Exercises and Problems

EXERCISES AND PROBLEMS

85. The Zygon Corporation was recently formed to produce a semiconductor chip that forms an essential part of the personal computer manufactured by a major corporation. The direct materials are added at the start of the production process while conversion costs are added uniformly throughout the production process. June is Zygon's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totaled $895,000, while conversion costs equaled $4,225,000. Accounting records indicate that 475,000 chips were started in June and 425,000 chips were completed. Ending inventory was 50% complete as to conversion costs. Required: a. What is the total manufacturing cost per chip for June? b. Allocate the total costs between the completed chips and the chips in ending inventory. Answer: a. Cost to account for Divided by equiv units Cost per equivalent units

Direct Materials $895,000 475,000 $1.88

Conversion Costs $4,225,000 450,000 $9.39

Total $5,120,000 $11.27

Equivalent unit for conversion costs = 425,000 completed + (50,000 x 0.5 completed) = 425,000 + 25,000 = 450,000 b.

Completed units = $11.27 x 425,000 = $4,789,750 Ending work in process = Direct materials = 50,000 x $1.88 = Conversion costs = 25,000 x $9.39 = Total

Difficulty: Terms to Learn:

2 Objective: 2 process-costing system, equivalent units

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$ 94,000 234,750 $328,750

86. Cedar Rapids Chemical placed 220,000 liters of direct materials into the mixing process. At the end of the month, 10,000 liters were still in process, 30% converted as to labor and factory overhead. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Cedar Rapids Chemical uses weighted-average costing. Required: a. Determine the equivalent units in process for direct materials and conversion costs, assuming there was no beginning inventory. b.

Determine the equivalent units in process for direct materials and conversion costs, assuming that 12,000 liters of chemicals were 40% complete prior to the addition of the 220,000 liters.

Answer: a. Direct materials: Beginning inventory Units started Equivalent units

0 liters 220,000 liters 220,000 liters

Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory

0 liters 220,000 liters 220,000 liters 210,000 liters 10,000 liters

Units transferred out Ending inventory, 30% complete Equivalent units b.

210,000 liters 3,000 liters 213,000 liters

Direct materials: Completed and transferred out (210,000 + 12,000) Ending inventory, 100% complete Equivalent units

222,000 liters 10,000 liters 232,000 liters

Conversion costs: Completed and transferred out Ending inventory, 30% complete Equivalent units

222,000 liters 3,000 liters 225,000 liters

Difficulty: Terms to Learn:

2 Objective: 5 weighted-average process-costing method, equivalent units

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87. Jordana Woolens is a manufacturer of wool cloth. The information for March is as follows: Beginning work in process Units started Units completed

10,000 units 20,000 units 25,000 units

Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labor during month Factory overhead

$ 6,000 $ 2,600 $30,000 $12,000 $ 5,000

Beginning work in process was half converted as to labor and overhead. Direct materials are added at the beginning of the process. All conversion costs are incurred evenly throughout the process. Ending work in process was 60% complete. Required: Prepare a production cost worksheet using the weighted-average method. Include any necessary supporting schedules. Answer: PRODUCTION COST WORKSHEET Flow of production Work in process, beginning Started during period To account for

Physical Units 10,000 20,000 30,000

Units completed Work in process, ending Accounted for

Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs

Direct Materials

Conversion

25,000 5,000 30,000

25,000 5,000 30,000

25,000 3,000 28,000

Totals $ 8,600 47,000 $55,600

Direct Materials $ 6,000 30,000 $36,000 30,000 $ 1.20

Conversion $ 2,600 17,000 $19,600 28,000 $ 0.70

$

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1.90

87. (continued) Assignment of costs Costs transferred out (25,000 x $1.90) Work in process, ending Direct materials (5,000 x $1.20) Conversion (5,000 x $0.70 x 0.60) Costs accounted for

Difficulty: Terms to Learn:

$47,500 6,000 2,100 $55,600

3 Objective: 5 weighted-average process-costing method, equivalent units

88. Four Seasons Company makes snow blowers. Materials are added at the beginning of the process and conversion costs are uniformly incurred. At the beginning of September, work in process is 40% complete and at the end of the month it is 60% complete. Other data for the month include: Beginning work-in-process inventory Units started Units placed in finished goods Conversion costs Cost of direct materials Beginning work-in-process costs: Materials Conversion

1,600 units 2,000 units 3,200 units $200,000 $260,000 $154,000 $ 82,080

Required: a. Prepare a production cost worksheet with supporting schedules using the weighted-average method of process costing. b. Prepare journal entries to record transferring of materials to processing and from processing to finished goods.

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Answer: a.

PRODUCTION COST WORKSHEET

Flow of Production Work in process, beginning Started during period To account for

Physical Units 1,600 2,000 3,600

Units completed Work in process, ending Accounted for

Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs

3,200 400 3,600

Totals $236,080 460,000 $696,080 $197

Assignment of costs Completed units (3,200 x $197) Work in process, ending Direct materials (400 x $115) Conversion (400 x $82 x 0.60) Costs accounted for

Direct Materials

Conversion

3,200 400 3,600

3,200 240 3,440

Direct Materials $154,000 260,000 $414,000 3,600 $ 115

Conversion $ 82,080 200,000 $282,080 3,440 $ 82

$630,400 $46,000 19,680

65,680 $696,080

b. Work in Process Materials Inventory Finished Goods Work in Process

Difficulty: Terms to Learn:

260,000 260,000 630,400 630,400

3 Objective: 4, 5 weighted-average process-costing method, equivalent units

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89. Surf Products Company uses an automated process to clean and polish its souvenir items. For March, the company had the following activities: Beginning work in process inventory Units placed in production Units completed Ending work in process inventory

3,000 items, 1/3 complete 12,000 units 9,000 units 6,000 items, 1/2 complete

Cost of beginning work in process Direct material costs, current Conversion costs, current

$2,500 $9,000 $7,700

Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. Required: Prepare a production cost worksheet using the FIFO method. Answer: PRODUCTION COST WORKSHEET Flow of production Work in process, beginning Started during period To account for

Physical Units 3,000 12,000 15,000

Units Completed: Work in process, beginning Started and completed Work in process, ending

Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs

3,000 6,000 6,000 15,000

Totals $ 2,500 16,700 $19,200 $1.45

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Direct Materials

6,000 6,000 12,000

Direct Materials $ 9,000 $ 9,000 12,000 $ 0.75

Conversion

2,000 6,000 3,000 11,000

Conversion $ 7,700 $ 7,700 11,000 $ 0.70

89. (continued) Assignment of costs Work in process, beginning Completion of beginning (2,000 x $0.70) Total beginning inventory Started and Completed (6,000 x $1.45) Total costs transferred out Work in process, ending Direct materials (6,000 x $0.75) Conversion (6,000 x $0.70 x 0.50) Costs accounted for

Difficulty: Terms to Learn:

$ 2,500 1,400 3,900 8,700 $12,600 $4,500 2,100

6,600 $19,200

3 Objective: 6 first-in, first-out (FIFO) process-costing method, equivalent units

90. The Laramie Factory produces expensive boots. It has two departments that process all the items. During January, the beginning work in process in the tanning department was 40% complete as to conversion and 100% complete as to direct materials. The beginning inventory included $6,000 for materials and $18,000 for conversion costs. Ending work-in-process inventory in the tanning department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 60% complete as to conversion. Beginning inventories included $7,000 for transferred-in costs and $10,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows:

Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Conversion costs Transferred-out cost

Tanning 5,000 14,000 16,000 ?

Finishing 4,000 ? 18,000 2,000

$18,000 32,000 50,000

? $19,000 ?

Required: Prepare a production cost worksheet using weighted-average costing for the finishing department.

