto500units.

Required Whatistheminimumpricethatcouldbecharged

forthisspecialorder?

Module.ex07.02 special Order Pricing Decision LO1

GreatFallsBrewery’sregularsellingpriceforacaseofbeeris$15.Variablecostsare$8percaseandfixedcoststotal$2percasebasedonproductionof250,000cases.Thefixedcostsremainunchangedwithinarelevantrangeof50,000to300,000cases.Aftersalesof180,000caseswereprojectedfortheyear,aspecialorderwasreceivedforanadditional30,000cases.

Required CalculateGreatFallsBrewery’sminimumacceptable

sellingpriceforthespecialorderof30,000cases.

Module.ex07.03 special Order: effect on income LO1

SuckertCompanymanufactureslacrossesticks.Thecompany’scapacityis4,500stickspermonth;how-ever,itcurrentlysellsonly3,000stickspermonth.LongMeadowSportshasofferedtobuy700lacrossesticksfor$50eachfromSuckert.Normally,thecompanysellsitssticksfor$65.Suckert’saccount-ingrecordsreportthecostofeachsticktobe$40,includingfixedcostsof$20each.

Required IfSuckertweretoacceptLongMeadow’soffer,

whatwouldbetheimpactonSuckert’sincome?

Module.ex07.04 Basic Make or Buy Decision LO2

IceColdCorporationmakesdorm-sizerefrigerators.Thecompany’srecordsshowthefollowingunitcoststomanufacturepart#15498:Direct materials $15Direct labor 18 Variable overhead 23Fixed overhead 13

AnothermanufacturerhasofferedtosupplyIceColdCorporationwithpart#15498foracostof$60perunit.IceColduses1,000unitsannually.

Required IfIceColdCorporationacceptstheoffer,whatwill

betheshort-runimpactonincome?

Module.ex07.05 Outsourcing Decision LO2 HumphreySportsisconsideringoutsourcingits

maintenancework.Thetotallaborcostforthemaintenancedepartmentis$150,000,andthecompanyhasanofferfromRobynMaintenancetoprovidetheservicefor$125,000.ThemaintenanceequipmentcurrentlyusedbyHumphreycannotbesoldandhasannualdepreciationof$10,000.Theoverheadallocatedtothemaintenancedepartmentis$20,000peryearandwouldnotbeavoidable.Ifthemaintenanceworkisoutsourced,allofHumphrey’smaintenanceworkerswillbeterminated.

Required Basedontheinformationgiven,whatshould

HumphreySportsdowithrespecttooutsourcingitsmaintenancework?

Module.ex07.06 Outsourcing Decision LO2 StateHospitalisconsideringoutsourcingitsmain-

tenancework.Thetotallaborcostforthemainte-nancedepartmentis$200,000,andthehospitalhasanofferfromJennyMaintenancetoprovidetheservicefor$150,000.Themaintenanceequipmentcurrentlyusedcannotbesoldandhasannualdepre-ciationof$10,000.Theoverheadallocatedtothemaintenancedepartmentis$20,000peryearandwouldnotbeavoidable.

Required Basedontheinformationgiven,whatshouldState

Hospitaldowithrespecttooutsourcingitsmainte-nancework?

Module.ex07.07 Basic Drop a segment Decision LO3

FinlayGraceSullivan&Companyhastwosalesoffices:onelocatedinPortland,Maine,andoneinPortsmouth,NewHampshire.ManagementisconsideringdroppingthePortlandoffice.Thecom-pany’srecordsreportthefollowinginformation: Portland PortsmouthSales $40,000 $50,000Direct costs: Variable 15,000 25,000 Fixed 10,000 10,000

Required WhatwillbetheeffectonincomeifPortlandis

eliminatedandhalfofitsfixedcostsareavoided?


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Theaccountingdepartmenthaspreparedthefollow-ingprojectedincomestatementforthecomingyearforyouruseinmakingdecisions:Sales $80,000Variable costs: Manufacturing ($5 3 4,000) $20,000 Marketing ($1 3 4,000) 4,000 24,000

Contribution margin $56,000Fixed costs: Manufacturing $10,000 Marketing 8,000 18,000

Operating profit $38,000

RequiredA.Shouldthecompanyacceptaspecialorderfor

500unitsatasellingpriceof$8?Assumingthattherearenovariablemarketingandadministra-tivecostsforthisorderandthatregularsaleswillnotbeaffected,whatistheimpactofthisdeci-siononcompanyprofits?

B. Supposethattheprecedingorderhasaonetimesetupfeeof$1,000.Shouldthespecialorderbeaccepted?Whyorwhynot?

C. Whatotherfactorsshouldbeconsidered,andhowwouldtheyimpactyourdecisiontoacceptthespecialorder?

D.DisregardingquestionsAthroughC,supposethatregularsaleswouldbereducedby200unitsifthespecialorderwereaccepted.Whatimpactwouldthishaveonthecompany’sdecision?

Module.Prob07.11 Make or Buy Decision: relevant costs and Qualitative Factors LO2

Tony’sElectronicsCorporationneeds12,000unitsofacertainparttobeusedintheproductionofitskaraokemachines.IfTony’sElectronicsbuysthepartfromScottCompanyinsteadofmakingitthemselves,Tony’scouldnotusethepresentfacilitiesforanothermanufacturingactivity.Sixtypercentofthefixedoverheadappliedwillcontinueregardlessofwhatdecisionismade.Thefollowingquantitativeinforma-tionisavailableregardingthesituationpresented:Costtomakethepart: Direct materials $ 5 Direct labor 25 Variable overhead 12 Fixed overhead applied 15

$57

Costtobuythepart: $45

RequiredA.Indecidingwhethertomakeorbuythepart,

whatareTony’stotalrelevantcoststomakethepart?

Module.ex07.08 Maximizing cM Given a Limited resource LO4

FootballsGaloreproducesbothpigskinandartificialleatherfootballsthatarestitchedbyoneoftwoma-chines.Selecteddatarelatedtoproducingabatchof10footballsforeachproductfollow: Pigskin ArtificialLeatherSales price $500.00 $250.00Direct materials $150.00 $50.00Direct labor $45.00 $40.00Variable overhead $30.00 $20.00Stitching hours 2 1

Onlytwomachinesarecapableofstitchingthefoot-balls.Theyhaveamaximumcapacityof3,000totalstitchinghoursperyear.

RequiredA.Whatisthecontributionmarginperlimited

resourceforeachtypeoffootball?B. Assumingthatdemandisnotaconstraint,how

manypigskinandartificialleatherfootballsshouldbeproducedbyFootballsGalore?

Module.ex07.09 sell or Process Further Decision LO6

SwineEnterprisesproduceshamsfromlocallyraisedpigs.Thecostofgettingthemeatreadyformar-ketis$1perpound.Hamsweighanaverageof12poundsandsellfor$1.50perpound.Thecompanycansmokethehamsforanadditional$0.50perpound.Thesmokedhamswouldsellfor$2.25perpound.

Required Shouldthecompanysmokethehams?Whatifthe

sellingpricewere$1.75perpound?

PrOBLeMsModule.Prob07.10 special Order Decision:

Qualitative Factors LO1 TheBelikCompanyhasthecapacitytoproduce

5,000unitsperyear.Itspredictedoperationsfortheyearareasfollows:Sales (4,000 units @ $20 each) $80,000Manufacturing costs: Variable $5 per unit Fixed $10,000Marketing and administrative costs: Variable $1 per unit Fixed $8,000


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B. Whichalternative(makeorbuy)ismoredesirableforTony’sandbywhatamount?

C. SupposethatTony’sElectronicsCorporationisinanareaofthecountrywithhighunemploymentandthatitisunlikelythatdisplacedemployeeswillfindotheremployment.Howmightthatimpactyourdecision?

Module.Prob07.12 Make or Buy Decision: Qualitative Factors LO2

TheHempDivisionofWestCompanyproducesrope.One-thirdoftheHempDivision’soutputissoldtotheHammockProductsDivisionofWest;theremainderissoldtooutsidecustomers.TheHempDivision’ses-timatedsalesandcostdataforthefiscalyearendingSeptember30areasfollows: Hammock Products Outsiders Sales $15,000 $40,000Variable costs 10,000 20,000Fixed costs 3,000 6,000

Gross margin $ 2,000 $14,000

Unit sales 10,000 20,000

TheHempDivisionhasanopportunitytopurchase10,000feetofidentical-qualityropefromanoutsidesupplieratacostof$1.25perunitonacontinuingbasis.AssumethattheHempDivisioncannotsellanyadditionalproducttooutsidecustomers.

RequiredA.ShouldWestallowitsHempDivisiontopurchase

theropefromtheoutsidesupplier?Whyorwhynot?

B. AssumethattheHempDivisionisnowatfullca-pacityandthatsufficientdemandexiststosellallproductiontooutsidersatpresentprices.Whatisthedifferentialcost(benefit)ofproducingtheropeinternally?

C. Assumethatthequalityoftheropeisfoundtobeofalesser,butstillsatisfactory,quality.Whatfactorsshouldbeconsidered?

D.Assumethatthequalityoftheropeisfoundtobeofquestionablequalitybutthatthepriceis$1.00perunit.Whatfactorsshouldbeconsideredinthedecision?

Module.Prob07.13 Decision Focus: eliminating Unprofitable segments LO3

CasagrandeCompanyiscurrentlyoperatingat80percentcapacity.Worriedaboutthecompany’sperformance,Mike,thegeneralmanager,reviewedthecompany’soperatingperformance.(Thesalesandrelatedcostinformationprovidedbelowareinmillionsofdollars.)

