financial accounting mglmod12

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Module 12 Demonstration Problem 1 Ramirez Company Ramirez Company uses a JIT system with backflush costing. The following transactions occurred in 20001. 1. Raw materials costing $250,000 were purchased on account. 2. Direct labor costs of $150,000 were incurred but not paid. 3. Actual overhead costs of $285,000 were incurred but not yet paid. 4. Goods with raw materials costing $250,000 were completed and transferred to Finished Goods. 5. Conversion costs $432,000 were applied to finished goods. 6. Goods costing $582,000 were sold. 7. The goods were sold to customers on account for $750,000. 8. The over-applied/under-applied overhead was closed to cost of goods sold. Journal entries: Transact ion ACCOUNT DEBIT CREDIT 1 Materials and Work in Process Accounts Payable 250,000 250,00 0 2 Conversion Costs Wages Payable 150,000 150,00 0 3 Conversion Costs Accounts Payable 285,000 285,00 0 4 Finished Goods Materials and Work in Process 150,000 150,00 0 5 Finished Goods Conversion Costs 432,000 432,00 0 6 Cost of Goods Sold 582,000

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Page 1: Financial Accounting mglmod12

Module 12

Demonstration Problem 1Ramirez Company

Ramirez Company uses a JIT system with backflush costing. The following transactions occurred in 20001.

1. Raw materials costing $250,000 were purchased on account.2. Direct labor costs of $150,000 were incurred but not paid.3. Actual overhead costs of $285,000 were incurred but not yet paid.4. Goods with raw materials costing $250,000 were completed and transferred to Finished Goods.5. Conversion costs $432,000 were applied to finished goods.6. Goods costing $582,000 were sold.7. The goods were sold to customers on account for $750,000.8. The over-applied/under-applied overhead was closed to cost of goods sold.

Journal entries:

Transaction ACCOUNT DEBIT CREDIT1 Materials and Work in Process

Accounts Payable250,000

250,0002 Conversion Costs

Wages Payable150,000

150,0003 Conversion Costs

Accounts Payable285,000

285,0004 Finished Goods

Materials and Work in Process150,000

150,0005 Finished Goods

Conversion Costs432,000

432,0006 Cost of Goods Sold

Finished Goods582,000

582,0007 Accounts Receivable

Sales Revenue750,000

750,0008 Cost of Goods Sold

Conversion Costs3,000

3,000

Page 2: Financial Accounting mglmod12

Demonstration Problem 2Parker Company

Parker Company produces two parts A and B. Part A has a unit contribution margin of $150. Part B has a unit contribution margin of $200. Part A uses 3 hours of machine time and part B uses 5 hours of machine time hours in the cutting department. The binding constraint is that there are only 240 machine hours available per week.

1. What is the optimal mix of products that Parker Company should produce each week?2. Suppose there is a demand constraint. Only 40 units of each part can be sold in a week. What is the optimal mix of products that Parker Company should produce?

Solution

1. Each unit of Part A has contribution margin = $150, and requires 3 hours of machine time. Thus contribution margin per unit of constrained resource = $150/3 = $50/machine hour. Each unit of Part B has contribution margin = $200, and requires 5 hours of machine time.Thus contribution margin per unit of constrained resource = $200/5 = $40/machine hour. Since the contribution margin per unit of constrained resource is higher for part A, the company should produce as much of part A as possible.

Total machine hours available = 240Thus the company should produce 240/3 = 80 units of part A

The optimal mix is 80 units of part A and 0 units of part B.

2. The company should try to sell as much of part A as possible since this part has a higher contribution margin per unit of the constrained resource. Since only 40 units of part A can be sold, the company should make 40 units of part A each week. The 40 units require 40 x 3 = 120 hours of machine time.

Thus 120 hours (240-120) are available for the production of part B. Number of units of part B produced each week = 120/5 = 24

Thus the optimal mix with the demand constraint is 40 units of part A and 24 units of part B each week.

Page 3: Financial Accounting mglmod12

Practice Problem 1Smith Company

Smith Company uses a JIT system with backflush costing. The following transactions occurred in August 2001.