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Answer: Production Cost Worksheet Finishing Department Weighted-Average Method Flow of production Work in process, beginning Transferred in during period To account for

Physical Units 4,000 16,000 20,000

Conversion

Trans-In

18,000 2,000 20,000

18,000 600 18,600

18,000 2,000 20,000

Totals $17,000 69,000 $86,000

Conversion $10,000 19,000 $29,000 18,600 $ 1.56

Trans-in $ 7,000 50,000 $57,000 20,000 $ 2.85

Units transferred out Work in process, ending Accounted for

Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs

$

Assignment of costs Transferred out (18,000 x $4.41) Work in process, ending Transferred-in costs (2,000 x $2.85) Conversion (600 x $1.56) Costs accounted for

Difficulty: Terms to Learn:

4.41

$79,380 $5,700 936

6,636 $86,016

3 Objective: 8 weighted-average process-costing method, equivalent units

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91. Lexington Company produces baseball bats and cricket paddles. It has two departments that process all products. During July, the beginning work in process in the cutting department was half completed as to conversion, and complete as to direct materials. The beginning inventory included $40,000 for materials and $60,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 80% complete as to conversion. Direct materials for finishing the units are added near the end of the process. Beginning inventories included $24,000 for transferred-in costs and $28,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows:

Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Conversion costs Transferred-out cost

Cutting 20,000 60,000 64,000

Finishing 24,000

$48,000 28,000 128,000

$34,000 68,500

68,000 20,000

Required: Prepare a production cost worksheet, using FIFO for the finishing department. Answer: Production Cost Worksheet Finishing Department FIFO Method Flow of Production Work in process, beginning Started during period To account for

Physical Units 24,000 64,000 88,000

Direct Materials

Conversion

Trans-In

4,800 44,000 6,000 54,800

44,000 20,000 64,000

Good units completed Beginning work in process Started and completed Ending work in process Accounted for

24,000 44,000 20,000 88,000

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24,000 44,000 0 68,000

91.

(continued) Costs WIP, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs

Totals $ 52,000 230,500 $282,500 $

3.75

Assignment of costs Work in process, beginning Completion of beginning: Direct Materials (24,000 x $0.50) Conversion (4,800 x $1.25) Total Beginning Inventory Started and Completed (44,000 x $3.75) Total costs transferred out Work in process ending: Transferred-in (20,000 x $2.00) Conversion (20,000 x $1.25 x 0.30) Costs accounted for Difficulty: Terms to Learn:

DMaterials $34,000 $34,000 68,000 $ 0.50

Conversion

Trans-In

$68,500 $68,500 54,800 $ 1.25

$128,000 $128,000 64,000 $ 2.00

$ 52,000 $12,000 6,000

$40,000 7,500

18,000 70,000 165,000 235,000

47,500 $282,500

3 Objective: 8 first-in, first-out (FIFO) process-costing method, equivalent units

92. General Fabricators assembles its product in several departments. It has two departments that process all units. During October, the beginning work in process in the cutting department was half completed as to conversion, and complete as to direct materials. The beginning inventory included $12,000 for materials and $3,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 75% complete as to conversion. Direct materials are added at the end of the process. Beginning inventories included $16,000 for transferred-in costs and $20,000 for conversion costs. Ending inventory was 25% complete. Additional information about the two departments follows: Cutting 20,000 40,000 50,000 10,000 $48,000 $16,000 $ 8,000

Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Direct manufacturing labor Other conversion costs

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Finishing 20,000 50,000 20,000 $28,000 $40,000 $24,000

Required: Prepare a production cost worksheet using weighted-average for the cutting department and FIFO for the finishing department. Answer: Production Cost Worksheet Cutting Department Weighted-Average Method Flow of Production Work in process, beginning Started during period To account for

Physical Units 20,000 40,000 60,000

Units transferred out Work in process, ending Accounted for

Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs

50,000 10,000 60,000

Totals $15,000 72,000 87,000 $

1.50

Direct Materials

Conversion

50,000 10,000 60,000

50,000 4,000 54,000

Direct Materials $12,000 48,000 60,000 60,000 $ 1.00

Conversion $ 3,000 24,000 27,000 54,000 $ 0.50

Assignment of costs Transferred out (50,000 x $1.50) Work in process, ending Direct materials (10,000 x $1.00) Conversion (10,000 x 0.40 x $0.50) Costs accounted for

$75,000 $10,000 2,000

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12,000 $87,000

92. (continued) Production Cost Worksheet Finishing Department FIFO Method

Work in process, beginning Started During Period To account for

Physical Units 20,000 50,000 70,000

Good Units Completed: Beginning Work in process Started and Completed Ending work in process Accounted for

20,000 30,000 20,000 70,000

Flow of Production

Totals

Costs Work in process, beginning Costs added during period Total Costs to account for Divided by equivalent units Equivalent-unit costs

$ 36,000 167,000 $203,000 $

3.66

Direct Materials

20,000 30,000 0 50,000

Direct Materials $28,000 $28,000 50,000 $ 0.56

Conversion

Trans-In

5,000 30,000 5,000 40,000

30,000 20,000 50,000

Conversion

Trans-In

$64,000 $64,000 40,000 $ 1.60

$75,000 $75,000 50,000 $ 1.50

Assignment of costs Work in process, beginning Completion of beginning: Direct Materials (20,000 x $0.56) Conversion (20,000 x 0.25 x $1.60) Total Beginning Inventory Started and Completed (30,000 x $3.66) Total costs transferred out Work in process ending Transferred-in (20,000 x $1.50) Conversion (20,000 x $1.60 x 0.25) Costs accounted for

Difficulty: Terms to Learn:

$ 36,000 $11,200 8,000

$30,000 8,000

19,200 55,200 109,800 165,000

38,000 $203,000

3 Objectives: 5-8 first-in, first-out (FIFO) process-costing method, equivalent units

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EXERCISES AND PROBLEMS 138.

The president of the company, Gregory Peters, has come to you for help. Use the following data to prepare a flexible budget for possible sales/production levels of 10,000, 11,000, and 12,000 units. Show the contribution margin at each activity level. Sales price Variable costs: Manufacturing Administrative Selling Fixed costs: Manufacturing Administrative

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$24 per unit $12 per unit $ 3 per unit $ 1 per unit $60,000 $20,000

Answer: Flexible Budget for Various Levels of Sales/Production Activity Units

10,000

11,000

12,000

Sales

$240,000

$264,000

$288,000

Variable costs: Manufacturing Administrative Selling

120,000 30,000 10,000

132,000 33,000 11,000

144,000 36,000 12,000

Total variable costs

160,000

176,000

192,000

Contribution margin

80,000

88,000

96,000

Fixed costs: Manufacturing Administrative

60,000 20,000

60,000 20,000

60,000 20,000

-0-

$ 8,000

$ 16,000

Operating income/(loss)

Difficulty: Terms to Learn:

$

2 Objective: flexible budget

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2

139.

Strauss Table Company manufactures tables for schools. The 20X5 operating budget is based on sales of 20,000 units at $100 per table. Operating income is anticipated to be $120,000. Budgeted variable costs are $64 per unit, while fixed costs total $600,000. Actual income for 20X5 was a surprising $354,000 on actual sales of 21,000 units at $104 each. Actual variable costs were $60 per unit and fixed costs totaled $570,000. Required: Prepare a variance analysis report with both flexible-budget and sales-volume variances. Answer: Strauss Table Company Variance Analysis Actual Results Units sold Sales Variable costs

Flexible Variances

Flexible Budget

21,000

Sales-Volume Variances

21,000

Static Budget 20,000

$2,184,000 1,260,000

$84,000 F 84,000 F

$2,100,000 1,344,000

$100,000 F 64,000 U

$2,000,000 1,280,000

Contribution margin Fixed costs

$924,000 570,000

$168,000 F 30,000 F

$756,000 600,000

$36,000 F 0

$720,000 600,000

Operating income

$354,000

$198,000 F

$156,000

$36,000 F

$120,000

Total flexible-budget variance = $198,000 favorable. Total sales-volume variance = $36,000 favorable.

Difficulty: 2 Objective: 2 Terms to Learn: static budget, flexible-budget variance, sales-volume variance

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140.

Nicholas Company manufacturers TVs. Some of the company's data was misplaced. Use the following information to replace the lost data:

Analysis

Flexible Variances

Flexible Budget

Sales-Volume Variances

112,500

Revenues

$42,080

$1,000 F

(A)

$1,400 U

(B)

(C)

$200 U

$15,860

$2,340 F

$18,200

$8,280

$860 F

$9,140

$17,740

(D)

$16,080

Fixed Costs Operating Income

112,500

Static Budget

Units Sold

Variable Costs

:

Actual Results

103,125

$9,140 (E)

Required: a. What are the respective flexible-budget revenues (A)? b. What are the static-budget revenues (B)? c. What are the actual variable costs (C)? d. What is the total flexible-budget variance (D)? e. What is the total sales-volume variance (E)? f. What is the total static-budget variance?

Answer: a. $42,080 – $1,000 = $41,080 b. $41,080 + $1,400 = $42,480 c. $15,860 + $200 = $16,060 d. $17,740 – $16,080 = $1,660 favorable e. $2,340 favorable + $1,400 unfavorable = $940 favorable f. $17,740 – $15,140 = $2,600 favorable

Difficulty: 2 Objective: 2 Terms to Learn: flexible budget, static budget, static-budget variance, flexiblebudget variance, sales-volume variance

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$15,140

141.

