SOLUTIONS MANUAL For Cost Accounting A Data Analytics Approach 2024 Release By Margaret Christ, Kip

SOLUTIONS MANUAL For Cost Accounting A Data Analytics Approach 2024 Release By Margaret Christ, Kip Holderness, and Vernon Richardson Solution Manual For Chapters 1-10 Cost Accounting A Data AnalyticsAll Approach 2024 Release By Margaret Christ, D. Kip Holderness and Vernon Richardson Chapter 1-10

Chapter 1 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 1. (LO 1.3) Which component of the AMPS model addresses the question of the best way for management accountants to communicate their analyses with decisionmakers? a. Ask the question b. Master the data c. Perform the analysis d. Share the story 2. (LO 1.5) Which of the following is considered discretionary information for a company’s accountants to provide? a. The break-even level of a new product b. The annual report submitted to shareholders detailing financial performance c. The federal tax return d. Sales information as part of the sales tax return 3. (LO 1.1) Which of the following value chain activities is considered to be a primary activity? a. Procurement b. Inbound logistics c. Human resources management d. Information technology 4. (LO 1.2) What requires context to create information? a. Knowledge b. Data c. Facts d. Data stores 5. (LO 1.4) The analysis of variances (e.g., actual performance is different from budgeted performance) is most often associated with which type of analytics? a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics 6. (LO 1.4) Summary statistics are most often associated with which type of analytics? a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics

d. Prescriptive analytics 7. (LO 1.4) Time series analysis is most often associated with which type of analytics? a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics 8. (LO 1.6) Which of the following is not one of the four overarching ethical principles mentioned in the 2017 IMA Statement of Ethical Professional Practice? a. Competence b. Honesty c. Confidentiality d. Credibility

9. (LO 1.3) Which questions aim to more clearly understand why net income is decreasing when revenues are increasing? a. What happened? What is happening? b. Why did it happen? What are the root causes of past results? c. Will it happen in the future? What is the probability something will happen?

Is it forecastable? d. What should we do based on what we expect will happen? How do we optimize our performance based on potential constraints?

10. (LO 1.3) What type of visualization is used to track overtime labor on a continuous, real-time basis? a. Dashboard with static display b. Dashboard with dynamic display c. Conditional formatting d. Bar chart for the past 10 months 11. (LO 1.3) Which management accounting question will require predictive analytics? a. Why did labor expenses increase over the past year as compared to prior years? b. Should the company rent or lease its headquarters office building? c. Can we forecast future sales for this company? d. Why did our cost structure (fixed and variable costs) change over the past year?

12. (LO 1.3) Which management accounting question will require prescriptive analytics? a. Why did the company perform worse this year than last year? b. Should the company manufacture its product, or should it outsource the production of its products to an outside contractor? c. Can we forecast future sales, earnings, and cash flows for this company? d. What was the total revenue last quarter?

13. (LO 1.2) A ________ is a person who analyzes accounting-related data to help an organization make effective business decisions. a. management accountant

b. financial accountant c. data scientist d. computer programmer 14. (LO 1.2) A ________ is a person employed to acquire, maintain, curate, access, manipulate, and statistically test data to address business questions. a. management accountant b. financial accountant c. data scientist d. computer programmer 15. (LO 1.2) If a manager is a decision-maker, and a data scientist is a developer, then what best describes a management accountant? a. An interpreter b. An expert at investments c. An intermediary d. A broker 16. (LO 1.5) Which of the following is mandatory information that a company’s accountants is required to maintain? a. The cost drivers used to allocate overhead b. The calculation of the difference between actual and budgeted performance c. The product price that should be charged to maximize profits d. The amount of dividends paid to shareholders 17. (LO 1.5) Which entity sponsors the certification of management accountants as a CMA? a. Institute of Management Accountants b. Institute of Certified Public Accountants c. American Institute of Management Accountants d. Association of Certified Management Accountants 18. (LO 1.5) Which of the following applies to management accounting? a. There are required audits of management accounting information. b. Management accounting works to minimize the cost of compliance with regulatory entities. c. A source of management accounting data comes from a cost accounting system. d. Common output is the income statement.

19. (LO 1.3) Performing a regression falls into which of the following components of the AMPS model? a. Ask the question b. Master the data c. Perform the analysis d. Share the story 20. (LO 1.3) Which data visualization is used to evaluate trends of values over time? a. Bar Chart b. Pie Chart c. Scatterplot d. Line Graph

(Level 1) Discussion Questions 1. (LO 1.1) Describe the primary activities in the value chain for your college or university. In your opinion, which primary activities create the most value?

Suggested Solution: Answers will vary. Universities admit students (as inputs) and use their resources (curriculum, faculty, buildings, computers, and so on) to create a job-ready, educated graduate (the output). Arguably, the school creates value (as shown in Exhibit 1.1). If it is not creating value in one form or the other, it probably will not survive.

1. INBOUND LOGISTICS are the activities associated with receiving and storing raw materials and other partially completed materials, and distributing those materials to manufacturing divisions when and where they are needed.  Universities hire faculty and faculty support, construct classrooms and faculty offices, create online teaching infrastructure, construct housing (where appropriate), etc.

2. OPERATIONS are the activities that transform inputs into finished goods and services.  Professors and instructors develop curricula, create degree programs, instruct and assess students for performance.

3. OUTBOUND LOGISTICS are the activities that warehouse and distribute the finished goods to customers.  Placement services, job fairs, employer relations, etc., help to place graduating students.

4. MARKETING AND SALES ACTIVITIES identify the needs and wants of customers to attract them to the company’s products and then buy them.  Universities market and advertise their degree programs and university services to prospective and current students.

5. SERVICE ACTIVITIES provide support to customers after the products and services are sold to them. Service activities include warranty repairs, parts, instruction manuals, and phone or internet support.  Alumni programs and placement programs continue to support students after they have graduated.

2. (LO 1.1) Describe the primary activities in the value chain for an accounting firm that issues audit reports. In your opinion, which primary activities create the most value?

Suggested Solution: 1. INBOUND LOGISTICS are the activities associated with receiving and storing raw materials and other partially completed materials, and distributing those materials to manufacturing divisions when and where they are needed.  Accounting firms hire accounting staff. They also create software programs to access general ledger and journal transactions for assessment.

2. OPERATIONS are the activities that transform inputs into finished goods and services.  Accounting firm staff evaluate the financial transactions and assess whether the financial reports fairly represent the financial position of the company.

3. OUTBOUND LOGISTICS are the activities that warehouse and distribute the finished goods to customers.  Accounting firm staff ensures that financial reports and opinion rendered on those financial reports are transmitted to the focal company and submitted to the Securities and Exchange Commission (where appropriate).

4. MARKETING AND SALES ACTIVITIES identify the needs and wants of customers to attract them to the company’s products and then buy them.  Accounting firm staff markets its services by bidding on audit jobs. It also does some general advertising.

5. SERVICE ACTIVITIES provide support to customers after the products and services are sold to them. Service activities include warranty repairs, parts, instruction manuals, and phone or internet support.  Accounting firm staff continue to support its clients through annual audit and quarterly reviews.

3. (LO 1.1) Give five examples of business processes at Tesla. How do they create business value for Tesla and its shareholders?

Suggested Solution:

Answers will vary. Here are five examples out of possibly thousands of processes that happen every day at Tesla. What is important is to find those that create the most value for Tesla and have to be performed by Tesla employees.

1. Tesla procures automobile parts from auto suppliers – Because of Tesla’s unique styling, getting quality parts from its suppliers on a timely basis will support its manufacturing business.

2. Tesla manufactures batteries for its electric vehicle at its desired specifications – The quantity and quality of its batteries are of critical importance to Tesla.

3. Accepting and processing preorders from its customers – Tesla receives some indication of the demand for each of its products, that helps with planning.

4. Tesla markets its products – Tesla works to get Tesla products in the front of mind for its customers.

5. Tesla car and truck design – Tesla designs its automobiles in a way that will appeal to its customers (for example, Cybertruck).

4. (LO 1.1) Describe where the management accounting role fits in the supporting activities of the firm in the value chain.

Suggested Solution: Management accounting fits best within the FIRM INFRASTRUCTURE activities. These activities represent all of the activities needed to support the primary activities of the company, including the CEO, finance, accounting (including management accounting), and legal. Management accounting helps provide the information needed to run the business. We note that the definition of a management accountant is an accountant who analyzes accounting-related data to help an organization make effective business decisions, consistent with a supporting activity of the firm.

5. (LO 1.1) Why are marketing and sales activities considered to be a primary value chain activity? How do those activities create value?

Suggested Solution: If no one is aware of the products and services provided, there is no value in providing those services. Marketing and sales activities increase knowledge, and ultimately, demand for the products and services provided.

6. (LO 1.1) In a manufacturing company, which primary value chain activity is supported by procurement?

Suggested Solution: INBOUND LOGISTICS are the activities associated with receiving and storing raw materials and other partially completed materials, and distributing those materials to manufacturing divisions when and where they are needed. Procurement, as a supporting activity, supports the primary value chain activity of INBOUND LOGISTICS.

7. (LO 1.2) What is the difference between the roles of the management accountant and the roles of the data scientist? Are both needed?

Suggested Solution: A data scientist is a person employed to acquire, maintain, curate, access, manipulate, and statistically test data to address business questions. Data scientists maintain the data, create specific datasets to address specific questions, and know where the datasets are stored and how to access them. In contrast, a management accountant understands the decisions that management is making and what is needed to evaluate those decisions, they are also intimately familiar with the characteristics of the data and have a working knowledge of data quality, data analytics techniques and statistical tools. Both a data scientist and a management accountant have an important role to play in addressing management questions.

8. (LO 1.3) Describe the AMPS Model (or AMPS Data Analytics Model). How is it used to summarize the data analytics process?

Suggested Solution: The AMPS Model provides a framework for addressing management accounting questions and performing data analytics. It includes four steps: (1) Ask the Question, (2) Master the Data, (3) Perform the Analysis, and (4) Share the Story. While recursive in nature, it works to form data-derived insights into management questions.

9. (LO 1.3) Why is the AMPS model considered to be recursive? What does that mean?

What exactly is repeated?

Suggested Solution: After completing all the steps of the AMPS model, the management accountant and the decision-maker often are more knowledgeable and better able to ask deeper,

more refined questions, suggesting that the AMPS model should best be viewed as cyclical, or recursive, in nature.

The management team may need to refine the question (ASK THE QUESTION); consider different, perhaps complementary data sources that better match the refined question (MASTER THE DATA); perform additional analytics (PERFORM THE ANALYSIS); and retell the story in each iteration (SHARE THE STORY) before the issue/problem/challenge can be finally addressed with some confidence.

10. (LO 1.3) What is the difference between descriptive analytics and diagnostic analytics?

Suggested Solution: While descriptive analytics works to address the question of “What happened?”, diagnostic analytics works to address the question of “Why did it Happen?”. They use different techniques to address these questions.

11. (LO 1.3) Why would you want to perform descriptive analytics before predictive analytics?

Suggested Solution: Before predicting what will happen or the probability that something will happen, it is often important to determine what happened in the past.

12. (LO 1.3) Some argue that a picture is worth a thousand clicks. Argue for and against the use of data visualizations when sharing the story.

Suggested solution: Increasingly, visualizations are preferred to written content to communicate results. For example, 91 percent of people prefer visual content over written content.1 Why is that? Well, some argue that the brain processes images 60,000 times faster than text (and 90 percent of information transmitted to the brain is visual). However, sometimes it is hard to see precise numbers in a visual, so that would be one case where a table of numbers might be superior to a data visualization.

13. (LO 1.4) Why do descriptive analytics techniques use counts, totals, sums, and averages to help address the question, “What happened?”.

Suggested Solution: Descriptive analytics techniques often summarize what happened by using various descriptive statistics and simple visualizations such as bar charts, line graphs and pie charts, among other techniques.

14. (LO 1.4) Identify three or four strategic questions management has that might be addressed by a management accountant using prescriptive analytics.

Suggested Solution: Answers will vary.

What product sales price will maximize revenue?

What level of sales will allow the company to break even?

If the exchange rate changes by either two or three percent next year, how much will profits change?

Should the company make or outsource its manufacturing to other producers?

15. (LO 1.5) Management needs management accounting information to address strategic questions. Why, then, is this information considered to be discretionary?

Suggested Solution: Because the information produced by management accountants is produced for internal purposes only, it is considered to be discretionary information because there is no law requiring it be provided to management. Managers simply decide what information they need and management accountants work to provide it.

16. (LO 1.5) Why is mandatory information produced even if the benefit to management is smaller than the cost to produce it? What potentially is the cost of noncompliance?

Suggested Solution: If adequate tax filings or regulatory filings are not submitted on a timely basis, regulators might have cause to charge penalties or close the business which may cause management to lose their jobs. This lack of compliance may also be communicated to potential or existing shareholders, customers, lenders, and employees which may cause them not to interact with the company any longer.

17. (LO 1.6) Why is presenting results in a neutral way (not favoring one conclusion over another) consistent with an ethical approach to management accounting?

When, if ever, should the management accountant depart from that approach?

Suggested Solution: The fourth standard of the IMA Statement of Ethical Professional Practice labeled Credibility, suggests that Management accountants both 1) Communicate information fairly and objectively, and 2) Provide all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

If results are not presented in a neutral way, management cannot rely on their reports, analyses or recommendations. Management accountants can still communicate their hunches based on their experience, but should be directly addressed that the information may in fact exhibit bias.

18. (LO 1.6) Why is accountant competence consistent with an ethical approach to management accounting? If the accountant isn’t competent (hasn’t been trained, has inadequate expertise, etc.), what is his duty to do?

Suggested Solution: The first standard of the IMA Statement of Ethical Professional Practice labeled Competence, suggests that Management accountants 1) maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills.

This suggests that the management accountant be well trained and have sufficient expertise to handle the management accounting tasks before them. If they are not competent, they need to recuse themselves from those specific tasks.

(Level 1) Brief Exercises 1. (LO 1.1) Order the following primary value chain activities in the correct sequence. a. Marketing and sales activities b. Service activities c. Operations d. Outbound logistics e. Inbound logistics Solution: Inbound Logistics > Operations > Outbound Logistics > Marketing and sales activities > Service Activities

2. (LO 1.1) Match each primary value chain activity with its definition. a. Marketing and sales activities b. Service activities c. Operations d. Outbound logistics e. Inbound logistics Definition

Primary Value Chain Activity

The activities that transform inputs into finished goods and services (for example, turning wood into furniture)

Operations

The support of customers after the products and services are sold to them (for example, warranty repairs, parts, and instruction manuals) The activities that warehouse and distribute the finished goods to customers Identification of customers’ needs and wants to help attract them to the company’s products and then buy them The activities associated with receiving and storing raw materials and other partially completed materials, and distributing those materials to manufacturing divisions when and where they are needed

Service activities

Outbound logistics

Marketing and sales activities

Inbound logistics

3. (LO 1.1) Link the examples of the supporting value chain activities to the correct term. a. Firm infrastructure b. Human resource management

c. Technology d. Procurement Example Activities

Supporting Value Chain Activity

Attorneys writing contracts with suppliers

Firm infrastructure

Purchasing and installing supply chain software to evaluate supply chain performance Purchasing raw materials to use in the manufacturing process Determining the cost of one square foot of decking board product Hiring new production line workers

Technology

Procurement Firm infrastructure Human resources

4. (LO 1.2) Indicate whether each of the following tasks is most likely to be performed by a manager, a management accountant, or a data scientist. a. Serve as a liaison between other professionals (Management accountant) b. Help management make effective decisions (Management accountant) c. Write scripts to extract data from databases (Data Scientist) d. Make decisions for the organization that are expected to maximize business value (Management) e. Create specific datasets to address specific questions (Data Scientist) f. Match management’s questions to the data that might help to answer those questions (Management accountant) g. Acquire, maintain, curate, access, manipulate and statistically test data (Data Scientist) 5. (LO 1.3) Link the components of the analytics mindset with the components of the AMPS model.

Analytics Mindset Component

AMPS Model Component (Ask the question, Master the data, Perform the analysis, or

Share the story) Extract, transform, and load relevant data Apply appropriate data analytics techniques Interpret and share the results Ask the right questions

Master the data Perform the analysis Share the story Ask the question

6. (LO 1.3) To MASTER THE DATA, a component of the AMPS model, we need to determine whether each type of data is categorical, alphanumeric, or numerical. Match each data item to its data type.

Data Item

Data Type (Categorical, Alphanumeric, or Numerical)

Item product number

Numerical

Sale or return (Yes or no)

Categorical

Product name

Alphanumeric

In stock (Yes or No?)

Categorical

Item price

Numerical

7. (LO 1.3) Match each management accounting task with the correct step in the AMPS model (ASK THE QUESTION, MASTER THE DATA, PERFORM THE ANALYSIS, or SHARE THE STORY).

Management accounting Task

AMPS Model Component

Gather datasets that show budgeted projections of the sales price per unit and related costs of production and marketing for the new product Evaluate the break-even level of sales for a new product Reporting the break-even level of sales using visualizations in a written report Ask management accounts to determine the break-even level of sales for a newly proposed product

Master the data

Perform the analysis Share the story

Ask the question

8. (LO 1.3) Match each analytics type (descriptive, diagnostic, predictive and prescriptive) with the management accounting question.

Management accounting Question

Analytics Type

Why did it happen?

Diagnostic analytics

Will it happen in the future?

What should we do, based on what we expect will happen?

What happened?

Predictive analytics Prescriptive analytics

Descriptive analytics

9. (LO 1.5) Label each of the following information items created by accountants as either discretionary information or mandatory information. a. Tax return to the Internal Revenue Service (Mandatory Information) b. Break-even analysis for the firm (Discretionary Information) c. A summary of the firm’s fixed costs versus variable costs (Discretionary Information) d. Financial statements to banks to help them continuously monitor the firm’s financial condition (Mandatory Information)

e. Costs of leasing versus buying a new mainframe computer (Discretionary Information) f. Employee terminations submission to the U.S. Department of Labor to determine level of unemployment insurance a company is required to carry (Mandatory Information)

10. (LO 1.5) Classify each of the following information items created by accountants as the result of either financial accounting or management accounting. a. Information provided to auditors to help them complete their audit of financial statements (Financial Accounting) b. Production budget (Management accounting) c. The allocation of costs to different jobs (Management accounting) d. Financial statements for shareholder use (Financial Accounting) e. The product price that maximizes profits for the company (Management accounting) f. Evaluation of different potential planning scenarios based on customer demand (Management accounting) 11. (LO 1.2) Match the following components of the information value chain to their definitions. a. Data b. Context c. Information d. Knowledge e. Decision Definition

Component of the Information Value Chain

The setting surrounding the data; the event, statement, or situation in which the data can be fully understood and evaluated Data organized in a way that is useful to the user in a given context Understanding of or familiarity with information gained through learning

Context

Raw facts that describe an event and

Data

Information Knowledge

have little meaning on their own A conclusion reached after consideration of knowledge gained

Decision

12. (LO 1.3) Match the components of the AMPS model to a variety of management accounting tasks.

Management accounting Task AMPS Model Component (Ask the question, Master the data, Perform the analysis, or Share the story) Decide which management question to emphasize to help management assess possible strategies Run a regression analysis to evaluate the impact of advertising Extract data from the accounting system and prepare it for analysis in a pivot table Clean the data and get the datasets ready for analysis Publish financial results using visualizations Analyze how profits will change if fuel prices increase in the coming year

Ask the question

Perform the analysis Master the data

Master the data Share the story Perform the analysis

13. (LO 1.3) Match the components of the AMPS model to the management accounting task of proposing a budget for the next period.

Management accounting Task AMPS Model Component (Ask the question, Master the data, Perform the analysis, Share the story) 1. Find appropriate past data to use to create the budget for the next period 2. Use prediction techniques to forecast next period’s budget 3. Share the budget with management in written form and using visualizations

Master the data Perform the analysis Share the story

4. Clean the past data and make sure all parts of the data are relevant for analysis 5. Identify the reporting period for the upcoming budget to be produced 6. Provide budget presentation to all interested parties 7. Compare the budgeted company sales projections to industry sales projections

Master the data

Ask the question Share the story Perform the analysis

14. (LO 1.4) Match each management accounting questions to the correct data analytics type: a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics

Management accounting Question

Data Analytics Type (Descriptive, Diagnostic, Predictive, Prescriptive)

What is the product mix our capacity allows us to make that will allow us to maximize profits?

Why did the product costs differ from the amount budgeted?

How many car batteries did we produce last week and last month?

What do we expect car battery sales to be next quarter?

Prescriptive analytics

Diagnostic analytics

Descriptive analytics

Predictive analytics

15. (LO 1.4) Match each management accounting question to the correct data analytics type: a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics

Management accounting Question What should we do if the inputs for our products increase in price?

Data Analytics Type

Why did sales, general, and administrative expenses increase relative to our closest competitor?

Diagnostic analytics

Which product is the most profitable one for our company?

Descriptive analytics

What is our expected profitability over the next five years?

Predictive analytics

Prescriptive analytics

16. (LO 1.4) Match each data analytics technique with the correct type of data analytics: a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics

Data Analytics Technique

Data Analytics Type

Computation of total sales by product over the past quarter

Descriptive analytics

Determining the difference between budgeted performance and actual performance

Diagnostic analytics

Considering the break-even level of products sold for a new product based on expected performance

Prescriptive analytics

Creating sales forecasts

Predictive analytics

Evaluating production statistics based on comparison with past performance

Diagnostic analytics

Identifying percentage changes from last period to this period

Descriptive analytics

17. (LO 1.6) Match each characteristic from the IMA Statement of Ethical Professional Practice to its Specific Standard (Competence, Confidentiality, Integrity or Credibility):

Ethics Characteristic

IMA Statement of Ethical Professional Practice to its Specific Standard (Competence, Confidentiality, Integrity or Credibility

Mitigate actual conflicts of interest

Integrity

Communicate information fairly and objectively

Credibility

Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and

Competence

skills Refrain from using confidential information for unethical or illegal advantage.

Confidentiality

Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

Credibility

Contribute to a positive ethical culture and place integrity of the profession above personal interests

Integrity

(Level 1) Problems 1. (LO 1.4) Management is asking you to determine which of your company’s products is most profitable in Arizona. This will help them determine their marketing plans to promote the product, and ultimately based on demand for its product, their expected production plans.

Required: Using the four components of the AMPS model, explain each step in addressing management’s question.

Solutions will vary.

AMPS Model Component

Detailed Steps in Determining Which Product is Most Profitable

Ask the question

Which of our products sold in Arizona is the most profitable?

Master the data

Gather product sales price (revenue) and appropriate

costs (cost of goods sold, advertising costs, etc.)

Perform the analysis

Calculate gross profit, contribution margin, etc. by product.

Determine whether total margin (total in dollars) or margin percentage is a better metric, etc.

Share the story

Communicate findings to management using tables, histograms, etc.

2. (LO 1.4) Analysis: Management is asking you to determine the break even level of sales for a new product (in units sold).

Required: Using the four components of the AMPS model, explain each step a cost accountant would use in addressing management’s question.

AMPS Model Component

Detailed Steps in Determining the Breakeven Level of Sales

Ask the question

How many units need to be sold to break even?

Master the data

Gather fixed and variable costs.

Perform the analysis

Use goal-seek analysis, or appropriate calculations, to determine break-even level

Share the story

Communicate break-even level for each product by reports, tables and/or visualizations.

3. (LO 1.3) Download the SkyDio Drone SKU dataset. Note the sales price and cost of each SKU (product). Use Excel to address the following questions. You may want to complete the Excel tutorial in Appendix A before attempting this assignment.

Required: a. What is the SKU with the highest sales price? (Hint: Use =max() function to calculate) SK2-PRK b. What is the highest cost of any SKU? (Hint: Use =max() function to calculate) $1,486 c. What is the SKU with the lowest sales price? (Hint: Use =min() function to calculate) SK2-USB d. What is the lowest cost of any SKU? (Hint: Use =min() function to calculate) $11 e. What is the average sales price of the SKUs offered for sale (round to two digits)? (Hint: Use =average() functions to calculate). $569.64 f. What is the median cost of the SKUs offered for sale? (Hint: Use =median() functions to calculate). $81.5

4. (LO 1.3) Download the DJI Mavic Drone SKU dataset. In Excel, calculate the gross margin (Sales Price – Cost) and gross margin percentage [(Sales Price – Cost)/Sales Price] for each SKU (product). You may want to complete the Excel tutorial in Appendix A before attempting this assignment.

Required: a. What is the SKU with the highest gross margin? (Hint: Use =max() function to calculate) DJI-AIF b. What is the SKU with the highest gross margin percentage? (Hint: Use =max() function to calculate) DJI-MIN c. What is the SKU with the lowest gross margin? (Hint: Use =min() function to calculate) DJI-GBA d. What is the SKU with the lowest gross margin percentage? (Hint: Use =min() function to calculate) DJI-IFB e. What is the average and median gross margin of the SKUs offered for sale? (Hint: Use =average() and =median() functions to calculate). Average Gross Margin is 183.25; Median Gross Margin is 117.5 f. What is the average and median gross margin percentage of the SKUs offered for sale (round to three digits)? (Hint: Use =average() and =median() functions to calculate).

Average = 0.387; Median 0.388

5. (LO 1.3) Download the DJI Mavic Drone Sales Journal dataset in Excel. Note the sales price and cost of each sale. In Excel, calculate the gross margin (Sales Price – Cost) for each sale. Use a pivot table to determine the following. It may be helpful to

perform this project after completing Lab 1.3 Excel, Lab 1.3 Tableau, or Lab 1.3 Power BI. Required: a. What are the total sales for SKU DJI-AIR? $11,988 b. What is the total gross margin for sales of SKU DJI-MMC? $790 c. Which product (SKU) had the highest sales during the month? MAV2II d. Which product (SKU) had the lowest gross margin during the month?

DJI-GBA 6. (LO 1.3) Download the SkyDio Drone Sales Journal dataset in Excel. Note the sales price and cost of each sale. In Excel, calculate the gross margin (Sales Price – Cost) for each line of the invoice. Use a pivot table to determine the following. It may be helpful to perform this project after completing Lab 1.3 Excel, Lab 1.3 Tableau, or Lab 1.3 Power BI. Required: a. What are the total sales for SKU SK2-CIK? $25,186 b. What is the total cost for all sales of SKU SKY-BAT? $1,386 c. What is the total gross margin for SKU SK2-BEA? $945 d. Which product (SKU) had the highest sales during the month? SKY-PRK e. Which product (SKU) had the lowest cost of sales during the month? SK2USB f. Which product (SKU) had the highest gross margin during the month? SKYPRK 7. (LO 1.3) Download the SkyDio Drone Sales Journal dataset in Excel. Note the sales price and cost of each sale. In Excel, calculate the gross margin (Sales Price – Cost) for each line of the invoice. Use a pivot table to determine the following. It may be helpful to perform this project after completing Lab 1.3 Excel, Lab 1.3 Tableau, or Lab 1.3 Power BI. Required: a. What is the total gross margin earned from customer 3022? $821 b. What are the total sales for customer 3000? $1,328 c. What is the total cost of sales for customer 3039? $885 d. Which customer bought the most during the month? Customer 3013 e. Which customer bought the least during the month? Customer 3008 f. What was the total amount of customer sales for the month for the company? $142,986.93

8. (LO 1.6) Santos Romero, a management accountant at PAM Transportation, has been around a long time. In fact, he’s been around so long that he believes he knows what has made and will continue to make the company successful and profitable.