Segment North South East WestSales $30 $40 $20 $10 Less variable costs 12 8 21 8

Contribution margin $18 $32 $ (1) $ 2 Less fixed costs 9 12 6 3

Operating profit (loss) $ 9 $20 $ (7) $ (1)

RequiredA.Whatisthecurrentoperatingprofitforthecom-

panyasawhole?B. Assumingthatallfixedcostsareunavoidable,

ifMikeeliminatedtheunprofitablesegments,whatwouldbethenewoperatingprofitforthecompanyasawhole?

C. Whatoptionsdoesmanagementhavetomaxi-mizeprofits?

D.Whatqualitativefactorsdoyouthinkmanage-mentshouldconsiderbeforemakingthisdeci-sion?Whatimpactcouldthesequalitativefactorshaveonthedecision?

Module.Prob07.14 Decision Focus: eliminating Unprofitable segments LO3

BigBucksCasinoiscurrentlyoperatingat80percentcapacity.Worriedaboutthecasino’sperformance,Grey,thegeneralmanager,reviewedthecompany’soperat-ingperformance.(Therevenueandcostdataareinmillions.)

Segment Card Tables Slots Craps RouletteRevenues $25 $50 $15 $35Less variable costs 12 20 9 15

Contribution margin $13 $30 $ 6 $20Less fixed costs 8 15 8 10

Operating profit (loss) $ 5 $15 $ (2) $10

RequiredA.Whatisthecurrentoperatingprofitforthecom-

panyasawhole?B. Assumingthatallfixedcostsareunavoidable,

ifGreyeliminatedtheunprofitablesegments,whatwouldbethenewoperatingprofitforthecompanyasawhole?

C. Whatoptionsdoesmanagementhavetomaxi-mizeprofits?

D.Whatqualitativefactorsdoyouthinkmanage-mentshouldconsiderbeforemakingthisdeci-sion?Whatimpactcouldthesequalitativefactorshaveonthedecision?


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Module.Prob07.15 Limited resource Decision LO4, 5

Robinson’sGroceryStoreisasmallcornergrocerystoreinruralMontana,andshelfspaceisverylimited.Managementmustdecidehowtoallocateshelfspaceforsalsa.Robinson’shasbeengivenanopportunitytosellaverypopularbrandofsalsaproducedbyBobbyTutor,apopularrockstar.Theuniquebottleistallerandthinnerthantheotherpopularbrandsonthemarket,increasingitsvisibil-ityontheshelf.Thesalesandcostdataforthenewsalsaandthethreeotherbrandspresentlysoldareshownbelow: Salsa Salsa Salsa New #1 #2 #3 SalsaSales price per jar $2.50 $2.75 $3.00 $4.00Cost to purchase 1.25 1.35 1.50 3.20

Contribution margin $1.25 $1.40 $1.50 $0.80

Bottles per footof shelf space 10 9 7 12

RequiredA.Rankthesalsasbasedonexpectedrevenueif

eachisgiven10feetofshelfspaceandallbottlesareexpectedtobesold.

B. Basedontheinformationgiven,whichsalsashouldgetthemostshelfspace?Why?

C. Whatqualitativefactorsshouldbeconsideredinthisdecision?Howwouldthesefactorsimpactthedecision?

Module.Prob07.16 Limited resource Decision LO4, 5

SunDevilGolfBallsproducestwotypesofgolfballs:thepromodelandthetourmodel.Theballsaresoldtoretailersincartonscontaining360balls(30boxescontaining4sleevesperbox,witheachsleeveholding3balls).Bothmodelsaremadeusingthesamemachines.Ittakes15minutesofmachinetimetoproduce360promodelgolfballs,whereasittakes30minutestoproducethesamenumberofthetourmodelballs.Thedifferenceinproductiontimeresultsmainlyfromthedifferentmaterialsusedinconstruction.Therelevantdataconcerningthetwomodelsareasfollows: ProModel TourModelSales price (per carton) $500 $590Less: Direct materials 200 265 Direct labor 50 50 Variable overhead 50 75

Contribution margin $200 $200

Required machine time 1/4 hour 1/2 hour

RequiredA.IftheamountofmachinetimeavailabletoSun

DevilGolfBallsislimited,whichgolfballshouldbeproducedinthelargerquantity?

B. Ifthetotalmachinetimeavailableis110hourspermonthandthedemandforeachmodelofgolfballis108,000ballspermonth,howmanyofeachmodelshouldbeproducedtomaximizeprofit?(Roundyouranswertothenearestcarton.)

C. Whatotherfactorsshouldbeconsideredinthisdecision,andhowwouldtheyimpactthedecision?


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exercisesModule.ex08.01 Understanding NPV LO1 Wilson,Inc.,hasaprojectwithanexpectedcash

inflowof$1millionattheendofYear5.Wilsonhasasecondprojectwithanexpectedcashinflowof$200,000tobereceivedattheendofeachyearforthenextfiveyears.

Required Ifbothprojectshavethesameexpectedcashout-

flows,whatcanbesaidofthenetpresentvalueofthefirstprojectcomparedtothesecondproject?

Module.ex08.02 Basic NPV with salvage Value LO1

SchaeferOrganicFarmspurchasedanewtractoratacostof$80,000.Annualoperatingcashinflowsareexpectedtobe$30,000eachyearforfouryears.Attheendofthetractor’susefullife,thesalvagevalueofthetractorisexpectedtobe$5,000.

Required Whatisthenetpresentvalueifthecostofcapitalis

12percent(ignoreincometaxes)?

Module.ex08.03 Basic NPV with salvage Value LO1

FoodBearGroceryStorepurchasedanewU-Scanmachineatacostof$100,000.Annualoperatingcashinflowsareexpectedtobe$40,000eachyearforfouryears.AttheendoftheU-Scan’susefullife,thesalvagevalueoftheU-Scanisexpectedtobe$3,000.

Required Whatisthenetpresentvalueifthecostofcapitalis

12percent(ignoreincometaxes)?

Module.ex08.04 Basic NPV: No salvage Value or Taxes LO1

CarrieRushingisconsideringthepurchaseofanewproductionmachinethatcosts$120,000.Shehasbeentoldtoexpectdecreasedannualoperatingex-pensesof$40,000forfouryears.Attheendofthefourthyearthemachinewillhavenosalvagevalueandwillbescrapped.

Required Whatisthenetpresentvalueofthemachineif

Carrie’scostofcapitalis9percent(ignoreincometaxes)?

Module.ex08.05 NPV and irr LO1, 2 Aplannedfactoryexpansionprojecthasanesti-

matedinitialcostof$800,000.Basedonadiscountrateof20percent,thepresentvalueofthefuturecostsavingsfromtheexpansionis$843,000.

Required Toyieldexactlya20percentreturnoninvestment,

theactualinvestmentexpenditureshouldnotexceedthe$800,000estimatedcostbymorethanwhatamount?

Module.ex08.06 irr: even cash Flows LO2 ThePearceClub,Inc.,isconsideringinvestingin

anexercisemachinethatcosts$5,000andwouldincreaserevenuesby$1,500ayearforfiveyears.

Required UseExceltocalculatetheequipment’sinternalrate

ofreturn(ignoreincometaxes).Roundyouranswertotwodecimals.

Module.ex08.07 irr: Tax effects LO2 TheGoldenGolfClubisconsideringaninvestment

ingolfcartsthatrequires$21,000andpromisestoreturn$29,000inthreeyears’time.Thecompanywilldepreciatethegolfcartsoverthethreeyearsandwillbeunabletosellthemforanyamountattheendofthattime.Thecompany’sincometaxrateis40percent.

Required UseExceltocalculatetheequipment’sinternalrate

ofreturn.Roundyouranswertotwodecimals.

Module.ex08.08 Depreciation Tax shield LO4

Owens,Grubbs,andRiley,LLP,recentlypurchasedanewfacilitytohousetheirlawpractice.Thefacil-itycost$500,000.Thepartnershipwilldepreciatethefacilitybyrecording$50,000ofdepreciationexpenseeachyearfor10years.Owens,Grubbs,andRiley,LLP,expectsthatitstaxratewillbe35percentinthecomingyear.

Required Whatisthetaxsavings(i.e.,thedepreciationtax

shield)associatedwiththenewfacilityinthecom-ingyear?


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assetwillreplaceanoldassetthatcurrentlyhasataxbasisof$80,000andcanbesoldfor$60,000now.Sullivanwillcontinuetoearnthesamerev-enuesaswiththeoldassetof$200,000peryear.However,savingsinoperatingcostswillbeexpe-riencedasfollows:atotalof$120,000ineachofthefirstthreeyearsand$90,000inthefourthyear.Sullivanissubjecttoa40percenttaxrateandhasanafter-taxcostofcapitalof10percent.

RequiredA.Whatisthepresentvalueofthedepreciationtax

shieldforthenewassetforYear1?B. Whatarethecashflows(netoftax)associated

withthedisposaloftheoldasset?C. Whatistheinvestment’snetpresentvalue(after

tax)?

Module.Prob08.12 Decision Focus: Lease or Buy Decision using NPV Analysis LO1, 4

BitandBytesellscomputerservicestoitsclients.Thefirmiscontemplatingtheacquisitionofacomputerbutisundecidedwhetheritshouldbeleasedorpurchased.Informationregardingthecomputerisasfollows:

Equipment Purchase InformationCash purchase price $275,000Annual maintenance 25,000Salvage value at the end of three years 120,000

Equipment Leasing InformationAnnual rental fee $75,000 plus 10 percent of billings(includes maintenance)

Other InformationEstimated billings: Year 1 $230,000 Year 2 250,000 Year 3 240,000Annual operating expenses 75,000Equipment setup 20,000Income tax rate 40%Depreciation method Straight-lineMinimum desired after-tax rate of return 12%

Required Prepareanetpresentvalueanalysisthatcompares

thepurchaseandleasingoptions.WhichalternativeisbestforBitandByte?