Madzinga’s Draperies manufactures curtains. A certain window requires the following: Direct materials standard Direct manufacturing labor standard

10 square yards at $5 per yard 5 hours at $10

During the second quarter, the company made 1,500 curtains and used 14,000 square yards of fabric costing $68,600. Direct labor totaled 7,600 hours for $79,800. Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labor price and efficiency variances for the quarter.

Answer: a. Direct materials variances: Actual unit cost

= $68,600/14,000 square yards = $4.90 per square yard

Price variance

= 14,000 x ($5.00 – $4.90) = $1,400 favorable

Efficiency variance

= $5.00 x [14,000 – (1,500 x 10)] = $5,000 favorable

b. Direct manufacturing labor variances: Actual labor rate

= $79,800/7,600 = $10.50 per hour

Price variance

= 7,600 x ($10.50 – $10.00) = $3,800 unfavorable

Efficiency variance

= $10.00 x (7,600 – 7,500) = $1,000 unfavorable

Difficulty: 2 Objective: 4 Terms to Learn: price variance, efficiency variance

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142.

The following data for the Alma Company pertain to the production of 1,000 urns during August. Direct Materials (all materials purchased were used): Standard cost: $6.00 per pound of urn. Total actual cost: $5,600. Standard cost allowed for units produced was $6,000. Materials efficiency variance was $120 unfavorable. Direct Manufacturing Labor: Standard cost is 2 urns per hour at $24.00 per hour. Actual cost per hour was $24.50. Labor efficiency variance was $336 favorable. Required: a. What is standard direct material amount per urn? b. What is the direct material price variance? c. What is the total actual cost of direct manufacturing labor? d. What is the labor price variance for direct manufacturing labor?

17-19

Answer: a. Standard cost per urn

= $6,000/1,000 = $6.00 per urn

Standard number of pounds per urn

= $6.00/$6.00 = 1.0 pound per urn

b. Materials price variance

= Total variance – efficiency variance = ($5,600 – $6,000) – $120 unfavorable = $520 favorable

c. Total standard labor cost of actual hours

= ((1,000/2) x $24) – $336 favorable = $11,664 = $11,664/24 = 486 hours = 486 x $24.50 = $11,907

Actual hours Total actual costs

= $11,907 – $11,664 = $243 unfavorable

d. Labor price variance

Difficulty: 3 Objective: 4 Terms to Learn: price variance, efficiency variance

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143.

The following data for the telephone company pertain to the production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost in a windstorm. Direct Materials (All materials purchased were used.) Standard cost per roll: a pounds at $4.00 per pound. Total actual cost: b pounds costing $9,600. Standard cost allowed for units produced was $9,000. Materials price variance: c . Materials efficiency variance was $80 unfavorable. Direct Manufacturing Labor Standard cost is 3 hours per roll at $8.00 per hour. Actual cost per hour was $8.25. Total actual cost: d . Labor price variance: e . Labor efficiency variance was $400 unfavorable. Required: Compute the missing elements in the report represented by the lettered items. Answer: a. Standard cost per roll

= $9,000/450 = $20.00

Standard number of pounds per roll = $20/$4 = 5 pounds per roll b. Actual pounds

= ($9,000 + $80)/$4 = 2,270 pounds

c. Materials price variance

= $9,600 – ($9,000 + $80) = $520 unfavorable

d. Total standard labor cost of actual hours = (450 x 3 x $8) + $400 = $11,200 Actual hours = $11,200/$8 = 1,400 Total actual cost

= 1,400 x $8.25 = $11,550 = $11,550 – $11,200 = $350 unfavorable

e. Labor price variance

Difficulty: 3 Objective: 4 Terms to Learn: standard cost, price variance, efficiency variance

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144.

Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts:

Category Direct Materials Direct Labor Direct Marketing

Standard Inputs for 1 output 1.00 0.30 0.50

Standard Cost per input $7.50 9.00 3.00

Actual performance for the company is shown below: Actual output: (in units) Direct Materials: Materials costs Input purchased and used Actual price per input Direct Manufacturing Labor:

4,000 $30,225 3,900 $7.75

Labor costs

$11,470

Labor-hours of input Actual price per hour Direct Marketing Labor:

1,240 $9.25

Labor costs

$5,880

Labor-hours of input Actual price per hour

2,100 $2.80

Required: a. What is the combined total of the flexible-budget variances? b. What is the price variance of the direct materials? c. What is the price variance of the direct manufacturing labor and the direct marketing labor, respectively? d. What is the efficiency variance for direct materials? e. What are the efficiency variances for direct manufacturing labor and direct marketing labor, respectively?

17-22

Answer: a. Actual Results Direct materials $30,225 Direct manufacturing labor 11,470 Direct marketing labor 5,880 $47,575

Flexible Budget $30,000 10,800 6,000 $46,800

Variances $225U 670 U 120 F $775 U

b. ($7.75 – $7.50) x (3,900) = $975 unfavorable c. Manufacturing Labor ($9.25 – $9.00) x 1,240 = $310 unfavorable Marketing Labor ($2.80 – $3.00) x 2,100 = $420 favorable d. [3,900 – (4,000 units x 1.00)] x $7.50 = $750 favorable e. Manufacturing Labor = [1,240 hours – (4,000 x 0.30 hours)] x $9.00 = $360 unfavorable Marketing Labor = [2,100 hours – (4,000 x 0.50 hours)] x $3.00 = $300.00 unfavorable Difficulty: 3 Objective: 4 Terms to Learn: standard cost, flexible-budget variance, price variance, efficiency variance 145.

Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $2.00 per gram. During February, 22,000 grams were purchased for $2.10 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y. Required: a. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the materials purchasing manager. b. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the production manager. c. Discuss the issues involved in determining the price variance at the point of purchase versus the point of consumption.

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Answer: a. Material price variance

b. Material price variance

= 22,000 x ($2.10 – $2.00) = $2,200 unfavorable = 20,000 x ($2.10 – $2.00) = $2,000 unfavorable

c. Measuring the price variance at the time of materials purchased is desirable in situations where the amount of materials purchased varies substantially from the amount used during the period. Failure to measure the price variance based on materials purchased could result in a substantial delay in determining that a price change occurred. Also, if the purchasing manager is to be held accountable for his/her purchasing activities, it is appropriate to have the materials price variances computed at the time of purchase so the manager can include the variances on his/her monthly report. This encourages the purchasing manager to be more responsible for the activities under his/her control. It provides a closer relationship between responsibility and authority and becomes a relevant performance measure. Difficulty: 2 Objectives: 4, 5 Terms to Learn: price variance, efficiency variance

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146.

During February the Lungren Manufacturing Company's costing system reported several variances that the production manager was surprised to see. Most of the company's monthly variances are under $125, even though they may be either favorable or unfavorable. The following information is for the manufacture of garden gates, its only product: 1. 2. 3. 4.

Direct materials price variance, $800 unfavorable. Direct materials efficiency variance, $1,800 favorable. Direct manufacturing labor price variance, $4,000 favorable. Direct manufacturing labor efficiency variance, $600 unfavorable.

Required: a. Provide the manager with some ideas as to what may have caused the price variances. b. What may have caused the efficiency variances? Answer: a. Direct materials' unfavorable price variance may have been caused by: (1) paying a higher price than the standard for the period, (2) changing to a new vendor, or (3) buying higher-quality materials. Direct manufacturing labor's favorable price variance may have been caused by: (1) changing the work force by hiring lower-paid employees, (2) changing the mix of skilled and unskilled workers, or (3) not giving pay raises as high as anticipated when the standards were set for the year. b. Direct materials' favorable efficiency variance may have been caused by: (1) employees/machinery working more efficiency and having less scrap and waste materials, (2) buying better-quality materials, or (3) changing the production process. Direct manufacturing labor's unfavorable efficiency variance may have been caused by: (1) poor working conditions, (2) changes in the production process (learning something new initially takes longer), (3) different types of direct materials to work with, or (4) poor attitudes on behalf of the workers. Difficulty: 3 Objective: 5 Terms to Learn: price variance, efficiency variance

17-25

147.