Given that there are no external standards to follow in management accounting, he would like to pick and choose which specific data to show management in a way that highlights his preferred outcome.

Required: 1. Is Bob’s approach ethical or not ethical? Explain.

Suggested Solution: Santos is certainly free to share his opinion with management, and can tell them his preferred outcome, as long as he clearly discloses to management the decisions he has made regarding the data analysis. Absent additional disclosures made directly to management, he should choose the data, perform the analysis, and share the results in an unbiased manner, and let management make the decisions in the way they like.

2. How can Santos provide management with various scenarios without overemphasizing his preferred outcome? If he does show various scenarios, what type of analytics is that (descriptive, diagnostic, predictive, or predictive)? Explain.

Suggested Solution: Prescriptive analytics shows a number of what-if analysis that allow the analyst to show different analyses, sensitivity analysis regarding the input, scenario analysis, etc.

9. (LO 1.5) Consider the chapter’s opening story regarding the increased cost and increased price for Tesla’s solar roof.

Required: Using the AMPS model, explain how Tesla could have avoided the following problems in each of these four areas: 1. What would be the appropriate question to determine the cost of a solar roof?

Suggested Solution: What are the cost components? Is installation included. Are they fixed, variable or mixed in nature? Do they depend on scale?

2. What data would you use?

Suggested Solution: Does the company have data on this car model?

Are there other solar roofs they have installed, even if it is on other products such that Tesla might have appropriate data?

3. Since the type of question leads to the appropriate analytics techniques, which analytics technique fits the question you asked in letter a. above?

Suggested Solution: Summary of past performance, Scatterplots, regression analysis, forecasts, etc.

4. What time of visualization would work to show your findings to Elon Musk and the Tesla management team?

Suggested Solution: Descriptive statistics of past performance shown in tables or simple charts, scatterplots, regression results in tables, etc.

10. (LO 1.3) The following data visualization explains the relationship between total monthly profit margin and labor cost per lawn.

Required: Suggested Solution: a.What does the following data visualization tell us about the relationship between labor cost per lawn mowed and monthly (profit) margin (the extent to which revenues exceed expenses) as shown on the vertical axis?

As the labor cost per lawn goes up, the overall profitability (profit margin) declines. There is a negative relationship between the labor cost per lawn mowed and the monthly profit margin. b. Is the data visualization above better or worse than the same data in the following tabular format? Explain.

The same data is shown in the table as is shown in the visualization; however, it is often easier to see trends using a line graph. If exact details of the decline in profitability as labor costs increase are needed, the table is likely best. If you’re trying to view overall trends, the visualization (line graph) is likely the best way to report results to stakeholders.

11. (LO 1.1) Consider the Value Chain in Exhibit 1.2 as a guide and apply it to Apple: Required: Suggested Solution: 1. Give examples of the primary activities Apple employs at their company to create value with its iPhone product.

INBOUND LOGISTICS are the activities associated with receiving and storing raw materials and other partially completed materials, and distributing those materials to manufacturing divisions when and where they are needed.

Apple meticulously designs its products – that is probably the area of greatest value creation. Apple and its contractors get necessary parts to create its iPhone products.

OPERATIONS are the activities that transform inputs into finished goods and services.

While Apple outsources most of its production to contractors (including FoxConn), it requires significant coordination with Apple to get the highest quality product.

OUTBOUND LOGISTICS are the activities that warehouse and distribute the finished goods to customers.

Apple and its contractors warehouse and distribute finished goods.

MARKETING AND SALES ACTIVITIES identify the needs and wants of customers to attract them to the company’s products and then buy them.

Apple has a significant presence in marketing its products, and is probably the second biggest area of value creation after design.

SERVICE ACTIVITIES provide support to customers after the products and services are sold to them. Service activities include warranty repairs, parts, instruction manuals, and phone or internet support.

Apple provides warranty services and support for its products.

Apple also maintains an app store, data storage, music and video store, etc. to both support its iPhone and serve as additional sources of revenue.

2. Where would you put a management accountant at Apple, in which supporting activity? Why does it fit best there?

Management accounting fits best within the FIRM INFRASTRUCTURE supporting activities. Management accounting provided the information needed to run the business at Apple to decide which products to manufacture and at what price, etc. We note that the definition of a management accountant is an accountant who analyzes accounting-related data to help an organization make effective business decisions, consistent with a supporting activity of the firm.

12. (LO 1.3) In discussing the first step of the AMPS model, there is an axiom that states, “Your data won’t speak unless you ask them the right data analysis questions”. What does this mean in terms of matching the right question with the available data?

Required: Let’s say you are the CEO of Chipotle (an American chain of fast casual restaurants), and you are trying to decide whether to add a drive-through component to all your stores to increase sales and profits. What question would you ask to address this question, and what data would you seek to address this question directly (imagine you can find and use any available data to answer this question).

Suggested solution: Answers will vary but questions include any of these possibilities and more: Questions: What is the return on investment for a drive-through component?

How much does a drive-through add in sales volume to a typical fast-food restaurant?

Is the sales per order greater for drive-through vs. in-store orders?

How much does drive-through cannibalize in-store orders?

How much does a drive-through system cost per store?

Which fast-food restaurant is most similar to Chipotle? Is there industry data available to analyze?

13. (LO 1.1) Consider the Information Value Chain in Exhibit 1.5.

Required: Imagine and improvise context for each of the following eight data items to turn them from data into information. What additional contextual information might be needed to evaluate the data?

Answers will vary.

1. The gross margin of the new drone product is 40%.

Suggested context: Could we compare to the other drone products (whether for the focal company or for a competitor) to see how the focal company measures up?

2. The salespeople are demanding a 10% raise.

Suggested context: Can we compare this raise to other salespeople in the industry, to sales people in general, or to other employees at the focal company to provide needed context?

3. The accountant found 123 errors in the journal entries.

Suggested context: Are these big or small errors? Are they material or not?

How many errors are typically made?

4. The product can no longer be manufactured in Vietnam due to export restrictions.

Suggested context: Are other companies in the same situation? Is there something specific about our product that makes it such that it cannot be exported? Does this restriction happen often? Is the restriction permanent?

5. Profits at Netflix increased by 2.1%.

Suggested context: Is that the increase in profits this month, this quarter or this year? How does it compare to the past?

6. Sales at Chipotle are expected to increase next year.

Suggested context: Have sales at Chipotle been increasing in the past (this year)? Are sales increasing at other fast-food companies? Is GDP increasing and is that the reason for the increase?

7. Sales returns at Dillard’s fell by 2% in January.

Suggested context: Is that 2% compared to last year in January? Or last month? Does it tie to holiday sales? Is that unusual? Did sales increase?

8. Inventory of last year’s Kubota model increased by 7% in May. Suggested context: Is inventory increasing because it has not sold as well?

Does the inventory suggest obsolescence? Are sales increasing? Which Kubota model is it?

14. (LO 1.3) Chipotle has a goal of maximizing its profits over the next five years.

Required: For each of the following types of questions, imagine/improvise questions specific questions to support Chipotle’s goal.

Answers will vary.

1. What happened? What is happening?

What was net income over the past five years?

2. Why did it happen? What are the root causes of past results?

How different was net income as compared to competitors? Is income increasing at an increasing rate?

3. Will it happen in the future? What is the probability something will happen?

Is it forecastable?

What is the projected net income over the next five years?

4. What should we do based on what we expect will happen? How do we optimize our performance based on potential constraints?”

How sensitive are future profits to an increase in meat (protein) and vegetable prices?

15. (LO 1.5) Consider the Senior Cost Position at HT Group in Exhibit 1.15 from the perspective of the AMPS model.

Required: Which characteristics of the job position are consistent with each component of the AMPS model? Are some components emphasized over others? Use specific items from “Key Roles and Responsibilities” and “The Ideal Candidate” in your response.

Answers will vary.

Ask the Question: Investigate and resolve significant manufacturing variances to standard costs and significant variances to budgets and forecasts

Master the Data: Conduct the monthly financial close of inventory-based transactions for approximately 40 organizations, including 6 factories Perform the Analysis: Strong analytical and problem-solving skills Prepare actual vs. plan (budget) analysis. Prepare various financial analysis related to manufacturing costs, inventory, and expense information for various customers as needed for decision-making support.

Share the Story: Exceptional written and verbal communication skills

Ability to effectively translate results of detailed analysis into clear, concise, and actionable recommendations

Chapter 2 End-of-Chapter Assignment Solutions Multiple Choice Questions (Level 1) Multiple-Choice Questions 1. (LO 2.2) The salary of a factory supervisor is considered to be a(n) ______ cost that requires _______ of costs to the cost object. a. direct; tracing b. direct; allocation c. indirect; tracing d. indirect; allocation 2. (LO 2.3) Whereas a ________ cost of a cost object changes in proportion to the changes in its volume, a _____ cost of a cost object does not change regardless of the volume produced. a. fixed; variable b. variable; fixed c. variable; mixed d. mixed; fixed 3. (LO 2.1) What is the monetary value of the resources used or sacrificed to achieve a certain objective, such as the production of a product or the delivery of a service? a. Sales price b. Cost c. Variable cost d. Cost object 4. (LO 2.2) Suppose that manufacturing overhead is allocated to a cost object. It is implied that overhead is a(n) _______ cost. a. direct b. product c. period d. prime 5. (LO 2.2) What is the correct order for cost tracing? a. Cost Incurred → Cost Accumulation → Cost Assignment → Cost Object b. Cost Incurred → Cost Tracing → Cost Accumulation → Cost Object c. Cost Incurred → Cost Assignment → Cost Accumulation → Cost Object d. Cost Incurred → Cost Tracing → Cost Assignment → Cost Object 6. (LO 2.3) Which type of cost includes a fixed rate for using a base amount, and then an additional variable charge for any usage over a base amount? a. Fixed cost b. Variable cost c. Amalgamated cost d. Mixed cost 7. (LO 2.4) Advertising a line of products on social media is considered which type of cost? a. Direct cost b. Product cost c. Period cost d. Inventoriable cost

8. (LO 2.4) The tires and installation for a Tesla Model Y are considered which types of cost? a. Product and prime costs b. Direct and period costs c. Variable and conversion costs d. Variable and period costs 9. (LO 2.5) The ________ is the estimated costs per unit that normally occur during the production of a product or performance of a service. a. standard cost b. budgeted cost c. actual cost d. cost object 10. (LO 2.5) The enterprise system that captures financial transactions and communicates financial performance to interested parties is a _____ system. a. manufacturing information b. human resource management c. financial reporting d. supply chain 11. (LO 2.5) The system that includes budgets and standard costs is the ______ system. a. costing b. human resource management c. customer relationship management d. supply chain 12. (LO 2.5) Which type of analytics addresses the management accounting question; Is the level of fixed and variable costs of our primary products different from the industry? a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics 13. (LO 2.7) The software package that is known more for data analysis than for visualization is _____ . a. Tableau b. Excel c. Power BI d. Access 14. (LO 2.6) The unique identifier in a relational table is the ________ key. a. primary b. secondary c. foreign d. unique 15. (LO 2.6) The columns in a table that contain descriptive information about the observations in the table are called _____ . a. fields b. records c. tables d. primary keys 16. (LO 2.6) _____ exist to create relationships between two tables so that users of the database can link up the details from multiple databases. a. Foreign keys

b. Primary keys c. Unique keys d. Linking keys 17. (LO 2.6) Linking tables in a relational database requires: a. a primary key and a foreign key, each in a different table. b. a foreign key in each table. c. a primary key in one table. d. a primary key and a foreign key, both in the same table.

18. (LO 2.7) Which analytics software tool works only on a Windows computer, and not on a Mac? a. Power BI b. Tableau c. Excel d. Python 19. (LO 2.5) Which of the following questions regarding the ethical collection and use of data is not suggested by the Institute of Business Ethics? a. How does the company use data, and to what extent is it integrated into firm strategy? b. Does the company send a privacy notice to individuals when their personal data are collected? c. Do the data used by the company include personally identifiable information? d. Does the company conduct appropriate due diligence when sharing data with or acquiring data from third parties?

20. (LO 2.5) Enterprise resource planning (ERP) systems integrate: a. b. c. d.

financial and non-financial information from an organization’s business processes. financial information among different organizations only. financial and human resources systems only. financial and non-financial information from an organization’s accounting processes.

Discussion Questions 1. (LO 2.1) Why is important to assign costs to a specific cost object, such as a product, process, service, department, or customer? What does this assignment accomplish?

Suggested solution: Understanding costs is fundamental to making strategic decisions! For example, managers may need to decide whether to purchase a new factory or invest in increasing the efficiency of existing facilities, or they may wonder which products and services are most profitable. Managers may also be required to examine costs to determine whether to undertake an advertising campaign to attract new customers or improve customer loyalty through improving customer service or product quality.

2. (LO 2.1) What is the difference between cost tracing and cost allocation when costs are assigned? Why are there different ways to assign costs?

Suggested solution: Cost tracing helps identify the costs belonging to a specific cost object. Tracing direct labor and direct materials to a finished project are good examples of cost tracing. In contrast, cost allocation assigns indirect costs to specific cost objects (such as different Apple iPhone models, Apple 12, Apple 13, Apple 14 and Apple 15 Iphone models).

3. (LO 2.2) Explain the difference between direct and indirect costs. What is the accounting treatment of each?

Suggested solution: Direct costs are costs that can be identified as belonging to a specific cost object, including those that are included in the final product. Indirect costs are costs that are incurred by companies that are not traced to specific cost objects and must be allocated often using cost drivers.

4. (LO 2.3) Why is it important when assessing profitability to understand the fixed and variable components of a product’s cost structure?

Suggested solution: Why is it important to differentiate between variable and fixed costs? As production increases, per-unit fixed costs decrease, which has important ramifications for production, firm profitability and other strategic decisions. This idea forms the basis of cost-volume-profit analysis, which is discussed in detail in Chapter 3.

5. (LO 2.4) Explain how product costs ultimately show up as inventory (on the balance sheet) first and then as cost of goods sold (on the income statement). What is the order of events? How do product costs differ from period costs?

Suggested solution: Product costs (such as factory supervisor salary and direct materials) are often referred to as inventoriable costs as they are placed into and accumulated in inventory.

Inventory is consumed when it is sold and the accumulated product costs are then expensed as Cost of Goods Sold in the period they were sold. Period costs (such as advertising expense, interest expense and the CEO salary) are expensed as they are incurred.

6. (LO 2.4) We note that direct labor is both a prime and a conversion cost. Why is direct labor a component of both?

Suggested solution:

Direct labor is a prime cost (as a direct cost) as well as a conversion cost that converts direct materials into its finished product. For that reason it is considered to be both a prime and a conversion cost.

7. (LO 2.5) Why does the Institute of Business Ethics suggest that companies conduct due diligence regarding ethical practices of third-party data providers? Why is that due diligence important?

Suggested solution: A company may carefully maintain ethical practices within its own company, but once they use data of other providers that may or may not follow ethical practices, the company is vulnerable.

For this reason, it is important to perform due diligence to assess the ethical data practices of third-party data providers.

8. (LO 2.6) Why is a centralized, shareable database preferable to many individual spreadsheets?

Suggested solution: Organizations use a centralized, shareable database called relational databases, which store data in separate tables and facilitate access to datasets that are related to each other. A relational database is composed of tables, fields, and records that can be accessed and updated by authorized users via a computer system or network which is not possible with a spreadsheet.

9. (LO 2.6) What is the difference between primary keys and foreign keys? Why are they both important for linking tables from different tables/databases?

Suggested solution: Primary keys are unique identifiers that are required in every table (database). Foreign keys create relationships between two tables so that users of the database can look up details of the record based on the primary key/foreign key relationship. There is not a requirement for a foreign key to be in every table.

10. (LO 2.6) What is the difference between a field and a record in a table?

Suggested solution: Fields (attributes) are the columns that contain descriptive information about the observations in the table. (The terms fields and attributes are used interchangeably in practice.) Records are the rows of the database, with each observation corresponding to a record, or unique instance, of what is being described in the table.

11. (LO 2.6) How do foreign keys work? Are they required in each table? Are they unique to each record?

Suggested solution:

Foreign keys create relationships between two tables so that users of the database can look up details of the record based on the primary key/foreign key relationship. There is not a requirement for a foreign key to be in every table.

12. (LO 2.7) What do data acquisition and preparation tools do? Name a few of the available software tools to perform the data acquisition and preparation.

Suggested solution: Data acquisition and preparation tools access needed data from a variety of sources and databases. Excel, Alteryx, SQL (Structured Query Language), Tableau Prep and Power Query are all examples of software tools that perform data acquisition and preparation.

13. (LO 2.7) In which situations would a managerial accountant use Power BI or Tableau instead of Excel?

Suggested solution: Power BI and Tableau both emphasize data visualization. They would be used when trying to either analyze data in a visual way, or to share the story by communicating results visually.

14. (LO 2.7) What is the difference between data acquisition tools and data visualization tools?

What is the function of each in order to facilitate data analysis and report on the findings?

Suggested solution: Data acquisition and preparation tools access needed data from a variety of sources and databases. They get the data ready for descriptive, diagnostic, predictive and prescriptive analysis.

In contrast, data visualization tools are used to either analyze data in a visual way, or to share the story by communicating results visually.

15. (LO 2.7) The job description in provided in the chapter mentions the VLOOKUP skill (see Exhibit 2.17). Given the formation of a cost accounting system (as shown in Exhibit 2.8), why would VLOOKUP be an important skill for a managerial accountant to develop?

Suggested solution: A cost accounting system requires inputs from multiple systems. The ability to link data from these systems is an important skill for the managerial accountant to be able to prepare the data for analysis. There are several ways to link these databases to each other including the use of VLOOKUP or the primary key/foreign key linkages in relational databases.

Brief Exercises

18. (LO 2.2) Classify each of the following product costs as either direct or indirect for Hershey’s Chocolate Factory that makes Hershey KissesTM. a. Foil to wrap Hershey Kisses (Direct) b. Factory Supervisor (Indirect) c. Factory Security (Annual Fee) (Indirect) d. Chocolate (Direct) e. Sugar (Direct) f. Factory Building Rent (Indirect) g. Equipment Depreciation (Straight-Line) (Indirect) 19. (LO 2.3) Classify each of the following costs as either variable costs (V) or fixed costs (F) for Hershey’s Chocolate Factory. a. Rent (F) b. Chocolate (V) c. Direct Labor Cost (Hourly) (V) d. Salaries (F) e. Insurance (F) f. Sugar (V) 20. (LO 2.2) Classify each of the following costs as direct labor (DL), direct materials (DM), indirect labor (IL), or indirect materials (IM) for the manufacture of the Tesla Cybertruck. a. Maintenance labor (IL) b. Maintenance parts (IM) c. Janitorial work (IL) d. Assembly (labor) of the Cybertruck (DL) e. Touchscreens for the Cybertruck (DM) f. Tires for the Cybertruck (DM) g. Factory supervisor salary (IL) 21. (LO 2.4) Classify each of the following costs as either period cost or product cost for the manufacture of a Tesla Cybertruck. a. Maintenance labor (product) b. Maintenance parts (product) c. Advertising on the Web (period) d. Assembly (labor) of the Cybertruck (product) e. Costs of branding (period) f. Tires for the Cybertruck (product) g. Factory supervisor salary (product) 22. (LO 2.4) Classify each of the following costs as either product or period costs. a. Product advertising (period) b. Direct labor (product) c. Direct materials (product) d. Office rent (period) e. Indirect labor (product)

f. Selling expenses (period) 23. (LO 2.4) Classify each of the following costs of services as direct, indirect, selling or general and administrative for a consulting company, where the cost object is the consulting engagement. a. Marketing/Bidding on new consulting jobs (selling) b. Wages paid to consultants performing consulting work (direct) c. Human resources department to manage existing and hire new consultants (indirect) d. Office maintenance manager salary (general and administrative) e. Supplies used by consultants on consulting job (direct) f. Wages paid for admin staff to directly support consulting work (direct) 24. (LO 2.5) For each of the following management accounting questions, explain which enterprise system(s) or other data source can provide the data that are needed to address the question(s). a. What is driving the materials quantity variance? (Manufacturing (or Production) System) b. What is our competitors’ cost structure (fixed and variable costs)? How does our cost structure compare? (Financial Reporting System) c. How many workers are available to fill our open positions, and what wage rate will we need to pay? (Human Resource Management System) d. How many of each product should we order from our suppliers? (Supply Chain Management System) e. Who is our most profitable customer? What products are they buying? (Customer Relationship Management System) 25. (LO 2.1, LO 2.2, LO 2.3, LO 2.4, LO 2.4, LO 2.5) Match each type of data required for a cost accounting system to the enterprise system that is the source of those data.

Enterprise System Cost Data Accounting Data Need  Financial reporting (accounting) systems (FRS)  Manufacturing (and/or production) system (MS)  Human resource management system (HRMS)  Customer relationship management system (CRMS)  Supply chain management system (SCMS) Point-of-sale data

CRMS

Direct labor

HRMS

Status of incoming raw materials

SCMS

Indirect labor

HRMS

Potential cost drivers

MS

Financial statements

FRS

26. (LO 2.6) Classify each of the relational database terms as database, fields, foreign key, primary key, records, or table. a. columns that contain descriptive characteristics (fields) b. observations shown in each row (records) c. unique identifier (primary key) d. facilitates linking of tables or databases to each other (foreign key) e. data organized like a spreadsheet with columns and rows (table) f. structured dataset accessed by many potential users (database) 27. (LO 2.6) Classify each of these data types as string, date, number, or geographic. a. Customer’s zip code (geographic) b. Last transaction data (date) c. Customer age (numerical) d. Customer name (string) e. Total customer purchases to date (numerical) 28. (LO 2.7) Match the characteristics shown to the three software tools primarily considered in this text (Excel, Tableau, Power BI).

Characteristic

Only works on Windows computers Functionality the same on Windows or Mac computers Default to a visual format General-purpose analysis tool Part of Microsoft Office Has different functionality in Windows-based and Macbased computers Emphasizes visualization

Software Tool (Excel, Tableau Desktop, Power BI) (May have more than one answer) Power BI Tableau Power BI and Tableau Desktop Excel Excel and Power BI Excel

Power BI and Tableau Desktop

29. (LO 2.7) Match the software tools (Alteryx, Excel, Power BI, Python, Tableau, Tableau Prep) with their descriptions.

Description of Software Tool

Software Tool (Alteryx, Excel, Power BI, Python, Tableau Desktop, Tableau Prep)

Similar to Tableau Prep, but also assists in advanced data preparation Usually considered the best software tool for visualizations (in addition to Power BI) Multipurpose tool for basic data preparation, business analysis, and data visualizations Requires knowledge of programming to perform business analytics Works directly with Tableau Desktop as a data-preparation tool Microsoft product that goes beyond Microsoft Excel for reporting and visualizing data

Alteryx Tableau Desktop Excel

Python Tableau Prep Power BI

30. (LO 2.7): Match the software tool to the to its primary data analytics task (e.g., data preparation, data analysis and data visualization).

Software Tool Data Analytics Task (e.g., data preparation, data analysis, data visualization) Alteryx

Data preparation

Power BI

Data visualization

SPSS

Data analysis

Tableau Prep

Data preparation

SQL

Data preparation

31. (LO 2-7) Given the linked tables below from our relational database, answer the following questions.

a. What is the total sales for Customer 2002? ($99.77+$53.67= $153.44) b. What is the business name of the customer for Transaction_ID 20310? (Arkansas Craft Distributors) c. What are the Transaction_ID’s for Customer 2002? (20383 and 20564) d. Where is the customer located that was involved with Transaction_ID 20168? (Des Moines, IA)

32. (LO 2-7) Given the linked tables below from our relational database, answer the following questions.

a. What Transaction_IDs for Arkansas Craft Distributors? (20140 and 20310) b. What are the dates of the transactions for Customer 2004? (12/20/2024 and 2/11/2025) c. What is the business name of the customer for Transaction_ID 20383? (Deep Ellum Brewing Company) d. Where is the customer located that was involved with Transaction_ID 20310? (Little Rock, AR)

Problems 1. (LO 2.1, LO 2.2, LO 2.3, LO 2.4) Below find cost term definitions and cost classifications.

Required: Match the following cost classifications to their definition.

Cost Classification Cost Term Definitions (Actual cost, Cost allocation, Cost object, Cost tracing, Fixed cost, Prime cost, or Variable cost) Costs that do not change regardless of the number of units (or volume) of the cost object produced The process of assigning direct costs to the relevant cost objects due to a direct linkage

Fixed cost

Cost tracing

All direct manufacturing costs, including direct material costs and direct labor costs Cost that changes in proportion to changes in the number of units produced (volume) Anything for which a measurement of costs is wanted or needed The process of assigning indirect costs to the relevant cost objects

Prime cost Variable cost Cost object Cost allocation

2. (LO 2.5) Below find cost accounting and related data and the name of various enterprise system data sources.

Required: Select the appropriate enterprise system data source for each type of cost accounting and related data.

Cost Accounting and Related Data

Enterprise System Choose From:     

Financial reporting (accounting) systems (FRS) Manufacturing (and/or production) system (MS) Human resource management system (HRMS) Customer relationship management system (CRMS) Supply chain management system (SCMS)

Details on returns transactions

FRS

Employee satisfaction and sentiment survey results

HRMS

Customer satisfaction data

CRMS

Active vendors (their contact info, where payment should be made, how much should be paid)

SCMS

Past orders by customers

CRMS

General ledger

FRS

3. (LO 2.6) Imagine a table listing direct and indirect parts (materials) used in production.

Required: Classify each type of data produced as database, field, foreign key, primary key, records, or table.

Database Characteristic Data Produced (Database, Field, Foreign key, Primary key, Records, or Table) Line-by-line listing of parts

Records

List of Contacts with various attributes maintained on an iPhone

Database

Cost of part

Field

Listing of all direct and indirect parts and their characteristics

Tables

Part number (unique)

Primary key

Product that typically uses a specific part

Foreign key

4. (LO 2.2, LO 2.3) Companies incur all sorts of costs to perform their business processes. Cost accountants will classify them in certain ways to understand them.

Required: Classify each company cost as a fixed or variable costs, and as a direct or indirect costs.

Company Costs Factory insurance Hourly production wages for employees working on assembly line Product marketing commissions Equipment repair

Fixed or Variable Costs?