Module.Prob08.13 NPV vs. Payback Method LO1, 5

StewartCorporationisreviewinganinvestmentproposal.Theinitialcostandrelateddataforeachyearoftheproject’slifearepresentedintheschedulebelow.Stewartassumesthatthecashflowstakeplaceattheendoftheyear.Stewartfurtheras-sumesthattheinvestment’ssalvagevalueattheendofeachyearisequaltoitsthennetbookvalue,but

ProBLeMsModule.Prob08.09 NPV and Preference

Decisions LO1 HarrimanEnterpriseshasthreepossibleprojects.

Eachprojectrequiresthesameinitialinvestmentof$1,000,000.Harriman’schieffinancialofficerhaspreparedthefollowingcashflowprojectionsforeachproject:Year Project X Project Y Project Z 1 $1,250,000 $ 0 $ 500,000 2 1,250,000 0 2,000,000 3 1,250,000 0 2,000,000 4 1,250,000 5,000,000 500,000

JimHarriman,thecompany’spresident,isunsureofwhichprojecttopursue.Eachholdspromiseforthecompany,butheisconfusedaboutwhattodobecauseeachprojectgeneratesthesameamountofcashflowoverthefour-yearperiod.

Required Ignoringtaxes,computethenetpresentvalueof

eachprojectata15percentcostofcapital.Whichprojectshouldbechosen?Why?

Module.Prob08.10 NPV LO3 TateEnterprisesisanonprofitorganizationthathas

acostofcapitalof10percent.Theorganizationisconsideringthereplacementofitscomputersystem.Theoldsystemhasanetbookvalueof$3,000andaremainingusefullifeoffiveyears,withnoexpectedsalvagevalueattheendofthefiveyears.Thecom-panyestimatesthesystem’scurrentsalvagevaluetobe$1,500.Anewcomputersystemwillcost$10,000andisexpectedtohaveausefullifeoffiveyears,withnosalvagevalue.Annualcashoperatingcostsare$4,000fortheoldsystemand$2,000forthenewsystem.

RequiredA.Whatisthepresentvalueoftheoperatingcash

outflowsfortheoldsystem?B. Whatisthepresentvalueoftheoperatingcash

outflowsforthenewsystem?C. Whatisthepresentvalueofthesalvagevalueof

theoldsystemifitisreplacednow?D.Wouldyouadvisetheorganizationtoreplacethe

system?Showcalculationstosupportyourrecom-mendation.

Module.Prob08.11 After-Tax NPV with Loss on sale and Depreciation Tax shield LO1, 4

SullivanCompanyplanstoacquireanewassetthatcosts$400,000andisanticipatedtohaveasalvagevalueof$30,000attheendoffouryears.Sullivan’spolicyistodepreciateallassetsusingstraight-linedepreciationwithnohalf-yearconvention.Thenew


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Stewartdoesnotexpecttheretobeasalvagevalueattheendoftheinvestment’susefullife. Initial Cost Annual Net Annual and Book After-Tax Net Year Value Cash Flows Income 0 $105,000 $ 0 $ 0 1 70,000 50,000 15,000 2 42,000 45,000 17,000 3 21,000 40,000 19,000 4 7,000 35,000 21,000 5 0 30,000 23,000

Stewartusesa24percentafter-taxtargetrateofreturnfornewinvestmentproposals.

RequiredA.Calculatethepaybackperiodfortheproject.B. Calculatetheproject’snetpresentvalue.

Module.Prob08.14 Payback Method: After-tax LO4, 5

StembridgeMedicalAssociatesisplanningtoacquirea$250,000X-raymachinethatpromisestoprovideincreasedefficienciesandhigher-resolutionX-rays.Themedicalgroupexpectsareductioninannualoperatingcostsof$80,000.Themachinewillbedepreciatedbythestraight-linemethodoverfiveyears(nohalf-yearconvention),withnosalvagevalueattheendoffiveyears.

Required ComputetheX-raymachine’spaybackperiodassum-

inga40percentincometaxrate.


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exercisesModule.ex09.01 Forecasting sales LO2 HarrimanEntertainmentproducedandsold100,000

videogamesfor$10eachlastyear.Demandisstrongforthecompany’svideogames,andthecompanybelievesthatvolumewillincreaseby25percentifthecompanyincreasesthegamepriceby20percent.

Required WhatareHarriman’sexpectedsalesrevenuesforthe

comingyear?

Module.ex09.02 sales Forecast LO2 YourfriendMarcyBraedenhasbeenworkingfor

thelasttwoyearswithasmallcompanythatpro-ducesandsellsavarietyofsmallhouseholditems.Recently,shetoldyouhowamazedsheisathowsuccessfulthecompanyisinforecastingsaleseachyear.Shedoesnotunderstandhowthecompanydoesit.

Required HelpMarcyoutbydescribingsomeofthefactors

thatheremployermayconsiderinforecastingsales.

Module.ex09.03 sales Budget LO2 Sarah’sSalonperformsmanicuresandpedicuresfor

itsclients.Sarah’salsosellsbottlesofnailpolishfor$2.50each.Sarah’smarketingmanagerhaspre-paredthefollowingfirst-quartersalesforecast:January 130bottlesFebruary 140bottlesMarch 165bottles

Total 435bottles

Required PrepareSarah’ssalesbudgetforeachmonthofthe

quarter.

Module.ex09.04 sales Budget LO2, 3 Lulu’sLocketssellssmalllocketsfor$1.50each.The

marketingdepartmentpreparedthefollowingfirst-quartersalesforecast.Lulu’shad10,000locketsonhandattheendofDecember.Thecompanytriestokeep10percentofthenextmonth’ssalesonhandattheendofeachmonth.January 135,000unitsFebruary 125,000unitsMarch 155,000units

Total 415,000units

Required PreparethesalesbudgetforLuLu’sLocketsforeach

monthofthequarter.

Module.ex09.05 Purchases Budget LO4 Mandy’sModemsestimatessalesof420,000mo-

demsduringtheupcomingyear.Eachmodemrequiresthreeinternalmemorychips.Thecompanybegantheyearwithaninventoryof20,000memorychipsandnobeginninginventoryofmodems.Thecompany’smanagementwantstomaintainanend-inginventoryofmodemsequalto10percentofthecurrentyear’ssalesandanendinginventoryofchipsequalto10percentofthecurrentyear’sprojectedneeds.

Required HowmanymemorychipsmustMandy’sModems

purchaseduringtheyear?

Module.ex09.06 irr: Purchases Budget LO4

BlanchardCompanybudgetsonanannualbasisforitsfiscalyear.Thefollowingbeginningandendinginventorylevels(inunits)areplannedforthefiscalyearofJuly1,2009,throughJune30,2010: July1,2009 June30,2010Rawmaterials* 40,000 50,000Workinprocess 10,000 10,000Finishedgoods 80,000 50,000

*Twounitsofrawmaterialareneededtoproduceeachunitoffinishedproduct.

Required IfBlanchardCompanyweretomanufacture500,000

finishedunitsduringthe2009–2010fiscalyear,howmanyunitsofrawmaterialwoulditneedtopurchase?

Module.ex09.07 Purchases Budget LO4 CrosserCompanybudgetsonaquarterlybasis.The

followingbeginningandendinginventorylevels(inunits)areplannedforthefirstandsecondquartersof2009. Jan–March,2009 April–June,2009Rawmaterials 40,000 50,000Workinprocess 12,000 15,000Finishedgoods 80,000 45,000Twounitsofrawmaterialareneededtoproduceeachunitoffinishedproduct.

Required IfCrosserCompanyweretomanufacture400,000

finishedunits(intotal)duringthefirsttwoquartersof2009,howmanyunitsofrawmaterialwoulditneedtopurchase?Preparethepurchasesbudgetforthefirstsixmonthsof2009.


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Estimatedproduction 50,000barsDirectlaborperbar 3minutesDirectlaborrequiredforestimatedproduction 2,500hoursAveragedirectlaborrateperhour $15.00Estimateddirectlaborcost $37,500

ActualproductionduringOctoberwas53,000barsandactualdirectlaborcostwas$39,000.

Required PrepareaflexiblebudgetforErshey’sChocolates

thatshowstheprojecteddirectlaborcostandanydifferencebetweentheflexiblebudgetandactuallaborcost.Werethecompany’slaborcostsoverorunderbudgetforthemonth?

ProBleMsModule.Prob09.11 Production and Purchases

Budget LO3, 4 AlvarezCompanyproducesvariouscomponentparts

usedintheautomotiveindustry.Thesalesbudgetforthefirsteightmonthsof2010showsthefollow-ingprojections:Month Units Month UnitsJanuary 25,000 May 31,400February 27,000 June 34,500March 32,000 July 36,700April 28,500 August 35,000

InventoryonDecember31oftheprioryearwasbudgetedat6,250units.Thedesiredquantityoffinishedgoodsinventoryattheendofeachmonthin2010istobeequalto25percentofthenextmonth’sbudgetedunitsales.Eachunitoffinishedproductrequiresthreepoundsofrawmaterial.Thecompanywantstohave30percentofnextmonth’srequiredrawmaterialsonhandattheendofeachmonth.

RequiredA.PrepareaproductionbudgetforJanuarythrough

Juneof2010.B. Prepareamaterialpurchasesbudgetforthe

sameperiodassumingthateachpoundofrawmaterialcosts$22.

Module.Prob09.12 Production and Direct Material Purchases Budget LO3, 4

AndersonCompanyproducesdecorativewindowsforresidentialandcommercialapplications.Thecompany’smarketingdepartmenthaspreparedasalesforecastforthefirsteightmonthsof2010basedonpastsalestrendsandexpectedmarketing

Module.ex09.08 cash summary Budget LO5 ThefollowingrecordsfromBensonInc.,arepro-

videdtoassistyouwithpreparationofcashsum-marybudgets.Bensonrequiresaminimumcashbalanceof$7,000tostarteachquarter.Thefollow-ingamountsareinthousandsofdollars.