Mayberry Company had the following journal entries recorded for the end of June. Unfortunately, the company's only accountant quit on July 10 and the president is at a loss as to the company's performance for the month of June. Materials Control Direct Materials Price Variance Accounts Payable Control Work-in-Process Control Direct Materials Efficiency Variance Materials Control Work-in-Process Control Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Wages Payable Control

150,000 5,000 145,000 60,000 4,000 64,000 425,000 7,500 9,000 423,500

Required: a. What kind of performance did the company have for June? Explain each variance. b. Why is Direct Materials given in two entries? Answer: a. The first entry is for materials purchases. The credit entry indicates a favorable variance. This could be an indicator that the purchasing agent did a good job or he/she bought inferior goods. Production was not as lucky in June. The debit entry for materials efficiency indicates that more materials were used than should have been under the operating plans for the month. For labor, the price was unfavorable, while the efficiency was favorable. This could have been caused by using higher-priced workers who were, in fact, better workers. Of course, there are many other possible causes. b. Recoding variances for direct materials is completed with two separate entries since the price variance is isolated at the point of purchase, while the efficiency variance is isolated at the point of use. Difficulty: 2 Objectives: 5 Terms to Learn: price variance, efficiency variance, standard cost

17-26

148.

Waddell Productions makes separate journal entries for all cost accounting-related activities. It uses a standard cost system for all manufacturing items. For the month of June, the following activities have taken place: Direct Manufacturing Materials Purchased Direct Manufacturing Materials Used Direct Materials Price Variance (at time of purchase) Direct Materials Efficiency Variance Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Direct Manufacturing Labor Payable

$300,000 250,000 10,000 unfavorable 15,000 favorable 6,000 favorable 4,000 favorable 170,000

Required: Record the necessary journal entries to close the accounts for the month. Answer: Materials Control Direct Manufacturing Materials Price Variance Accounts Payable Control

300,000 10,000 310,000

Work-in-Process Control Direct Materials Efficiency Variance Materials Control

265,000

Work-in-Process Control Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Wages Payable Control

180,000

15,000 250,000

Difficulty: 3 Objective: 5 Terms to Learn: price variance, efficiency variance, standard cost

17-27

6,000 4,000 170,000

149.

Tyson’s Hardware uses a flexible budget to develop planning information for its warehouse operations. For 20X5, the company anticipated that it would have 96,000 sales units for 664 customer shipments. Average storage bin usage for various inventories was estimated to be 200 per day. The costs and cost drivers were determined to be as follows: Item Product handling Storage Utilities Shipping clerks Supplies

Fixed $10,000 1,000 1,000

Variable $1.25 3.00 1.50 1.00 0.50

Cost driver per 100 units per storage bin per 100 units per shipment per shipment

During the year, the warehouse processed 90,000 units for 600 customer shipments. The workers used 225 storage bins on average each day to sort, store, and process goods for shipment. The actual costs for 20X5 were: Item Product handling Storage Utilities Shipping clerks Supplies

Actual costs $10,900 465 2,020 1,400 340

Required: a. Prepare a static budget for 20X5 with static-budget variances. b. Prepare a flexible budget for 20X5 with flexible-budget variances. Answer: a. Tyson’s Hardware — Static Budget with Variances — 20X5 Static Actual Budget Product handling $10,900 $11,200 Storage 465 600 Utilities 2,020 2,440 Shipping clerks 1,400 1,664 Supplies 340 332 Total $15,125 $16,236

17-28

Variances $300 F 135 F 420 F 264 F 8U $1,111 F

b.

Tyson’s Hardware — Flexible Budget with Variances — 20X5 Flexible Actual Budget Product handling $10,900 $11,125 Storage 465 675 Utilities 2,020 2,350 Shipping clerks

1,400

340 $15,125

300 $16,050

Supplies Total

Variances $225 F 210 F 330 F 1,600200

40 U $925 F

Difficulty: 2 Objective: 6 Terms to Learn: static budget, flexible budget, static-budget variance, flexiblebudget variance CRITICAL THINKING 150. Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. Answer: A static budget is one based on the level of output planned at the start of the budget period. A flexible budget calculates budgeted revenue and budgeted costs based on the actual output in the budget period. The only difference between the static budget and the flexible budget is that the static budget is prepared for the planned output, whereas the flexible budget is prepared based on the actual output. A static budget variance is the difference between the actual results and the corresponding budgeted amounts in the static budget. A flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on the actual output in the budget period. Difficulty: Terms to Learn:

2 Objective: 1 static budget, flexible budget

17-29

F

151. The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: A Level 0 variance is simply the difference between actual operating income and planned operating income in the static budget. A Level 1 variance would be any of the differences between the static budget and the actual results that make up operating income. Examples of such differences could include the following items: Units sold (Static budget – actual) Revenues (Static budget – actual) Material costs (Static budget – actual) Direct manufacturing labor (Static budget – actual) Variable manufacturing overhead (Static budget – actual) Contribution margin (Static budget – actual) Fixed costs (Static budget – actual) A Level 2 variance subdivides the level 0 variance (which is the total of the Level 1 variances) into a sales volume variance and a flexible-budget variance. The sales volume variance is the difference between the flexible budget amount and the corresponding static budget amount. The flexible budget variance is an actual result and the corresponding flexible budget amount based on the actual output level in the budget period. Specific examples of Level 2 variances could include any of the items shown in the list of Level 1 variances. A Level 3 variance would include price variances that reflect the difference between the actual input price and a budgeted input price, such as the direct material price variance, the direct labor rate variance, and the variable overhead rate variance. Level 3 variances would also include efficiency variances that reflect the difference between an actual input quantity and a budgeted input quantity. Examples would include material quantity variances, labor efficiency variances, and variable overhead efficiency variances. Difficulty: Terms to Learn:

3 variance

Objective:

2,3

152. Describe the purpose of variance analysis. Answer: Variance analysis should help the company learn about what happened and how to perform better and should not be a tool in playing the ―blame game.‖ Difficulty: Terms to Learn:

2 variance

Objective:

17-30

5

153. Give at least three good reasons why a favorable price variance for direct materials might be reported. Answer: Any three of the following: a. The purchasing manager skillfully negotiated a better purchase price. b. The purchasing manager changed to a lower-priced supplier. c. The purchasing manager purchased in larger quantities resulting in quantity discounts. d. The purchasing manager changed to lower-quality materials. e. An unexpected industry oversupply resulted in decreased prices for materials. f. Budgeted purchase prices were not carefully set. Difficulty: Terms to Learn:

3 Objective: price variance

4

154. Give at least three good reasons why an unfavorable efficiency variance for direct manufacturing labor might be reported. Answer: Any three of the following: a. More lower-skilled workers were scheduled than planned. b. Work was inefficiently scheduled. c. Machines were not properly maintained. d. Budgeted time standards were too tight. Difficulty: Terms to Learn:

3 Objective: efficiency variance

4

155. What is benchmarking, and how is it useful to a company? Answer: Benchmarking is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance in competing companies or in companies having similar processes. Companies can examine aspects of their own operations in comparison to similar operations and see if they are operating at a disadvantage. Benchmarking might provide targets and opportunities to cut costs, and might even show where they have a competitive advantage over similar companies. Difficulty: Terms to Learn:

2 Objective: benchmarking

17-31

7

EXERCISES AND PROBLEMS 183. Spirit Company sells three products with the following seasonal sales pattern: Quarter 1 2 3 4

Products B 30% 20% 20% 30%

A 40% 30% 20% 10%

C 10% 40% 40% 10%

The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows: Product A B C

Units 50,000 125,000 62,500

Selling Price $4 10 6

Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

17-32

Answer: First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

20,000 x $4

15,000 x $4

10,000 x $4

5,000 x $4

50,000 x $4

$80,000

$60,000

$40,000

$20,000

$200,000

37,500 x $10

25,000 x $10

25,000 x $10

37,500 x $10

125,000 x $10

$375,000

$250,000

$250,000

6,250 x $6

25,000 x $6

25,000 x $6

6,250 x $6

62,500 x $6

Sales

$37,500

$150,000

$150,000

$37,500

$375,000

Total

$492,500

$460,000

$440,000

Product A: Sales (units) Price Sales Product B: Sales (units) Price Sales Product C: Sales (units) Price

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

17-33

$375,000 $1,250,000

$432,500 $1,825,000

184. Lubriderm Corporation has the following budgeted sales for the next six-month period: Month June July August September October November

Unit Sales 90,000 120,000 210,000 150,000 180,000 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month. Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds. Required: a. Prepare production budgets in units for July, August, and September. b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month. Answer: a. Budgeted sales Add: Required ending inventory

July 120,000 42,000

August 210,000 30,000

September 150,000 36,000

Total inventory requirements Less: Beginning inventory

162,000 24,000

240,000 42,000

186,000 30,000

Budgeted production

138,000

198,000

156,000

Production in units

July 138,000

August 198,000

September 156,000

Targeted ending inventory in lbs.* Production needs in lbs.***

297,000 690,000

234,000 990,000

987,000 207,000

1,224,000 297,000

1,032,000 234,000

Purchases needed in lbs. Cost ($8 per lb.)