1. Raw materials costing $32,000 were purchased on account.2. Direct labor costs of $27,000 were incurred but not paid.3. Actual overhead costs of $25,000 were incurred but not yet paid.4. Goods with raw materials costing $32,000 were completed and transferred to Finished Goods.5. Conversion costs $54,000 were applied to finished goods.6. Goods costing $86,000 were sold.7. The goods were sold to customers on account for $105,000.8. The over-applied/under-applied overhead was closed to cost of goods sold.

Journal entries:

Transaction ACCOUNT DEBIT CREDIT1 Materials and Work in Process

Accounts Payable32,000

32,0002 Conversion Costs

Wages Payable27,000

27,0003 Conversion Costs

Accounts Payable25,000

25,0004 Finished Goods

Materials and Work in Process32,000

32,0005 Finished Goods

Conversion Costs54,000

54,0006 Cost of Goods Sold

Finished Goods86,000

86,0007 Accounts Receivable

Sales Revenue105,000

105,0008 Conversion Costs

Cost of Goods Sold2,000

2,000

Page 4: Financial Accounting mglmod12

Practice Problem 2Harding Company

Harding Company produces two parts A and B. Part A has a unit contribution margin of $60. Part B has a unit contribution margin of $45. Part A uses 15 minutes of direct labor and part B uses 30 minutes of direct labor in the welding department, which employs 10 workers who work 8-hour shifts. 1. What is the optimal mix of products that Harding Company should produce each day?2. Suppose there is a demand constraint. Only 200 units of each part can be sold in a day. What is the optimal mix of products that Parker Company should produce?

Solution

1. Contribution margin of part A = $60Part A requires 15 minutes of labor timeThus contribution margin per unit of constrained resource = $60/15 = $4/minute of direct labor.

Contribution margin of part B = $45Part B requires 30 minutes of labor timeThus contribution margin per unit of constrained resource = $45/30 = $1.50/minute of direct labor.

Since the contribution margin per unit of constrained resource is higher for part A, the company should produce as much of part A as possible.

Total direct labor hours available per day = 10 workers x 8 hours /worker = 80 hours

The company can produce 4 (60 minutes/15 minutes per part) units of part A in one hour.Thus the company should produce 80 x 4 = 320 units of part A

The optimal mix is 320 units of part A and 0 units of part B.

2. The company should try to sell as much of part A as possible since this part has a higher contribution margin per unit of the constrained resource. Since only 200 units of part A can be sold, the company should make 200 units of part A each day. The 200 units require 50 (200/4) hours of direct labor.

Thus 30 hours (80-50) are available for the production of part B.Two units of part B can be produced in one hour.Thus the number of units of part B produced each day = 30 x 2 = 60

Thus the optimal mix with the demand constraint is 200 units of part A and 60 units of part B each day.

Page 5: Financial Accounting mglmod12

ExercisesMultiple Choice

1. Which of the following is not required for calculating the economic order quantity for a merchandising firm?

A. stock-out costsB. setup costsC. ordering costsD. carrying costs

2. Assume that the annual demand for a product is D. The carrying cost one unit of inventory is C. The cost of placing and receiving an order is P. The number of units ordered in each order is U. The economic order quantity is the square root of

A. 2DC/PB. 2DU/PC. 2DP/CD. 2DP/U

3. Langhans Company uses a part purchased from suppliers in its products. The economic order quantity of this part is 5,000 units. The average and maximum daily usage are 500 and 600 units respectively. The lead time is 3 days. What is the reorder point assuming that no safety stock is carried?

A. 1,800 unitsB. 1,500 unitsC. 1,200 unitsD. 500 units

4. Martinez Company uses a part purchased from suppliers in its products. The economic order quantity of this part is 2,000 units. The average and maximum daily usage are 200 and 250 units respectively. The lead time is 4 days. What is the reorder point assuming that safety stock is carried?

A. 250 unitsB. 600 unitsC. 800 unitsD. 1,000 units

5. Under backflush costing, the actual overhead costs are debited toA. Manufacturing OverheadB. Conversion CostsC. Work in ProcessD. Raw Materials Inventory

Page 6: Financial Accounting mglmod12

6. Under backflush costing, which of the following accounts is debited for materials purchases?A. Materials and Work-in-Process InventoryB. Conversion CostsC. Work in ProcessD. Raw Materials Inventory

7. Which of the following costs is a direct cost in a JIT environment? Assume that in the JIT environment, production occurs in cells dedicated to a single product.