Quarter 1 2 3 4Beginningcashbalance $10 $ ? $ ? $ ?Cashcollections ? ? 126 80

Totalcashavailable $86 $ ? $ ? $ ?Inventorypurchases 41 59 ? 33Operatingexpenses ? 43 55 ?Equipmentpurchases 11 9 8 5Dividends 3 3 3 3

Totaldisbursements $ ? $114 $ ? $ ?Excess(deficiency)ofcash (4) ? 30 ?Financing: Borrowings ? 21 — — Repayments* — — (?) (8)

Total $ ? $ ? $ ? $ ?Endingcashbalance $ ? $ ? $ ? $ ?

*Includesinterest.

Required FillinthemissingamountsinBenson’scashsum-

marybudget.

Module.ex09.09 cash receipts Budget LO5 Art’sArchitectureFirmbeginsbusinessonJanuary1

ofthecurrentyear.Thecompanycharges$100perhourfortheirservices.Artestimatesfirst-quarterchargeablehoursasfollows:January 100February 500March 400

Total 1,000

Thefirmexpectscashtobecollectedinthefollow-ingmanner:40percentofrevenuescollectedinthemonthofwork50percentofrevenuescollectedinthemonthfollowingwork10percentofrevenuescollectedinsecondmonthfollowingwork

Required Prepareacashreceiptsbudgetforthefirstquarter.

HowmuchwillclientsowethecompanyattheendofMarchifrevenuesareexactlyasestimated?

Module.ex09.10 Flexible Budget LO8 Ershey’sChocolatesproducesmilkchocolatecandy

bars.Thecompanycurrentlyusesastaticbudgetprocess.Thecompany’scontrollerpreparedthefol-lowingbudgetforOctober’sproduction:


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andpricingplans.Thevicepresidentofmarketingbelievesthesalesforecastisreasonableandhopestogrowsalesinthecomingyearbasedpartlyonthemarketingandpricingchangesputinplaceduringtheyear.Thesalesforecastfor2010isasfollows:Month Units Month UnitsJanuary 10,000 May 22,100February 17,000 June 24,300March 13,000 July 26,200April 18,500 August 27,000

InventoryonDecember31,2009,wasbudgetedat1,500units.Thedesiredquantityoffinishedgoodsinventoryattheendofeachmonthin2010istobeequalto15percentofthenextmonth’sbudgetedunitsales.Eachcompletedunitoffinishedproductrequires1.5gallonsofaspecialresin.Thecompanyhasdeterminedthatitneeds20percentofnextmonth’srawmaterialneedsonhandattheendofeachmonth.

RequiredA.PrepareaproductionbudgetforJanuarythrough

Juneof2010.B. Prepareamaterialpurchasesbudgetforthe

sameperiod,assumingthateachgallonofthespecialresincosts$10.

Module.Prob09.13 Direct labor and overhead Budgets LO4

AshCompanymanufacturestelephonehandsetsundervariousbrandnames.Thecompanyhasbuiltastrongreputationbasedonqualitytelephonesandhasbeenprofitableforanumberofyears.HarrimanLassiter,thecompany’spresident,hasdecidedtomakeasignificantpushforlaborandoverheadcostcontrolsinthecomingmonthsbecauseofincreasedoverseascompetition.Harrimanhasaskedthemar-ketingandaccountingdepartmentstoprovidedatarelatedtolaborcostsandmanufacturingoverhead.ProductionbudgetsfortheperiodendingJune30areasfollows:Month Units Month UnitsJanuary 25,000 April 28,500February 27,000 May 31,400March 32,000 June 34,500

Eachtelephonerequires2.5hoursofdirectlaborforassemblyandtesting.Thecompanycurrentlyappliesmanufacturingoverheadtoproductionattherateof$7perdirectlaborhour.

RequiredA.PrepareadirectlaborbudgetforJanuary

throughJune.Directlaboraverages$15perhour.B. Prepareamanufacturingoverheadbudgetfor

thesameperiod.

Module.Prob09.14 Direct labor and overhead Budgets LO4

BabcockBuildersisawell-regardedconstructioncompanythatservesasageneralcontractorforbothresidentialandcommercialconstructionproj-ects.Oneofthecompany’ssignaturefeaturesisitscabinetry.Thecompany’sfounderandpresident,BillBabcock,beganmanufacturingcabinetssixyearsagoinanefforttocapitalizeonthecompany’srepu-tationandtheskillsofitscraftsmen.Thecompany’sproductionbudgetforthefirstsevenmonthsof2010isshownbelow:Month Units Month UnitsJanuary 10,000 May 22,100February 17,000 June 24,300March 13,000 July 26,200April 18,500

Babcock’smostpopularcabinetisasmallcherrywoodcabinettypicallyusedinbathrooms.Eachcompletedunitrequires3.5hoursofdirectlabor,andtheskilledlaborcostsanaverageof$25perhour.Thecompanyappliesoverheadattherateof$3perdirectlaborhour.

RequiredA.PrepareadirectlaborbudgetforJanuary

throughJune.B. Prepareamanufacturingoverheadbudgetfor

thesameperiod.

Module.Prob09.15 cash receipts Budget LO5

Barrera’sOutdoorOutfitterssellsmanyitemsthatsportingenthusiastsfinduseful.Thecompanysellsshoes,pants,shirts,jackets,fly-fishingequipment,hikingequipment,huntingequipment,andvari-ousotherproducts.Thefollowingsalesprojectionswerepreparedbythecompany’ssalesmanagerandincludeallitemsforeachofthefirstsevenmonthsof2010: Sales SalesMonth Volume Month VolumeJanuary 25,000 May 31,400February 27,000 June 34,500March 32,000 July 36,700April 28,500

Theaveragesalespriceperitemis$12.Thecompanyestimatesthatitcollects70percentofeachmonth’ssalesinthemonthofsaleand20percentthefol-lowingmonth.Theremainingoutstandingsalesarecollectedinthenextmonth.ThebalanceofaccountsreceivableonDecember31,2009,was$141,600.Oftheaccountsreceivablebalance,$33,600representsuncollectedNovembersales.


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Required PrepareacashreceiptsbudgetforJanuarythrough

Juneof2010.

Module.Prob09.16 cash receipts Budget LO5

BaumBookstoreisatraditionatStateUniversity.Thestorehasservedstudentsandfacultyformorethan50yearsandisstillregardedasthepremierbookstoreinthearea.BaumBookstore’ssalesbud-getshowsthefollowingprojections(i.e.,thenum-berofunitsineachcategory)fortheperiodendingMay31,2010: SchoolMonth Books Supplies Software MiscellaneousJanuary 4,000 2,700 240 1,700February 1,400 1,450 190 1,400March 1,000 1,310 175 1,500April 500 1,600 100 1,650May 1,800 1,850 145 2,125

Theaveragesalespriceofeachofthevariousitemsisasfollows:books,$70;schoolsupplies,$20;software,$90;andmiscellaneous,$15.Becausethestoresellsprimarilytostudentsandfaculty,therearenocreditsales.

Required Prepareacashreceiptsbudgetbyitemcategoryfor

eachmonth.

Module.Prob09.17 cash receipts, Disbursements, and summary Budget LO5

BarleyRestaurantSupplysellsvariousequipmentandsuppliestorestaurantsinthelocalandsur-roundingcommunities.Thecompany’scontroller,BarryBarley,hasrequestedyourhelpinpreparingacashbudgetforthemonthofJune.Barryaccumu-latedthefollowinginformationforyou:a. ThecashbalanceonJune1wasestimatedtobe

$10,000.b. ActualsalesforAprilandMayandbudgeted

salesforJuneareasfollows: April May JuneCashsales $16,500 $15,500 $17,500Salesonaccount 30,000 40,000 50,000

Totalsales $46,500 $55,500 $67,500

Salesonaccountarecollectedoveratwo-monthperiod,with70percentbeingcollectedinthefirstmonthandtheremainderbeingcollectedinthesec-ondmonth.c. Inventorypurchasesareexpectedtobe$35,000

inJune.Thecompanypaysforinventorypur-chasesinthefollowingmonth’spurchases.ThebalanceofMay’spurchasesis$22,000.

d. Sellingandadministrativeexpensesarebudgetedtobe$14,000forJune.Ofthatamount,50per-centisdepreciation.

e. Equipmentcosting$14,000willbepurchasedinJuneforcash.

f. Dividendsintheamountof$2,500willbepaid.g. Thecompanywantstomaintainaminimumcash

balanceof$10,000andhassetupalineofcreditatthelocalbankthatcanbeusedtocoveranyshortage.Ifthecompanymustborrow,theloanwillbemadeatthebeginningofthemonth,andanyrepaymentwillbemadeattheendofthemonthofrepayment.

RequiredA.PrepareacashreceiptsbudgetforJune.B. PrepareacashdisbursementsbudgetforJune.C. Prepareaschedulethatshowswhetheranybor-

rowingagainstthelineofcreditisneeded.