780,000 x $8

927,000 x $8

798,000 x $8

Total material purchases

$6,240,000

$7,416,000

$6,384,000

b.

Total requirements in lbs. Less: Beginning inventory in lbs.

* ** ***

****

0.3 times next month's needs (180,000 + 24,000 - 36,000) times 5 lbs. x 0.3 5 lbs. times units to be produced, across row 17-34

**

252,000 780,000

****

(690,000 x .3) = 207,000 lbs., etc. row across

Difficulty: 3 Objective: 3 Terms to Learn: operating budget 185. Gerdie Company has the following information: Month March April May June July

Budgeted Sales $50,000 53,000 51,000 54,500 52,500

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for April through June. Answer: Desired ending inventory Plus COGS Total needed Less beginning inventory Total purchases

April $ 9,180 31,800 40,980 9,540 $31,440

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

17-35

May $ 9,810 30,600 40,410 9,180 $31,230

June $ 9,450 32,700 42,150 9,810 $32,340

Total $ 9,450 95,100 104,550 9,540 $ 95,010

186. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. b.

Determine the quantity of framing, glass, and backing that is to be purchased during August. Determine the total costs of direct materials for August purchases.

Answer: a. Desired ending inventory* Production needs (10,000 units)**

b.

Framing 2,250 40,000

Glass 750 10,000

Backing 750 20,000

Total needs Less: Beginning inventory

42,250 1,500

10,750 500

20,750 500

Purchases planned

40,750

10,250

20,250

Cost of direct materials: Framing (40,750 x $0.30) Glass (10,250 x $6.00) Backing (20,250 x $2.25) Total

$12,225.00 61,500.00 45,562.50 $119,287.50

*1,500 x 1.5 = 2,250 framing 500 x 1.5 = 750 glass 500 x 1.5 = 750 backing **10,000 x 4 = 40,000 framing 10,000 x 1 = 10,000 glass 10,000 x 2 = 20,000 backing

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

17-36

187. Michelle Enterprises reports the year-end information from 20X5 as follows: Sales (100,000 units) Less: Cost of goods sold Gross profit Operating expenses (includes $10,000 of Depreciation) Net income

$250,000 150,000 100,000 60,000 $ 40,000

Michelle is developing the 20X6 budget. In 20X6 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 20X6. Answer: Michelle Enterprises Budgeted Income Statement For the Year 20X6 Sales (95,000 x $2.75) Cost of goods sold (20X6 sales x 62%) Gross profit Less: Operating expenses [($0.50 x 95,000] + $10,000) Net income

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

17-37

$261,250 161,975 99,275 57,500 $ 41,775

188. Brad Corporation is using the kaizen approach to budgeting for 20X5. The budgeted income statement for January 20X5 is as follows: Sales (240,000 units) Less: Cost of goods sold

$720,000 480,000

Gross margin Operating expenses (includes $64,000 of fixed costs) Net income

240,000 192,000 $ 48,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month. Required: Prepare a kaizen-based budgeted income statement for March of 20X5. Answer: Sales Less: Cost of goods sold ($480,000 x 0.99 x 0.99) Gross margin Operating expenses [($128,000 x 0.99 x 0.99) + $64,000] Net income

$720,000 470,448 249,552 189,453 $ 60,099

Difficulty: 2 Objective: 5 Terms to Learn: kaizen budgeting

17-38

189. Allscott Company is developing its budgets for 20X5 and, for the first time, will use the kaizen approach. The initial 20X5 income statement, based on static data from 20X4, is as follows: Sales (140,000 units) Less: Cost of goods sold

$420,000 280,000

Gross margin Operating expenses (includes $28,000 of depreciation)

140,000 112,000

Net income

$28,000

Selling prices for 20X5 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%. Required: Prepare a kaizen-based budgeted income statement for 20X5. Answer: Sales (126,000 x $3.24) Less: COGS (126,000 x $1.80)

$408,240 226,800

Gross margin 181,440 Operating expenses ($28,000 + $79,800) Net income

107,800 $ 73,640

Difficulty: 2 Objectives: 4, 5 Terms to Learn: kaizen budgeting, sensitivity analysis

17-39

190. Russell Company has the following projected account balances for June 30, 20X5: Accounts payable Accounts receivable Depreciation, factory Inventories (5/31 & 6/30) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable

$40,000 100,000 24,000 180,000 200,000 80,000 4,000 140,000 160,000

Sales Capital stock Retained earnings Cash Equipment, net Buildings, net Utilities, factory Selling expenses Maintenance, factory

$800,000 400,000 ? 56,000 240,000 400,000 16,000 60,000 28,000

Required: a. Prepare a budgeted income statement for June 20X5. b. Prepare a budgeted balance sheet as of June 30, 20X5. Answer: a. Sales Cost of goods sold: Materials used Wages Depreciation Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries Net income b.

Assets: Cash Accounts receivable Inventories Equipment, net Buildings, net Total

Russell Company Income Statement For the Month of June 20X5 $800,000 $200,000 140,000 24,000 4,000 28,000 16,000

$60,000 80,000

412,000 388,000

140,000 $248,000

Russell Company Balance Sheet June 30, 20X5 $ 56,000 100,000 180,000 240,000 400,000 $976,000

Liabilities and Owners’ Equity: Accounts payable $ 40,000 Bonds payable 160,000 Capital stock 400,000 Retained earnings* 376,000 Total

*$976,000 – ($40,000 + $160,000 + $400,000) = $376,000 Difficulty: 2 Objectives: 3, A Terms to Learn: operating budget 17-40

$976,000

191. Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 20,000 units of Big and 10,000 units of Bigger. Shamokin plans on having an ending inventory of 4,000 units of Big and 2,000 units of Bigger. Currently, Shamokin has 1,000 units of Big in its inventory and 800 units of Bigger. Each product requires two labor operations: molding and polishing. Product Big requires one hour of molding time and one hour of polishing time. Product Bigger requires one hour of molding time and two hours of polishing time. The direct labor rate for molders is $20 per molding hour, and the direct labor rate for polishers is $25 per polishing hour. Required: Prepare a direct labor budget in hours and dollars for each product. Desired Production: Big 20,000 4,000 24,000 1,000 23,000

Bigger 10,000 2,000 12,000 800 11,200

Direct Labor Budget for Big: Molding Desired Production of Big 23,000 Hours of Labor Required per unit 1 Total Hours of Labor Required 23,000 Direct Labor Rate $20 Cost of Direct Labor for Big $460,000

Polishing 23,000 1 23,000 $25 $575,000

$1,035,000

Direct Labor Budget for Bigger: Molding Desired Production of Bigger 11,200 Hours of Labor Required per unit 1 Total Hours of Labor Required 11,200 Direct Labor Rate $20 Cost of Direct Labor for Bigger $224,000

Polishing 11,200 2 22,400 $25 $560,000

$784,000

$1,135,000

$1,819,000

Expected sales Desired ending inventory Production needs Less: beginning inventory Desired production

Total Direct Labor Costs

$684,000

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

17-41

Total

192. Duffy Corporation has prepared the following sales budget: Month May June July August September

Cash Sales $16,000 20,000 18,000 24,000 22,000

Credit Sales $68,000 80,000 74,000 92,000 76,000

Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. Required: Prepare a schedule of cash collections for July through September. Answer: July $18,000

August $24,000

September $22,000

Total $64,000

Collections of credit sales from: Current month 29,600 Previous month 36,000 Two months ago 6,800

36,800 33,300 8,000

30,400 41,400 7,400

96,800 110,700 22,200

$102,100

$101,200

$293,700

Cash sales

Total collections

$90,400

Difficulty: 2 Objective: A Terms to Learn: cash budget

17-42

193. The following information pertains to Amigo Corporation: Month July August September October November December 



Sales $30,000 34,000 38,000 42,000 48,000 60,000

Purchases $10,000 12,000 14,000 16,000 18,000 20,000

Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30% Month following sale 50% Two months following sale 15% Amount uncollectible 5% 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required: a. Prepare a summary of cash collections for the 4th quarter. b. Prepare a summary of cash disbursements for the 4th quarter. Answer: a. Cash collections Oct $36,448 + Nov $40,812 + Dec $47,940 = $125,200 August September October November December

October $ 5,100 19,000 12,348

November

-------$36,448

--------$40,812

5,700 21,000 14,112

December

6,300 24,000 17,640 -------$47,940

b. Cash disbursements Oct $14,800 + Nov $16,800 + Dec $18,800 = $50,400 September October November December

October 8,400 6,400

-------$14,800 Difficulty: 2 Terms to Learn: cash budget

November 9,600 7,200 --------$16,800 Objective: A

17-43

December

10,800 8,000 -------$18,800

EXERCISES AND PROBLEMS 134. Cocoa Pet Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled: Product Standard Deluxe Overhead costs

Number of Setups 3 7

Number of Components 30 50

$20,000

$60,000

Number of Direct Labor Hours 650 150

Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours. a. What is the total amount of overhead costs assigned to the standard model? b. What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead. c. What is the total amount of overhead costs assigned to the standard model? d. What is the total amount of overhead costs assigned to the deluxe model? e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why? Answer: a. [$80,000 / (650 + 150)] x 650 = $65,000 b.