A. Salaries of sales staffB. Salaries of production supervisorC. Cost of air-conditioning and heatingD. landscaping costs

8. Which of the following costs is not a direct cost in a JIT environment? Assume that in the JIT environment, production occurs in cells dedicated to a single product.

A. Cost of power for machines in a cellB. Salaries of production supervisorC. Direct laborD. Salary of Accounting Staff

9. The theory of constraints focuses on improving organizational performance by exploitingA. internal constraintsB. external constraintsC. binding constraintsD. loose constraints

II. Matching ProblemE Constraints on firm due to limited demand

for productsA. Internal Constraints.

F Costs of placing and receiving an order B. Reorder PointB Point in time where a new order should be

placedC. Loose Constraints

A Constraints on firm due to limited labor or machine hours in production departments

D. Economic Order Quantity

C Constraint whose limited resources are not fully utilized by a product mix

E. External Constraints

D Order quantity that minimizes the total of ordering and carrying costs

F. Ordering Costs

H Constraint whose limited resources are fully utilized by a product mix

G. Safety Stock

G Extra inventory carried because of demand uncertainties

H. Binding Constraints

Page 7: Financial Accounting mglmod12

Homework Problem 1Allen Company

Allen Company uses a JIT system with backflush costing. The following transactions occurred in 2001.

1. Raw materials costing $120,000 were purchased on account.2. Direct labor costs of $90,000 were incurred but not paid.3. Actual overhead costs of $132,000 were incurred but not yet paid.4. Goods with raw materials costing $120,000 were completed and transferred to Finished Goods.5. Conversion costs $225,000 were applied to finished goods.6. Goods costing $345,000 were sold.7. The goods were sold to customers on account for $500,000.8. The over-applied/under-applied overhead was closed to cost of goods sold.

Journal entries:

Transaction ACCOUNT DEBIT CREDIT1 Materials and Work in Process

Accounts Payable120,000

120,0002 Conversion Costs

Wages Payable90,000

90,0003 Conversion Costs

Accounts Payable132,000

132,0004 Finished Goods

Materials and Work in Process120,000

120,0005 Finished Goods

Conversion Costs225,000

225,0006 Cost of Goods Sold

Finished Goods345,000

345,0007 Accounts Receivable

Sales Revenue500,000

500,0008 Conversion Costs

Cost of Goods Sold 3,000

3,000

Page 8: Financial Accounting mglmod12

Homework Problem 2Baird Company

Baird Company uses a JIT system with backflush costing. The following transactions occurred in May 2001.

1. Raw materials costing $25,000 were purchased on account.2. Direct labor costs of $18,000 were incurred but not paid.3. Actual overhead costs of $28,000 were incurred but not yet paid.4. Goods with raw materials costing $25,000 were completed and transferred to Finished Goods.5. Conversion costs of $44,000 were applied to finished goods.6. Goods costing $66,000 were sold.7. The goods were sold to customers on account for $79,000.8. The over-applied/under-applied overhead was closed to cost of goods sold.

Journal entries:

Transaction ACCOUNT DEBIT CREDIT1 Materials and Work in Process

Accounts Payable25,000

25,0002 Conversion Costs

Wages Payable18,000

18,0003 Conversion Costs

Accounts Payable28,000

28,0004 Finished Goods

Materials and Work in Process25,000

25,0005 Finished Goods

Conversion Costs44,000

44,0006 Cost of Goods Sold

Finished Goods66,000

66,0007 Accounts Receivable

Sales Revenue79,000

79,0008 Cost of Goods Sold

Conversion Costs2,000

2,000

Page 9: Financial Accounting mglmod12

Homework Problem 3White Corporation

White Corporation produces two parts A and B. Part A has a unit contribution margin of $20. Part B has a unit contribution margin of $45. Part A uses 1/3 hours of direct labor and part B uses 0.5 hours of direct labor in the machining department, which employs 10 workers who work 8-hour shifts. 1. What is the optimal mix of products that White Corporation should produce each day?2. Suppose there is a demand constraint. Only 120 units of each part can be sold in a day. What is the optimal mix of products that Parker Company should produce?