Fixed Variable

Direct or Indirect Costs?

Variable

Indirect

Variable

Indirect

Indirect Direct

Rent on factory building Fixed Indirect Factory maintenance Fixed Indirect Direct materials Variable Direct Business licenses Fixed Indirect 5. (LO 2.4) Companies incur all sorts of costs to perform their business processes. Cost accountants will classify them in certain ways to understand them.

Required: Classify the following company costs as period or products costs, and as prime and/or conversion costs.

Company Costs Factory insurance Hourly production wages for employees working on assembly line Product marketing commissions Equipment repair Rent on factory building Corporate office maintenance Direct materials Business licenses

Period or Product Costs Product Product

Prime and/or Conversion Costs

Period

Neither

Product Product Period

Conversion Conversion Neither

Product Period

Prime Neither

Conversion Prime and Conversion

6. (LO 2.6) Data types detail the possible set of values that each attribute can possess.

Required: Label each of the following attributes with the correct data type (alphanumeric, date, number, or geographic).

Attribute Supplier Name Supplier Address Supplier ID Number Supplier Location Supplier Contact Number

Data Type Alphanumeric Alphanumeric Number Geographic Alphanumeric or Number

7. (LO 2.6) The following tables repeat Exhibit 2.14 in the chapter.

Required: Answer the following questions based on the exhibit.

a. How much did Edna spend on her transaction? $38.36 b. If the company needed to contact the customer who participated in Transaction 4, what phone number should it use? 512-471-3333 c. What is the purpose of a foreign key? Does the Customers Table have a foreign key?

Foreign keys create relationships between two tables so that users of the database can look up details of the record based on the primary key/foreign key relationship.

The customer table does not have a foreign key.

8. (LO 2.5) Cost accountants use a number of internal and external data sources to perform their work.

Required: For each of the following internal and external data sources, propose one management accounting question the data may be able to address.

Suggested solution (answers will vary): a. Macroeconomic data – How will GDP growth affect the demand for our product in the coming year? b. Financial reporting system – What are the fixed and variable costs of each product in our company’s portfolio of products? c. Industry data – What is the cost behavior for similar products in our industry? d. Customer relationship management system – What is our most popular product and who is purchasing it? e. Supply chain management system – When will the direct material components arrive for our product? Where are they sourced? f. Human resource management system – What is the labor rate variance for our direct labor?

9. (LO 2.7) Refer to the job listing for the Cost Accountant position advertised by Archon Resources in Exhibit 2.17.

Required: Which of the necessary skills/responsibilities for this position are discussed in this chapter? How do you think this course will prepare you for a job like this? In which courses, life experiences, or on-the-job training will you learn and develop the other skills?

Suggested solution (answers will vary): This course will teach how to determine fixed and variable costs, as part of the “Determine fixed costs” responsibility.

This course and other accounting (and accounting information system) courses will help “Construct data accumulation systems”.

This course and other accounting courses will help with “computer literacy, MS Excel in particular (familiarity with VLOOKUPS and pivot tables)” The financial accounting classes will help with an “In-depth understanding of Generally Accepted Accounting Principles (GAAP).

10. Solution: Summarize monthly sales and compute the % Change from one month to the next (as shown in the chapter).  (2b) What is the July monthly sales? $471,868  (2c) What is the November monthly sales? $445,057  (3b) What is the percentage change in monthly sales from May to June (round to two decimal points)? 2.05%  (3c) What is the percentage change in monthly sales from November to December (round to two decimal points)? 4.31% 11. Solution: Summarize sales by month, by sales region (regions 1-4), and by both month and region.

Solution:  (2b) What is the January monthly sales? $488,388  (2c) What is the February monthly sales? $487,364  (3b) What is the total sales for region 3? $1,358,312  (3c) What is the total sales for region 1? $1,367,478  (4b) What is the December sales for region 2? $139,236  (4c) What is the April sales for region 3? $130,128 12. LO 2.1, LO 2.2, LO 2.3, LO 2.4, LO 2.5) Consider the following hypothetical situation. Divya Patel, the new plant manager of Garden Scapes Manufacturing Plant Number 7, wonders about the classification of its product and period costs. Product costs are held in inventory until they are sold. Once the inventory is sold, the expense of the inventory will be shown on the income statement as the cost of goods sold. However, period costs are expensed on the income statement as they are incurred.

Required a. Imagine that you are in a job similar to Divya’s. If you believe that certain costs are unclearly classified and you needed the income statement to report higher income so that you can receive

bonus pay in the current period, would you classify those costs as product costs or as period costs? How would your decision impact subsequent periods? b. In your view, is it ethical to change cost classifications to maximize reported income? Would it be ethical to change your accounting methods each period to maximize your chances of getting a bonus?

Suggested solution (answers will vary): In ethical situations it is not always clear what should be done. We note that the possibility of bonus pay might sway a manager to classify costs one way or the other. The ethical standard of Integrity noted in Chapter 1 suggest that a manager should “refrain from engaging in any conduct that would prejudice carrying out duties ethically”. Costs that are recorded as product or period costs ultimately will go through the income statement, but whether they “hit” the income statement this period or next period is the question.

If management determines that a change in cost classification is needed, it should consistently follow that cost classification in current and subsequent periods, not that the accounting method each period to maximize the chance of getting a bonus.

13. (LO 2.5) (Ethics) We define personally identifiable information as any information that permits an individual’s identity to be directly or indirectly inferred. Suppose that Sleep Number Mattresses uses personally identifiable income information and a credit score to determine whether to extend credit to its customers, and this information is maintained in its customer relationship management (CRM) system.

Required 1. Why might a company need to use personally identifiable information to decide whether to extend credit to a customer?

2. If such information is used, what ethical responsibility does the company have to keep that information secure and private?

Suggested solution (answers will vary): To determine whether to extend credit to a customer, a company will need personally identifiable information. When extending credit, the company will want to assess the probability the credit (or loan) will be repaid. Annual income, debt already held, and credit score (among other variables) are all used to evaluate the probability of repayment.

The Institute of Business Ethics suggests there are several questions companies should address concerning the ethical use of data, including personally identifiable information, including: 1. Does the company send a privacy notice to individuals when their personal data are collected?

Is the request to use the data clear? Do individuals agree to the terms and conditions of use of their personal data?

2. Does the company assess the risks linked to the specific type of data it uses? Has the company considered the risks of data use or possible data breaches of potentially sensitive data?

3. Does the company have safeguards in place to mitigate the risks of data misuse? Are preventive controls on data access in place and are they effective? Are penalties established and enforced for data misuse?

4. Does the company have the appropriate tools to manage the risks of data misuse? Is the feedback from these tools evaluated and measured? Does internal audit regularly evaluate these tools?

Addressing these questions directly will help the company address their ethical responsibility to keep that information secure and private.

14. (LO 2.5) (Ethics) As discussed in the chapter, The Institute of Business Ethics suggests that companies consider six questions that will allow a company to create value from data use and analysis while protecting the privacy of stakeholders. Why do you think the first two questions, repeated below, are necessary for Sleep Number Mattresses to consider when gathering and collecting data from its current and potential customers?

Required a. How does the company use data, and to what extent is data collection and analysis integrated into firm strategy? Are the data accurate and reliable? Will data collection primarily benefit customers and/or employees?

Suggested solution: The company needs to articulate how they will collect and use the customer data collected. The data must be handled carefully to ensure that the data is accurate, reliable and helpful for both the customer and the employee. The data collection will help the employee to perform their job and help with the information it needs for their own and management’s decision making.

The data collection will allow the company to potentially provide a benefit to the customer in these possible ways: 1. Tailor their marketing and product selection to meet the needs of their customers (as learned from the customer data collected).

2. Extend credit to those customers seeking credit who have met various criteria. b. How should Sleep Number Mattresses advise its customers when their personal data are collected? Is the request to use the data clear to users? Do they agree to the terms and conditions of use of their personal data?

Suggested solution: The Institute of Business Ethics suggests there are several questions companies should address concerning the ethical use of data, including personally identifiable information, including: Does the company send a privacy notice to individuals when their personal data are collected? Is the request to use the data clear? Do individuals agree to the terms and conditions of use of their personal data?

15. (LO 2.6) Consider the Cost Accountant job position at Archon Resources shown in the chapter.

Suggested Solution: a. Why is it important for the cost accountant to determine the level of fixed and variable costs?

As production increases, per-unit costs decrease, which have important ramifications for production, firm profitability and other strategic decisions. This idea forms the basis of cost-volume-profit analysis, which is discussed in detail in Chapter 3. b. Describe the importance for the cost accountant to have the VLOOKUP skill in working with data.

A cost accounting system requires inputs from multiple systems. The ability to link data from these systems is an important skill for the managerial accountant to be able to prepare the data for analysis. There are several way to link these databases to each other including the use of VLOOKUP or the primary key/foreign key linkages in relational databases. c. Why is the quality of “Integrity, with an ability to handle confidential information” an important quality for ethical responsibility as a Cost Accountant?

Integrity and Confidentiality are both standards set forth in the IMA Statement of Ethical Professional Practice (see the discussion in Chapter 1). Cost/Managerial Accountants must hold these ethics to gain the trust of management and others in the organization (including employees, customers, suppliers, regulators) that they serve. d. Given the discussion of this chapter regarding available enterprise systems, why does a cost accountant need to “Collect cost information and maintain an expenses database” and “Construct data accumulation systems” as part of their job description?

A cost accounting system requires inputs from multiple systems. The ability to link data from these systems is an important skill for the managerial accountant to be able to prepare the data for analysis.

Chapter 3 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 33. (LO 3.1) A water utility charges homeowners $0.03 per gallon of water, in addition to a monthly service fee. A customer’s water bill could accurately be classified as a: a. fixed cost b. variable cost

c. mixed cost d. standard cost 34. (LO 3.1) Geormetician Inc. purchased machinery from Grey Star, which has guaranteed that the machine will last 10 years. Depreciation for the machinery is best classified as a: a. fixed cost b. variable cost c. mixed cost d. standard cost 35. (LO 3.1) Within a relevant range: a. Fixed costs per unit are constant. b. Total variable costs are constant. c. Increased production does not require the purchase of additional machinery. d. Total cost per unit increases.

36. (LO 3.1) Qualytics Company purchased machinery from Easy Bit, which has guaranteed that the machine will last 10 years. Within the relevant range, as Qualytics increases production: a. Per unit variable cost increases. b. Per unit total costs remain constant. c. Total fixed costs increase. d. Per-unit fixed costs decrease.

37. (LO 3.2, 3.3) To estimate costs using prior data, regression analysis is preferable to the high-low method because: a. Regression analysis is not influenced by data outliers. b. Regression analysis makes use of more data. c. Regression analysis is computationally simpler. d. Regression analysis emphasizes data that are more recent.

38. (LO 3.2, 3.3) Which of the following is not an advantage of using regression analysis to estimate costs rather than the high-low method? a. Regression is likely more accurate because it uses more data points in the calculations. b. Regression uses simpler calculations. c. Regression provides an estimate of fixed costs. d. Regression can be used to predict future costs.

39. (LO 3.3) In a regression analysis examining the effect of customer visits on total office costs, R is 0.12. Interpret R. a. There is a strong positive correlation between customer visits and total office costs. b. There is a strong negative correlation between customer visits and total office costs. c. There is little or no linear relationship between customer visits and total office costs.

d. There is a curvilinear relationship between customer visits and total office costs.

40. (LO 3.3) Which of the following describes the precision of an estimate in a regression analysis? a. Correlation b. Standard error c. Coefficient d. Margin of safety 41. (LO 3.3) Snack Pantry regresses total costs on units produced. Results of the regression indicate a statistically significant coefficient of 2.5 on the units produced variable. How should this result be interpreted? a. Each unit costs an average of $2.50 to produce. b. Each unit has an average variable cost of $2.50. c. Each unit has an average fixed cost of $2.50. d. Each unit has an average labor cost of $2.50.

42. (LO 3.4) Which of the following is not used in CVP analysis? a. Fixed cost per unit b. Variable cost per unit c. Total operating income d. Revenue per unit 43. (LO 3.4) Which of the following equations is incorrect? a. Contribution margin – fixed costs = operating income b. Contribution margin per unit + variable cost per unit = sales price c. (Contribution margin per unit * units) – Fixed cost per unit = sales price d. Revenue – variable costs –operating income = fixed costs 44. (LO 3.4) Which of the following costs is deducted from revenue to calculate contribution margin? a. Depreciation b. Hourly wages for the sales department c. Rent for production facility d. Production supervisor salary 45. (LO 3.5) All things equal, how will the purchase of additional production equipment affect a company’s breakeven point? a. The breakeven point will increase. b. The breakeven point will decrease. c. The breakeven point will remain the same. d. It depends on the price of the production equipment.

46. (LO 3.5) Trader Mo’s is a furniture company. The company has decided to alter its strategy by selling its automated production equipment and producing furniture using skilled labor instead.

However, in the short-term, the company is unable to cut fixed costs due to contractual obligations related to production equipment. In the short-term, how will this change in strategy affect the breakeven point? a. The breakeven point will increase. b. The breakeven point will decrease. c. The breakeven point will remain the same. d. Indeterminable without knowing the average selling price of the furniture.

47. (LO 3.5) The breakeven point is the point at which _______ is equal to zero. a. revenue b. gross margin c. contribution margin d. operating income 48. (LO 3.5) Gouda Vibes Company must increase profitability this year to avoid bankruptcy. Gouda Vibes can sell all units produced, but it faces a production constraint: a shortage of skilled labor.

To maximize profit, Gouda Vibes should produce: a. products that have the highest contribution margin. b. products that have the highest sales price. c. products that use the least amount of skilled labor. d. products that have the highest contribution margin per hour of skilled labor.

49. (LO 3.6) Operating leverage is a measure of: a. a company’s cost structure b. a company’s profitability c. a company’s competitiveness d. a company’s strategy 50. (LO 3.6) All things equal, which of the following will decrease a company’s operating leverage? a. Purchasing production equipment b. Hiring supervisors who work on salary c. Increasing production d. Automating production to decrease direct labor 51. (LO 3.7) When companies sell more units than they produce, operating income will be highest under: a. Absorption costing b. Variable costing c. Standard costing d. Mixed costing

52. (LO 3.7) Which of the following is considered a period cost under variable costing? a. Direct materials b. Direct labor c. Variable manufacturing overhead d. Fixed manufacturing overhead

(Level 1) Discussion Questions 1. (LO 3.1, 3.5) Explain how increased automation may affect breakeven analysis, margin of safety, and operating leverage.

Suggested Solution: Increased automation replaces labor costs (which tend to be variable) with fixed costs (which tend to be fixed). Holding total costs constant, increased fixed costs will increase a company’s breakeven point, reduce margin of safety, and increase operating leverage.

2. (LO 3.2, 3.3) Why is regression analysis superior to the high-low method for producing cost models?

Suggested Solution: Regression analysis makes use of all available data points, while the high-low method uses only two data points in the dataset. The use of additional data is likely to yield more accurate cost information. Additionally, a regression analysis renders useful statistical data such related to precision and the degree to which independent variables are correlated with dependent variables, which can be very useful to understanding cost drivers.

3. (LO 3.2, 3.3) Explain the effect of data outliers on the high-low method and regression.

Suggested Solution: Data outliers are likely to be selected as the high or low point when using the high-low method.

The high-low method provides a cost function based on only two data points and ignores all other data points. Thus, outliers in a dataset are likely to result in cost functions that do not accurately represent the data. Regression uses all data points, and is thus influenced less by outliers.

4. (LO 3.3) Explain why companies should be cognizant of relevant range when using regression analysis to predict future costs.

Suggested Solution:

Companies must consider the relevant range of their data because drastic changes in production volume are likely to violate some underlying assumptions of cost volume profit analysis.

Specifically, within the relevant range, total fixed costs and variable costs per unit are assumed to be constant. If, for example, production increases dramatically, total fixed costs are likely to change as companies purchase additional machinery and facilities to produce more units.

5. (LO 3.1, 3.6) Identify companies at opposite ends of the cost structure spectrum (relatively high versus low fixed costs). How does cost structure alter firm strategy?

Suggested Solution: Software companies such as Microsoft have very high fixed costs and low variable costs (high operating leverage). Retailers such as Target have relatively high variable costs and low fixed costs (low operating leverage). For companies like Microsoft, there is considerable risk in launching new products because of the volume necessary to be profitable. Variable costs often fall during recessions. So even in bad economic circumstances, companies with low operating leverage can turn a profit.

6. (LO 3.4, 3.5) Explain how changes in product mix affect CVP analysis in a multi-product setting.

What strategies might companies use to alter product mix?

Suggested Solution: For companies with multiple products, CVP analysis depends on a weighted-average, or composite, unit. Changes in product mix change the weighted average revenue and cost per unit. Companies can alter product mix through developing new products, changing pricing strategies, and advertising.

7. (LO 3.4, 3.5) How do the quality and price of raw materials and direct labor influence breakeven point and target profit analysis?

Suggested Solution: Quality and price of the inputs of products and services can affect the breakeven point and target profit in two ways. Higher quality inputs increase production costs. However, they can also increase the price customers are willing to pay for goods and services. Companies must determine how inputs will affect both cost and revenue.

8. (LO 3.6) Under what conditions might a company wish to increase its degree of operating leverage?

Suggested Solution: A higher degree of operating leverage can result in increased profits for companies that are selling more products or services than the breakeven point. So companies that expect to be profitable can benefit from higher operating leverage. However, higher operating leverage also

results in higher risk because higher operating leverage will increase losses when companies fail to breakeven.

9. (LO 3.6) Explain how outsourcing production can affect a company’s cost structure and operating leverage.

Suggested Solution: Many companies outsource production to reduce labor costs. Reducing labor costs will affect a company’s cost structure because it may decrease the relative weight of variable costs relative to fixed costs. If a company decreases the relative weight of variable costs, they will have higher operating leverage.

10. (LO 3.6) How are a company’s cost structure and breakeven point related?

Suggested Solution: A company’s cost structure is a company’s relative mix of fixed and variable costs. If total costs are held constant, as fixed costs increase, a company’s breakeven point increases.

11. (LO 3.7) What are the drawbacks of absorption costing?

Suggested Solution: Relative to variable costing, absorption costing can encourage managers to over-produce inventory (i.e., produce more inventory than is needed for sales) because it results in higher net income. This occurs because the cost of producing unsold items is included in inventory and not expensed until they are sold in future periods. Companies that overproduce inventory also experience higher costs of storing and maintaining that inventory, and experience higher losses due to obsolescence, spoilage, and shrinkage.

12. (LO 3.7) How might absorption costing lead to unethical behavior on the part of managers?

Suggested Solution: Relative to variable costing, absorption costing can encourage managers to over-produce inventory (i.e., produce more inventory than is needed for sales) because it results in higher net income. Managers can benefit from this higher reported net income in the form of bonuses, even though in the long-term, companies are worse-off as a result of overproduction of goods.

13. (LO 3.7) How might companies design incentive packages for managers to counteract the drawbacks of absorption costing?

Suggested Solution: Incentive packages should account for the fact that reported net income is higher for absorption costing than variable costing when companies overproduce inventory. Companies can address

this issue by carefully monitoring inventory levels, or by using variable costing for managers’ earnings targets.

14. (LO 3.7) Briefly explain the differences between an absorption costing income statement and variable costing income statement.

Suggested Solution: Absorption costing income statements group costs by product and period costs, and emphasize gross margin. Variable costing income statements group costs by fixed and variable costs, and emphasize contribution margin.

15. (LO 3.7) When calculating product cost per unit, why does absorption costing include fixed manufacturing overhead cost?

Suggested Solution: Under US GAAP, all inventory costs, including fixed manufacturing overhead costs, must be absorbed or included in inventory. By excluding fixed manufacturing overhead costs, companies are failing to account for the complete or total cost of producing goods and services.

(Level 1) Brief Exercises 1. (LO 3.1, 3.4) Food Orchard sells a single product. It has total sales of $250,000 (10,000 units), a variable cost per unit of $15 per unit, and fixed costs of $125,000. What is contribution margin per unit?

Ans: $25 sales/unit – $15 VC/unit = $10 VC/unit 2. (LO 3.1, 3.2) SpeakerSoft Inc uses the high-low method to estimate production costs. Per the company’s analysis, variable costs are $12.95 per unit, while fixed costs are $13,500. If SpeakerSoft expect to product 3,000 units next month, what are projected production costs?

Ans: $13,500 + $12.95 * 3000 = $52,350

3. (LO 3.1, 3.3) SpeakerSoft Inc uses regression analysis to estimate production costs. Per the company’s regression output, units produced has a regression coefficient of $13.80, while the intercept coefficient is $15,000. If Speakersoft expect to product 4,000 units next month, what are projected production costs?

Ans: $15,000 + $13.80 * 4000 = $70,200

4. (LO 3.4) Consider the following information for FestiveFood Co.: Sales (units) Revenue Variable Costs

$ $ $

500.00 60,000.00 20,000.00

Fixed Costs Operating income

$ $

10,000.00 30,000.00

If FestiveFood increases sales price by 10% but sales volume remains the same, what is the effect on contribution margin? Will contribution margin increase or decrease, and by what percent?

Ans: Old Income: Revenue Variable Costs Contribution Margin

$60,000 $20,000 $40,000

New Income: Revenue

$66,000

Variable Costs Contribution Margin

$20,000 $46,000

$46,000/$40,000 – 1 = 15% increase 5. (LO 3.4) Nature Mart. has after-tax income of $30,000, a tax rate of 40%, fixed costs of $15,000, and a contribution margin ratio of 50%. What is Nature Mart’s total revenue?

Ans: Pretax profit = after-tax profit/(1-tax rate) Pretax profit = $30,000/(0.6) = $50,000 CM – FC = Pretax profit .5(Rev) - 15,000 = 50,000 .5(Rev) = 65,000 Revenue = $130,000

6. (LO 3.4) Lifestyle Colours Co. has operating income of $75,000, fixed costs of $50,000, a contribution margin of $5.00 per unit, and a contribution margin ratio of 0.4. What is the Lifestyle Colours’ variable cost per unit?

Ans: CM – FC = Income CM – 50,000 = 75,000 CM = 125,000 Contribution margin ratio = (total CM)/(total rev) .4 = 125,000/total rev Total sales = 125,000/.4

Total sales = 312,500 Total CM/(CM/unit) = units 125,000/5.00 = 25,000 units Total rev/units = rev/unit $312,500/25,000 units = $12.50/unit Rev/unit – CM/unit = VC per unit $12.50 - $5 = $7.50 7. (LO 3.4) Sell Squad Co. has a contribution margin of 0.75, a sales price per unit of $9.75, and total variable costs of $19,500. What are total unit sales for Sell Squad?

Ans: 1-CM% = VC% VC% = .25 Rev * VC% = total variable costs Rev * 25% = $19,500 Rev = $78,000.

Rev/(rev/unit) = units $78,000/$9.75 = 8,000 units 8. (LO 3.4) Venture Bliss Co. spends 36% of its revenue on variable costs. It has an average fixed cost per unit of $4.00, a sales price per unit of $8.00, and total variable costs of $54,000. What is Venture Bliss’ operating income?

Ans:

1-CM% = VC% VC% = .36 Rev * VC% = total variable costs Rev * 36% = $54,000 Rev = $150,000.

Rev/(rev/unit) = units $150,000/$8.00 = 18,750 units Rev – VC – FC = OI 150,000 – 54000 – (4*18750) = OI 150,000 – 54000 – (75000) = OI OI = $21,000

9. (LO 3.4) Investify Co. has revenue of $198,000 over 24,000 units. Contribution margin per unit is $6.60 and fixed costs are $70,000. What is the tax rate for Investify if after-tax net income is $51,272?

Ans: CM – FC = Pre-tax income 6.60*24,000 – 70,000 = Pre-tax income 158,400 – 70,000 = Pre-tax income 88,400 = Pre-tax income Pre-tax income * (1-tax rate) = after-tax income 88,400 * (1-tax rate) = $51,272 (1-tax rate) = 51272/88400 1-tax rate = 0.58 Tax rate = 0.42, or 42% 10. (LO 3.4) Hagle Inc. saw an increase in sales of 10% last year. Selling price per unit, variable cost per unit, and total fixed costs remained constant. Determine whether the following items increased (I), decreased (D), remained the same (R), or cannot be determined (C). a. Total Sales (I) b. Contribution margin per unit (R) c. Margin of safety (I) d. Breakeven point (R) 11. (LO 3.5) Heal Quick Co. has revenue of $13,500 over 4,320 units, a contribution margin of $2.50 per unit, and fixed costs of $25,000. What is the breakeven point in revenue for Heal Quick?

Ans: Rev per unit = $13,500/4320 units = $3.125 CM% = CM per unit / rev per unit CM% = 2.50/3.125 CM% = .8 BE point in revenue = FC/CM% BE point in revenue = 25000/.8 = $31,250 12. (LO 3.5) Nexa Bull Co. has revenue of $11.00 per unit. Variable costs are 35% of revenue and total fixed costs are $31,000. What is the breakeven point in units for Nexa Bull?

Ans: 1 – VC% = CM% 1 – 35% = CM% = 65% CM% * Rev per unit = CM per unit 65% * 11 = CM per unit = $7.15 BE point in units= FC/CM per unit

BE point in revenue = 31000/7.15 = 4,336 units (rounded up to nearest unit) 13. (LO 3.5) Nutrilix Co. earns an average of $20.00 in revenue per unit and spends an average of $7.20 per unit on variable costs. Fixed costs are $25,000. How much revenue must Nutrilix generate in order to achieve operating income of $50,000?

Ans: CM per unit = Rev per unit – VC per unit CM per unit = 20 – 7.20 = 12.80 CM% = CM per unit/rev per unit CM% = 12.80/20.00 CM% = .64 Target revenue = (FC + Target income)/CM% Target revenue = (25,000 + 50,000)/.64 Target revenue = (75,000)/.64 Target revenue = $117,187.50 14. (LO 3.5) Pharm Nest Co. has a contribution margin ratio of 50% and revenue per unit of $50.00.

The tax rate is 25% and fixed costs are $65,000. How many units must Pharm Nest sell in order to generate after-tax profits of $150,000?

Ans: CM per unit = rev per unit * CM% CM per unit = 50 * 50% CM per unit = 25.00 Pre-tax income * (1-tax rate) = after-tax income Pre-tax income * (1-.25) = $150,000 Pre-tax income * (.75) = $150,000 Pre-tax income = 200,000 Target sales units = (FC + Pre-tax Target income)/CM per unit Target sales units = (65000 + 200,000)/25 Target sales units = (265,000)/25 Target sales units = 10,600 units 15. (LO 3.5) Gadget Gazette Co. has revenue of $30.00 per unit. Variable costs are 30% of revenue and total fixed costs are $84,000. Current sales generate revenue of $144,000. What is the margin of safety in units for Gadget Gazette?