[$80,000 / (650 + 150)] x 150 = $15,000

c.

Setups: $20,000 / (3 + 7) = $2,000 Components: $60,000 / (30 + 50) = $750 ($2,000 x 3) + ($750 x 30) = $28,500

d.

($2,000 x 7) + ($750 x 50) = $51,500

e.

Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated.

Difficulty: 2 Objectives: 1, 3, 5, 8 Terms to Learn: activity-based costing (ABC)

17-44

135. Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 20X5, Come-On-In compiled the following data for the two products: Deluxe Standard Sales units 50,000 400,000 Sales price per unit Direct material and labor costs per unit Manufacturing support costs per unit

$650.00 $180.00 $ 80.00

$475.00 $130.00 $120.00

Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 20X5: Activity Setups Machine-related Packing

Cost Driver of setups of machine hours of shipments

Cost $ 500,000 $44,000,000 $ 5,000,000

Total 500 600,000 250,000

Deluxe 400 300,000 50,000

Standard 100 300,000 200,000

Required: a. Using the current system, what is the estimated 1. total cost of manufacturing one unit for each type of door? 2. profit per unit for each type of door? b.

Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?

c.

Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)?

d.

Using the activity-based costing data presented above, 1. compute the cost-driver rate for each overhead activity. 2. compute the revised manufacturing overhead cost per unit for each type of entry door. 3. compute the revised total cost to manufacture one unit of each type of entry door.

e.

Is the deluxe door as profitable as the original data estimated? Why or why not?

f.

What considerations need to be examined when determining a sales mix strategy? 17-45

Answer: a. Currently estimated deluxe-entry door total cost per unit is $260 = $180 + $80. Currently estimated standard-entry door total cost per unit is $250 = $130 + $120. Currently estimated deluxe-entry door profit per unit is $390 = $650 – $260. Currently estimated standard-entry door profit per unit is $225 = $475 – $250. b.

Support manufacturing costs are currently allocated based on direct labor dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labor is needed to manufacture each unit in the deluxe product line.

c.

The high machine-related costs are probably a result of purchasing the new robotics equipment for the deluxe product line. Yes, the total number of machine hours is the same for each product line, but the deluxe line uses 6 machine hours per unit (300,000 mh / 50,000 units), while the standard product line only uses 0.75 machine hours per unit (300,000 mh / 400,000 units). By evaluating machine hours per unit rather than total machine hours, these numbers make more sense.

d1. Manufacturing overhead cost driver rates: Setup activity is $1,000/setup = $500,000/500 setups. Machine-related activity is $73.33/machine hour = $44,000,000/600,000 machine hours. Packing activity is $20/shipment = $5,000,000/250,000 shipments. d2. Revised overhead costs per unit: Deluxe-entry door is $468 per unit = [($1,000 x 400) + ($73.33 x 300,000) + ($20 x 50,000)] / 50,000 units. Standard-entry door is $65.25 per unit = [($1,000 x 100) + ($73.33 x 300,000) + ($20 x 200,000)] / 400,000 units. d3. Revised total cost per unit for the deluxe-entry door is $648.00 = $180.00 + $468.00. Revised total cost per unit for the standard-entry door is $195.25 = $130.00 + $65.25. e.

No, the deluxe door is not as profitable as originally estimated because the deluxe door requires a disproportionate share of the overhead activities (the robotics system) and thus, more of the overhead costs are assigned to the deluxe door when using an ABC system. Revised profit per unit for the deluxe-entry door is $2.00 = $650.00 – $648.00. Revised profit per unit for the standard-entry door is $279.75 = $475.00 – $195.25. Currently estimated deluxe-entry door profit per unit is $390 = $650 – $260. Currently estimated standard-entry door profit per unit is $225 = $475 – $250.

17-46

f.

First, the sales-mix strategy ought to consider the current and future market demands for the two types of entry doors. Other considerations include the capacity-related constraints of the robotics system, other equipment, and the facilities. The fact that customers may be willing to pay more for the deluxe doors should be considered when evaluating the profitability of each product line. Costs do not drive a sales-mix strategy. Difficulty: 3 Objectives: 1,3,5,6 Terms to Learn: activity-based costing (ABC)

136. Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply: BRASS

CHROME

WHITE

30,000

50,000

40,000

Selling price

$40

$20

$30

Direct materials

$ 8

$ 4

$ 8

Direct labor

$15

$ 3

$ 9

$12

$ 3

$ 9

Direct labor hours

40

10

30

Machine hours

25

25

10

Setup hours

1.0

0.5

1.0

Inspection hours

30

20

20

Projected sales in units

PER UNIT data:

Overhead cost based on direct labor hours (traditional system)

Hours per 1000-unit batch:

Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labor hours Machine hours Setups Inspections

Overhead costs

$465,500 $405,000 $870,500

17-47

Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours

Required: a. Using the traditional system, determine the operating profit per unit for the brass style of faucet. b.

Determine the activity-cost-driver rate for setup costs and inspection costs.

c.

Using the ABC system, for the brass style of faucet: 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit.

d.

Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

Answer: a. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 – ($8 + 15 + 12). b.

The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2700.

c.

ABC system: Overhead costs per unit for Brass faucets are $9.40 per unit. 30,000 units in projected sales / 1000 units per batch = 30 batches; 30 batches x 1 setup hour per batch = 30 setup hours; 30 batches x 30 inspection hours per batch = 900 inspection hours. 30 setup hours x $4,900 = $147,000/30,000 units = $4.90/unit 900 inspection hours x $150 = $135,000/30,000 units = $4.50/unit Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit. Operating profit per unit for Brass faucets is $7.60 = $40 – ($8 + 15 +9.40).

d.

Traditional system: ABC system:

Operating profit per unit for Brass faucets is $5.00. Operating profit per unit for Brass faucets is $7.60.

Because the products do not all require the same proportionate shares of the support resources of setup hours and inspection hours, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated. Difficulty: 2 Objectives: 1, 3, 5, 6 Terms to Learn: activity-based costing (ABC)

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137. Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply: BRASS

CHROME

WHITE

30,000

50,000

40,000

Selling price

$40

$20

$30

Direct materials

$ 8

$ 4

$ 8

Direct labor

$15

$ 3

$ 9

$12

$ 3

$ 9

Direct labor hours

40

10

30

Machine hours

25

25

10

Setup hours

1.0

0.5

1.0

Inspection hours

30

20

20

Projected sales in units

PER UNIT data:

Overhead cost based on direct labor hours (traditional system)

Hours per 1000-unit batch:

Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labor hours Machine hours Setups Inspections

Overhead costs

$465,500 $405,000 $870,500

Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours

Required: a. Using the traditional system, determine the operating profit per unit for each style of faucet. b.

Determine the activity-cost-driver rate for setup costs and inspection costs.

c.

Using the ABC system, for each style of faucet 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit.

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d.

Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

Answer: a. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 – ($8 + $15 + $12) Operating profit per unit for Chrome faucets is $10 = $20 – ($4 + $3 + $3) Operating profit per unit for White faucets is $4 = $30 – ($8 + $9 + $9) b.

The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2,700.

c.

ABC system: Overhead costs per unit for Brass faucets are $9.40 per unit. 30,000 units in projected sales / 1,000 units per batch = 30 batches; 30 batches x 1 setup hour per batch = 30 setup hours; 30 batches x 30 inspection hours per batch = 900 inspection hours 30 setup hours x $4,900 = $147,000/30,000 units = $4.90/unit 900 inspection hours x $150 = $135,000/30,000 units = $4.50/unit Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit Operating profit per unit for Brass faucets is $7.60 = $40 – ($8 + $15 + $9.40). Overhead costs per unit for Chrome faucets are $5.45 per unit.