Module.Prob09.18 sales and cash collections Budgets LO2, 5

MountainMashproducesicecreamforwholesaledistributiontogrocers,restaurants,andindepen-denticecreamshops.March,April,May,June,andJulyarebusymonthsforthecompanyasitscustom-ersgearupforthespringandsummerrush.Moun-tainMashhasprojectedthefollowinglevelofsales(ingallons)forMarchthroughJune:Month Units Month UnitsMarch 70,000 June 90,000April 80,000 July 92,000May 85,000

Thecompanyhasasetwholesalesellingpriceof$3.50pergallon.MountainMash’scustomerspurchaseicecreamoncredit,withtheagreementthattheymustpayinvoiceswithin30days.Nonetheless,notallcus-tomerspaywithinthattimeframe.MountainMash’screditmanagerhasdevelopedthefollowingtabletoshowthetypicalcashcollectionpattern:70percentofsalesarecollectedinthemonthofsale25percentofsalesarecollectedinthemonthfollowingthemonthofsale5percentofsalesarecollectedinthesecondmonthfollowingthemonthofsale

RequiredA.PrepareasalesbudgetforMarch,April,May,

June,andJuly.B. PrepareacashreceiptsbudgetforMay,June,and

July.BesuretorememberthecashcollectionsfrommonthspriortoMay.

C. Ifsalesandcashcollectionsareexactlyasthecompanyestimates,howmuchwillcustomersoweMountainMashasoftheendofJuly?


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exercisesModule.ex10.01 Flexible Budget LO2 Gordonknitswoolcapsforsaleatthelocalskiresorts.

Hepreparedthefollowingbudgetfortheproductionandsaleof150woolcaps.Unfortunately,Gordonfellillwithabadcaseofthefluandwasabletomakeandsellonly125woolcaps.Sales revenue $1,500.00Variable costs: Direct materials (yarn) 375.00 Direct labor 750.00 Commission to resort 112.50Fixed costs 75.00

Net income $ 187.50

Required PrepareaflexiblebudgetforGordonbasedonthe

productionandsaleof125woolcaps.

Module.ex10.02 Direct Materials Price and Usage Variances LO5

TheWoodsEnterprisespreparedthefollowingstan-dardcostsfortheproductionofonestuffedbear:Direct materials 1.5 pounds of stuffing @ $2 per lbDirect labor 2 hours of assembly @ $15 per hr

Actual production costs for the production of 1,000 stuffed bears required 1,750 pounds of stuffing at a cost of $1.95 per pound and 1,950 labor hours at $15.25 per hour.

RequiredA.Calculatethedirectmaterialpricevariance.B. Calculatethedirectmaterialusagevariance.

Module.ex10.03 Direct Labor rate and efficiency Variances LO6

RefertotheinformationinModule.Ex10.02above.

RequiredA.Calculatethedirectlaborratevariance.B. Calculatethedirectlaborefficiencyvariance.

Module.ex10.04 Materials and Labor Variances LO5, 6

Lastyear,VeraCorporationbudgetedforproductionandsalesof20,000clothhandbags.Veraproducedandsold19,250handbags.Eachhandbaghasastan-dardrequiringfourfeetofmaterialatabudgetedcostof$2.50perfootand45minutesofsewingtimeatacostof$0.28perminute.Thehandbagssellfor$45.00.Actualcostsfortheproductionof18,000handbagswere$201,600formaterials(80,000feetat$2.52perfoot)and$260,400forlabor(868,000minutesat$0.30perminute).

RequiredA.Whatisthehandbag’ssalespricevariance?B. Whatisthehandbag’sdirectmaterialprice

variance?C. Whatisthehandbag’sdirectmaterialusage

variance?D.Whatisthehandbag’sdirectlaborratevariance?E. Whatisthehandbag’sdirectlaborefficiency

variance?

Module.ex10.05 Variable Overhead spending and efficiency Variances LO7

BittermenCompany,whichusesstandardcosting,reportedthefollowingoverheadinformationforthelastquarteroftheyear:Actual overhead incurred: Fixed $10,500 Variable 66,810Budgeted fixed overhead 11,000Variable overhead rate per direct labor hour 5.00Standard hours allowed for actual production 13,100Actual labor hours used 13,000

RequiredA.Whatisthevariableoverheadspendingvariance?B. Whatisthevariableoverheadefficiency

variance?

Module.ex10.06 Variable Overhead spending and efficiency Variances LO7

SimonEnterprisesappliesvariableoverheadatarateof$1.50perdirectlaborhourandfixedover-headatarateof$1.75perdirectlaborhour.Thecompanybudgetstwodirectlaborhoursforeachofthe5,900unitsthatarescheduledforproduction.Lastyear,Simonincurredactualvariableoverheadtotaling$18,750andactualfixedoverheadtotal-ing$21,500fortheproductionof6,000units.Inaddition,11,800directlaborhourswereactuallyincurred.

RequiredA.Calculatethevariableoverheadefficiency

variance.B. Calculatethevariableoverheadspending

variance.

Module.ex10.07 Fixed Overhead Volume and spending Variances LO8

RefertotheinformationinModule.Ex10.06above.

RequiredA.Calculatethefixedoverheadvolumevariance.B. Calculatethefixedoverheadspendingvariance.


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• Eachparthasastandardrequiring20minutesofassemblytimeatacostof$0.25perminute.

• Averagewholesalepriceforeachpartis$8.• Actualcostsfortheproductionof11,000parts

were$17,094for11,100poundsofmaterial.• Actuallaborcostswere$58,080for242,000min-

utesoflabortime.

RequiredA.Whatwasthebudgetedcontributionmarginper

part?B. Whatwastheactualcontributionmarginper

part?C. WhatwasTurner’sflexiblebudgetvariance?D.WhatwasTurner’sdirectmaterialpricevariance?E. WhatwasTurner’sdirectmaterialusage

variance?F. WhatwasTurner’slaborratevariance?G.WhatwasTurner’slaborefficiencyvariance?

Module.Prob10.10 Material and Labor Variances: solve for Missing Data LO5, 6

SparkyElectricproducesaspecialtypeofgroundedoutlet.Theoutletsareusedinareaswherewaterislikelytobepresent,suchaskitchens,bathrooms,outdoorworkareas,porches,poolsides,workshops,andsoforth.SparkyElectrichasapolicytomaintainaslittleinventoryofMaterialsAandBaspossible.Forthequarterincludedinthisanalysis,therewasnobeginningorendinginventoryofeithermate-rial.Selectedstandardcostinformationisprovidedbelow:

Cost StandardsMaterial A 2 pounds at $6.00 per pound $12.00Material B 3 gallons at $3.00 per gallon 9.00Labor 4 hours at $3.20 per hour 12.80

Total standard $33.80 unit cost

The performance report for the third quarter of the year appears as follows (F indicates a favorable variance; U indicates an unfa-vorable variance):

Comparison of Actual and Standard Total Actual Standard VarianceMaterial A $37,515 $38,400 $ 885 FMaterial B 30,195 28,800 1,395 ULabor 39,525 40,960 1,435 F

Analysis of Variance Total Usage Price/Rate VarianceMaterial A $1,500 F $ 615 U $ 885 FMaterial B 900 U 495 U 1,395 ULabor 160 F 1,275 F 1,435 F

PrOBLeMsModule.Prob10.08 Flexible Budget Variance

LO2 FortWorthCompanyisaprinterandbinderof

specializedbookletsandpamphlets.Lastyear,thecompany’ssalesmanagerestimatedsalestobe10,000combinedbookletsandpamphlets.Thesalesmanageralsoestimatedthattheitemswouldretailforapproximately$10each.Variousproductioncostsincludingdirectandindirectmaterial,directandindirectlabor,andvariableoverheadwereestimatedtototal$50,000,whilefixedcostswereestimatedtobe$20,000.

Duringtheyear,FortWorth’sunitsalesequaleditsproductionof12,000units.Becauseofchang-ingmarketconditions,specificallycompetition,theaveragesellingpricefelltojust$9.50perunit.Therewereincreasedvariablecostsaswellthatresultedinaverageperunitvariablecostsof$6.Attheendoftheyear,thecompany’scontrolleraccumulatedfixedcostsandfoundthemtobe$21,000.

Required Prepareareporttoshowthedifferencebetweenthe

actualcontributionmarginandthebudgetedcontri-butionmarginperthestaticbudget.Then,comparetheactualcontributionmarginandthebudgetedcontributionmarginpertheflexiblebudget.

Module.Prob10.09 comprehensive Variance Analysis LO3, 5, 6

TurnerCorporationproducesoverdrivetransmissionpartsforseveralsmallspecialtyautomobilecompa-nies.Priortofoundingthecompany,BensonTurner,thecompany’spresident,hadanillustriousstock-car-racingcareer.Afterseveralseriousinjuries,Benson’sfamilyconvincedhimthatitwastimetoretirefromthesportandpursueacalmerandsaferlineofwork.

Thecompanyhasbeenoperatingforjustoverfiveyearsandisbeginningtoshowsignsofsig-nificantgrowth.Bensonisaplannerandhewantstogetahandleonhismanufacturingoperationsbeforethecompany’sgrowthbecomeshisprimarypreoccupation.Thecompany’splantmanagerandcontrollermetlastweektopulltogetherinforma-tionthattheycouldpresenttoBenson.Whilethecompanyproducesover150differentparts,thetwoofthemthoughtthataccumulatingdetaileddataononesingletypicalpartwouldbesufficientforthequicklycalledmeeting.Asaconsequence,thefol-lowingdatawerecapturedforthelast12months:• Budgetedproductionandsales:12,000parts.• Actualproductionandsales:11,000parts.• Eachparthasastandardrequiringonepoundof

materialatabudgetedcostof$1.50perpound.


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RequiredA.Howmanyunitswereproducedduringthe

quarter?B. HowmanypoundsofMaterialAwereuseddur-

ingthequarter?C. Whatwastheactualpricepaidperpoundfor

MaterialAduringthequarter?D.HowmanygallonsofMaterialBwerepurchased

duringthequarter?E. Whatwastheactualpricepaidpergallonfor

MaterialBduringthequarter?F. Howmanyactuallaborhourswereusedduring

thequarter?G.Whatwastheactualwagerateperhourduring

thequarter?