Ans: 1 – VC% = CM% 1 – 30% = CM% = 70% Rev per unit * CM% = CM per unit

30 * 70% = CM per unit = $21.00 BE units = FC/CM per unit BE units = 84,000/21.00 = 4,000 units Current unit calculation Rev / rev per unit = units $144,000 / 30 = 4,800 units Margin of safety in units = current units – BE units Margin of safety in units = 4,800 units – 4,000 units = 800 units 16. (LO 3.5) Classify the following changes with regards to how they will change the breakeven point (in number of units). Use the following classifications: Increase (I), Decrease (D), Remained the same (R), or Cannot be determined (C). a. Increase in selling price (D) b. Decrease in variable cost per unit (D) c. Increase in fixed costs (I) d. Automation alters the mix of variable costs to fixed costs (I) 17. (LO 3.6) Phelps Co. has current sales of $200,000, operating income of $40,000, and a degree of operating leverage of 1.5. If sales increase by $40,000, what will operating income be?

Ans: If sales increase by 20% ($40,000/$200,000), then operating income will increase by 30% (20% * 1.5 DOL) to $52,000 ($40,000*1.3).

18. (LO 3.6) Zennit Co. has current sales of $30,000, variable costs of $6,000, and fixed costs of $14,000. What is Zennit’s degree of operating leverage?

Ans: Rev – VC = CM 30,000 – 6,000 = CM = 24,000 CM – FC = OI 24,000 – 14,000 = 10,000 DOL = CM/OI DOL = 24,000/10,000 DOL = 2.4 19. (LO 3.6) Couture Engine Co. has current sales of $800,000, variable costs of $200,000, and a 1.6 degree of operating leverage. What must sales be in order to increase operating income to $562,500?

Ans: Rev – VC = CM 800,000 – 200,000 = CM 600,000 = CM

DOL = CM/OI 1.6 = 600,000/OI OI = 600,000/1.6 OI = 375,000 % Change in rev * DOL = % Change in OI % Change in rev * DOL = % Change in OI % Change in rev * 1.6 = 50% [(562,500 future OI / 375,000 current OI] – 1] % Change in rev = 50%/1.6 % Change in rev = 31.25% (future rev / current rev) – 1 = 31.25% future rev / 800,000 = 131.25% future rev = 131.25% * 800,000 future rev = 1,050,000

20. (LO 3.7) Absorption costing incentivizes the overproduction of goods. What is the most likely effect of overproduction of goods in the current period on the following? Use the following classifications: Increase (I), Decrease (D). a. Inventory (I) b. Spoilage (I) c. Operating income (I) d. Future operating income (D)

(Level 1) Problems

1. (LO 3.1, 3.4, 3.5) Maine Outfitters produces boots for outdoor enthusiasts. Average cost information for its boots is found below: Selling price per unit Variable cost per unit Direct Material Direct Labor Manufacturing Overhead Marketing Annual Fixed Costs

$75 $25 $10 $7.50 $2.50 $300,000

A. What is the breakeven point in units?

Fixed costs / CM per unit $300,000 /$30 10,000 units

B. How many units must Maine Outfitters sell in order to earn $150,000 in operating income?

Fixed costs + target income/CM per unit 15,000 units C. Assume Maine Outfitters is subject to a 25% tax rate. How many units must the company sell in order to earn $180,000 in after-tax income?

After tax income = pretax income/(1-tax rate) 180,000 = x/.75 X = 240,000 Fixed costs + target income/CM per unit 18,000 units D. Assume Maine Outfitters is currently selling 20,000 units. Calculate the company’s margin of safety in sales dollars.

Margin of safety = current sales – breakeven sales Margin of safety = $1,500,000 – $750,000 Margin of safety = $750,000

2. (LO 3.1, 3.2) Maui Cream Co. is a restaurant that provides catering services. The table below tracks the number of orders and total catering travel costs for Maui Cream Co. for each month during the past year. Tourist season is denoted by a 1 in the Tourist Season column. Use the table and the high-low method to evaluate the effect of orders on total cost, then answer the following questions.

Maui Cream Co. Month January February March April May June July August September October November December

Orders Tourist Season Total Cost 61 0 $ 1,720 81 0 $ 2,120 85 0 $ 2,200 69 1 $ 2,156 85 1 $ 2,370 62 1 $ 1,740 93 1 $ 2,546 58 1 $ 1,428 98 0 $ 2,300 81 0 $ 2,444 79 0 $ 2,080 88 0 $ 2,612

A. Using the high-low method, estimate the variable travel cost per order.

(2,300-1,428)/(98-58) = $21.80 per order.

B. What is the monthly fixed travel cost for Maui Cream Co.? y = ax + b 2,300 = 21.80*98 + b $163.60= b C. Estimate the travel cost for next month assuming Maui Cream Co expect 80 orders.

Y = 21.80*80 + 163.60 Y = $1,907.60

3. (LO 3.1, 3.3) Maui Cream Co. is a restaurant that provides catering services. Below is the regression output to analyze the effect of number of orders and busy season on total catering travel costs. Tourist season is a binary variable set equal to 1 months in the tourist season. Use the regression output to answer the following questions.

SUMMARY OUTPUT Regression Statistics Multiple R 0.87 R Square 0.75 Adjusted R Square 0.70 Standard Error 196.07 Observations 12 ANOVA df Regression Residual Total

Intercept Orders Tourist Season

2 9 11

SS 1063632.66 345995.34 1409628

Coefficients 214.42 24.39 43.41

Standard Error 401.06 4.82 121.82

A. What is the coefficient of correlation?

R = 0.87

MS 531816.33 38443.93

t Stat 0.53 5.07 0.36

F 13.83

Significance F 0.00

P-value 0.61 0.00 0.73

Lower 95% -692.85 13.50 -232.16

Upper 95% 1121.69 35.28 318.97

B. What amount of variation in travel costs is explained by the independent variables of orders and tourist season?

75.0% C. According to the regression output, which independent variable(s) are significant?

Only orders. Tourist season is insignificant.

4. (LO 3.1, 3.3) White Space Services provides basic and advanced internet installation. To better understand costs, White Space Services has regressed total monthly costs on the number of basic and advanced installations. Use the regression output to answer the following questions.

SUMMARY OUTPUT Regression Statistics Multiple R 0.49 R Square 0.24 Adjusted R Square 0.19 Standard Error 1945.48 Observations 34 ANOVA df Regression Residual Total

2 31 33

SS 36092314.77 117331391.23 153423706.00

Intercept Basic Advanced

Coefficient s 260.37 56.76 97.64

Standard Error 1965.44 30.49 55.07

MS 18046157.38 3784883.59

t Stat 0.13 1.86 1.77

F 4.77

Significance F 0.02

Pvalue 0.90 0.07 0.09

Lower 95% -3748.18 -5.42 -14.67

Upper 95% 4268.91 118.94 209.95

A. What is the coefficient of correlation?

R = 0.49 B. What amount of variation in costs is explained by the model (use the metric that controls for number of independent variables?

19.0% C. According to the regression output, which independent variable(s) are significant at p = 0.1?

Basic and advanced installations D. According to the regression output, what is the total cost estimate for a month with 250 basic installations and 100 advanced installations?

260.37 + (56.76*250) + (97.64*100) $24,214.37

5. (LO 3.3) Fruitzy produces batches of flavored sodas and uses regression analysis to better understand costs. Fruitzy has regressed total weekly costs on the number of batches of each soda flavor. Use the regression output to answer the following questions.

SUMMARY OUTPUT Regression Statistics Multiple R 0.80 R Square 0.64 Adjusted R Square 0.59 Standard Error 12719.46 Observations 24 ANOVA df Regression

3

Residual

20

Total

23

Intercept Lemon Strawberry Grape

SS 5752957226.0 3 3235690875.4 3 8988648101.4 6

Coefficient s

Standard Error

25404.59 99.88 245.28 239.68

52624.33 188.33 100.44 48.42

MS 1917652408.6 8

F 11.85

Significance F 0.00

161784543.77

t Stat 0.48 0.53 2.44 4.95

Pvalue

Lower 95%

0.63 0.60 0.02 0.00

-84367.84 -292.97 35.78 138.69

Upper 95% 135177.0 2 492.73 454.79 340.68

A. What amount of variation in costs is explained by the model (use the metric that controls for the number of independent variables)?

59% B. According to the regression output, which flavor has the highest variable cost?

Strawberry C. According to the regression output, which independent variable has the highest level of significance?

Grape D. According to the regression output, what is the total cost estimate for a week in which Fruitzy produces 150 lemon batches, 250 strawberry batches, and 350 grape batches?

25,404.59 + (150*99.88) + (250*245.28) + (350*239.68) $185,594.59 6. (LO 3.4) All Or Muffin company has the following financial information:

Revenue Variable Costs Contribution Margin Fixed Costs Operating Income Taxes Net Income

$ $ $ $ $ $ $

1,800,000 630,000 1,170,000 430,000 740,000 199,800 540,200

A. What is All Or Muffin’s contribution margin ratio?

65% CM% = CM/rev CM% = 1,170,000/1,800,000 B. What is All Or Muffin’s tax rate?

27% Pretax profit * (1-tax rate) = after-tax profit 740,000 * (1-tax rate) = 540,200 1-tax rate = 540,200/740,000 1-tax rate = .73 Tax rate = .27 or 27% C. If All Or Muffin increases sales price by 10% and maintain current unit sales, what will All Or Muffin’s net income be? $671,600

Revenue Variable Costs Contribution Margin Fixed Costs Operating Income Taxes Net Income

$ $ $ $ $ $ $

1,980,000 630,000 1,350,000 430,000 920,000 248,400 671,600

D. If All Or Muffin increases unit sales by 10%, what will All Or Muffin’s net income be? $625,610

Revenue Variable Costs Contribution Margin Fixed Costs Operating Income Taxes Net Income

$ 1,980,000 $ 693,000 $ 1,287,000 $ 430,000 $ 857,000 $ 231,390 $ 625,610

7. (LO 3.4, 3.5) The Pet Mansion company has the following financial information:

Sales (units) Revenue Variable Costs Fixed Costs Operating Income

$ $ $ $

8,000 1,600,000 384,000 66,120 1,149,880

A. What is The Pet Mansion’s contribution margin ratio?

76% CM% = CM/rev CM% = (rev – VC)/rev CM% = (1,600,000-384,000)/1,600,000)

B. What is The Pet Mansion’s breakeven point in units?

435 units CM per unit = CM / units CM per unit = (rev – VC)/ units CM per unit = (1,600,000-384,000)/8,000 units CM per unit = $152 BE units = FC/CM per unit BE units = 66,120/$152

C. The Pet Mansion has the opportunity to switch suppliers to gain more quality inputs to production. Doing so will increase variable costs by 10% and increase unit sales by 10%.

If The Pet Mansion switches suppliers, what will The Pet Mansion’s contribution margin ratio be?

73.6% 1 – VC% = CM% 1 – VC% = 76% VC% = 24% If variable costs increase by 10%, the new VC% will be 26.4% (24%*1.1), so the new CM% will be 73.6% (1-26.4%).

D. If The Pet Mansion switches suppliers, what will the Pet Mansion’s breakeven point in units be?

449.18=>450 units

Sales (units) Revenue Variable Costs Fixed Costs Operating Income

$ $ $ $

8,800 1,760,000 464,640 66,120 1,229,240

CM per unit = CM / units CM per unit = (rev – VC)/ units CM per unit = (1,760,000-464,640)/8,800 units CM per unit = $147.20 BE units = FC/CM per unit BE units = 66,120/$147.20

8. (LO 3.5) Pawxie Vibe company has sales of 20,000 units and the following per-unit financial information:

Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

4.80 1.20 3.60 2.40 1.20

A. Assuming a tax rate of 25%, what is current net income?

$18,000 Pretax Income * (1-tax rate) = after tax income 20,000 units *1.20 per unit profit * (.75%) = after tax income B. Pawxie Vibe has a target operating income of $37,500. How many units must it sell to reach that target?

23,750 units Target sales units = (FC + Pre-tax Target income)/CM per unit Target sales units = (20,000*2.40 + 37,500)/3.60 Target sales units = (85,500)/3.60

C. Pawxie Vibe predicts that it can cut fixed advertising expenses by $10,000, resulting in a reduction in unit sales of 10%. What will operating income be if Pawxie Vibe cuts advertising expenses? $26,800

Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

86,400.00 21,600.00 64,800.00 38,000.00 26,800.00

9. (LO 3.4, 3.5) Pupzy company units have a sales price of $1,875.00 and a variable cost of $562.50.

Fixed costs are $550,000 and Pupzy’s tax rate is 40%.

A. What is Pupzy’s contribution margin ratio?

70% VC% = VC/Rev VC% = 562.50/1,875 VC% = 30% 1 – VC% = CM% 70% = CM% B. Pupzy wants after-tax net income of $300,000. How much revenue must Pupzy generate in order to achieve this net income? $1,500,000 Pre-tax income * (1-tax rate) = after-tax income Pre-tax income * (1-40%) = $300,000 Pre-tax income * (60%) = $300,000 Pre-tax income = $300,000/60%

Pre-tax income = $500,000 Target revenue = (FC + Target pre-tax income)/CM% Target revenue = ($550,000 + $500,000)/70% Target revenue = $1,500,000

C. Pupzy has the opportunity to switch to a new, more efficient supplier. Doing so will decrease variable cost per unit by 15%. However, the switch will also require an additional $60,000 in fixed costs. If Pupzy makes the switch, what is Pupzy’s new contribution margin ratio?

74.5% VC% = VC/Rev VC% = 478.125[562.50*85%)/1,875 VC% = 25.5% 1 – VC% = CM% 74.5% = CM%

D. If Pupzy makes the switch to the new supplier, how much revenue must Pupzy generate to generate $300,000 in after-tax net income? $1,489,932.89 Pre-tax income * (1-tax rate) = after-tax income Pre-tax income * (1-40%) = $300,000 Pre-tax income * (60%) = $300,000 Pre-tax income = $300,000/60% Pre-tax income = $500,000 Target revenue = (FC + Target pre-tax income)/CM% Target revenue = ($610,000 [550,000 plus 60,000 new fixed costs]+ $500,000)/ 74.5% Target revenue = $1,110,000/74.5% 10. (LO 3.4, 3.5) Shield Panda company has sales of 2,500 units and the following financial information:

Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ 135,000.00 $ 54,000.00 $ 81,000.00 $ 45,000.00 $ 36,000.00

A. What is Shield Panda’s breakeven point in units?

1,388.89 => 1,389 units

CM per unit = CM / units CM per unit = 81,000 / 2,500 units CM per unit = $32.40 BE point in units = FC/CM per unit BE point in units = $45,000/$32.40 B. Shield Panda projects an increase in sales of 25% next year. What will be Shield Panda’s breakeven point in units next year?

1,388.89 => 1,389 units An increase in sales does not change breakeven point C. What will be Shield Panda’s margin of safety next year in units?

1,736 units Margin of safety in units = projected units – breakeven units Margin of safety in units = 2500*1.25 – 1,389

D. Calculate Shield Panda’s margin of safety ratio for next year.

1,736 margin of safety units / 3,125 sales units = 55.56% 11. (LO 3.5) Agri Bucket company has the following financial information:

Unit Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income Net income

$ $ $ $ $ $

70,000 2,800,000 1,946,000 854,000 90,000 764,000 550,080

A. What is Agri Bucket’s breakeven point in units?

7,377.05=>7,378 units CM per unit = CM / units CM per unit = 854,000 / 70,000 units CM per unit = $12.20 BE point in units = FC/CM per unit BE point in units = $90,000/$12.20 B. What is Agri Bucket’s income-tax rate?

28% Pre-tax income * (1-tax rate) = after-tax income

$764,000 * (1-tax rate)= $550,080 (1-tax rate)= $550,080/ $764,000 (1-tax rate)= 72% Tax rate = 28% C. What is Agri Bucket’s margin of safety?

62,622 units

Margin of safety in units = projected units – breakeven units Margin of safety in units = 70,000 – 7,378 D. What must Agri Bucket’s revenue be in order to earn $750,000 in net income? $3,710,382.51

CM% = CM / rev CM% = $854,000/2,800,000 CM% = 30.5% Pre-tax income * (1-tax rate) = after-tax income Pre-tax income * (1-28%) = $750,000 Pre-tax income * (72%) = $750,000 Pre-tax income = $750,000/72% Pre-tax income = $1,041,666.67 (rounded) Target revenue = ($90,000 + $1,041,666.67)/ 30.5% Target revenue = $3,710,382.51

12. (LO 3.6) Agro Market has the following financial information:

Unit Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

10,000 5,000,000 1,250,000 3,750,000 750,000 3,000,000

A. What is Agro Market’s degree of operating leverage?

1.25 DOL = CM/OI DOL = $3,750,000/$3,000,000 B. A 10% increase in sales will generate what percent increase in operating income?

12.5%

10% increase in sales * 1.25 DOL = 12.5% increase in operating income C. Agro Market has determined a way to reconfigure its production line to reduce labor costs. Doing so will save Agro Market 20% on its per-unit variable costs. If Agro Market reconfigures its production line, what will be the change in Agro Market’s operating income? $250,000 increase New Income statement: Unit Sales Revenue $ Variable Costs $ Contribution Margin $ Fixed Costs $ Operating Income $

10,000 5,000,000 1,000,000 4,000,000 750,000 3,250,000

D. If Agro Market reconfigures its production line, what will be Agro Market’s degree of operating leverage be?

1.231 DOL = CM/OI DOL = $4,000,000/$3,250,000

E. If Agro Market reconfigures its production line, a 10% increase in sales will generate what percent increase in operating income?

12.31% 10% increase in sales * 1.231 DOL = 12.31% increase in operating income 13. (LO 3.6) Study Volt has the following financial information:

Unit Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

86,000 8,600,000 2,150,000 6,450,000 1,800,000 4,650,000

A. What is Study Volt’s degree of operating leverage?

1.3871 DOL = CM/OI

DOL = $6,450,000/$4,650,000 B. A 10% increase in sales will generate what percent increase in operating income?

13.87% 10% increase in sales * 1.3871 DOL = 13.87% increase in operating income

C. To deal with an industry-wide labor shortage, Study Volt has decided to increase automation on its production line. Doing so will decrease variable costs by 60% but will increase fixed costs by $2,000,000. Assuming constant sales, if Study Volt reconfigures its production line, what will be the change in Study Volt’s operating income? $710,000 decrease New Income statement: Unit Sales Revenue $ Variable Costs $ Contribution Margin $ Fixed Costs $ Operating Income $

86,000 8,600,000 860,000 7,740,000 3,800,000 3,940,000

D. If Study Volt reconfigures its production line, what will be Study Volt’s degree of operating leverage?

1.9645 DOL = CM/OI DOL = $7,740,000/$3,940,000

E. If Study Volt reconfigures its production line, a 10% increase in sales will generate what % increase in operating income?

19.645% 10% increase in sales * 1.9645 DOL = 19.645% increase in operating income

14. (LO 3.5) Nutri Eazy has the following financial information:

Unit Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

150,000 2,100,000 825,000 1,275,000 300,000 975,000

A. What is Nutri Eazy’s breakeven point in units?

35,294.12=>35,295 units CM per unit = CM / units CM per unit = 1,275,000 / 150,000 units CM per unit = $8.50 BE point in units = FC/CM per unit BE point in units = $300,000/$8.50 B. Nutri Eazy currently pays a fee of $1.50 in advertising costs to a marketing company for each item sold. Nutri Eazy has been offered a new contract by the marketing company in which Nutri Eazy pays a flat fee of $210,000, regardless of how many units are sold. If Nutri Eazy changes the marketing contract to include the fixed fee, what is the new breakeven point in units?

51,000 units New Income Statement Unit Sales Revenue $ Variable Costs $ Contribution Margin $ Fixed Costs $ Operating Income $

150,000 2,100,000 600,000 1,500,000 510,000 990,000

CM per unit = CM / units CM per unit = 1,500,000 / 150,000 units CM per unit = $10.00 BE point in units = FC/CM per unit BE point in units = $510,000/$10.00

C. If Nutri Eazy changes the marketing contract to include the fixed fee, how would operating income change? $15,000 increase New Income Statement Unit Sales Revenue $ Variable Costs $ Contribution Margin $ Fixed Costs $ Operating Income $

150,000 2,100,000 600,000 1,500,000 510,000 990,000

D. At what level of sales units would Nutri Eazy will be indifferent between the per-unit and fixed fee contracts? In other words, at what level of sales units would operating income be identical?

140,000 units Nutri Eazy is indifferent at the point in which: Additional fixed advertising costs = variable advertising cost savings $210,000 = $1.50 * units sold $210,000/$1.50 = units sold 140,000 = units sold 15. (LO 3.5) The Lace Connection has the following financial information:

Unit Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

25,000 5,000,000 3,750,000 1,250,000 850,000 400,000

A. How many units must The Lace Connection sell in order to generate $600,000 in operating income?

29,000 units CM per unit = CM/units CM per unit = $1,250,000/25,000 CM per unit = $50.00 Target sales units = (FC + Target income)/CM per unit Target sales units = ($850,000 + 600,000)/50 Target sales units = 29,000 units B. The Lace Connection is considering updating its production line to increase quality. The change will require more machinery and automation, which will result in savings of 25% of variable costs and an increase of $1,175,000 in fixed costs. Assuming no change in unit sales, what will operating income be if The Lace Connection updates the production line? $162,500 New Income Statement

Unit Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income

$ $ $ $ $

25,000 5,000,000 2,812,500 2,187,500 2,025,000 162,500

C. If The Lace Connection updates the production line, how many units must The Lace Connection sell in order to generate $600,000 in operating income?

30,000 units CM per unit = CM/units CM per unit = $2,187,500/25,000 CM per unit = $87.50 Target sales units = (FC + Target income)/CM per unit Target sales units = ($2,025,000 + 600,000)/ $87.50 Target sales units = 30,000

D. At what level of sales units would The Lace Connection will be indifferent between updating and not updating the production line? In other words, at what level of sales units will operating income be identical (rounded to the nearest whole number)?

31,333 units The Lace Connection is indifferent at the point in which: Additional fixed costs = variable cost savings $1,175,000 = $37.50 * units sold $1,175,000 /$37.50 = units sold 31,333.33 = units sold

16. (LO 3.7 CMA Question) Chassen Company, a cracker and cookie manufacturer, has the following unit costs for June.

Variable manufacturing cost $5.00

Variable marketing cost $3.50

Fixed manufacturing cost $2.00

Fixed marketing cost $4.00

A total of 100,000 units were manufactured during June of which 10,000 remain in ending inventory.

The 10,000 units are the only finished goods inventory at month-end.

A. Using the absorption costing method, Chassen's finished goods inventory value would be: Ans: $70,000 Chassen’s finished goods inventory would total $70,000 as absorption costing includes both variable ($5.00) and fixed ($2.00) manufacturing costs ($7.00 x 10,000 units).

B. Using the variable costing method, Chassen's finished goods inventory value would be: Ans: $50,000 Chassen’s finished goods inventory would total $50,000 as variable costing includes only variable manufacturing costs ($5.00 x 10,000 units).

C. How much higher would operating income be under absorption costing than variable costing for Chassen?

Ans: $20,000 The difference in income is equal to the difference in the change of inventory value between the two methods. The $20,000 of fixed manufacturing cost in ending inventory would not be expensed during the current period under absorption costing, which would increase operating income by $20,000 17. (LO 3.7 CMA Question) Dremmon Corporation reports the following information from the last fiscal year: Units Beginning inventory of finished goods 100 Production during the year 700 Sales 750 Ending inventory of finished goods 50 Per Unit Product selling price Variable manufacturing cost Fixed manufacturing cost (based on units produced) Budgeted selling and administrative costs (all fixed)

$200 90 20 $45,000

* Assume product costs are consistent between periods, and that all units in ending inventory were produced in the last fiscal year.

A. Prepare a basic absorption costing income statement, showing Dremmon’s operating income.

Sales (750 x $200) COGS [750 x ($90 + $20)]82,500 Gross Margin Selling & administrative 45,000 Operating income

$150,000 67,500 $ 22,500

B. Under absorption costing, by how much did Dremmon’s ending inventory balance decrease?

Ans: $5,500 50 unit decrease * ($90 var. mfg costs + $20 fixed mfg costs) C. Prepare a basic variable costing income statement, showing Dremmon’s operating income.

Sales (750 x $200) Variable Costs (750*$90)67,500 Contribution Margin Fixed Costs (700*20 + $45,000) Operating income

$150,000 82,500 59,000 $ 23,500

D. Under variable costing, by how much did Dremmon’s ending inventory balance decrease?

Ans: $4,500 50 unit decrease * $90 var. mfg costs Chapter 4 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 1. (LO 4.2) Which of the following products or services is least appropriate for a job costing system? a. Furniture b. Soft drinks c. Medical services d. Interior design consultations 2. (LO 4.1, 4.2) Which of the following is not included as a production cost in a job order costing system? a. Production machine maintenance b. Marketing c. Indirect materials d. Factory utilities 3. (LO 4.4) All of the following are reasons why companies are likely to use applied, rather than actual, overhead for job costing EXCEPT: a. Companies have difficulty tracing supervisor labor costs. b. Companies have significant amounts of indirect costs. c. Companies face a delay when gathering indirect cost data. d. Companies decide not to trace certain materials costs.

4. (LO 4.5) Correcting an overapplication of overhead will result in increased: a. finished goods inventory. b. work-in-process inventory. c. cost of goods sold. d. net income.

5. (LO 4.4) Nature Meadow Company analyzes indirect costs and determines that 85% of its costs are related to machine maintenance and depreciation. Which of the following is the most appropriate application base? a. Direct labor hours b. Direct labor costs

c. kWh (kilowatt hours) consumed d. Machine hours 6. (LO 4.2) Job costing is most likely to be used by companies that produce: a. jewelry. b. paint. c. bottled water. d. breakfast cereals.

7. (LO 4.1, 4.3) In job costing, costs are accumulated by a specific cost object. Which of the following is not a cost object in job costing? a. An individual client b. A customized order c. An individualized service d. Monthly factory production costs 8. (LO 4.1, 4.2) Which of the following information is not contained on a job cost sheet? a. Direct labor hours b. Amount of direct materials purchased c. Direct labor rates d. Applied overhead rates 9. (LO 4.3) Which of the following represents a credit to the manufacturing overhead account? a. The application of overhead b. The use of indirect materials c. The use direct labor d. The use of supervisor labor 10. (LO 4.6) Snack Mart uses a normal costing system and applies overhead at a rate of $10 per direct labor hour. During the year, the company had the following data: Actual Direct Labor costs: Actual Direct Labor hours: Estimated Direct Labor hours: Actual Direct Materials: Actual Manufacturing Overhead:

$80,000 3,000 hours 3,500 hours $30,000 $25,000

Prior to any adjusting entries to manufacturing overhead, what are the total production costs for Snack Mart for the year? a. $135,000 b. $140,000 c. $145,000 d. $150,000 Production costs = Direct materials + Direct Labor + Manufacturing Overhead (MOH) Production costs = $30,000 + $80,000 + MOH Production costs = $30,000 + $80,000 + Actual Direct Labor Hours (DLH) * Predetermined Overhead Rate (POH)

Production costs = $30,000 + $80,000 + 3,000 * $10/DLH Production costs = $30,000 + $80,000 + 30,000 Production costs = $140,000 11. (LO 4.4) Given the following information about Nibbles N Scribbles Co., what was Nibbles N Scribbles’ predetermined application rate for manufacturing overhead (MOH)?