Solution

1. Contribution margin of part A = $20Part A requires 20 minutes (1/3 hours) of labor timeThus contribution margin per unit of constrained resource = $20/20 = $1.00/direct labor minute.

Contribution margin of part B = $45Part B requires 30 minutes (0.5) hours of labor timeThus contribution margin per unit of constrained resource = $45/30 = $1.50/direct labor minute.

Since the contribution margin per unit of constrained resource is higher for part B, the company should produce as much of part B as possible.

Total direct labor hours available per day = 10 workers x 8 hours /worker = 80 hours

The company can produce 2 units of part B in one hour.Thus the company should produce 80 x 2 = 160 units of part A

The optimal mix is 0 units of part A and 160 units of part B.

2. The company should try to sell as much of part B as possible since this part has a higher contribution margin per unit of the constrained resource. Since only 120 units of part B can be sold, the company should make 120 units of part B each week. The 120 units require 120 x 0.5 = 60 hours of direct labor.

Thus 20 hours (80- 60) are available for the production of part A.Three units of part A can be produced in one hour.Thus number of units of part A produced each day = 20 x 3 = 60

Thus the optimal mix with the demand constraint is 60 units of part A and 120 units of part B each day.

Page 10: Financial Accounting mglmod12

Homework problem 4Haley Corporation

Haley Company produces two parts A and B. Part A has a unit contribution margin of $100. Part B has a unit contribution margin of $60. Part A uses 4 hours of machine time and part B uses 2 hours of machine time. The binding constraint is that there are only 180 machine hours available per week.

1. What is the optimal mix of products that Haley Company should produce each week?2. Suppose there is a demand constraint. Only 50 units of each part can be sold in a week. What is the optimal mix of products that Haley Company should produce?

Solution

1. Contribution margin of part A = $100Part A requires 4 hours of machine timeThus contribution margin per unit of constrained resource = $100/4 = $25/machine hour.

Contribution margin of part B = $60Part B requires 2 hours of machine timeThus contribution margin per unit of constrained resource = $60/2 = $30/machine hour.

Since the contribution margin per unit of constrained resource is higher for part B, the company should produce as much of part B as possible. Total machine hours available = 180Thus the company should produce 180/2 = 90 units of part B

The optimal mix is 0 units of part A and 90 units of part B.

2. The company should try to sell as much of part B as possible since this part has a higher contribution margin per unit of the constrained resource. Since only 50 units of part B can be sold, the company should make 50 units of part A each week. The 50 units require 50 x 2 = 100 hours of machine time.

Thus 80 hours (180-100) are available for the production of part A. Number of units of part A produced each week = 80/4 = 20

Thus the optimal mix with the demand constraint is 20 units of part A and 50 units of part B each week.

Page 11: Financial Accounting mglmod12

I. Indicate whether each of the following costs is a direct cost in a traditional and JIT environment. In the JIT environment, production occurs in cells dedicated to a product/product line. Check yes if the cost can be traced to products usually by physical observation without undue cost or inconvenience. Check no, if the cost must be assigned using activity drivers or allocation.

Item Traditional environment

JIT environment

Supervisor salary (cell/department) no yesLandscaping costs no noSalary of accounting Staff no noDirect materials yes yesSupplies used by production supervisor no yesMachine maintenance (cell) no yesReceiving materials no yesInsurance on factory no noCost of power for machines no yesDepreciation on machines no yes

II. Indicate whether each of the following costs is a direct cost in a traditional and JIT environment. In the JIT environment, production occurs in cells dedicated to a single product. Check yes if the cost can be traced to products usually by physical observation without undue cost or inconvenience. Check no, if the cost must be assigned using activity drivers or allocation.

Traditional environment

JIT environment

Depreciation of building no noMaintenance no yesSalary of sales staff no noDirect labor yes yesCost of heating the building no noParts for machines (cell) no yesMaterials handling no yesProperty taxes no noCost of power for machines no yesDepreciation on machines no yes