Module.Prob10.11 comprehensive Variance Analysis: Decision Focus LO5, 6, 7, 8

SmallTykesWorldCompanymass-produceschairsforchildren.Thechairscanbepurchasedinavarietyofcolors,butonlyonebasicdesign.Thechairsarewildlypopular,especiallywithyoung,highlyeducatedparents.Thedesignisthekeytothecompany’ssuccessandthereseemstobenoendtothedemandforSmallTykes’products.Thefollowingdatawereextractedfromthecompany’sstandardcostsheet:Plastic 10 pounds at $4.50 per poundMolding 3 feet at $3.00 per footDirect labor 4 hours at $6.00 per hourVariable overhead $3 per direct labor hourFixed overhead $55,000 per period

TransactionsduringthemonthofJunewere:• SmallTykespurchasedplasticat$4.45perpound

andissued185,000poundstoproduction.• SmallTykespurchasedmoldingat$3.10perfoot

andissued50,000feettoproduction.• Thedirectlaborpayrolltotaled$435,000for

72,500hours.• Totaloverheadcostswere$275,000,including

$221,125ofvariableoverhead.• SmallTykesproduced18,000chairsduringthe

month.

RequiredA.Calculateallmaterial,labor,variableoverhead,

andfixedoverheadvariances.B. Interpretthematerialandlaborvariances.What

dotheyindicateaboutthecompany’sperfor-mance?

C. BasedonyourresponsetoquestionB,whatareasneedtobeinvestigated?

D.Howcouldthecompanycontrolorbetterman-ageitsoperations?

E. Inyouropinion,whatarethebestoptions?Why?

Module.Prob10.12 Variable and Fixed Overhead Variances LO1, 7, 8

FranklinGlassWorks’productionbudgetfortheyearendedNovember30,2009,wasbasedon200,000units.Eachunitrequirestwostandardhoursoflaborforcompletion.Totaloverheadwasbudgetedat$900,000fortheyear,andthefixedoverheadratewasestimatedtobe$3perunit.Bothfixedandvariableoverheadareassignedtotheproductonthebasisofdirectlaborhours.TheactualdatafortheyearendedNovember30,2009,areasfollows:Production in units 198,000Labor hours 440,000Variable overhead $352,000Fixed overhead $575,000

RequiredA.Whatarethetotalstandardhoursallowedfor

actualproductionfortheyearendedNovember30,2009?

B. WhatisFranklin’svariableoverheadefficiencyvariance?

C. WhatisFranklin’svariableoverheadspendingvariance?

D.WhatisFranklin’sfixedoverheadspendingvariance?

E. WhatisFranklin’sfixedoverheadvolumevariance?


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exercisesModule.ex11.01 segment and contribution

Margin LO4 ParadiseBurgerCompanymakestwoburgers,each

inaseparatedivision:cheeseburgersandchiliburgers.Segmentedincomestatementsforthemostrecentyearareasfollows: Cheeseburgers ChiliburgersSales $250,000 $600,000Variableexpenses 185,000 360,000Contributionmargin $65,000 $240,000Traceablefixedexpenses 45,000 100,000

Segmentmargin $20,000 $140,000

ParadiseBurger’smanagementisconsideringaspecialadvertisingcampaignduringbroadcastcoverageofamajorsportingevent.Managementhasdeterminedthatbasedontheexpenseoftheadvertisingcam-paign,$28,000,onlyonedivisioncanbefeatured.In-housemarketingstudiessuggestthatthecampaigncouldincreasesalesofthecheeseburgersdivisionby$100,000orincreasesalesofthechiliburgersdivisionby$75,000.

Required Whichproductshouldbefeaturedinthecampaign?

Why?Showcomputationstosupportyourrecom-mendation.

Module.ex11.02 segmented income statements LO4

HenriettaLtd.producesfineclothingforwomen.Therearetwoprimarydivisionswithinthecompany:professionalwearandformalwear.Thefollowingincomestatementswerepreparedforthedivisions: Professional FormalSales $1,200,000 $1,750,000Variableexpenses 955,000 1,360,000

Contributionmargin $245,000 $390,000Fixedexpenses 115,000 175,000

Income $130,000 $215,000

Theaboveincomestatementswerepreparedbyaninexperiencedstaffaccountant.Commonfixedexpensesof$50,000wereallocatedtothetwodivi-sionsasfollows:30percenttoprofessionalwearand70percenttoformalwear.

Required Preparenewsegmentedincomestatementsfor

HenriettaLtd.afterremovingthecommonfixedexpenses.

Module.ex11.03 rOi and Margin LO5 DinningCorporationhastwodivisions.Inthemost

recentyeartheSinteringDivisionreportedsalesof$150,000andanassetturnoverratioof3.0.Thedivision’scontrollerreportedtoheadquartersthattherateofreturnonaverageinvestedassetswas18.0percent.

Required Calculatethepercentageofnetincometosales

(i.e.,margin).

Module.ex11.04 rOi and Asset Turnover LO5

Brew-Me-A-Cupisanewandgrowingchainofcoffeeshops.Thecompanyoperatesitsbusinessusingsegmentstocontrolandmanageoperations.Themostprofitabledivisionisthespecialtydrinksdivision.IntheHillsboroughAvenuelocation,thedivisionhassalesof$600,000,netoperatingincomeof$15,000,andaverageoperatingassetsof$1,200,000.

Required Whatistheassetturnoverforthespecialtydrinks

division?

Module.ex11.05 rOi with Margin and Turnover and residual income LO5

ComfortableCarpetsmanufacturesandinstallsvari-oustypesofcarpetsfortheircustomers.Comfort-ableCarpetshadsalesof$1,200,000fortheyear.Theyalsohavenetoperatingincomeof$300,000,andaverageoperatingassetsof$1,500,000.

RequiredA.WhatisComfortableCarpets’marginandturn-

overfortheyear?B. WhatistheROIforthecompany?


OlivePatchItalianrestaurantisdividedintoseg-mentsbasedonlocation.ItsCapitalBoulevardloca-tionintheeasternsegmenthassalesof$600,000,netoperatingincomeof$60,000,andaverageoperatingassetsof$800,000.

RequiredA.WhatisOlivePatch’smarginandturnover?B. WhatistheROIforOlivePatch?


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M11-2 C h a p t e r 1 1 : D e c e n t r a l i z a t i o n , P e r f o r m a n c e E v a l u a t i o n , a n d t h e B a l a n c e d S c o r e c a r d

perspectiveandtheinternalbusinessperspectiveofthebalancedscorecard.

Required Discusshowqualitycanbeassessed(i.e.,measured)

forthecustomerperspectiveandtheinternalbusi-nessperspective.Useshortandconcisestatements.

Module.ex11.11 Quality costs LO7 Nocompanycansimplywishqualityintobeing;

rather,qualitycomesatacost.Qualitycostsareoftenclassifiedintofourgeneralcategories:preven-tioncosts,appraisalcosts,internalfailurecosts,andexternalfailurecosts..

Required Brieflydescribeeachofthefourgeneralcategories

ofqualitycostsandprovideseveralexamplesofcoststhatmaybeincludedineachcategory.

Module.ex11.12 Quality costs LO7 TimmerMeatsisalargemeatprocessorinthe

southeasternUnitedStates.Thecompany’smostrecentyear’ssalestotaled$50million.Overthelastseveralyears,thecompanyhashadanunfortunatenumberofqualityproblems,whichthreatensthecompany’sexistence.WebbTimmer,thecompany’spresident,askedthecompany’scontrollerandqual-itycontrolmanagertoaccumulatedatarelatedtoproductquality.ThesetwoindividualspreparedthefollowingdataforWebb:Warrantyclaims $120,000Foodpoisoningliabilitylawsuits 200,000Qualitytraining 305,000Inspectionofincomingmeat 900,000Statisticalprocesscontrol 650,000Spoilageandwaste 900,000Productqualityaudits 475,000

RequiredA.Computetotalpreventioncosts.B. Computetotalappraisalcosts.C. Computetotalinternalfailurecosts.D.Computetotalexternalfailurecosts.E. Webbisconsideringspendingmoreoninspec-

tions.Whatisthelikelyimpactonotherfailurecosts?Whatdoyourecommend?

Module.ex11.13 Quality costs LO7 PlumRepublicisanupscaleretailclothingstorethat

sellsclothesforprofessionalworkingwomen.Thestoreexpectssalesof$10millionfortheyear.Plum’scustomershavelodgedrecentcomplaintsaboutthequalityoftheclothesandservicereceivedwhileshoppingatPlumRepublic.Consequently,manage-mentrecentlyimplementedaqualityimprovementprogramandafterseveralmonthsaccumulatedthefollowingdata:


Therearetwodifferenthotelchainsthatyouhaveidentifiedaspotentialinvestmentopportunities.Youarelookingforaminimumrequiredrateofreturnof8percent.Asastartingpoint,youhaveac-cumulatedsomebasicinformationtocalculatethereturnoninvestmentandresidualincome. HotelAster HotelBellaSales $10,000,000 $6,000,000Netoperatingincome 200,000 300,000Averageoperatingassets 2,000,000 3,000,000

Required CalculatetheROIandresidualincomeforeach

hotel.Explainthemeaningofyourcalculations.

Module.ex11.08 residual income LO5 AlliedElectronicshasaparticulardivisionthatgen-

erates$3,000,000insalesandoperatingincomeof$250,000onaverageoperatingassetsof$1,250,000.Thecompany’smanagementteamhasmadeitclearthatdivisionmanagersareexpectedtogeneratesufficientincometoguaranteeaminimumreturnof10percent.

Required Whatisthedivision’sresidualincome?