MOH Application base: Estimated MHs: Actual MHs: Estimated overhead costs: Actual overhead costs: a. b. c. d.

machine hours (MH)s 10,000 hours 12,000 hours $48,000 $50,000

$4.00/machine hour $4.17/machine hour $4.80/machine hour $5.00/machine hour

Predetermined Overhead Rate (POR) = Estimated overhead costs/estimated machine hours POR = $48,000/10,000 hours POR = $4.80

12. (LO 4.6) Study Volt Inc, underapplied manufacturing overhead during the quarter. Assuming no adjusting entry is made, which of the following will be overstated? a. Net income b. Finished goods inventory c. Work-in-process inventory d. Cost of goods sold 13. (LO 4.6) Zen Craft applies overhead at a rate of $4.50 per direct labor hour. Zen Craft’s actual overhead rate was $4.25. Which of the following is correct? a. Actual total overhead must be higher than estimated total overhead. b. Actual total overhead must be lower than estimated total overhead. c. Zen Craft had fewer direct labor hours than anticipated during the year. d. There is insufficient data to determine the relationship between estimated and actual overhead.

14. (LO 4.5) Bake It Easy incurred more overhead costs than it applied. Prior to any adjusting entries, which of the following must be true? a. The overhead application rate was higher than the actual overhead rate. b. The manufacturing overhead account has a debit balance. c. Net income is overstated. d. Bake It Easy produced more goods than anticipated.

15. (LO 4.3) Regal Furnishers used $10,000 worth of indirect materials in production in June. The journal entry made to record this transaction should include a $10,000 debit to: a. Work-in-Process Inventory.

b. Accounts Payable. c. Raw Materials. d. Manufacturing Overhead.

16. (LO 4.6) Under a normal costing system, which of the following is not included when computing the cost of a job? a. Direct materials b. Direct labor c. Sales Commision d. Applied overhead 17. (LO 4.5) Shield Bunny had the following information: Allocation base: Estimated DLH: Actual DLH: Estimated overhead cost/DLH: Actual overhead cost/DLH:

Direct labor hours (DLH) 20,000 hours 25,000 hours $5/DLH $4/DLH

Assuming no adjusting entry to manufacturing overhead, which of the following is true? a. b. c. d.

There will be a debit balance in the Manufacturing Overhead account.

There will be a credit balance in the Manufacturing Overhead account.

There will be a zero balance in the Manufacturing Overhead account.

The balance in the Manufacturing Overhead account cannot be calculated with the given information.

18. (LO 4.1, 4.2) Chic Lab produces furniture. Under a job costing system, which of the following is most likely to be considered indirect labor during the construction of a chair? a. Significant labor used to shape and cut wood b. Moderate labor used to assemble wood c. Minimal labor used to stain the chair d. Moderate labor used to closely supervise the production of chairs 19. (LO 4.1, 4.2) Alfredough caters meals for large corporate functions. Under a job cost system, which of the following is most likely to be considered indirect materials for Alfredough’s orders? a. Cost of meat used during preparation of food b. Cost of fruit used during preparation of food c. Cost of vegetables used during preparation of food d. Cost of salt used during preparation of food 20. (LO 4.2, 4.3) Under a job costing system, a company that uses two distinct processes to produce inventory must use the same allocation base for each production process. a. True b. False 21. (LO 4.2, CMA) In practice, items such as wood screws and glue used in the production of school desks and chairs would most likely be classified as

a. b. c. d.

direct labor. factory overhead. direct materials. period costs.

Correct answer b. Since it is difficult to assign quantities and costs of items such as screws and glue to specific products, they are generally charged to factory overhead.

(Level 1) Discussion Questions 16. (LO 4.1) Describe how accurate cost information can provide a competitive advantage to a company.

Suggested Solution: Accurate cost information can allow companies to know their profits on their products and services. This can assist companies as they engage in marketing efforts because they can focus on more profitable goods and services. In addition, accurate cost information can help companies know where they should not compete, which is also very useful.

17. (LO 4.1) What are the potential consequences of inaccurate cost information?

Suggested Solution: Inaccurate cost information can cause companies to produce goods and services that they believe are profitable, but that are in fact unprofitable. In this scenario, the harder a company works, the faster it loses money. Inaccurate cost information can also lead companies to make suboptimal decisions regarding product mix and advertising decisions.

18. (LO 4.2) Describe how inaccurate overhead allocations, if not corrected, can affect a company’s financial statements.

Suggested Solution: If not corrected, inaccurate overhead allocations result in inventory being over- or undercosted which affect a company’s balance sheet. When sold, inventory costs are expensed as cost of goods sold, so inaccurate overhead allocations can, if not corrected, affect a company’s income statement.

19. (LO 4.2) Describe the process of generating predetermined overhead rates.

Suggested Solution: Managers generate predetermined overhead rates by estimating total overhead for a period, and dividing estimating overhead by an estimate of the allocation base (e.g., estimated direct labor hours or estimated machine hours).

20. (LO 4.2) Explain why companies typically use applied overhead rather than actual overhead.

Suggested Solution: Actual overhead is seldom used because actual overhead costs are generally unknown until the end of an accounting period (and sometimes even later!). While companies can revise cost information for the period once actual overhead costs become known, doing so creates a moving standard, which can negatively affect employee morale.

21. (LO 4.3) Explain how financial statements are impacted if overhead allocation rates are too low, and no adjusting entries are made to correct manufacturing overhead.

Suggested Solution: If overhead allocation rates are too low, recorded work-in-process inventory will be lower than actual work-in-process inventory. As inventory costs flow through a company’s accounting system, recorded finished goods inventory and cost of goods sold will be lower than actual, resulting in recorded profit being higher than actual profit.

22. (LO 4.4) Describe the principles and factors that should guide management’s selection of a manufacturing overhead application base.

Suggested Solution: Ideally, management should select an overhead application base that is a cost driver, such that cost drivers can reasonably predict overhead costs. If a cost driver is used, then managers can take steps to decrease overhead costs by decreasing the cost drivers that lead to those costs.

23. (LO 4.4) Describe how the selection of allocation bases can be used to favor one division or product over another. What ethical considerations should be considered when determining allocation bases?

Suggested Solution: The way a company allocates overhead costs does not change a company’s total overhead costs or profitably. However, it does affect the profitability of divisions or products. Managers should be aware that an arbitrary selection of an allocation base can impact employees responsible for divisions or products, and can be perceived as unfair; particularly when compensation is affected by allocations over which these employees have no control.

24. (LO 4.4) Explain the conditions under which a company may choose to use different application bases for different production processes, even if only one type of product is made.

Suggested Solution: Many companies use multiple manufacturing departments to produce a single product. When the cost drivers for manufacturing departments differ, companies may select the most

appropriate cost driver for each department and allocate overhead for each department separately.

25. (LO 4.4) Explain why companies estimate an overhead application rate when any such estimate is unlikely to be correct.

Suggested Solution: Although allocated overhead is unlikely to be completely accurate, an estimate is often needed to make decisions related to pricing strategy and product mix. Estimates are used because overhead costs are generally unknown until the end of the accounting period. With time and research, companies should be able to improve these estimates.

26. (LO 4.5) Describe the two methods of correcting over- or underapplied overhead and explain how management decides which method to use.

Suggested Solution: 1. Companies can write off all over- or underapplied overhead to cost of goods sold.

2. Companies can adjust over-or underapplied overhead on a proportional basis to work-inprocess inventory, finished goods inventory, and cost of goods sold based on the ending balances in these accounts.

The second option is theoretically better because it does not assume, like the first option, that all goods and services were completed and/or sold during the period. If using option 1 has a material impact on the financial statements, companies should use option 2.

27. (LO 4.5) Describe why writing off all over-or underapplied overhead to cost of goods sold leads to inaccurate cost information.

Suggested Solution: Writing all over-or underapplied to cost of goods sold assumes that all goods and services were completed and/or sold during the period. For most companies, this is not the case. Consider a company that overapplies overhead and has work-in-process and finished goods inventory at the end of a period. In this case, writing off the entire overapplied overhead to cost of goods sold increases cost of goods sold too much, because no production costs are assigned to workin-process inventory of finished goods inventory.

28. (LO 4.6) Explain the factors that management should consider when determining whether or not to trace production costs.

Suggested Solution: The decision to trace production costs is based on a cost benefit analysis. Tracing production costs to individual goods and services mitigates the need for estimates, thus providing more

accurate information. However, the ability to trace costs to individual goods and services often requires investment in technology or other expenses. Managers must determine whether the benefits of more accurate cost information are worth the cost of gathering that information.

29. (LO 4.6) Explain why and how a company could recategorize overhead costs as direct costs.

Suggested Solution: A company can essentially recategorize overhead cost as direct cost by tracing costs to individual goods and services. For instance, a furniture manufacturer can standardize and measure the amount of glue used in each chair if desired. Overhead costs are assigned, rather than traced, to goods and services using estimates. Direct costs require no estimates because they are traced and therefore known.

30. (LO 4.6) Explain how overhead costs are affected when companies replace direct labor with machine labor.

Suggested Solution: Direct labor is a direct cost. The cost of machines, including depreciation and maintenance, is typically considered an overhead cost, and is applied to goods and services using an estimate via an allocation rate.

31. (LO 4.6) Explain the role that estimates play in the calculation of job costs.

Suggested Solution: Overhead costs are allocated to individual goods and services using an estimate (i.e., a predetermined overhead rate). As overhead becomes a more significant proportion of the cost of a good or service, it becomes increasingly important for companies to ensure these estimates are as accurate as possible.

(Level 1) Brief Exercises 1. (LO 4.3 4.5) During the year, the total actual cost of inventory produced for The Wood Legacy was $1,500,000 (assume no beginning or ending inventory balances). Actual manufacturing overhead was $300,000. Direct materials incurred during the year were $900,000, and direct labor costs were $350,000. The Wood Legacy uses a normal costing system and applies overhead at a rate of 100% of direct labor costs. The Wood Legacy’s adjusting entry to manufacturing overhead at the end of the year would have been a ___________ (debit or credit) entry of $__________ to manufacturing overhead.

Debit; $50,000

2. (LO 4.1, 4.6) CreativeCubicle uses a normal costing system and applies overhead on the basis of machine hours. CreativeCubicle has compiled the following information: Actual Direct Labor costs: Actual Direct Labor hours: Estimated Machine hours: Actual Direct Materials: Actual Machine hours: Actual MOH: Estimated MOH:

$300,000 25,000 hours 14,000 hours $750,000 15,000 hours $235,000 $210,000

Prior to any adjusting entries to manufacturing overhead, what are the total production costs for BCD for the year?

Applied overhead = $210,000/14,000 hours * 15,000 hours = $225,000 Total production costs = DL + DM + MOH = $300,000 + $750,000 + $225,000 = $1,275,000 3. (LO 4.4) Calculate Sneakerzy’s predetermined overhead application rate given the following information: Overhead application base: Estimated Direct Labor hours: Actual Direct Labor hours: Estimated MOH: Actual MOH:

Direct labor hours 18,000 22,000 $165,600 $188,000

$165,600/18,000 hours = $9.20/DLH 4. (LO 4.1, 4.4) High Icon underapplied inventory by $12,000 during the year. The company had the following information: Overhead application base: Estimated machine hours: Actual machine hours: Estimated overhead:

Machine hours 10,000 14,000 $190,000

What were the actual overhead costs for the year for High Icon?

Applied overhead = $190,000/10,000 hours * 14,000 hours = $266,000 $266,000 + $12,000 $278,000 5.

(LO 4.4) Solar Nexus overapplied inventory by $43,250 in May. The following information was compiled from Solar Nexus’s accounting information system: Overhead application base:

Machine hours

Estimated machine hours: Actual overhead: Estimated overhead:

40,000 $432,500 $346,000

Calculate actual machine hours for Solar Nexus in May. Applied overhead = Actual overhead – $43,250 overapplication Applied overhead = $432,500 – $43,250 Applied overhead = $389,250 Applied overhead = ($346,000/40,000 hours) * actual hours = $389,250 Actual hours = $389,250/($346,000/40,000 hours) Actual hours = 45,000

6. (LO 4.3) In January, Fine Furnish used 4,000 pounds of a bonding agent, X2P, for their products.

The cost of X2P is $0.015 per pound. Fine Furnish classifies X2P as indirect materials and records the cost of X2P in an account called “Indirect Materials.” What is the journal entry that Fine Furnish should use to record the use of X2P in January?

(DR) Manufacturing Overhead (CR) Indirect materials

$60 $60

4,000 lbs. * $0.015/lb = $600 7. (LO 4.6) Quest API applies manufacturing overhead at a rate of $2.75 per machine hour. Total production costs per Quest API’s normal costing system were $194,000 for November. Direct materials and direct labor costs were $65,000 and $85,000, respectively. How many machine hours were used during November?

Production costs = DM + DL + applied MOH $194,000 = $65,000 + $85,000 + applied MOH Applied overhead = $44,000 = application rate * machine hours $44,000 = $2.75 * machine hours Machine hours = 16,000 8. (LO 4.6) In December, Dwellify used $130,000 of direct materials in production. Dwellify costs for direct labor average $12.50 per hour, and total production costs were $204,800. In addition, Dwellify applies manufacturing overhead at a rate of $4.50 per direct labor hour. How many direct labor hours did Dwellify use in December?

Production costs = DM + DL + applied MOH $204,800 = $130,000 + ($12.50/DLH + $4.50/DLH)*x $204,800 = $130,000 + ($17/DLH) * x $74,800 = $17/DLH * x Direct labor hours = 4,400 *x = number of direct labor hours

9. (LO 4., 4.6) Insomniacs Inc. reported the following information: Predetermined overhead application rate: Actual overhead rate: Estimated machine hours: Actual machine hours:

$8.30/machine hour $8.50/machine hour 30,000 32,000

If Insomniacs Inc. does not use an adjusting entry to correct manufacturing overhead, what will the effect be on net income (assuming no beginning or ending inventory balances)?

Insomniacs’ net income will be ____________(overstated or understated) by $____________.

Overstated; $6,400 $0.20 understatement of overhead/MH * 32,000 hours = $6,400 MOH understatement, resulting in overstatement of net income.

Manufacturing Overhead Beg. Bal. $0 DR $272,000 (for actual overhead) CR $265,600 (for applied overhead) End. Bal. $6,400 10. (LO 4.5) Andromics determined that it must make an adjusting entry to correct a $16,000 underapplication of manufacturing overhead. Andromics had the following ending balances: Raw materials inventory Work-in-process inventory Finished goods inventory Cost of goods sold

$6,500 $175,000 $135,000 $490,000

Assuming that Andromics has determined that the amount of the correction is material and cannot all be written off to cost of goods sold, what journal adjusting entry must be made to correct the underapplication?

(DR) Work-in-Process inventory (DR) Finished Goods inventory (DR) Cost of Goods Sold (CR) Manufacturing Overhead

$3,500 $2,700 $9,800 $16,000

$16,000 is prorated based on the ending balances of the accounts above, except for raw materials, which is ignored.

11. (LO 4.5) Alpha Heal applies overhead at a rate of $6 per direct labor hour. Applied overhead during the year amounted to $56,000, while actual overhead amounted to $52,000. Alpha Heal had the following ending balances: Work-in-process inventory Finished goods inventory Cost of goods sold

$32,000 $18,000 $70,000

Assuming that Alpha Heal has determined that the amount of the correction is immaterial, what journal adjusting entry must be made to correct the misapplication of overhead?

(DR) Manufacturing Overhead (CR) Cost of Goods Sold

$4,000 $4,000

$16,000 is prorated based on the ending balances of the accounts above.

12. (LO 4.5) Stratify Co. made the following adjusting entry at the end of the last quarter: (DR) Cost of Goods Sold $12,700 (CR) Manufacturing Overhead

$12,700

This means that manufacturing overhead was __________ (overstated or understated). Without this adjusting entry, net income would be ____________ (overstated or understated).

Understated, overstated

13. (LO 4.2, 4.3) Hackersome has the following costs for August.

Sales consulting services Administrative building rent Factory electricity Administrative building utilities

$35,000 $5,000 $500 $600

Advertising Factory maintenance Factory equipment depreciation Direct labor Indirect labor Direct materials Accounting services

$3,000 $14,000 $25,000 $30,000 $12,000 $10,500 $4,000

What are the total production costs for August?

$500 + $14,000 + $25,000 + $30,000 + 12,000 + $10,500 = $92,000 14. (LO 4.4) Boots N Beyond had the following cost information for July:

Overhead costs Direct labor hours Machine hours

Estimated $130,000

Actual $125,000

40,000

42,000

8,000

8,500

Boots N Beyond uses direct labor hours to apply manufacturing overhead. What is Boots N Beyond’s overhead application rate? $130,000/40,000 = $3.25/DLH 15. (LO 4.4, 4.6) Hypercraft has two production departments, Cutting and Sewing. The Cutting department applies costs based on direct labor hours while the Sewing department applies costs based on machine hours. Hypercraft had the following cost information for October:

Estimated overhead Direct labor hours Machine hours

Cutting $54,000 2,400 30

Sewing $64,600 950 170

Hypercraft received and completed order #225 in October, which had the following information: Direct materials: $6,000 Direct labor: $15,500 Cutting department direct labor hours: 200 hours Sewing department machine hours: 20 hours Hypercraft uses a normal costing system. What is the cost of order #225?

Cost = DM + DL + MOH Cost = $6,000 + $15,500 + ($54,000/2,400 hours*200 hours) + ($64,600/170 hours*20 hours) = Cost = $33,600 16. (LO 4.4, CMA) Using the following budget data for Valley Corporation, which produces only one product, calculate the company’s predetermined factory variable overhead application rate.

Units to be produced 11,000 Units to be sold 10,000

Indirect materials, varying with production Indirect labor, varying with production Factory supervisor’s salary, incurred regardless of production Depreciation on factory building and equipment Utilities to operate factory machines Security lighting for factory Selling, general and administrative expenses

$ 1,000 $ 10,000 $ 20,000 $ 30,000 $ 12,000 $ 2,000 $ 5,000

Answer: Valley’s predetermined overhead application rate is $2.09.

(Indirect material + Indirect labor + Utilities) ÷ Production ($1,000 + $10,000 + $12,000) ÷ 11,000 = $2.09

17. (LO 4.2, 4.4, CMA) Patterson Corporation expects to incur $70,000 of factory overhead and $60,000 of general and administrative costs next year. Direct labor costs at $5 per hour are expected to total $50,000. If factory overhead is to be applied per direct labor hour, how much overhead will be applied to a job incurring 20 hours of direct labor?

Answer: The overhead applied to a job incurring 20 hours of direct labor is $140 as shown below.

Total budgeted direct labor hours: Overhead cost/direct labor hour: Overhead cost for 20 hours:

$50,000 ÷ $5 $70,000 ÷ 10,000 20 x $7

= = =

10,000 hrs. $7 per hr. $140

(Level 1) Problems

1. (LO 4.4) Web Bytes allocates manufacturing overhead on the basis of direct labor hours. Web Bytes had the following cost information: Estimated direct labor hours: 10,000 hours Actual direct labor hours: 12,000 hours Estimated manufacturing overhead costs: $18,000 Actual manufacturing overhead costs: $24,000 a. What is Web Bytes’ predetermined overhead rate? $18,000/10,000 hours $1.80/DLH

b. What is Web Bytes’ applied overhead for the year? $1.80/DLH * 12,000 $21,600 c. What is the amount of over- or underapplied overhead for the year? $24,000 actual – $21,600 applies $2,400 underapplied

2. (LO 4.1, 4.3, 4.6) Dashing Diva has the following costs for April.

Direct labor Direct materials Factory utilities Accounting services Direct marketing Production supervisor salaries Factory equipment depreciation

$ $ $ $ $ $ $

20,000.00 15,000.00 8,000.00 12,000.00 17,000.00 6,000.00 13,000.00

a. What are the total production costs?

20k + 15k + 8k + 6k + 13k = $62,000

b. What are the total manufacturing overhead costs?

8k + 6k + 13k = $27,000 c. Dashing Diva produced Job #123 with the following actual costs: $1,500 of direct materials, $1,800 of direct labor, and $1,000 of manufacturing overhead. Dashing Diva allocates manufacturing overhead at a rate of 80% of direct labor costs. Under a normal costing system, what was Dashing Diva’s recorded cost for Job #123? $1,500 + $1,800 + (80% * 1,800) = $4,740

3. (LO 4.4, 4.6) Jackson Mills has the following cost information: Estimated

Actual

Overhead costs Direct labor hours Machine hours

$100,000

$125,000

40,000

50,000

32,000

25,000

a. If Jackson Mills uses direct labor hours as an application base, what is the predetermined overhead rate for the year? $100,000 / 40,000 DLH = $2.50/DLH b. If Jackson Mills uses direct labor hours as an application base, how much manufacturing overhead is applied to jobs during the year? $2.50/DLH * 50,000 actual DLH = $125,000 c. If Jackson Mills uses direct labor hours as an application base, and Job #486 uses 40 direct labor hours, how much overhead is applied to Job #486? $2.50/DLH * 40 DLH = $100 d. If Jackson Mills uses machine hours as an application base, what is the predetermined overhead rate for the year? $100,000 / 32,000 DLH = $3.125/MH e. If Jackson Mills uses machine hours as an application base, how much manufacturing overhead is applied to jobs during the year? $3.125/MH * 25,000 actual MH = $78,125 f.

If Jackson Mills uses machine hours as an application base, and Job #486 uses 16 machine hours, how much overhead is applied to Job #486? $3.125/MH * 16 MH = $50

g. What journal entry would Jackson Mills to apply overhead to Job #486 if Jackson Mills uses machine hours as an application base and Job #486 uses 16 machine hours?

WIP – Job #486 Manufacturing Overhead

$50 $50

4. (LO 4.4, 4.6) Jacobs Molding Company has separate application rates for each of its two departments, Mixing and Assembly. In the Mixing department, Jacobs uses machine hours to allocate costs. In the Assembly department, direct labor costs are used to allocate costs. The following estimates were provided by Jacobs’ management at the beginning of the year:

Estimated overhead costs Estimated direct labor costs Estimated direct labor hours Estimated machine hours

Mixing $60,000 $600,000 25,000 24,000

Assembly $90,000 $750,000 30,000 45,000

a. What is the Mixing department’s predetermined application rate per unit of application base? $60,000/24,000 MH = $2.50/MH b. What is the Assembly department’s predetermined application rate per unit of application base? $90,000/750,000 DL$ = $0.12/DL$ c. Jacobs recorded 20 machine hours in the Mixing department and direct labor costs of $1,500 in the Assembly department for Job #357. How much manufacturing overhead is applied to Job #357? $2.50/MH * 20 MH + $0.12/DLH * $1,500 DL$ = $230.00

5. (LO 4.4, 4.6) Smithson Electric provides residential and business electric repair services. While direct labor and materials costs are traced to individual customers, administrative labor and transportation costs are considered overhead and applied as a percentage of direct labor costs.

At the beginning of the year, Smithson estimates $10,000 of overhead costs and $50,000 of direct labor costs. Actual costs for the year are $12,000 for overhead and $48,000 for direct labor. Ending balances for WIP Inventory, Finished Goods Inventory, and Cost of Goods Sold are $4,000, $15,000, and $141,000 respectively.

a. (LO 4.4) What is Smithson’s predetermined overhead rate (rounded to the nearest percent)? $10,000 OH/ $50,000 DL$ = 20% of direct labor costs

b. The Jackson account accumulated $5,000 in direct labor costs and $3,300 in direct materials for the year. What is the amount of overhead charged to the Jackson account? $5,000 * 20% = $1,000 c. Using the data from Part B above, what is the total cost for Jackson? $5,000 direct labor + $3,300 direct materials + $1,000 applied MOH = $9,300 d. If Smithson determines that any over- or under-application of manufacturing overhead can be written off to cost of goods sold at the end of the year, what journal entry should be used to reconcile overhead?

Cost of Goods Sold

$2,400

Manufacturing Overhead

$2,400

Cost of goods sold is understated because Smithson incurred more overhead costs than the company applied. This entry reconciles overhead by increasing cost of goods sold by the underapplied amount. e. If Smithson determines that writing off all over- or underapplied manufacturing overhead to cost of goods sold could significantly affect the companies financial statements, what journal entry should be used at the end of the year to reconcile overhead?

WIP Inventory

$60.00

Finished Goods Inventory

$225.00

Cost of Goods Sold

$2,115.00

Manufacturing Overhead

$2,400.00

The amounts for the first three accounts are determined by dividing the ending balance of each account ($4,000, 15,000, and $141,000) by the total of these amounts ($160,000), and then multiplying that proportion by the $2,400 understatement of applied overhead.

6. (LO 4.5) Glenway Enterprises applies manufacturing overhead at a rate of $4/MH, and it used 57,000 machine hours during the year. At the end of the year, Glenway learns that actual overhead costs incurred were $210,000. Ending balances are $800, $200, and $9,000 for workin-process inventory, finished goods inventory, and cost of goods sold, respectively. a. By what amount is Glenway’s manufacturing overhead over- or underapplied?

Applied overhead = $4/MH * 57,000 MH = $228,000 Actual overhead = $210,000 $228,000 – $210,000 = $18,000 overapplied b. Assume the amount of overapplied overhead is deemed immaterial by Glenway management. What is the adjusting entry to manufacturing overhead?

(DR) Manufacturing Overhead (CR) COGS

$18,000 $18,000

c. Assume the amount of overapplied overhead is deemed material by Glenway management. What is the adjusting entry to manufacturing overhead?

Ending balances are $800, $200, and $9,000 for work-in-process inventory, finished goods inventory, and cost of goods sold, respectively, for a total of $10,000. Each account will get a prorated share of the $18,000 credit: 8%, 2%, and 90% respectively.

(DR) Manufacturing Overhead $18,000 (CR) Work-in-Process Inventory $1,440 (CR) Finished Goods Inventory $360 (CR) COGS $16,200

7. (LO 4.4) The Spice Saga has two production departments, Assembly and Finishing. The following information was used to calculate overhead application rates:

Estimated overhead Direct labor hours Machine hours

Assembly $800,000 50,000 16,000

Finishing $400,000 30,000 8,000

Total $1,200,000 80,000 24,000

Overhead information for Job #687 is as follows: Direct labor hours Machine hours

Assembly 100 30

Finishing 125 18

Total 225 48

a. Assume that The Spice Saga uses direct labor hours to apply overhead in both production departments. How much overhead will be applied to Job #687? $1,200,000 total estimated OH costs/ 80,000 total DLH hours = $15/DLH 225 direct labor hours * $15/DLH = $3,375 b. Assume that The Spice Saga uses machine hours to apply overhead in both production departments. How much overhead will be applied to Job #687? $1,200,000 total estimated OH costs/ 24,000 total MH hours = $50/MH 48 machine hours * $50/MH= $2,400 c. Assume that The Spice Saga uses direct labor hours to apply overhead in the Finishing department and machine hours to apply overhead in the Assembly department. How much overhead will be applied to Job #687?