50,000 units in projected sales / 1,000 units per batch = 50 batches; 50 batches x .5 setup hour per batch = 25 setup hours; 50 batches x 20 inspection hours per batch = 1,000 inspection hours 25 setup hours x $4,900 = $122,500/50,000 units = $2.45/unit 1,000 inspection hours x $150 = $150,000/50,000 units = $3.00/unit Overhead costs for Chrome faucets ($2.45 + $3.00) = $5.45 per unit Operating profit per unit for Chrome faucets is $7.55 = $20 – ($4 + $3 + $5.45).

Overhead costs per unit for White faucets are $7.90 per unit. 40,000 units in projected sales/ 1,000 units per batch = 40 batches; 40 batches x 1 setup hour per batch = 40 setup hours; 40 batches x 20 inspection hours per batch = 800 inspection hours 40 setup hours x $4,900 = $196,000/40,000 units = $4.90/unit 800 inspection hours x $150 = $120,000/40,000 units = $3.00/unit Overhead costs for white faucets ($4.90 + $3.00) = $7.90 per unit. Operating profit per unit for White faucets is $5.10 = $30 – ($8 + $9 + $7.90).

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Answer: d. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 – ($8 + $15 + $12). Operating profit per unit for Chrome faucets is $10 = $20 – ($4 + $3 + $3). Operating profit per unit for White faucets is $4 = $30 – ($8 + $9 + $9) ABC system: Operating profit per unit for Brass faucets is $7.60 = $40 – ($8 + $15 + $9.40). Operating profit per unit for Chrome faucets is $7.55 = $20 – ($4 + $3 + $5.45). Operating profit per unit for White faucets is $5.10 = $30 – ($8 + $9 + $7.90). Because the products do not all require the same proportionate shares of the overhead resources of setup hours and inspection hours, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated. Difficulty: 3 Objectives: 1, 3, 5, 6 Terms to Learn: activity-based costing (ABC)

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138. At Deutschland Electronics, product lines are charged for call center support costs based on sales revenue. Last year’s summary of call center operations revealed the following: Surveillance Products Number of calls for information 1,000 Average call length for information 3 minutes Number of calls for warranties 300 Average call length for warranties 7 minutes Sales revenue $8,000,000

Specialty Products 4,000 8 minutes 1,200 15 minutes $5,000,000

Deutschland Electronics currently allocates call center support costs using a rate of 0.5% of sales revenue. Required: a. Compute the amount of call center support costs allocated to each product line under the current system. b.

Assume Deutschland decides to use the average call length for information to assign last year’s support costs. Does this allocation method seem more appropriate than percentage of sales? Why or why not?

c.

Assume Deutschland decides to use the numbers of calls for information and for warranties to assign last year’s support costs of $65,000. Compute the amount of call center support costs assigned to each product line under this revised ABC system.

d.

Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information?

e.

Discuss the barriers for implementing ABC for this call center.

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Answer: a. Call center support costs allocated to surveillance products is $40,000 = 0.005 x $8,000,000 and to specialty products is $25,000 = 0.005 x $5,000,000. b.

Yes, average call length appears to be a more appropriate allocation method because it allocates more support costs to specialty products, which consume a greater portion of the call center’s resources.

c.

$65,000 of support costs / 6,500 total calls (Surveillance 1,000 + 300 + Specialty 4,000 + 1,200) = $10 per call. Call center support costs allocated to surveillance products is $13,000 = 1,300 calls x $10 per call, and to specialty products is $52,000 = 5,200 calls x $10 per call.

d.

To increase profits, Specialty Product managers would want less cost allocated to their departments. Therefore, if support cost allocation were based on length of call, Specialty Products management may emphasize keeping calls for their department short and to the point, rather than emphasizing understanding and helping the caller.

e.

Poor model design or poor analytical interpretation and accountability consequences may function as barriers to using ABC assignments for the call center activities. It is also important to recognize that the call volumes from this year may be an anomaly so that in an average year, the current allocation rate on sales may not be as distortive as it appears for this year.

Difficulty: 3 Objectives: 1, 3, 5, 6, 8 Terms to Learn: activity-based costing (ABC) 139. For each of the following activities identify an appropriate activity-cost driver. a. machine maintenance b. machine setup c. quality control d. material ordering e. production scheduling f. warehouse expense g. engineering design

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Answer: Any one of the listed cost drivers is correct. Activity A. Machine Maintenance

# of machines

Machine hours

Actual times for various maintenances of various machines

B. Machine Setup

# of setups

Setup hours

Actual times for various setups for various machines

C. Quality Control

# of inspections

Inspection hours

Actual times for various inspections for various controls

D. Material Ordering

# of orders

Ordering hours

Actual times for various orders for various materials

E. Production Scheduling

# of runs

Scheduling hours

Actual times for various runs for various schedules

F. Warehousing

# of bins, aisles

Picking hours

Actual times for various parts for various warehousing activities

G. Engineering Design

# of engineers # of designs

Engineering hours

Actual times for various engineering designs

Difficulty: 2 Terms to Learn: activity 140.

Objectives: 3, 5

The Marionettes Company is noted for an exceptionally impressive line of Mardi Gras masks. Marionettes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 20X5: Activity Marketing Customer service Order execution Warehousing

Cost $30,000 10,000 5,000 5,000

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Cost driver $500,000 of sales 5,000 customer 100 orders 50 product lines

Required: a. Determine the activity-cost-driver rate for each of the four selling and distribution activities. b.

Under what circumstances is it appropriate to use each of the activity-cost drivers?

c.

Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.

Answer: a. Activity-cost driver rate for Marketing = 6% of sales = $30,000/$500,000. Activity-cost driver rate for Customer Service = $2 per customer = $10,000/5,000. Activity-cost driver rate for Order Execution = $50 per order = $5,000/100. Activity-cost driver rate for Warehousing = $100 per order = $5,000/50. b.

For marketing, using 6% of stipulated sales is appropriate when management wants to limit marketing costs to a budgeted proportion to sales. Using the number of customers for customer service is appropriate when the customer service costs are similar enough to use the average for all customers. Using the number of orders for order execution is appropriate when all orders are sufficiently alike in terms of resources used that they can be averaged. Using the number of product lines for warehousing is appropriate when each product line requires similar proportions of the warehousing efforts.

c.

For marketing, using 6% of sales limits the marketing activities to an arbitrary amount without consideration for potential opportunities. Using the number of customers for customer service can lead to customer service initiatives to limit the amount of time servicing each customer to cause the number of customers serviced to increase. Using the number of orders for order execution can result in purchasers splitting orders to increase the numbers of orders executed. Using the number of product lines for warehousing can lead warehouse personnel to designate more product line differences in the warehouse.

Difficulty: 3 Terms to Learn: activity

Objectives: 3, 5, 6, 8

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EXERCISES AND PROBLEMS 183. Spirit Company sells three products with the following seasonal sales pattern: Quarter 1 2 3 4

Products B 30% 20% 20% 30%

A 40% 30% 20% 10%

C 10% 40% 40% 10%

The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows: Product A B C

Units 50,000 125,000 62,500

Selling Price $4 10 6

Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

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Answer: First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

20,000 x $4

15,000 x $4

10,000 x $4

5,000 x $4

50,000 x $4

$80,000

$60,000

$40,000

$20,000

$200,000

37,500 x $10

25,000 x $10

25,000 x $10

37,500 x $10

125,000 x $10

$375,000

$250,000

$250,000

6,250 x $6

25,000 x $6

25,000 x $6

6,250 x $6

62,500 x $6

Sales

$37,500

$150,000

$150,000

$37,500

$375,000

Total

$492,500

$460,000

$440,000

Product A: Sales (units) Price Sales Product B: Sales (units) Price Sales Product C: Sales (units) Price

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

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$375,000 $1,250,000

$432,500 $1,825,000

184. Lubriderm Corporation has the following budgeted sales for the next six-month period: Month June July August September October November

Unit Sales 90,000 120,000 210,000 150,000 180,000 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month. Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds. Required: a. Prepare production budgets in units for July, August, and September. b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month. Answer: a. Budgeted sales Add: Required ending inventory

July 120,000 42,000

August 210,000 30,000

September 150,000 36,000

Total inventory requirements Less: Beginning inventory

162,000 24,000

240,000 42,000

186,000 30,000

Budgeted production

138,000

198,000

156,000

Production in units

July 138,000

August 198,000

September 156,000

Targeted ending inventory in lbs.* Production needs in lbs.***

297,000 690,000

234,000 990,000

987,000 207,000

1,224,000 297,000

1,032,000 234,000

Purchases needed in lbs. Cost ($8 per lb.)

780,000 x $8

927,000 x $8

798,000 x $8

Total material purchases

$6,240,000

$7,416,000

$6,384,000

b.