Module.ex11.09 Net Operating income and residual income LO5

WilliamsonGroupoperatesachainofbookstores.Arecentbusinessexpansionplanresultedintheopeningofmorethan25newstores.TheUplandstorehasonefeaturethattheStowestoredoesnothave—asmallcoffeeshop.Earlyindicationsarethatthecoffeeshophasdrivenupthelocation’srev-enuesandprofits.Operatingdatafortwoofthesestoresisprovidedbelow: Upland StoweROI 18.75% 14.0%Netoperatingincome ? ?Minimumrequiredreturn 15% 15%Averageoperatingassets $200,000 $150,000Residualincome ? ?

RequiredA.Calculatenetoperatingincomeandresidual

incomeforeachdivision.B. Comparethetwodivisionsanddiscusstheuseful-

nessofROIandresidualincomeforthepurposeofcomparingthedivisions.

Module.ex11.10 Assessing Quality and internal Business Perspective LO6

Improvingthequalityofproductsandservicesisanimportantcomponentinboththecustomer


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Costsofreturningpoor-qualityclothesto $ 90,000manufacturersEmployeetrainingforbuyersandsalespeople 15,000Inspectionsofnewmerchandise 30,000Lostsales 100,000

RequiredA.Whatarethetotalpreventioncosts?B. Whatarethetotalappraisalcosts?C. Whatarethetotalinternalfailurecosts?D.Whatarethetotalexternalfailurecosts?

Module.ex11.14 Quality costs LO7 Crabby’sSeafoodRestaurantisafamily-owned

restaurantthathasbeenaroundformanyyearsandtakesprideinitsfreshfishandqualityingredi-ents.However,overthepastyear,Crabby’shashadincreasingnumbersofcomplaintsfromcustomersaboutthequalityofservicereceivedandthequal-ityofthefoodserved,andthecompanywasevensuedforfoodpoisoning.BillCrabby,therestaurant’sowner,accumulatedthefollowingdatarelatedtotherestaurant’sproductqualityandservicequalityoverthelastyear:Costsofcompensatingcustomersfor $7,000unsatisfactorymealsEmployeetrainingforcooksandwaitstaff 15,000Foodpoisoningliabilitylawsuits 20,000Costofremakingentrees 10,000Inspectionofincomingingredients 5,000Spoilageandwastefromdiscarding 2,500poor-qualityfoodLostsales 15,000

RequiredA.Computetotalpreventioncosts.B. Computetotalappraisalcosts.C. Computetotalinternalfailurecosts.D.Computetotalexternalfailurecosts.

PrOBleMsModule.Prob11.15 rOi and eVA LO5 JimMcLean,manageroftheAirflowDivisionofBeal

Manufacturing,iscontemplatingtwoinvestmentalternatives.BecauseBealdoesnothaveexcesscashtomakethenecessaryinvestment,thecompanywillborrow$1.4million.Thecompanywillpayinterestattherateof8percent.Withouteitherinvestmentincluded,hisdivisionhasafter-taxincomeof$3.5millionandaverageoperatingassetsof$29million.Thecompany’staxrateis30percent.Informationrelatedtothetwoinvestmentalternativesisasfollows:

Scrubber CoolingSystemAfter-taxoperatingincome $60,000 $90,000Investmentexpenditure $700,000 $700,000

RequiredA.CalculatetheROIforeachinvestment.Round

youranswertotwodecimals.B. IfBealborrowstheentire$1.4millionforthe

twoinvestments,whatisthecombinedEVAforthetwoinvestments?WilltheinvestmentscreatewealthforBealManufacturing?

Module.Prob11.16 rOi vs. residual income: Decision Focus LO5

RaddingtonIndustriesproducestoolanddiema-chineryforvariousmanufacturers.Twoyearsago,thecompanyexpandedverticallybyacquiringRegisSteelCompany,oneofitssuppliersofalloysteelplates.Inordertomanagethetwoseparatebusi-nesses,theoperationsofRegisSteelarereportedseparatelyasaninvestmentcenter.

Raddingtonmonitorsitsdivisionsonthebasisofbothunitcontributionandreturnonaveragein-vestment(ROI),withtheinvestmentdefinedasaver-ageoperatingassetsused.RaddingtonhasapolicyofbasingallemployeebonusesondivisionalROI.Allinvestmentsinoperatingassetsareexpectedtoearnaminimumreturnof11percentbeforeincometaxes.

Regis’scostofgoodssoldisconsideredtobeentirelyvariable,whereasthedivision’sadministra-tiveexpensesarenotdependentonvolume.Sellingexpensesareamixedcost,with40percentattrib-utedtosalesvolume.Overthelasttwoyears,Regis’sROIhasrangedfrom11.8percentto14.7percent.DuringthefiscalyearendedNovember30,2009,Regiscontemplatedacapitalacquisitionwithanes-timatedROIof11.5percent;however,divisionman-agementdecidedagainsttheinvestmentbecauseitbelievedthattheinvestmentwoulddecreaseRegis’soverallROI.

The2009incomestatementforRegisispre-sentedbelow.Thedivision’soperatingassetswere$15,750,000onNovember30,2009,a5percentincreaseoverthe2008year-endbalance.

RegisSteelDivisionOperatingStatement

FortheYearEndedNovember30,2009($000omitted)

Salesrevenue $25,000Costofgoodssold 16,500

Grossprofit $8,500Administrativeexpenses 3,955Sellingexpenses 2,700

Incomefromoperationsbeforeincometaxes $1,845


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RequiredA.CalculatetheunitcontributionforRegisSteel

Divisionif1,484,000unitswereproducedandsoldduringtheyearendedNovember30,2009.

B. Calculatethereturnoninvestment(ROI)forRegisSteelDivisionfor2009.

C. Calculatetheresidualincomeusingtheaverageoperatingassetsemployedfor2009fortheRegisSteelDivision.

D.ExplainwhythemanagementofRegisSteelDivisionwouldhavebeenmorelikelytoacceptthecontemplatedacquisitionifresidualincomeratherthanROIwereusedasaperformancemeasure.

E. TheRegisSteelDivisionisaseparateinvestmentcenterwithinRaddingtonIndustries.Identifysev-eralitemsthatRegisSteelshouldcontrolifitistobeevaluatedfairlybyeithertheROIorresidualincomeperformancemeasure.

Module.Prob11.17 Quality costs report LO7 WailaiMacadamiaConfectionersisamakeroffine

candiesandchocolates.Thecompany’sfounderbelievesthatproductionhasbecomelesswellcontrolledinrecentmonths,resultinginadecreaseinoverallqualityandagrowingtideofcustomerdissatisfaction.NimiNaoro,qualitycontrolmanager,isalsoconcernedbutshebelievesthatthecompanyisbeingsufficientlyproactivetocombatmostqual-ityconcerns.Sheasksthecontrollertoaccumulateanydatathatmightrelatetothecompany’scurrentqualitycontrolefforts.Thefollowingdataarepro-videdtoNimi:Productrefundsduetoqualityguarantee $60,000claimsProductliabilityclaim(onelawsuitthat 100,000wassettled)Reworkcosts 300,000Qualitytraining 152,500Inspectionofincomingingredients 450,000Statisticalprocesscontrol 325,000Spoilageofchocolates,candies,and 150,000ingredientsProductqualityaudits 237,500Totalannualsales 25,000,000

Required Prepareareportthatshowstotalprevention,ap-

praisal,internalfailure,andexternalfailurecosts.Basedonthereport,whatrecommendationswouldyoumaketothecompany?Besuretoconsidertherelationbetweenqualitycostsandannualsales.

Module.Prob11.18 Quality costs, excel LO7 TannerLeathersimplementedaqualitycontroland

improvementprogramin2009.Thequalitycontrolmanager,adaughterofthecompany’spresident,developedthefollowingtablethatshowsthecomponentsofqualitycostasapercentageofthecompany’ssalesforthelastfiveyears. Internal ExternalYear Prevention Detection Failure Failure2009 3% 4% 9% 13%2010 4 5 8 112011 5 6 6 82012 6 5 4 62013 7 2 1 2

RequiredA.Prepareagraph(i.e.,atrendgraph)thatshows

thetrendforeachqualitycostcategory.TocompletethegraphinExcel,usethechartwizardandselect“XY(scatter)graphwithdatapointsconnectedbylines”asthecharttype.Youshouldhaveonegraphwithfourseparatelines.Showthepercentageofsalesontheverticalaxisandtheyearonthehorizontalaxis.

B. WhatdoesthegraphtellyouaboutthesuccessofTannerLeathers’qualityprogram?


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M12-1C h a p t e r 1 2 : F i n a n c i a l S t a t e m e n t A n a l y s i s

exercisesModule.ex12.01 Profitability ratios LO6 RecentannualreportsofCoca-ColaandPepsiCore-

vealthefollowingfinancialinformation(inmillions): Coca-Cola PepsiCoRevenues $8,338 $13,007Interestexpense 199 345Netincome 1,045 762Averagetotalassets 8,028 10,079

Theincometaxrateis34percent.

RequiredA.Calculatetherateofreturnonassetsforeach

company.B. Breaktherateofreturnonassetsintoreturnon

salesandtotalassetturnover.C. Commentontherelativeprofitabilityofthetwo

companies.

Module.ex12.02 Profitability ratios LO6 Recentannualreportsoftwofastfoodchains

(Company1andCompany2)revealthefollowingfinancialinformation(inmillions): Company1 Company2Revenues $3,043 $8,017Interestexpense 95 184Netincome 852 1,426Averagetotalassets 2,841 7,671

Theincometaxrateis34percent.

RequiredA.Calculatetherateofreturnonassetsforeach

company.B. Breaktherateofreturnonassetsintoreturnon

salesandtotalassetturnover.C. Commentontherelativeprofitabilityofthetwo

companies.