Assembly department: $800,000 total estimated OH costs/ 50,000 DLH = $16/DLH Finishing department: $400,000 total estimated OH costs/ 8,000 MH = $50/MH (100 assembly DLH * $16/DLH) + (18 finishing MH * $50/MH) = $2,500

8. (LO 4.2, 4.3) Chefly applies manufacturing overhead at a rate of $15 per direct labor hour.

10,000 hours of direct labor were incurred during June. Chefly also recorded the following transactions in June:

  

$20,000 of indirect materials (categorized on the books as raw materials) used in production $15,000 of indirect labor (paid on account) used in production $100,000 of direct materials used in production

a. What is the journal entry to record the use of direct materials?

(DR) Work-in-Process Inventory (CR) Raw Materials

$100,000 $100,000

b. What is the journal entry to record the use of indirect labor?

(DR) Manufacturing Overhead (CR) Wages Payable

$15,000 $15,000

c. What is the journal entry to record the application of manufacturing overhead for the month of June?

(DR) Work-in-Process Inventory (CR) Manufacturing Overhead

$150,000 $150,000

$15/DLH * 10,000 DLH

9. (LO 4.2, 4.3, 4.5) Olive You applies manufacturing overhead at a rate of $0.40 per kilowatt hour (kWh) of electricity. Olive You’s production facility used 125,000 kWh of electricity during January. The following information is provided about Olive You’s production in January:  Olive You overapplied overhead by $1,350 during the month. The company writes off over- or underapplied overhead to cost of goods sold only.  $736,000 of inventory was completed during January  $700,000 of inventory was sold during January

a. What is the journal entry to record the application of manufacturing overhead for the month of January?

(DR) Work-in-Process Inventory (CR) Manufacturing Overhead

$50,000 $50,000

$0.40/kWh * 125,000 kWh b. What is the journal entry to record the completion of WIP inventory during January?

(DR) Finished Goods Inventory (CR) Work-in-Process Inventory

$736,000 $736,000

c. What is the journal entry to record the sale of inventory during January?

(DR) Cost of Goods Sold (CR) Finished Goods Inventory

$700,000 $700,000

d. What is the journal entry to write off the overapplication of overhead in January?

(DR) Manufacturing Overhead (CR) Cost of Goods Sold

$1,350 $1,350

10. (LO 4.5) Style Loop has compiled overhead costs from the past several years in order to determine how various application bases correlate with the firm’s total manufacturing overhead costs. Use the following correlation output as you answer the questions below. Assume all correlation coefficients are statistically significant.

Actual overhead costs 1.00

Direct labor costs

0.82

1.00

Direct labor hours

0.91

0.95

1.00

Machine hours

0.67

0.55

0.42

Actual overhead costs Direct labor costs

Direct labor hours

Machine hours

1.00

a. What is the correlation between overhead costs and machine hours?

0.67 b. What is the correlation between direct labor costs and direct labor hours?

0.95 c. Based only on the correlation data, which allocation base would be the most suitable for applying manufacturing overhead?

Direct labor costs

11. (LO 4.5) Dapperfy has three production departments: Assembly, Sanding, and Painting. Dapperfy has compiled actual overhead cost information for each completed job for the past two years in order to examine how four overhead application bases could be used to apply overhead in the future. Use the following correlation output as you answer the questions below. Assume all correlation coefficients are statistically significant.

Assembly dept. overhead costs Sanding dept. overhead costs Painting dept. overhead costs Departmental direct labor costs Departmental direct labor hours Departmental machine hours Departmental kilowatt hours

Assembly dept. overhead costs 1.00

Sanding dept. overhead costs

Painting dept. overhead costs

Direct labor costs

Direct labor hours

Machine hours

0.70

1.00

0.75

0.91

1.00

0.95

0.72

0.79

1.00

0.82

0.75

0.82

0.90

1.00

0.43

0.92

0.99

0.52

0.57

1.00

0.36

0.96

0.94

0.44

0.48

0.89

Kilowatt hours

1.00

a. What is the correlation between overhead costs in the Sanding department and departmental machine hours?

0.92

b. Based only on the correlation data, which allocation base would be the most suitable for applying manufacturing overhead in the Assembly department?

Departmental direct labor costs

c. Based only on the correlation data, which allocation base would be the most suitable for applying manufacturing overhead in the Sanding department?

Departmental kilowatt hours d. Based only on the correlation data, which allocation base would be the most suitable for applying manufacturing overhead in the Painting department?

Departmental Machine hours

12. (LO 4.6) Style Lab uses a normal costing system to calculate order costs. Style Lab allocates manufacturing overhead costs to its orders at the rate of 25% of direct labor costs. Use the following information to answer the questions below.

Direct materials Direct labor

Order #1466 $1,538 $1,250

Order #1467 $3,449 $2,114

Order #1468 $10,817 $4,994

a. What is the total cost of order #1466? $1,538 + $1,250 + ($1,250 * 0.25) = $3,100.50 b. What is the total cost of order #1467? $3,449 + $2,114 + ($2,114* 0.25) = $6,091.50 c. What is the total cost of order #1468? $10,817 + $4,994 + ($4,994 * 0.25) = $17,059.50

13. (LO 4.6) Ad Spot provides advertising services to local business. It is calculating customer profitability for the previous year. Ad Spot uses a normal costing system to calculate the costs of

servicing clients. Ad Spot applies manufacturing overhead costs to its clients at a rate of 10% of direct labor costs. Use the following information to answer the questions below.

Revenue Direct materials Direct labor Direct labor hours

McDowell $ 12,500 $ 4,414 $ 3,265 172

Jones $ 15,435 $ 7,144 $ 4,518 251

Yang $ 11,800 $ 4,360 $ 5,334 314

Bernanke $ 6,000 $ 4,864 $ 1,120 63

a. What was the total cost of providing service to McDowell last year? $4,414 + $3,265 + ($3,265 * 10%) = $8,005.50 b. What was the total cost of providing service to Bernanke last year? $4,864 + $1,120 + (1,120 * 10%) = $6,096.00 c. What is the sales profit percentage for the Jones account? $15,435 – (7,144 + $4,518 + (4,518 * 10%)) = $3,321.20 profit $3,321.20 profit / $15,435 revenue = 21.52% d. How much profit did Ad Spot generate from the Yang account? $11,800 – (4,360 + $5,334 + (5,334 * 10%)) = $1,572.60

14. (LO 4.4, 4.6) Tuxedough applies manufacturing overhead on the basis of machine hours.

Tuxedough has compiled the following information for the prior year: Estimated overhead costs

$1,800,000

Actual overhead costs

$1,750,000

Estimated machine hours

64,000 hours

Actual machine hours

75,000 hours

a. Under a normal costing system, what is Tuxedough’s overhead application rate? $1,800,000 estimated OH costs/64,000 estimated MH =

$28.125/MH b. What is the total applied overhead for last year? $28.125/MH * 75,000 machine hours = $2,109,375

c. To close out under- or overapplied overhead to cost of goods sold at the end of the year, Tuxedough would have made a ___________ (debit or credit) entry of $__________ to manufacturing overhead.

Debit: $359,375 $2,109,375 applied overhead – $1,750,000 actual overhead d. With perfect hindsight, what overhead application rate could Tuxedough have used so that all incurred overhead was applied to inventory without the need for an adjusting entry? $1,750,000 actual OH costs/75,000 estimated MH = $23.333/MH 15. (LO 4.1, 4.3, 4.5) Glamly uses a normal costing system and applies manufacturing overhead to jobs at a rate of 110% of direct labor costs. The company had no beginning or ending raw materials or work-in-process inventory in January. In addition, the company has the following costs for February.

Direct labor Direct materials Factory utilities Advertising expenses Production supervisor salaries Factory equipment depreciation Factory rent Janitorial services for production facility Indirect materials

$ $ $ $ $ $ $

84,000 27,000 10,000 23,000 18,000 20,000 25,000

$ $

18,000 5,000

a. Prior to any adjusting entries, what is the total amount debited to manufacturing overhead in February?

10k + 18k + 20k + 25k + 18k + 5k = $96,000

b. Prior to any adjusting entries, what is the total amount credited to manufacturing overhead in February? $92,400 $84,000 direct labor costs * 110% c. Glamly makes an adjusting entry at the end of February to account for any inaccurate application of overhead. Assuming that the overhead estimate is immaterial, what adjusting entry will Glamly make?

(DR) Cost of Goods Sold (CR) Manufacturing Overhead

$3,600 $3,600

Chapter 5 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 53. (LO 5.1) Fably Inc. is a specialty clothing shop that employs dozens of tailors and several supervisors who oversee the tailors’ work in the production facility. Supervisor labor is considered manufacturing overhead. Which of the following allocation bases is most likely to be the cost driver of supervisor labor? a. Direct labor hours b. Machine hours c. Units produced d. Square footage 54. (LO 5.1) The Glow Company produces motion-sensor LED candles. The company has considerable manufacturing overhead costs, including a number of employees who meticulously examine the quality of the candles before they are shipped to customers. Which of the following allocation bases is most likely to be the cost driver of quality control? a. Direct labor hours b. Machine hours c. Units produced d. Square footage 55. (LO 5.1) Using a traditional job-order cost system with a single allocation base may result in the undercosting of a product or service. Undercosting a product or service can result in: a. overstated product efficiency. b. overstated product market share. c. overstated product profitability.

d. undercosting all products and services.

56. (LO 5.1) Crimson Box produces two products. Per the company’s traditional job-costing system, Basic Box and Premium Box cost $30 and $50 to produce, respectively. Recently, Crimson Box implemented a two-stage allocation system, which indicated a cost of $25 for the Basic Box and $65 for the Premium Box. The implementation of a two-stage cost allocation revealed that Basic Box was __________. a. undercosted b. overcosted c. cross-costed d. inefficient 57. (LO 5.1) Crimson Box produces two products. Per the company’s traditional job-costing system, Basic Box and Premium Box cost $30 and $50 to produce, respectively. Recently, Crimson Box implemented a two-stage allocation system, which indicated a cost of $25 for the Basic Box and $65 for the Premium Box. When Crimson Box implements two-stage cost allocation, how are manufacturing overhead costs affected? a. Total manufacturing overhead costs increase. b. Total manufacturing overhead costs decrease. c. Total manufacturing overhead costs are unchanged. d. Total manufacturing overhead costs increase, but product costs remain the same.

58. (LO 5.1, 5.2) Activity-based costing differs from two-stage job-order costing in that it attempts to establish a cause-effect relationship between cost drivers and indirect costs. a. True b. False 59. (LO 5.2) Which of the following cost systems is least likely to conform to GAAP? a. Traditional job-order costing b. Two-stage job-order costing c. Activity-based costing d. Process costing 60. (LO 5.2) Which of the following indirect costs can be included as a product cost under activitybased costing but should not be included as a product cost according to GAAP? a. Machine depreciation b. Factory rent c. Supervisor labor d. Advertising expenses 61. (LO 5.2) Which of the following indirect costs is not included as a product cost under activitybased costing but should be included as a product cost according to GAAP?

a. b. c. d.

Machine depreciation Factory rent Supervisor labor Advertising expenses

62. (LO 5.2) Under activity-based costing, which of the following costs are not allocated to individual products and services? a. Marketing costs b. Warranty costs c. Facility-support costs d. Indirect labor costs 63. (LO 5.2) The costs of testing a new product and obtaining a patent are examples of: a. unit-level costs. b. batch-level costs. c. product-line costs. d. facility-support costs.

64. (LO 5.2) Big T’s apparel produces custom t-shirts. Big T’s uses activity-based costing and has determined that it is willing to sell t-shirts for $12 apiece for orders of 100 shirts or more, and $15 apiece for orders of fewer than 100 shirts. This pricing strategy is likely the result of Big T’s analysis of ___________. a. unit-level costs b. batch-level costs c. product-line costs d. facility-support costs 65. (LO 5.2) In an activity-based costing system, costs are allocated to jobs and products based on ____________. a. resource usage b. simplicity c. profit margins d. historic costs 66. (LO 5.2) Which of the following levels of cost is most susceptible to changes in production volume? a. Unit-level b. Batch-level c. Product-line d. Facility-support

67. (LO 5.2) Which of the following is the chief difficulty of implementing and maintaining an activity-based costing system? a. Allocating costs from cost pools to jobs and products b. Determining activity cost pools c. Allocating costs to activity cost pools d. Allocating traced costs to products 68. (LO 5.3) Practical capacity typically means that workers are using _________ of their time productively. a. 65%-70% b. 75%-80% c. 85%-90% d. 95%-100% 69. (LO 5.3) Which of the following factors indicates that a company should not implement activitybased costing? a. Minimal overhead costs b. Complex products c. Extensive product variety d. Excessive profits 70. (LO 5.3) At highly productive companies, most employees are able to work at full capacity. a. True b. False 71. (LO 5.4) Relative to traditional activity-based costing, time-driven activity-based costing is easier to implement because it removes the need to: a. Estimate the resources used by activities b. Query employees about how they spend their time c. Allocate indirect costs d. Identify activity cost pools.

72. (LO 5.2, 5.3, 5.4) Unlike traditional activity-based costing, time-driven activity-based costing relies on estimates from management rather than more detailed information from employees throughout the organization. a. True b. False 73. (LO 5.2, CMA) When using activity-based costing techniques, which one of the following departmental activities would be expected to use machine hours as a cost driver to allocate overhead costs to production? a. Plant cafeteria

b. Machine setups c. Material handling d. Robotics painting 74. (LO 5.2) A company is considering the implementation of an activity-based costing and management program. The company: a. should focus on manufacturing activities and avoid implementation with service-type functions. b. will probably find a lack of software in the marketplace to assist with the related recordkeeping. c. will likely gain added insights into causes of cost. d. will likely use fewer cost pools than it did under more traditional accounting methods.

75. (LO 5.2, 5.3, CMA) The Chocolate Baker specializes in chocolate baked goods. The firm has long assessed the profitability of a product line by comparing revenues to the cost of goods sold.

However, Barry White, the firm’s new accountant, wants to use an activity-based costing system that takes into consideration the cost of the delivery person. Listed below are activity and cost information relating to two of The Chocolate Baker’s major products.

Muffins

Cheesecake

Revenue

$53,000

$46,000

Cost of goods sold

$26,000

$21,000

Delivery Activity Number of deliveries

150

85

Average length of delivery

10 minutes

15 minutes

Cost per hour for delivery

$20.00

$20.00

Under activity-based costing, which one of the following statements is correct? a. The muffins are $2,000 more profitable. b. The cheesecakes are $75 more profitable. c. The muffins are $1,925 more profitable. d. The muffins have a higher profitability as a percentage of sales and, therefore, are more advantageous.

(Level 1) Discussion Questions

32. (LO 5.1) Describe how companies create cost pools in a job-order cost system that uses twostage cost allocations.

Suggested Solution: In a job-order cost system that uses two-stage cost allocations, costs are grouped into pools based on how specific cost drivers affect those cost pools. For example, a company may choose to group costs into pools based on whether they are driven primarily by machine hours or labor hours.

33. (LO 5.1) Assume that a company allocates overhead on the basis of machine hours, and uses the same overhead rate for all machines in the factory. Under what circumstances would this practice distort the overhead assigned to specific products?

Suggested Solution: Allocating all machine-related overhead on the basis of total machine hours assumes that all machine hours consume resources at the same rate. This is most likely to be problematic if some products or services use more complex (i.e., expensive) machines than other products or services, and will result in products and services that are over/undercosted.

34. (LO 5.1, 5.2) Explain why two-stage cost systems improve the cause-effect relationship between allocation base and indirect costs, relative to a single-stage cost system.

Suggested Solution: Single-stage cost systems can lead to distorted costs because they fail to account for the fact that manufacturing overhead costs have various cost drivers. A two-stage cost system better accounts for the fact that different products and services use different resources.

35. (LO 5.1, 5.2) Why should allocation bases be cost drivers?

Suggested Solution: Overhead is allocated to products and services based on allocation bases. Allocation bases should ideally be cost drivers, such that there exists a cause-effect relationship between the allocation base and cost. When cost drivers are used as allocation base, companies can gain insight into how changes in cost drivers affect costs, and can make strategic decisions to eliminate costs, or ensure that those costs provide value that customers are willing to pay for.

36. (LO 5.1) In the context of the allocation of indirect costs, explain what is meant by one product subsidizing another, and explain how this phenomenon can affect a company.

Suggested Solution: The allocation of indirect costs is a zero-sum game, in that cost allocation does not change overall costs. If a company’s cost system produces inaccurate cost information, it is shifting cost from one product to another, resulting in some products that are overcosted, and some that are undercosted. Companies generally focus on products and services that generate the most profit.

When reported profit for products and services are inaccurate, companies are likely to make suboptimal strategic decisions.

37. (LO 5.1) Describe the circumstances under which a company may opt for a job-order cost system with single-stage allocations for indirect costs rather than two-stage allocations.

Suggested Solution: In a two-stage costing system, costs are grouped into pools based on cost drivers. For some companies, most or all indirect costs are “driven” by a single cost driver, and additional cost pools are unnecessary.

38. (LO 5.2) Describe the type of companies for which activity-based costing would not be worth the cost of implementation.

Suggested Solution: Activity-based costing systems require enormous amounts of resources in terms of both time and money. They require managers to identify cost drivers, and they require significant efforts to gather data on costs and cost drivers. For companies that have relatively low levels of indirect cost, or companies that have low product variety, simpler costing systems provide cost information that is “good enough.” In other words, the benefits of having more accurate cost data are not justified by the costs of implementing and maintaining an activity-based costing system.

39. (LO 5.3) Describe why companies group activities together based on the level of costs associated with those activities.

Suggested Solution: All costs within an activity cost pool are allocated to products based on a single cost driver. As such, it is imperative that cost drivers can reasonably predict all costs contained within an activity cost pool. Activity-based costing relies on the assumption that costs are incurred at various levels (i.e., unit, batch, product, and facility), and should therefore be allocated on that same level.

40. (LO 5.2) Employees often provide services for companies that could be categorized into multiple activities. How does an activity-based costing system account for this division of labor?

Suggested Solution: The first-stage allocation in an activity-based costing system assigns costs to cost pools. When an individual provides services to a company that can be categorized across multiple activities, companies must divide labor costs into applicable activity cost pools. This is accomplished through the use of employee surveys in which employees can detail how they use their time.

41. (LO 5.3) Activity-based costing relies on survey data from employees regarding how they use their time. Why might this information be inaccurate?

Suggested Solution: Employees tend to assign all working hours to activities, even though employees rarely if ever use 100% of their time working on specific activities. As a result, survey results tend to overcount the amount of time spent on various activities.

42. (LO 5.2) Explain how a company with better cost information may outperform companies with inaccurate cost information, even when underlying costs are the same.

Suggested Solution: Companies that understand underlying cost information are more knowledgeable about the profitability of individual products and services. As a consequence, they can advertise more effectively to target sales on more profitable products. In addition, they are better prepared to make strategic decisions that can result in lower product costs.

43. (LO 5.3) Consider a clothing manufacturer. Identify costs at the unit level, batch level, product line, and facility-support level that are common in the industry.

Suggested Solution:  Unit level o Fabric o Indirect materials o Direct labor  Batch level o Quality control o Machine setup costs  Product line o Patents o Distribution costs o Advertising  Facility-support o Factory rent o Insurance

44. (LO 5.3) Explain why many companies that use activity-based costing do not allocate facilitylevel indirect costs.

Suggested Solution: An underlying premise of activity-based costing is that activity costs are driven by activity cost drivers. Facility-level indirect costs are not affected by cost drivers, so many companies do not allocate these costs to any cost object. Instead, they are born by the company as a whole.

45. (LO 5.4) Explain the primary advantage of time-driven activity-based costing over traditional activity-based costing.

Suggested Solution: The primary advantage of time-driven activity-based costing over traditional activity-based costing is that the former does not rely on employee surveys to inform the company about the amount of resources that are consumed by various activities. Instead, time-driven activity-based costing relies on management to estimate the amount of time it takes to perform activities, and allocates overhead based on that estimate.

46. (LO 5.4) What are the ethical concerns related to management estimating how long it takes to perform various activities in a time-driven activity-based costing system?

Suggested Solution: One ethical consideration related to time-driven activity-based costing is that management estimates the amount of time it takes to perform various activities. These estimates will ideally be based on experience and employee input, but not necessarily. As a result, employee performance could conceivably be compared to an unrealistic standard.

(Level 1) Brief Exercises 1. (LO 5.3) HiFly runs a flight school and uses an activity-based costing system. Flight hours are often used as an allocation base. Lessons can range from 30 minutes to 120 minutes of flight time. HiFly uses various aircraft. Classify the following costs as unit-level, batch-level, productline, or facility-support. e. Aircraft maintenance (maintenance scheduled is based on flight time) (Unit) f. Aircraft hangar rental (Facility support) g. Aircraft depreciation (Facility support) h. Aircraft insurance (Facility support) i. Pilot certification (pilots must be certified for each aircraft type they fly) (Product) j. Aircraft safety inspection (performed after each flight lesson) (Batch)

2. (LO 5.3) Butter Tint produces jewelry boxes and uses an activity-based costing system. Classify the following costs as unit-level, batch-level, product-line, or facility-support.

A. Indirect materials such as wood glue (Unit) B. Machine setups (Batch) C. Packing/shipping costs (Unit) D. Factory insurance (Facility support) E. Product design costs (Product) F. Warranty costs (Unit) 3. (LO 5.1) Touristica has the following budgeted cost information: Budgeted manufacturing overhead

$720,000

Budgeted production (units)

18,500

Budgeted direct labor hours

2,400

Cost Pool Cost Pool 1

Total Cost $400,000

Cost Pool 2 Total

$320,000 $720,000

Allocation Base Unit Direct labor hour

Assume Touristica uses two-stage allocation to assign overhead costs to cost objects. What is the allocation rate of Cost Pool 2 (rounded to the nearest penny)?

Ans: $320,000/2,400 hours = $133.33/DLH 4. (LO 5.1) Weekend Lab has the following budgeted cost information: Budgeted manufacturing overhead

$400,000

Budgeted production (units)

25,000

Budgeted direct labor hours

18,000

Cost Pool Cost Pool 1

Total Cost $100,000

Cost Pool 2 Total

$300,000 $400,000

Allocation Base Unit Direct labor hour

Weekend Lab uses two-stage allocation to assign overhead costs to cost objects. How much overhead cost is allocated to Job 123, which is an order for 50 units and uses 15 hours?

Ans: 50 units * $4.00/unit + 15 DLH * $16.67/DLH = $450.00 5. (LO 5.1) Thrill Engine has the following budgeted cost information: Budgeted manufacturing overhead

$36,000

Budgeted machine hours

20,000

Budgeted direct labor hours

5,000

Cost Pool Machine-related MOH

Total Cost $20,000

Labor-related MOH Total

$16,000 $36,000

Allocation Base Machine hour Direct labor hour

Job 226 uses 80 machine hours and 80 direct labor hours. Assuming that two-stage allocation yields more accurate cost allocations, a single-stage allocation of overhead using machine hours as the allocation base results in Job 226 being ___________ (overcosted/undercosted) by _______________.

Ans: Undercosted by $192 Single-stage: 80 MH * $1.80/MH = $144.00 Two-stage: 80 MH * $1.00/MH + 80 DLH * $3.20/DLH = $336 6. (LO 5.1) HyperLens has the following budgeted cost information: Budgeted manufacturing overhead $1,928,500 Budgeted machine hours

8,000

Budgeted direct labor hours

4,200

Budgeted units

40,000

Cost Pool Machine-related MOH

Total Cost $772,800

Labor-related MOH Unit-related MOH Total

$ 44,500 $146,000 $963,300

Allocation Base Machine hour Direct labor hour Unit

HyperLens uses two-stage allocation with three cost pools to assign overhead costs to orders.

What is the per-unit allocation rate for unit-related manufacturing overhead?

Ans: $146,000/40,000 units = $3.65/unit

7. (LO 5.1) Zen Detour has the following budgeted cost information: Budgeted manufacturing overhead $704,000 Budgeted machine hours

5,000

Budgeted direct labor hours

3,500

Budgeted units

20,000

Cost Pool Machine-related MOH

Total Cost $352,500

Labor-related MOH Unit-related MOH Total

$ 73,500 $278,000 $704,000

Allocation Base Machine hour Direct labor hour Unit

Zen Detour uses two-stage allocation with three cost pools to assign overhead costs to orders.

How much overhead cost is allocated to Order #0221, which uses 2 machine hours, 1.5 direct labor hours, and produced 48 units?

Ans: ($2 MH * $70.5/MH) + (1.5 DLH * $21/DLH) + (48 units * $13.9/unit) = $839.70 $141 + $31.50 + $667.20 = $839.70 8. (LO 5.2, 5.3) Photo Saga uses activity-based costing and has come up with the following allocation rates: Activity Driver Process order Sales order $18.00 Packing and shipping Item shipped $3.00 Billing Sales order $4.00 Product customization

Customized order

$120.00

Rate per order per item per order per customized order

Job 924 is a custom order for 12 items. How much indirect cost should be allocated to Job 924?

Job 924 Driver Sales order Item shipped Sales order Customized order

Rate $ $ $ $

Count 18.00 3.00 4.00 120.00

1 12 1 1 Total

Cost Allocation $ 18.00 $ 36.00 $ 4.00 $ 120.00 $ 178.00

9. (LO 5.3) Artica uses activity-based costing. Artica has developed the following allocation rates: Activity Driver Rate Process order Sales order $ 4.50 per order

Quality check Modification Packing and shipping

Item checked Item modified Order shipped

$ $ $

1.25 8.25 12.00

per item per modified i per shipped or

Hetic, one of Artica’s clients, recently ordered 100 items from Artica, of which 25 were modified (which incurs additional cost). How much indirect cost should be allocated to the Hetic order?

Hetic Driver Sales order Item checked Item modified Order shipped

Rate $ $ $ $

Count 4.50 1.25 8.25 12.00

1 100 25 1 Total

Cost Allocation $ 4.50 $ 125.00 $ 206.25 $ 12.00 $ 347.75

10. (LO 5.2, 5.3) Silver Company is a catering company that uses activity-based costing. Silver Company has developed the following allocation rates: Activity Driver Rate Receive request Event $ 350.00 Plan an event Event $ 400.00 Invite guests Guest $ 12.00 Billing Event $ 25.00

per even per even per gues per even

Silver Company recently catered an event for 50 guests. How much indirect cost should be allocated to the event?