Total requirements in lbs. Less: Beginning inventory in lbs.

* ** ***

****

0.3 times next month's needs (180,000 + 24,000 - 36,000) times 5 lbs. x 0.3 5 lbs. times units to be produced, across row 17-58

**

252,000 780,000

****

(690,000 x .3) = 207,000 lbs., etc. row across

Difficulty: 3 Objective: 3 Terms to Learn: operating budget 185. Gerdie Company has the following information: Month March April May June July

Budgeted Sales $50,000 53,000 51,000 54,500 52,500

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for April through June. Answer: Desired ending inventory Plus COGS Total needed Less beginning inventory Total purchases

April $ 9,180 31,800 40,980 9,540 $31,440

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

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May $ 9,810 30,600 40,410 9,180 $31,230

June $ 9,450 32,700 42,150 9,810 $32,340

Total $ 9,450 95,100 104,550 9,540 $ 95,010

186. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. b.

Determine the quantity of framing, glass, and backing that is to be purchased during August. Determine the total costs of direct materials for August purchases.

Answer: a. Desired ending inventory* Production needs (10,000 units)**

b.

Framing 2,250 40,000

Glass 750 10,000

Backing 750 20,000

Total needs Less: Beginning inventory

42,250 1,500

10,750 500

20,750 500

Purchases planned

40,750

10,250

20,250

Cost of direct materials: Framing (40,750 x $0.30) Glass (10,250 x $6.00) Backing (20,250 x $2.25) Total

$12,225.00 61,500.00 45,562.50 $119,287.50

*1,500 x 1.5 = 2,250 framing 500 x 1.5 = 750 glass 500 x 1.5 = 750 backing **10,000 x 4 = 40,000 framing 10,000 x 1 = 10,000 glass 10,000 x 2 = 20,000 backing

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

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187. Michelle Enterprises reports the year-end information from 20X5 as follows: Sales (100,000 units) Less: Cost of goods sold Gross profit Operating expenses (includes $10,000 of Depreciation) Net income

$250,000 150,000 100,000 60,000 $ 40,000

Michelle is developing the 20X6 budget. In 20X6 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 20X6. Answer: Michelle Enterprises Budgeted Income Statement For the Year 20X6 Sales (95,000 x $2.75) Cost of goods sold (20X6 sales x 62%) Gross profit Less: Operating expenses [($0.50 x 95,000] + $10,000) Net income

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

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$261,250 161,975 99,275 57,500 $ 41,775

188. Brad Corporation is using the kaizen approach to budgeting for 20X5. The budgeted income statement for January 20X5 is as follows: Sales (240,000 units) Less: Cost of goods sold

$720,000 480,000

Gross margin Operating expenses (includes $64,000 of fixed costs) Net income

240,000 192,000 $ 48,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month. Required: Prepare a kaizen-based budgeted income statement for March of 20X5. Answer: Sales Less: Cost of goods sold ($480,000 x 0.99 x 0.99) Gross margin Operating expenses [($128,000 x 0.99 x 0.99) + $64,000] Net income

$720,000 470,448 249,552 189,453 $ 60,099

Difficulty: 2 Objective: 5 Terms to Learn: kaizen budgeting

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189. Allscott Company is developing its budgets for 20X5 and, for the first time, will use the kaizen approach. The initial 20X5 income statement, based on static data from 20X4, is as follows: Sales (140,000 units) Less: Cost of goods sold

$420,000 280,000

Gross margin Operating expenses (includes $28,000 of depreciation)

140,000 112,000

Net income

$28,000

Selling prices for 20X5 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%. Required: Prepare a kaizen-based budgeted income statement for 20X5. Answer: Sales (126,000 x $3.24) Less: COGS (126,000 x $1.80)

$408,240 226,800

Gross margin 181,440 Operating expenses ($28,000 + $79,800) Net income

107,800 $ 73,640

Difficulty: 2 Objectives: 4, 5 Terms to Learn: kaizen budgeting, sensitivity analysis

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190. Russell Company has the following projected account balances for June 30, 20X5: Accounts payable Accounts receivable Depreciation, factory Inventories (5/31 & 6/30) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable

$40,000 100,000 24,000 180,000 200,000 80,000 4,000 140,000 160,000

Sales Capital stock Retained earnings Cash Equipment, net Buildings, net Utilities, factory Selling expenses Maintenance, factory

$800,000 400,000 ? 56,000 240,000 400,000 16,000 60,000 28,000

Required: a. Prepare a budgeted income statement for June 20X5. b. Prepare a budgeted balance sheet as of June 30, 20X5. Answer: a. Sales Cost of goods sold: Materials used Wages Depreciation Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries Net income b.

Assets: Cash Accounts receivable Inventories Equipment, net Buildings, net Total

Russell Company Income Statement For the Month of June 20X5 $800,000 $200,000 140,000 24,000 4,000 28,000 16,000

$60,000 80,000

412,000 388,000

140,000 $248,000

Russell Company Balance Sheet June 30, 20X5 $ 56,000 100,000 180,000 240,000 400,000 $976,000

Liabilities and Owners’ Equity: Accounts payable $ 40,000 Bonds payable 160,000 Capital stock 400,000 Retained earnings* 376,000 Total

*$976,000 – ($40,000 + $160,000 + $400,000) = $376,000 Difficulty: 2 Objectives: 3, A Terms to Learn: operating budget 17-64

$976,000

191. Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 20,000 units of Big and 10,000 units of Bigger. Shamokin plans on having an ending inventory of 4,000 units of Big and 2,000 units of Bigger. Currently, Shamokin has 1,000 units of Big in its inventory and 800 units of Bigger. Each product requires two labor operations: molding and polishing. Product Big requires one hour of molding time and one hour of polishing time. Product Bigger requires one hour of molding time and two hours of polishing time. The direct labor rate for molders is $20 per molding hour, and the direct labor rate for polishers is $25 per polishing hour. Required: Prepare a direct labor budget in hours and dollars for each product. Desired Production: Big 20,000 4,000 24,000 1,000 23,000

Bigger 10,000 2,000 12,000 800 11,200

Direct Labor Budget for Big: Molding Desired Production of Big 23,000 Hours of Labor Required per unit 1 Total Hours of Labor Required 23,000 Direct Labor Rate $20 Cost of Direct Labor for Big $460,000

Polishing 23,000 1 23,000 $25 $575,000

$1,035,000

Direct Labor Budget for Bigger: Molding Desired Production of Bigger 11,200 Hours of Labor Required per unit 1 Total Hours of Labor Required 11,200 Direct Labor Rate $20 Cost of Direct Labor for Bigger $224,000

Polishing 11,200 2 22,400 $25 $560,000

$784,000

$1,135,000

$1,819,000

Expected sales Desired ending inventory Production needs Less: beginning inventory Desired production

Total Direct Labor Costs

$684,000

Difficulty: 2 Objective: 3 Terms to Learn: operating budget

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Total

192. Duffy Corporation has prepared the following sales budget: Month May June July August September

Cash Sales $16,000 20,000 18,000 24,000 22,000

Credit Sales $68,000 80,000 74,000 92,000 76,000

Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. Required: Prepare a schedule of cash collections for July through September. Answer: July $18,000

August $24,000

September $22,000

Total $64,000

Collections of credit sales from: Current month 29,600 Previous month 36,000 Two months ago 6,800

36,800 33,300 8,000

30,400 41,400 7,400

96,800 110,700 22,200

$102,100

$101,200

$293,700

Cash sales

Total collections

$90,400

Difficulty: 2 Objective: A Terms to Learn: cash budget

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193. The following information pertains to Amigo Corporation: Month July August September October November December 



Sales $30,000 34,000 38,000 42,000 48,000 60,000

Purchases $10,000 12,000 14,000 16,000 18,000 20,000

Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30% Month following sale 50% Two months following sale 15% Amount uncollectible 5% 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required: a. Prepare a summary of cash collections for the 4th quarter. b. Prepare a summary of cash disbursements for the 4th quarter. Answer: a. Cash collections Oct $36,448 + Nov $40,812 + Dec $47,940 = $125,200 August September October November December

October $ 5,100 19,000 12,348

November

-------$36,448

--------$40,812

5,700 21,000 14,112

December

6,300 24,000 17,640 -------$47,940

b. Cash disbursements Oct $14,800 + Nov $16,800 + Dec $18,800 = $50,400 September October November December

October 8,400 6,400

-------$14,800 Difficulty: 2 Terms to Learn: cash budget

November 9,600 7,200 --------$16,800 Objective: A

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December

10,800 8,000 -------$18,800

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