Module.ex12.03 rate of return: comparison of Different companies LO3, 6

Thefollowingdatashowfiveitemsfromthefinan-cialstatementsofthreecompaniesforarecentyear(amountsinmillions):

CompanyA CompanyB CompanyCFortheYearRevenues $8,824 $9,000 $11,742Incomebefore 615 1,043 611interestandrelatedtaxes1

Netincome 477 974 503tocommonshareholders2

AverageduringtheYearTotalassets 9,073 6,833 7,163Common 2,915 3,494 2,888shareholders’equity

1Netincome+Interestexpense×(1−taxrate)2Netincome−Preferredstockdividends

RequiredA.Computetherateofreturnonassetsforeach

company.Separatetherateofreturnonassetsintothereturnonsalesandtheassetturnoverratio.

B. ThethreecompaniesareAmericanAirlines,Johnson&Johnson,andMayDepartmentStores.WhichofthecompaniescorrespondstoA,B,andC,respectively?Whatcluesdidyouuseinreach-ingyourconclusions?

ProbleMsModule.Prob12.04 common-size statements

LO3 FollowingarethebalancesheetsforHoward’s

HammocksforDecember31,2009and2008.Howard’sHammocksComparativeBalanceSheets

2009 2008Cash $130,000 $110,000Accountsreceivable 130,000 120,000Inventory 225,000 215,000Prepaidinsurance 25,000 30,000

Totalcurrentassets $510,000 $475,000

Long-terminvestments $110,000 $75,000Land 200,000 175,000Propertyandequipment 215,000 95,000Accumulateddepreciation (105,000) (80,000)

$420,000 $265,000

Totalassets $930,000 $740,000

Continued on next page


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M12-2 C h a p t e r 1 2 : F i n a n c i a l S t a t e m e n t A n a l y s i s

LiabilitiesandShareholders’EquityNotespayable $3.2 $3.7 $4.2Accountspayable 2.8 3.7 4.1Accruedexpenses 0.9 1.1 1.0

Totalcurrentliabilities $6.9 $8.5 $9.3Long-termdebt,6%interest 3.0 2.0 1.0

Totalliabilities $9.9 $10.5 $10.3Shareholders’equity 8.9 9.2 9.1

Totalliabilitiesandshareholders’equity $18.8 $19.7 $19.4

IncomeStatementfortheYearEndedDecember31(inmillions)Netsales $24.2 $24.5 $24.9Costofgoodssold (16.9) (17.2) (18.0)

Grossmargin $7.3 $7.3 $6.9Sellingandadministrativeexpenses (6.6) (6.8) (7.3)

Earnings(loss)beforetaxes $0.7 $0.5 $(0.4)Incometaxes (0.3) (0.2) 0.2

Netincome $0.4 $0.3 $(0.2)

RequiredA.Whatistherateofreturnontotalassetsfor2009?B. Whatisthecurrentratiofor2009?C. Whatisthequick(acid-test)ratiofor2009?D.Whatistheprofitmarginfor2008?E. Whatistheprofitmarginfor2009?F. Whatistheinventoryturnoverfor2008?G.Whatistheinventoryturnoverfor2009?H.Whatistherateofreturnonstockholders’equity

for2008?I. Whatistherateofreturnonstockholders’equity

for2009?J. Whatisthedebt-equityratiofor2009?

Howard’sHammocksComparativeBalanceSheets(continued)

2009 2008Accountspayable $60,000 $50,000Payrollpayable 10,000 8,000Taxespayable 10,000 9,000

Totalcurrentliabilities $80,000 $67,000Notespayable 100,000 80,000Capitalstock 500,000 400,000Retainedearnings 250,000 193,000

Totalliabilitiesandstockholders’equity $930,000 $740,000

Required Usingtheprecedingincomestatementfigures,pre-

parecommon-sizestatementsfor2009and2008.

Module.Prob12.05 comprehensive ratio Analysis LO4, 5, 6

UsingthefollowingfinancialstatementsforEagleCompany,computetherequiredratios:

EagleCompanyBalanceSheetasofDecember31(inmillions)

2007 2008 2009AssetsCash $2.6 $1.8 $1.6Governmentsecurities 0.4 0.2 0.0Accountsandnotesreceivable 8.0 8.5 8.5Inventories 2.8 3.2 2.8Prepaidassets 0.7 0.6 0.6

Totalcurrentassets $14.5 $14.3 $13.5Property,plant,andequipment(net) 4.3 5.4 5.9

Totalassets $18.8 $19.7 $19.4


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M13-1C h a p t e r 1 3 : T h e S t a t e m e n t o f C a s h F l o w s

exercisesModule.ex13.01 Accrual to cash: Direct

Method LO2 VardyToys,Inc.,prepaysinsuranceinJanuaryofeach

yearonvariouspolicies.Thebeginningbalanceinpre-paidinsurancewas$12,500,andtheendingbalancewas$10,000.Theincomestatementreportsinsuranceexpenseof$65,000.

Required Underthedirectmethod,whatamountwouldap-

pearforcashpaidforinsuranceintheoperatingsectionofthestatementofcashflows?

Module.ex13.02 Accrual to cash: Direct Method LO2

WilliamsMedia,Inc.’scomparativebalancesheetsin-cludedaccountsreceivableof$100,000onDecember31,2008,and$125,000onDecember31,2009.SalesofconsultingservicesreportedbyWilliamsMediaonits2009incomestatementamountedto$2million.

Required WhatistheamountofcashcollectionsthatWilliams

MediashouldreportintheOperatingsectionofits2009statementofcashflows,assumingthatthedirectmethodisused?

Module.ex13.03 Accrual to cash: Direct Method LO2

Workman-SmithCompany’scomparativebalancesheetsincludedinventoryof$120,000onDecember31,2008,and$110,000onDecember31,2009.Workman-Smith’scomparativebalancesheetsalsoincludedaccountspayableof$60,000onDecember31,2008,and$55,000onDecember31,2009.Workman-Smith’saccountspayablebalancesarecomposedsolelyofamountsduetosuppliersforpurchasesoninventory.Costofgoodssold,asreportedbyWorkman-Smithonits2009incomestatement,amountedto$850,000.

Required Whatistheamountofcashpaymentsforinventory

thatWorkman-SmithshouldreportintheOperatingActivitiessectionofits2009statementofcashflows,assumingthatthedirectmethodisused?

Module.ex13.04 Adjustments to Net income Using the indirect Method: Operating Activities LO1

TiffanyCompanyusestheindirectmethodtopreparetheOperatingActivitiessectionofthestatementofcashflows.ThefollowingactivitiesoccurredduringtheyearatTiffanyCompany.a. __________Depreciationexpenseb. __________Gainonthesaleofuseddeliverytruckc. __________Baddebtexpensed. __________Increaseinaccountspayablee. __________Purchaseofanewdeliverytruck

f. __________Lossonretirementofbondsg. __________Increaseinprepaidrenth. __________Decreaseininventoryi. __________Increaseininvestmentsj. __________Amortizationofpatents

Required Foreachoftheaboveitems,fillintheblanktoindicate

whetheritwouldbeaddedtonetincome(A),deductedfromnetincome(D),ornotreportedinthissectionofthestatementundertheindirectmethod(NR).

Module.ex13.05 cash equivalents and investing Activities LO1, 3

VanPatten,Inc.,madetwopurchasesduringSeptem-ber.Onewasa$25,000certificateofdepositthatma-turesin90days.Theotherwasa$50,000investmentinMicrosoftcommonstockthatwillbeheldindefinitely.

Required Howshouldeachofthesetransactionsbetreated

onthestatementofcashflows?

Module.ex13.06 Financing Activities LO1, 3 WaldenBookBuyersbuys5,000sharesofitsown

commonstockat$25pershare.Thecompanypur-chasesthesharesasTreasurystock.

Required Howisthistransactionreportedonthestatementof

cashflows?

Module.ex13.07 investing Activities: indirect Method LO1, 3

WashburnDeliveryCompanysoldacompanycarfor$12,000.Itsoriginalcostwas$35,000,andtheaccu-mulateddepreciationatthetimeofsalewas$20,000.

Required Howdoesthetransactiontorecordthesaleappear

onastatementofcashflowspreparedusingtheindirectmethod?

Module.ex13.08 cash equivalents LO1, 3 WhitneyR.V.’sInc.hasinvesteditsexcesscashinthe

followinginstrumentsduringDecember2008:Certificate of deposit, due Jan. 31, 2009 $100,000Certificate of deposit, due May 31, 2009 150,000Investment in City of Portland bonds, due June 30, 2009 110,000Investment in Sheetz Inc. stock 125,000A money market fund 225,00090-day Treasury bills 125,000Treasury note, due December 2009 200,000

RequiredA.Whatshouldbeincludedincashequivalentsat

year-end2008?B. Whereshouldtheamountofcashequivalentsbe

disclosed?


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Netincomefor2009is$35,000.Depreciationexpenseis$22,000.Assumethatallsalesandallpurchasesareonaccount.

RequiredA.PreparetheOperatingActivitiessectionof

thestatementofcashflows,usingtheindirectmethod.Explainwhycashflowfromoperatingactivitiesismoreorlessthanthenetincomefortheperiod.

B. WhatadditionalinformationdoyouneedtopreparetheOperatingActivitiessectionofthestatementofcashflowsusingthedirectmethod?

C. Explaintheusefulnessofeachmethodformana-gerialdecisionmaking.

prObleMModule.prob13.09 Operating Activities:

Direct vs. indirect Method LO1, 2, 3 Theaccountbalancesforthenon-cashcurrentassets

ofAllenCompanyareasfollows: December31

2008 2009

Accounts receivable $ 45,000 $ 38,000

Inventory 40,000 50,000

Prepaid insurance 21,000 17,000

Total current assets $106,000 $105,000


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exercises module.ex02.04 basic cost flows: raw materials...

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