Driver Event Event Guest Event

Rate $350.00 $400.00 $ 12.00 $ 25.00

Count 1 1 50 1 Total

11. (LO 5.4) Photo Factory is a photography studio that uses time-driven activity-based costing.

Photo Factory estimates that one minute of time uses $1.85 in resources. It has developed the following time estimates for its activities: Estimated Activity Driver minutes Photo appointment Photo session 45 Digital editing Photos edited 10 Printing/Packaging Photos printed 0.5 Rush order Rush order 45 Photo Factory recently did work for a client named Jones. The job consisted of editing 10 photos and printing 250 photos. The order was expedited. How much indirect cost should be allocated to the client?

Cost Allocation $350.00 $400.00 $600.00 $25.00 $1,375.00

Driver Photo session Photos edited Photos printed Rush order

Jones Estimated Minutes

Count 1 10 250 1

Total Minutes 45 10 0.5 45

Total Minutes x rate/minute Indirect Cost Allocation

45 100 125 45 315 1.85 582.75

$ $

12. (LO 5.4) Shine Capsule, which provides lighting for concerts and music festivals, uses time-driven activity-based costing. Shine Capsule estimates that one minute of time uses $6.50 in resources, and it has developed the following time estimates for its activities: Estimated Activity Driver minutes Equipment packing and unpacking Event 350 Equipment setup # of stages 240 Light optimization # of light towers 15 Shine Capsule was recently hired to help with the Mountain Music Festival. The event had three stages, each with 6 light towers. How much indirect cost should be allocated to the event?

Driver Event # of stages # of light towers

Estimated Minutes

Count 1 3 18

Total Minutes 350 240 15

Total Minutes x rate/minute

$ $

350 720 270 1,340 6.50 8,710.00

13. (LO 5.4) Gold Sense, which uses time-drive activity-based costing, estimates that one minute of time uses $1.35 in resources, and it has developed the following time estimates for its activities: Estimated Activity Driver minutes Process order Sales order 6 Packing and shipping Item shipped 2 Billing Sales order 5 Customization Customized item 7.5 Gold Sense recently fulfilled an order for 15 items, 5 of which were customized. How much indirect cost should be allocated to the order?

Driver

Count

Estimated

Total Minutes

Minutes Sales order

1

6

Item shipped

15

2

Sales order

1

5

Customized item

5

7.5 Total Minutes

6 30 5 38 79 $ 1.35 $ 105.98

x rate/minute

14. (LO 5.4) Amber Allure is implementing an activity-based costing system. The company has gathered information about overhead costs, and it used employee surveys to determine how resources are consumed by various activities as follows: Overhead Costs Supervisor labor Machine maintenance Indirect materials Factory lease and insurance Total

Supervisor labor Machine maintenance Indirect materials Factory lease and insurance

$750,000 $450,000 $225,000 $125,000 $1,550,000

Unit Production 40% 70% 75% 20%

Resource Consumption by Activity Quality Control Design Improvement 50% 5% 30% 0% 10% 10% 0% 0%

Facility Supp 5% 0% 5% 80%

What is the total amount of cost allocated to the quality control cost pool?

Supervisor labor Machine maintenance Indirect materials Factory lease and insurance Total

Unit Production $300,000 $315,000 $168,750 $ 25,000 $808,750

Activity Cost Pools Quality Control Design Improvement $375,000 $37,500 $135,000 $0 $ 22,500 $22,500 $0 $0 $532,500 $60,000

Facility Support $ 37,500 $0 $ 11,250 $100,000 $148,750

15. (LO 5.4) Bling Fuel is implementing an activity-based costing system. The company has gathered information about overhead costs, and it used employee surveys to determine how resources are consumed by various activities as follows: Indirect Costs Indirect labor Indirect materials Product design Equipment depreciation Factory lease Total

Indirect labor Indirect materials Product Design Equipment Depreciation Factory Lease

$115,000 $310,000 $80,000 $120,000 $145,000 $770,000

Production 45% 60% 0% 50% 0%

Resource Consumption by Activity Quality Control Patent Filing Marketing 20% 10% 20% 25% 0% 15% 10% 10% 80% 0% 0% 0% 0% 0% 0%

What is the total amount of cost allocated to the Marketing cost pool?

Production Indirect labor Indirect materials Product Design Equipment Depreciation Factory Lease Total

$51,750 $186,000 $ $60,000 $ $297,750

Activity Cost Pools Quality Patent Filing Control $23,000 $11,500 $77,500 $ $8,000 $8,000 $ $ $ $ $108,500 $19,500

(Level 1) Problems

1. (LO 5.3; CMA) Atmel Inc. manufactures and sells two products. Consider the following data regarding these products.

Units produced and sold Machine hours required per unit Receiving orders per product line

Product A 30,000 2 50

Product B 12,000 3 150

Marketing $23,000 $46,500 $64,000 $ $ $133,500

F

Production orders per product line Production runs Inspections

12 8 20

18 12 30

Total budgeted machine hours are 96,000. The budgeted overhead costs are shown below.

Receiving costs Engineering costs Machine setup costs Inspection costs Total budgeted overhead

$450,000 300,000 25,000 200,000 $975,000

a. The cost driver for receiving costs is the number of receiving orders per product line.

Using activity-based costing, what is the receiving cost per unit for Product A?

The per-unit overhead cost allocation of receiving costs for product A is $3.75, as shown below.

Receiving costs per order: Per unit of Product A:

$450,000 ÷ (50 + 150) (50 x $2,250) ÷ 30,000

= =

$2,250 $3.75

b. The cost driver for engineering costs is the number of production orders per product line.

Using activity-based costing, what is the engineering cost per unit for Product B? The engineering cost per unit of Product B is $15, calculated as follows.

Engineering cost per order:

$300,000 ÷ (12 + 18)

=

$10,000

Engineering cost per Product B:

$10,000 x 18

=

$180,000

Cost per unit of Product B:

$180,000 ÷ 12,000

=

$15.00

2. (LO 5.2, 5.3, CMA) Smart Electronics manufactures two types of gaming consoles, Models M-11 and R-24. Currently, the company allocates overhead costs based on direct labor hours; the total overhead cost for the past year was €80,000. Additional cost information for the past year is presented below.

Total Direct Labor Hours Used Product Name

Units Sold

Direct Costs per Unit

Selling Price per Unit

M-11

650

1,300

€10

€90

R-24

150

1,500

€30

€60

Recently, the company lost bids on a contract to sell Model M-11 to a local wholesaler and was informed that a competitor offered a much lower price. Smart Electronics’ controller believes that the cost reports do not accurately reflect the actual manufacturing costs and product profitability for these gaming consoles. He also believes that there is enough variation in the production process for Models M-11 and R-24 to warrant a better cost-allocation system. Given the nature of the electronic gaming market, setting competitive prices is extremely crucial. The controller has decided to try activity-based costing and has gathered the following information.

Number of Setups

Number of Components

Number of Material Movements

M-11

3

17

15

R-24

7

33

35

€20,000

€50,000

€10,000

Total activity cost

The number of setups, number of components, and number of material movements have been identified as activity-cost drivers for overhead. a. Using Smart’s current costing system, calculate the gross margin per unit for Model M-11 and for Model R-24. Assume no beginning or ending inventory. Show your calculations.

Ans: Model M-11: Overhead cost allocated (per unit): [€80,000 / (650 + 150)] x 650 = €65,000 65000/1300 = 50 Gross margin per unit: €90 - €10 - €50 = €30 Model R-24: Overhead cost allocated (per unit): [€80,000 / (650 + 150)] x 150 = €15,000 15,000/1500 = 10 Gross margin per unit: €60 - €30 - €10 = €20 b. Using activity-based costing, calculate the gross margin for Model M-11 and for Model R-24.

Assume no beginning or ending inventory. Show your calculations.

Setups: €20,000 / (3 + 7) = €2,000 Components: €50,000 / (17 + 33) = €1,000 Material Movements: €10,000/(15 + 35) = €200

Model M-11: (€2,000 x 3) + (€1,000 x 17) + (€200*15) = €26,000 Overhead cost allocated by ABC (per unit): €26,600/1300 = €20.00 Gross margin per unit: €90 - €10 - €20 = €60 Model R-24: (€2,000 x 7) + (€1000 x 33) + (€200 x 35) = €54,000 Overhead cost allocated by ABC (per unit): €54,000/1,500 = €36.00 Gross margin per unit: €60 - €30 - €36 = -€6.00 c. Describe how Smart Electronics can use the activity-based costing information to formulate a more competitive pricing strategy. Be sure to include specific examples to justify the recommended strategy.

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. The traditional method allocates overhead costs on the basis of direct labor hours. The ABC system considers important differences in overhead resource requirements by using multiple cost drivers and thus provides a better picture of the costs of each product model, provided that the activity measures are fairly estimated.

In the case of Smart Electronics, Model R-24 uses more setups, components, and material movements, which might not be reflected in the labor hours. The following table shows the overhead allocated per unit and profit margin per unit under the current conventional costing system and ABC. As indicated, Model R-24 was previously undercosted and Model M-11 was overcosted.

Overhead allocated per unit under the current costing system and ABC: Current Costing System

ABC

Model M-11

€50

€20

Model R-24

€10

€36

Gross margin per unit under the current costing system and ABC” Current Costing System

ABC

Model M-11

€30

€60

Model R-24

€20

-€6

Smart Electronics’ management can use the information from the ABC system to make better pricing decisions. Allocating overhead by ABC gives a clear cost picture that Model R-24 costs more to manufacture because it uses more setups, components, and material movements. The current price of $60 is inadequate in covering the total cost and results in negative gross margin.

Therefore, the company might decide to increase the price of the Model R-24. For Model M-11, the previous overhead was overestimated given that it was allocated by labor hours. Under ABC, only €60 of the overhead was allocated to every unit of Model M-11. Management might reduce the price of Model M-11 to make it more competitive.

d. Identify and explain two advantages and two limitations of activity-based costing.

Advantages: The ABC system better captures the resources needed for Model M-11 and Model R-24. It identifies all of the various activities undertaken when producing the products and recognizes that different products consume different amounts of activities. Hence, the ABC system generates more accurate product costs.

Limitations: ABC requires continuously estimating cost drivers, and updating and maintaining the system, which makes the system relatively costly.

A complicated system is sometimes confusing to the top management.

Estimation of cost of activities and selection of cost drivers sometime may cause estimation errors, which could result in misleading cost information.

3. (LO 5.1) Harper Manufacturing determines allocation rates as part of its annual budgeting process, which takes place 1 month before the beginning of the year. The company reports the following manufacturing overhead information as part of its budgeting process: Budgeted MOH

$15,000,000

Budgeted production (units)

25,000,000

Budgeted direct labor hours

40,000

Cost Pool Cost Pool 1 Cost Pool 2 Total

Total Cost $6,000,000 $9,000,000 $15,000,000

Allocation Base Unit Direct labor hour

a. Assuming that Harper uses a traditional job costing system with a single allocation base (units), what is the predetermined overhead rate for the upcoming year? $15MM / 25MM units = $0.60/unit

b. Assume Job 189 comprises 36 units and 2 direct labor hours. If Harper uses a traditional job costing system with a single allocation base (units), what is the total allocated manufacturing overhead to the job?

36 units * $0.60 = $21.60 c. Now assume that Harper uses a two-stage job costing system with the two cost pools listed above. What are the predetermined overhead rates for each cost pool for the upcoming year?

Cost pool 1: $6MM / 25MM units = $0.24/unit Cost pool 2: $9MM / 40,000 DLH = $225.00/DLH

d. Assume Job 189 comprises 36 units and 2 direct labor hours. If Harper uses a job costing system with the two cost pools listed above, what is the total allocated manufacturing overhead to the job?

(36 units * $0.24/unit) + (2 DLH * $225/DLH) = $458.64 $8.64 + $450 = $458.64

4. (LO 5.1) Brew Shack is a small brewery that is trying to better understand its costs. The company, which currently uses traditional job-order costing, allocates overhead costs using a single cost driver. The company is considering using two-stage allocation to assign overhead costs to batches of product. It gathers the following estimates: Budgeted MOH

$48,000

Budgeted machine hours

20,000

Budgeted direct labor hours

5,000

Cost Pool Machine-related MOH

Total Cost $30,000

Labor-related MOH Total

$18,000 $48,000

Allocation base Machine hour Direct labor hour

One batch of Pumpkin Moon Ale uses 4 machine hours and 1.5 direct labor hours. a. Assuming that Brew Shack allocates manufacturing overhead costs on the basis of machine hours, what amount of overhead is allocated to a batch of Pumpkin Moon Ale? 4 MH * $2.40/MH ($48,000/20,000 MH) = $9.60

b. Assuming that Brew Shack allocates manufacturing overhead costs on the basis of direct labor hours, what amount of overhead is allocated to a batch of Pumpkin Moon Ale? 1.5 DLH * $9.60/DLH ($48,000/5,000 DLH) = $14.40 c. Assuming that Brew Shack uses two-stage allocation with the two cost pools indicated above, what amount of overhead is allocated to a batch of Pumpkin Moon Ale? 4 MH * $1.5/MH + 1.5 DLH * $3.60/DLH = $11.40 5. (LO 5.1) Munch Lab produces and sells gourmet gift baskets. The company currently uses traditional job-order costing that allocates indirect costs based on the budgeted production of baskets. Munch Lab is considering using two-stage allocation to assign overhead costs to batches of product. Management gathers the following estimates: Budgeted MOH

$240,000

Budgeted machine hours

1,000

Budgeted direct labor hours

16,000

Budgeted baskets

40,000

Cost Pool Machine-related MOH

Total Cost $ 30,000

Labor-related MOH Unit-related MOH Total

$180,000 $ 30,000 $240,000

Allocation base Machine hour Direct labor hour Basket

Job 314 is an order for 10 gift baskets. The job requires 2 hours of labor and 15 minutes of machine time. a. Assuming that Munch Lab allocates all indirect costs on the basis of gift baskets, how much indirect cost will be allocated to Job 314?

10 baskets * $6.00/basket ($240,000 MOH/40,000 baskets) = $60.00 b. Assuming that Munch Lab uses two-stage allocation to allocate indirect costs using the three cost pools listed above, how much indirect cost will be allocated to Job 314?

0.25 MH * $30.00/MH + 2 DLH * $11.25/DLH + 10 baskets * $0.75/basket = $37.50 c. Assuming that two-stage costing is more accurate than single-stage costing, under a single-stage costing system, Job 314 would be ____________ (undercosted/overcosted) by ____________.

Overcosted by $22.50.

6. (LO 5.3) Finagle Industries uses an activity-based costing system and has determined the following allocation rates: Activity Driver Rate Process order Sales order $8.00 per order Packing and shipping Item shipped $5.00 per item Billing Sales order $3.00 per order Customized per customized Product customization $140.00 order order Use the table above to answer the following questions:

Driver Sales order Item shipped Sales order Customized order

a. Job 124 is a standard order that contains 14 items. What is the indirect cost allocation for Job 124?

Job 124 Count Cost Allocation Rate $ 8.00 1 $ 8.00 $ 5.00 14 $ 70.00 $ 3.00 1 $ 3.00 $ 140.00 0 $ Total $ 81.00

b. Job 125 is a customized order that contains 3 items. What is the indirect cost allocation for Job 125?

Job 125 Driver Sales order Item shipped Sales order Customized order

Rate $ $ $ $

8.00 5.00 3.00 140.00

Count Cost Allocation 1 $ 8.00 3 $ 15.00 1 $ 3.00 1 $ 140.00 Total $ 166.00

c. Job 126 is a customized order that contains 23 items. What is the indirect cost allocation for Job 126?

Job 126 Driver Sales order Item shipped Sales order

Rate $ $ $

8.00 5.00 3.00

Count Cost Allocation 1 $ 8.00 23 $ 115.00 1 $ 3.00

Customized order

$

140.00

1 Total

$ $

140.00 266.00

7. (LO 5.3) Chow Maine sells earthen dishes. It ships products throughout the United States, though occasionally orders are picked up at the manufacturing facility. Chow Maine uses an activity-based costing system and has determined the following allocation rates: Activity Driver Rate Process order Sales order $ 3.50 per order Quality check Item checked $ 0.75 per item Modification Item modified $ 9.50 per modified item Packing and shipping Order shipped $ 13.00 per shipped order Use the table above to answer the following questions: a. Job 0208 is an order for 23 items, 6 of which required modification. The order is shipped. What is the indirect cost allocation for Job 0208?

Job 0208 Driver Count Cost Allocation Rate Sales order $ 3.50 1 $ 3.50 Item checked $ 0.75 23 $ 17.25 Item modified $ 9.50 6 $ 57.00 Order shipped $ 13.00 1 $ 13.00 Total $ 90.75

b. Job 0209 is an order for 114 items, none of which required modification. The order is shipped. What is the indirect cost allocation for Job 0209?

Driver Sales order Item checked Item modified Order shipped

Rate $ $ $ $

Job 0209 Count Cost Allocation 3.50 1 $ 3.50 0.75 114 $ 85.50 9.50 0 $ 13.00 1 $ 13.00 Total $ 102.00

c. Job 0210 is an order for 6 items, all of which required modification. The order is picked up at the manufacturing facility. What is the indirect cost allocation for Job 0210?

Driver Sales order Item checked

Rate $ $

Job 0210 Count Cost Allocation 3.50 1 $ 0.75 6 $

3.50 4.50

Item modified Order shipped

$ $

9.50 13.00

6 0 Total

$ $ $

57.00 65.00

8. (LO 5.3) Black Tie is an event-planning organization. Black Tie meets with the client to determine the scope of the engagement before planning and running the event. Black Tie has developed and activity-based costing system with the following allocation rates: Activity Driver Rate Receive request Event $ 300.00 per event Plan an event Event $ 850.00 per event Invite guests Guest $ 52.00 per guest Billing Event $ 15.00 per event Use the table above to answer the following questions:

Driver Event Event Guest Event

a. The Malphus event was a wedding for 200 guests. What is the indirect cost allocation?

Malphus Count Cost Allocation Rate $ 300.00 1 $ 300.00 $ 850.00 1 $ 850.00 $ 52.00 200 $ 10,400.00 $ 15.00 1 $ 15.00 Total $ 11,565.00

b. The Liu event was a graduation and included 40 guests. What is the indirect cost allocation?

Driver Event Event Guest Event

Rate $ $ $ $

Liu Count 300.00 850.00 52.00 15.00

1 1 40 1 Total

Cost Allocation $ 300.00 $ 850.00 $ 2,080.00 $ 15.00 $ 3,245.00

c. The Vanderfall event was an anniversary party for 150 guests. What is the indirect cost allocation?

Driver Event Event

Rate $ $

300.00 850.00

Vanderfall Count Cost Allocation 1 $ 300.00 1 $ 850.00

Guest Event

$ $

52.00 15.00

150 1 Total

$ $ $

7,800.00 15.00 8,965.00

9. (LO 5.4) Sweet Hues Industries has adopted a time-driven activity-based costing system. Its management estimates that an indirect cost rate of $1.50 per minute reasonably reflects the cost of company resources.

Management has estimated the amount of time that each activity uses as follows: Activity

Driver

Process order Packing and shipping Billing Rush order

Sales order Item shipped Sales order Rush order

Estimated Minutes 5 3 2 60

a. Job 226 is a standard order that contains 93 items. What is the indirect cost allocation for Job 226?

Driver Sales order Item shipped Sales order Rush order

Count 1 93 1 0

Job 226 Estimated Minutes Total Minutes 5 3 2 60 Total Minutes x rate/minute $ $

5 279 2 286 1.50 429.00

b. Job 227 is a standard order that contains 18 items. What is the indirect cost allocation for Job 227?

Driver Sales order Item shipped Sales order Rush order

Count 1 18 1 0

Job 227 Estimated Minutes Total Minutes 5 3 2 60 Total Minutes x rate/minute $ $

5 54 2 61 1.50 91.50

c. Job 228 is a rush order that contains 2 items. What is the indirect cost allocation for Job 228?

Driver Sales order Item shipped Sales order Rush order

Count 1 2 1 1

Job 228 Estimated Minutes Total Minutes 5 3 2 60 Total Minutes x rate/minute $ $

5 6 2 60 73 1.50 109.50

10. (LO 5.4) The Accounts Payable department at Pelletize Grillz uses a time-driven activity-based costing system. The company estimates that each minute of time in the Accounts Payable department uses $3.15 worth of resources. Pelletize Grillz, which is very cautious with new vendors, implements an extensive quality-control check on all items received for the first 6 months of using a new vendor. Management believes that after 6 months, the quality control check is no longer needed.

Management has estimated the amount of time that each activity uses as follows: Estimated Minutes

Activity

Driver

Process invoice

Invoice First order from new vendor Units received in first 6 months with a new vendor

Set up new vendor

Quality control

12 25

2

a. Invoice 0246 is an invoice for 18 items from a vendor who has worked with Pelletize Grillz for over a year. What is the indirect cost allocation for Job 0246?

Invoice 0246 Driver

Estimated Count Minutes

Total Minutes

Invoice

1

12

First order from new vendor

0

25

Units received in first 6 months with a new vendor

0

2 Total

12 -

Minutes 12 x rate/minute $3.15 $37.80 b. Invoice 0247 is an invoice for 30 items from a vendor who has worked with Pelletize Grillz for the past 4 months. What is the indirect cost allocation for Job 0247?

Invoice 0247 Estimated Count Minutes

Driver

Total Minutes

Invoice

1

12

First order from new vendor

0

25

Units received in first 6 months with a new vendor

30

2

12 -

60 Total Minutes 72 x rate/minute $3.15 $226.80

c. Invoice 0248 is an invoice for 25 items from a vendor who has not worked with Pelletize Grillz previously (in other words, this is the vendor’s first invoice). What is the indirect cost allocation for Job 0248?

Invoice 0248 Driver

Estimated Count Minutes

Total Minutes

Invoice

1

12

First order from new vendor

1

25

Units received in first 6 months with a new vendor

25

2

12 25

50 Total Minutes 87 x rate/minute $3.15 $274.05

11. (LO 5.4) Tru Photo is a photo studio that has adopted a time-driven activity-based costing system. Tru Photo’s management estimates that an indirect cost rate of $2.40 per minute reasonably reflects the cost of company resources.

Management has estimated the amount of time that each activity uses as follows: Estimated Minutes

Activity

Driver

Photo appointment Digital editing Printing/Packaging Rush order

Photo session Photos edited Photos printed Rush order

60 5 0.5 30

a. After the Jones family photo session, Tru Photo edited 13 photos and printed 30 photos.

The Jones family did not request that the order be expedited. What is the indirect cost allocation for the Jones family?

Driver Photo session Photos edited Photos printed Rush order

Count 1 13 30 0

Jones Estimated Minutes Total Minutes 60 5 0.5 30 Total Minutes x rate/minute $ $

60 65 15 140 2.40 336.00

b. After the Ong family photo session, Tru Photo printed 50 photos, and the order was expedited. The session required no digital editing. What is the indirect cost allocation for the Ong family?

Driver Photo session Photos edited Photos printed Rush order

Count 1 0 50 1

Ong Estimated Minutes Total Minutes 60 5 0.5 30 Total Minutes x rate/minute $ $

60 25 30 115 2.40 276.00

c. The Festa family photo session resulted in 18 photos that were digitally edited. Tru Photo expedited the order, which included 26 photos. What is the indirect cost allocation for the Festa family?

Festa

Driver Photo session Photos edited Photos printed Rush order

Count 1 18 26 1

Estimated Minutes Total Minutes 60 5 0.5 30 Total Minutes x rate/minute $ $

60 90 13 30 193 2.40 463.20

12. (LO 5.3) Grecko Inc. has the following indirect costs: Overhead Costs Supervisor labor Machine maintenance Indirect materials Factory lease and insurance Total

$1,250,000 $1,500,000 $300,000 $450,000 $3,500,000

While implementing an activity-based costing system, Grecko decides to use the following activity cost pools: Production, Quality Control, Design Improvement, and Facility Support.

Grecko has gathered data to estimate how indirect cost categories relate to activity cost pools as follows: Resource Consumption by Activity Unit Production Quality Control Design Improvement Facility Support

Total

Supervisor labor

60%

30%

5%

5%

100%

Machine maintenance

70%

30%

0%

0%

100%

Indirect materials

75%

5%

10%

10%

100%

Factory lease and insurance

0%

0%

0%

100%

100%

Use the template below to determine the total amount of indirect cost in each activity cost pool: Activity Cost Pools Unit

Quality

Design

Facility

Total

Production

Control

Improvement

Support

Unit Production

Quality Control

Activity Cost Pools Design Improvement

Facility Support

Supervisor labor Machine maintenance Indirect materials Factory lease and insurance Total

Answer:

Supervisor labor Machine maintenance Indirect materials Factory lease and insurance Total

Total

$750,000

$375,000

$62,500

$62,500

$1,250,000

$1,050,000

$450,000

$0

$0

$1,500,000

$225,000

$15,000

$30,000

$30,000

$300,000

$0

$0

$0

$450,000

$450,000

$2,025,000

$840,000

$92,500

$542,500

$3,500,000

13. (LO 5.3) Spice Gram produces hot sauce and has the following indirect costs:

Indirect Costs Indirect labor Indirect materials Product design Equipment depreciation Factory lease Total

$355,000 $150,000 $45,000 $135,000 $120,000 $805,000

Spice Gram has identified the following activities for its activity-based costing system: Production, Quality Control, Patent Filing, Marketing, and Facility Support. Production is a unit-level cost, Quality Control is a batch-level cost, Patent Filing and Marketing are product-level costs, and Facility-level costs are aggregated in a facility-support pool.

Spice Gram has gathered data to estimate how indirect cost categories relate to activity cost pools as follows:

Indirect labor

Resource Consumption by Activity Quality Patent Facility Production Marketing Control Filing Support 55% 15% 5% 20% 5%

Total 100%

Indirect materials

70%

25%

0%

5%

0%

100%

Product Design

0%

5%

20%

75%

0%

100%

Equipment Depreciation

40%

0%

0%

0%

60%

100%

Factory Lease

0%

0%

0%

0%

100%

100%

Use the template below to determine the total amount of indirect cost in each activity cost pool: Activity Cost Pools Facility Production Quality Control Patent Filing Marketing Support Indirect labor

Total

Indirect materials Product design Equipment depreciation Factory lease Total Answer Production

Activity Cost Pools Quality Patent Filing Control

Marketing

Facility Support

Indirect labor

$195,250

$ 53,250

$17,750

$71,000

$17,750

Indirect materials

$105,000

$ 37,500

$ -

$7,500

$ -

Product design

$-

$ 2,250

$9,000

$33,750

$ -

$54,000

$ -

$ -

$ -

$81,000

$ -

$-

$ -

$ -

$120,000

$ 354,250

$ 93,000

$26,750

$112,250

$218,750

Equipment depreciation Factory lease Total

Total $355,000 $150,000 $45,000 $135,000 $120,000 $805,000

14. (LO 5.3) Shutter Spark is a printing company that specializes in photo printing. Shutter Spark has the following indirect costs:

Indirect Costs Indirect materials Indirect labor Utilities and insurance Depreciation Total

$3,750,000 $1,560,000 $1,250,000 $1,040,000 $7,600,000

Shutter Spark uses the following cost pools in its activity-based costing system: Album Printing, Batch Setup, Product Design, and Facility Support.

Shutter Spark uses employee surveys to estimate how indirect cost categories relate to activity cost pools. The company has gathered the following data:

Indirect materials Indirect labor Utilities and insurance Depreciation

Album Printing 95% 40% 50% 50%

Resource Consumption by Activity Batch Product Facility Setup Design Support 0% 5% 0% 30% 25% 5% 10% 10% 30% 0% 0% 50%

Use the template below to determine the total amount of indirect cost in each activity cost pool: Activity Cost Pools Album Batch Facility Product Design Printing Setup Support Indirect materials Indirect labor Utilities and insurance Depreciation Total

Total 100% 100% 100% 100%

Total

Answer: Activity Cost Pools Album Printing Indirect materials

$3,562,500

Batch Setup $0

Product Design $187,500

Facility Support $0

Total $3,750,000

Indirect labor

$624,000

$468,000

$390,000

$78,000

$1,560,000

Utilities and insurance

$625,000

$125,000

$125,000

$375,000

$1,250,000

Depreciation

$520,000

$0

$0

$520,000

$1,040,000

Total

$5,331,500

$593,000

$702,500

$973,000

$7,600,000

15. (LO 5.3) Nomadist Inc. publishes a travel magazine. Nomadist has the following activity cost pools and estimated cost drivers for the year: Activity

Cost Pool

Cost Driver

Copy editing

$3,375 # of pages

Photography

$5,000 # of photos

Advertisement design

$12,500

Printing Distribution Total

# of advertisements # of printed $30,000 copies # of printed $4,200 copies $55,075

Number of Cost Drivers

Allocation Rate

1,500

per page

180

per photo per advertisement

400 18,000

per copy

18,000

per copy

a. Calculate allocation rates for each activity cost pool by filling in the final column.

Answer Activity

Cost Pool

Cost Driver

Copy Editing

$3,375 # of pages

Photography

$5,000 # of photos

Advertisement design

# of $12,500 advertisements # of printed $30,000 copies # of printed $4,200 copies $55,075

Printing Distribution Total

Number of Cost Drivers 1,500 180 400 18,000 18,000

Allocation Rate $2.2500 $27.7778 $31.2500 $1.6667 $0.2333

per page per photo per advertisement per copy per copy

b. Use your answer above to assign costs to 3 monthly issues of Nomadist’s travel magazine by completing the table below.

Activity Copy editing Photography Advertisement design Printing Distribution

Cost Driver # of pages # of photos # of advertisements # of printed copies # of printed copies

March

April

May

150 25

160 28

140 32

45

40

30

1,700

1,750

1,900

1,700

1,750

1,900

Total cost allocation

Answer Activity

Cost Driver

Copy Editing

# of pages

Photography Advertisement Design Printing Distribution

March

April

May

= 150 * $2.25 per page = 160 * $2.25 per page = 140 * $2.25 per page = 25 * $27.78 per = 28 * $27.78 per = 32 * $27.78 per # of photos photo photo photo # of = 45 * $31.25 per = 40 * $31.25 per = 30 * $31.25 per advertisements advertisement advertisement advertisement # of printed = 1700 * $1.67 per = 1750 * $1.67 per = 1900 * $1.67 per copies copy copy copy # of printed = 1700 * $0.23 per = 1750 * $0.23 per = 1900 * $0.23 per copies copy copy copy

Total cost allocation

$5,668.19

$5,712.78

$5,751.39

16. (LO 5.3) The Adventure Studio creates escape room scenarios that are then sold to escape rooms around the United States. Through extensive research, the Adventure Studio has found a number of activities that influence the cost of producing escape room scenarios. These activities and the associated cost drivers are displayed below: Activity

Cost Pool

Cost Driver

Scenario design

$250,000 Scenario

Prop production

$120,000 Props

Film clip production Total

$130,000 Film clips $500,000

Number of Cost Drivers

Allocation Rate 8

per scenario

160

per prop

32

per film clip

a. Calculate allocation rates for each activity cost pool by filling in the final column.

Answer Activity

Cost Pool

Cost Driver

Scenario design

$250,000 Scenario

Prop production

$120,000 Props

Film clip production

$130,000 Film clips

Total cost allocation

$500,000

Number of Cost Drivers

Allocation Rate 8

160 32

per scenario

$31,250.00 $750.00

per prop per film clip

$4,062.50

b. Use your answer above to assign costs to three escape room scenarios created by The Adventure Studio by completing the table below.

Activity

Cost Driver

Scenario design Prop production Film clip production Total cost allocation

Scenario Props Film clips

Answer Activity

Cost Driver

Scenario Design

Scenario

Prop Production Film clip production Total cost allocation

Props Film Clips

Haunted Food Truck

Zombie Wedding 1 25 4

8th Grade Algebra 1 20 5

1 16 7

Haunted Food Truck Zombie Wedding 8th Grade Algebra = 1 * $31250 per = 1 * $31250 per = 1 * $31250 per scenario scenario scenario = 25 * $750 per prop = 20 * $750 per prop = 16 * $750 per prop = 4 * $4062.5 per film = 5 * $4062.5 per film = 7 * $4062.5 per film clip clip clip $66,250.00

$66,562.50

$71,687.50

17. (LO 5.2, 5.3) Wanderica makes software for managing real estate portfolios. Wanderica is implementing activity-based costing in one of its departments, which has the following indirect costs and allocation base data:

Activity Cost Pool

Cost Pool Total

Cost Driver

# of Cost Drivers

# of customer requests

Customer Service

$310,250

Process Orders

$616,750 # of orders

Feature Design

5,000 400

$2,231,500 # of new features

Debug Software

1,200

$436,500 # of patches

1,800

a. Determine allocation rates for each cost driver listed above.

Answer: Activity Cost Pool

Cost Pool Total

Customer service

$310,250

Take customer orders Design new features

Cost Driver

Number of Cost Drivers

# of customer requests

5,000

$616,750 # of orders $2,231,500

Debug software

400

# of new features

1,200

$436,500 # of batches

1,800

Allocation Rate per customer

$62.05 $1,541.875

per order per new feature

$1,859.583 $242.50

per batch

b. Calculate cost allocations for each of the following customers, based on their usage of Wanderica’s resources.

Activity

Cost Driver

BiG6

SanTech

Coastal

Customer service

# of customer requests

14

30

17

Take customer orders

# of orders

4

3

7

Design new features

# of new features

18

25

35

Debug software

# of batches

30

10

28

Total cost allocation

Answer:

Activity

Cost Driver

Customer Service

# of customer requests

Process Orders

# of orders

Feature Design

# of new

BiG6

SanTech

Coastal

= 14 * $62.05 per customer = 4 * $1541.88 per order

= 30 * $62.05 per customer = 3 * $1541.88 per order

= 17 * $62.05 per customer = 7 * $1541.88 per order

= 18 * $1859.58 per

= 25 * $1859.58 per

= 35 * $1859.58 per

features Debug Software

# of patches

new feature

new feature

new feature

= 30 * $242.5 per batch

= 10 * $242.5 per batch

= 28 * $242.5 per batch

$47,783.70

$55,401.71

$83,723.39

Total cost allocation

Chapter 6 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 1. (LO 6.1) Which of the following is not a reason for sharing support services? a. Increased efficiency b. Increased expertise c. Improved consistency d. Improved ability to customize shared services to groups and departments 2. (LO 6.1) Which of the following departments is least likely to be considered a support department? a. Motor pool b. Cafeteria c. Information technology department d. Assembly department 3. (LO 6.2) When allocating the costs of a single support department to production departments, the dual-rate method determines an allocation rate for variable costs by using the __________ usage of support department resources, and it allocates costs by multiplying this rate by ___________ usage of support department resources. a. actual; actual b. actual; budgeted c. budgeted; actual d. budgeted; budgeted 4. (LO 6.2) The dual-rate method of allocating support department costs relies on categorizing costs as either: a. fixed or variable. b. inventoriable or non-inventoriable. c. recurring or unique. d. product or period.

5. (LO 6.2) When allocating the costs of a single support department to production departments, the dual-rate method determines an allocation rate for fixed costs by using the __________ usage of support department resources, and it allocates costs by multiplying this rate by ___________ usage of support department resources. a. actual; actual b. actual; budgeted c. budgeted; actual d. budgeted; budgeted 6. (LO 6.3) In which of the following allocation methods does the order of allocation (that is, which support department allocates first) affect cost allocations? a. Direct method b. Single-rate method c. Step-down method d. Reciprocal method 7. (LO 6.3) Which of the following allocation methods ignores the cost of services provided by one support department to another? a. Direct method b. Single-rate method c. Step-down method d. Reciprocal method 8. (LO 6.3) Which of the following methods provides the simplest support-department cost allocations? a. Direct method b. Equitable method c. Step-down method d. Reciprocal method 9. (LO 6.3) Which of the following methods provides the most accurate support-department cost allocations? a. Direct method b. Equitable method c. Step-down method d. Reciprocal method 10. (LO 6.3) Which of the following methods provides support department cost allocations that are 100 percent accurate?

I. Direct method II. Step-down method III. Reciprocal method a. b. c. d.

None of these III only I and III II and III

11. (LO 6.3) Which of the following methods is sometimes used to allocate production department costs to support departments?

I. Direct method II. Step-down method III. Reciprocal method a. b. c. d.

None of these III only I and III II and III

12. (LO 6.4) Costs used in a single production process that produces multiple products, but that cannot be attributed to individual products, are known as: a. sunk costs. b. separable costs. c. joint costs. d. combination costs.

13. (LO 6.4) Separable costs are costs that occur after the _________ and can be attributed to specific products. a. split-off point b. midpoint c. completion point d. separable point 14. (LO 6.5) Which of the following statements regarding joint products and by-products is true? a. Joint products are more profitable than by-products. b. Joint costs are typically allocated to by-products. c. Joint production processes always yield joint products and by-products. d. There are always more joint products than by-products.

15. (LO 6.5) Which joint product allocation method ignores revenue? a. Physical units method b. Sales value at split-off method c. Net realizable value method d. Constant gross margin method 16. (LO 6.5) Which joint product allocation method can sometimes cause negative costs to be allocated to products? a. Physical units method b. Sales value at split-off method c. Net realizable value method d. Constant gross margin method 17. (LO 6.5) Which joint product allocation method best assigns costs based on the causal relationship between costs and economic benefit received? a. Physical units method b. Sales value at split-off method

c. Net realizable value method d. Constant gross margin method 18. (LO 6.5) Which of the following joint cost allocation methods affects overall company profitability?

I. Physical units method II. Sales value at split-off method III. Net realizable value method IV. Constant gross margin method a. None of these b. I and II c. III and IV d. I, II, III, and IV 19. (LO 6.5) Which of the following joint cost allocation methods are affected by separable costs?

I. Physical units method II. Sales value at split-off method III. Net realizable value method IV. Constant gross margin method a. b. c. d.

I and III I and II III and IV I, II, III, and IV

20. (LO 6.5) In which of the following joint cost allocation methods is the profitability of one product most influenced by the separable costs of other products? a. Physical units method b. Sales value at split-off method c. Net realizable value method d. Constant gross margin method 21. (LO 6.1, 6.3; CMA) Wilcox Industrial has two support departments, the Information Systems Department and the Personnel Department, and two manufacturing departments, the Machining Department and the Assembly Department. The support departments service each other as well as the two production departments. Company studies have shown that the Personnel Department provides support to a greater number of departments than the Information Systems Department. If Wilcox uses the step-down method of departmental allocation, which one of the following cost allocations would not occur? Some of the costs of the: a. b. c. d.

Personnel Department will be allocated to the Information Systems Department.

Information Systems Department will be allocated to the Personnel Department.

Personnel Department will be allocated to the Assembly Department.

Personnel Department will be allocated to the Assembly Department and the Machining Department.

The general step-down sequence begins with the support department that renders the greatest amount of service. There, the Personnel Department would be first and the Information Systems Department would not be allocated to the Personnel Department.

22. (LO 6.1, 6.3; CMA) Render Inc. has four support departments (maintenance, power, human resources, and legal) and three operating departments. The support departments provide services to the operating departments as well as to the other support departments. The method of allocating the costs of the support departments that best recognizes the mutual services rendered by support departments to other support departments is the: a. direct allocation method. b. dual-rate allocation method. c. step-down allocation method. d. reciprocal allocation method.

The reciprocal allocation method allocates costs by explicitly including the mutual services provided among support departments and allows for the full incorporation of interdepartmental relationships.

23. (LO 6.4; CMA) In a production process where joint products are produced, the primary factor that will generally distinguish a joint product from a by-product is the: a. relative total sales value of the products. b. relative total volume of the products. c. relative ease of selling the products. d. accounting method used to allocate joint costs.

Joint products generally have a higher sales value than by-products.

(Level 1) Discussion Questions 1. (LO 6.1) Why do companies create support departments to provide companywide services?

Suggested Solution: Companywide services can save labor costs, eliminate duplicate work, and help ensure that services are standardized across the company.

2. (LO 6.1) Why do most companies allocate support department costs to production departments?

Suggested Solution: Most companies allocate support department costs to production departments because support department costs are viewed as a cost to providing goods and services produced by production

departments. As such, support department costs should be included as a cost of providing goods and services.

3. (LO 6.2, 6.3) There are various methods of allocating support-department costs. Explain why companies may sacrifice accuracy for convenience.

Suggested Solution: More accurate cost information comes at a cost. Better information can sometimes lead to better strategic decisions. However, if companies cannot justify the expense of obtaining better cost information, then they will likely settle for cost information that is less accurate, but easier to obtain or calculate.

4. (LO 6.2) The single-rate method may discourage managers of production departments from using support-department services. How will this affect a company’s costs in the short term and in the long term?

Suggested Solution: The single-rate method allocates all support department costs (both fixed and variable) using a single allocation base (such as direct labor hours). This method artificially inflates the allocation rate (because it includes fixed costs) and makes it appear as though all support department costs are variable. Facing artificially high allocation rates, production departments may limit their use of support department services.

In the short-term, variable support department costs will decrease, but fixed support department costs will continue to be incurred. In the long-term, companies may be able to decrease fixed support department costs. For example, they may decrease the number of employees working in the support departments.

5. (LO 6.3) For companies that have multiple support departments, describe how supportdepartment allocation methods differ with regard to how costs are allocated between support departments.

Suggested Solution: There are three methods of allocating support department costs in companies with multiple support departments: the direct method, the step-down method, and the reciprocal method.

In the direct method, support departments do not allocate costs to other support departments.

In the step-down method, support departments are first ranked. Higher ranked support departments allocate costs to lower-ranked support departments, but lower-ranked support departments do not allocate costs to higher-ranked support departments. In the reciprocal method, all support departments allocate costs to all other support departments.

6. (LO 6.3) Under the step-down method of allocating support department costs, support departments are ranked to determine the order in which costs are allocated to production departments. Explain why the order in which support departments are ranked can affect the allocation of support department costs to production departments.

Suggested Solution: In the step-down method, support departments are first ranked. Higher ranked support departments allocate costs to lower-ranked support departments, but lower-ranked support departments do not allocate costs to higher-ranked support departments. Because lowerranked support departments also carry costs from higher-ranked support departments, the amount allocated to production departments can differ based on these rankings.

7. (LO 6.3) Why is the reciprocal method theoretically superior to the direct and step-down methods of support department cost allocation?

Suggested Solution: Theoretically, support departments can consume the resources of other support departments.

Both the direct and step-down methods ignore this theoretical relationship between support departments to some degree because neither method accounts for all costs between support departments. In contrast, the reciprocal method accounts for this relationship when allocating costs.

8. (LO 6.4) Explain how companies determine the split-off point in a production process.

Suggested Solution: The split-off point is the point in production in which production processes begin to produce distinct products. Before the split-off point, production processes are necessary for all products, and cannot be assigned to individual products.

9. (LO 6.5) Managers can select among many methods for allocating joint costs. If managers desire to allocate joint costs to products is based on each products’ ability to cover those costs, which method should be selected? Explain your answer.

Suggested Solution: If managers desire to allocate joint costs to products based on each products’ ability to cover those costs, then they should use the net realizable value or constant gross margin method. The net realizable value, which is based on products’ revenue from final sales price less separable costs, allocates more costs to more profitable units. The constant gross margin method allocates costs in such a way that all products will report identical gross margins. The constant gross margin also allocates more costs to more profitable units but can also result in less profitable products having no or even negative joint costs.

10. (LO 6.5) Managers can select among many methods for allocating joint costs. If managers desire to reduce competition within the firm between employees working on different products, which method should be selected? Explain your answer.

Suggested Solution: The constant gross margin method is the best way to reduce competition between products.

The constant gross margin method allocates costs in such a way that all products will report identical gross margins. All cost savings by a product team would be shared by all product teams.

11. (LO 6.5) Explain the difference between joint products and by-products.

Suggested Solution: The distinction between joint products and by-products revolves around whether a product produced by a manufacturing process is a primary purpose of a joint manufacturing process.

Joint products are a primary purpose of a joint manufacturing process, while by-products are incidental to the process. In addition, by-products have little, or even negative, economic value.

12. (LO 6.5) Explain why production costs that occur after the split-off point are allocated to individual joint products rather than shared between joint products.

Suggested Solution: Production costs that occur after the split-off point can be attributed to a single product. As a result, it makes sense that the specific product for which these costs are necessary should be assigned to those products.

13. (LO 6.5) Manager compensation is often tied to the profitability of the product lines over which they have control. Explain why joint cost allocation methods may have a significant effect on manager compensation even though they have no effect on company profitability.

Suggested Solution: Joint cost allocation methods do not change a firm-wide financial statements, but can have a substantial impact on the reported profitability of individual product lines. The allocation method selected by a company can assign shared costs to managers over which they have no control.

14. (LO 6.5) Ultimately, regardless of joint cost allocation method, a company’s overall costs do not change. Explain how the choice of joint cost allocation method might influence the morale of employees and the cooperation between production departments.

Suggested Solution: Individuals are typically motivated when they perceive that their efforts affect outcomes. When employees are assigned uncontrollable costs, they may lose motivation to improve. Under the constant gross margin method, managers are assigned both joint and separable costs from all other divisions to equalize gross margin across the company, which can increase the perception that costs are not controllable. In addition, these managers have little individual incentive to cut costs because they receive only a portion of those cost savings.

15. (LO 6.5) What ethical considerations must a manager consider when determining how to allocate joint costs among departments?

Suggested Solution: Although allocation methods do not change company-wide financial statements, they can affect individual departments and products. Cost allocations may seem unfair to employees when they are uncontrollable and have a detrimental effect on reported performance and associated compensation. In addition, some allocation methods may increase competition between divisions or products, which could cause individuals to focus their efforts on decreasing their allocation of fixed costs, instead of improving the company as a whole.

(Level 1) Brief Exercises 1. (LO 6.1, 6.2) Golden Martini has two production departments, Bottling and Packaging.

Both departments are serviced by a single support department—information technology (IT). Support department costs are allocated to production departments on the basis of support department hours. The IT department has fixed costs of $450,000.

In addition, the maintenance department incurs a rate of $40 per hour in variable costs.

Budgeted and actual IT department hours in each production department are as follows: Production Department Budgeted Hours Actual Hours Production Department Bottling Packaging Total

Budgeted Hours 1,500 4,500 6,000

Actual Hours 1,200 5,000 6,200

Required If a single-rate cost allocation method is used, what amount of IT services cost will be budgeted for the Bottling department?

Bottling: $690,000 = $450,000 FC + $40/hr x 6,000 hr VC; $690,000/6,000 budgeted hours = $115.00 rate x 1,200 actual hours = $138,000

2. (LO 6.1, 6.2) The Bling Club has two production departments, Smelting and Repair, that

are both serviced by a single support department, machine maintenance. Support department costs are allocated on the basis of support department hours. The maintenance department has fixed costs of $140,000. In addition, the maintenance department incurs a rate of $30 per hour in variable costs. Budgeted and actual maintenance department hours in each production department are as follows:

Production Department Smelting Repair Total

Budgeted Hours 2,000 2,500 4,500

Actual Hours 1,800 3,000 4,800

Required If a single-rate cost allocation method is used, what amount of maintenance services cost will be allocated to the smelting department?

Smelting: $61.111 rate ($275,000/4,500 budgeted hours) * 1,800 actual hours = $110,000.00 275,000 = 140,000 FC + 30/hr*4,500 hr VC 3. (LO 6.1, 6.2) Style Cycle has two production departments, Frames and Tires, that are

both serviced by a single support department, engineering services. Support department costs are allocated on the basis of support department hours. The engineering services department has fixed costs of $35,000. In addition, the engineering services department incurs a rate of $45 per hour in variable costs. Budgeted and actual maintenance department hours in each production department are as follows: Production Department Frames Tires Total

Budgeted Hours 1,800 3,000 4,800

Actual Hours 2,000 3,000 5,000

Required If a dual-rate cost allocation method is used, what amount of engineering services cost will be allocated to Frames based on actual usage?

Frames: $45.00 VC rate * 2,000 actual hours + $7.292 FC rate ($35,000/4,800 budgeted hours) * 1,800 budgeted hours = $103,125.00

4. (LO 6.1, 6.3) Antique Charm has two support departments, machine maintenance (MM) and human resources (HR). Machine maintenance costs for the year total $300,000 and are allocated according to the number of budgeted machine hours expected for each department.

HR costs for the year total $150,000 and are allocated based on employee head count. Use the data below to answer the following question.

Support Departments Machine Human Maintenance Resources MM: Machine Hours HR: Number of employees Costs to Allocate

$

200 20 300,000

$

8 150,000

Production Departments Furniture Décor

$

18,000 40 -

$

Total 2,000 40 -

$

20,200 108 450,000

Required Using the direct method, what amount of machine maintenance costs will be allocated to the furniture department? $300,000 * (18,000 furniture hours / 20,000 total hours) = $270,000 5. (LO 6.1, 6.3) Amber Envy has two support departments, engineering services (ES) and human resources (HR). Engineering costs for the year total $500,000 and are allocated according to the number of budgeted labor hours expected for each department. HR costs for the year total $200,000 and are allocated based on employee head count. Use the data below to answer the following question.

Support Departments Engineering Human Services Resources ES: Labor Hours HR: Number of employees Costs to Allocate

$

500 18 500,000

$

10 200,000

Production Departments Candles Lotion

$

1,200 46 -

$

Total 400 56 -

Required Using the direct method, what amount of engineering costs will be allocated to the lotion department? $500,000 * (400 lotion hours / 1,600 total hours) = $125,000 6. (LO 6.1, 6.3) Tidal Splash has two support departments, engineering services (ES) and human resources (HR). Engineering costs for the year total $1,800,000 and are allocated according to the number of budgeted labor hours expected for each department. HR costs for the year total

$

2,100 130 700,000

$240,000 and are allocated based on employee head count. Use the data below to answer the following question.

Support Departments Engineering Human Services Resources ES: Labor Hours HR: Number of employees Costs to Allocate

$

600 4 1,800,000

$

Production Departments Boards Slides

3 240,000

$

6,000 10 -

Total 9,000 14 -

$

$

15,600 31 2,040,000

Required Using the step-down method, what amount of engineering costs will be allocated to the boards department if engineering allocates prior to human resources? $1,800,000 * (6,000 board hours / 15,000 total hours) = $720,000 7. (LO 6.1, 6.3) Lit Treasures has two support departments, machine maintenance (MM) and human resources (HR). Machine maintenance costs for the year total $45,000 and are allocated according to the number of budgeted machine hours expected for each department. HR costs for the year total $95,000 and are allocated based on employee head count. Use the data below to answer the following question.

Support Departments Machine Human Maintenance Resources MM: Machine Hours HR: Number of employees Costs to Allocate

1,000 $

Production Departments Sparklers Rockets -

10 45,000

4 $

95,000

$

25,000 5 -

$

30,000 25 -

Required Using the step-down method, what amount of maintenance costs will be allocated to the sparklers department if human resources allocates prior to the maintenance department?

Total costs to allocate from machine maintenance: $45,000 MM costs + $23,750 allocated from HR to MM [$95,000 * (10 MM employees / 40 total employees) = $68,750 Allocation to Sparklers: $68,750 * (25,000 board hours / 55,000 total hours) = $31,250 8. (LO 6.1, 6.3) Craftism has two support departments, information technology (IT) and custodial services (CS). IT allocates costs on the basis of labor hours, while custodial services allocates on

Total

$

56,000 44 140,000

the basis of square footage. Craftism allocates support department costs to production departments using the reciprocal method. Craftism reports the following data:

Support Departments Information Custodial Technology Services IT: Labor Hours CS: Square footage Costs to Allocate

200 $

600 250,000

500 $

Production Departments Macrame 2,000

500 350,000

$

Knitting 2,500

800 -

$

Total 5,200

1,600 -

$

3,500 600,000

Required Identify the two equations that should be used to determine the total costs allocated from the support departments.

IT = 250,000 + .2*CS (600 sq ft used by IT / 3,000 total sq ft) CS = 350,000 + .1*IT (500 IT hours used by CS / 5,000 total IT hours) 9. (LO 6.1, 6.3) Arts Vibe has two support departments: machine maintenance (MM) and human resources (HR). MM allocates costs on the basis of machine hours, while custodial services allocates on the basis of employee headcount. Arts Vibe allocates support department costs to production departments using the reciprocal method. Arts Vibe reports the following data:

MM: Machine Hours HR: Number of employees Costs to Allocate

Support Departments Production Departments Machine Human Abstract Impressionism Total Maintenance Resources 50 30 200 270 550 2 2 8 15 27 $ 50,000 $ 75,000 $ - $ - $ 125,000

Required Identify the two equations that should be used to determine the total costs allocated from the support departments.

MM = 50,000 + .08*HR(2 MM employees / 25 total employees) HR = 75,000 + .06*MM (30 machine hours used by HR / 500 total machine hours) 10. (LO 6.4, 6.5) Biochem incurs $180,000 in joint costs to produce 34,000 gallons of RX1 and 46,000 gallons of RX2. RX1 is sold for $4.00 per gallon, while RX2 is sold for $6.00 per gallon. Biochem allocates joint costs using the physical units method.

Required Determine the reported profit per gallon for RX1.

Proportion of Costs 42.5%

Sales Value Cost at SplitAllocation off/unit Cost/Unit Profit/Unit $ 76,500 $4.00 2.25 $1.75

Joint Physical Joint Costs Products Units $180,000.00 RX1 34,000.00

Unit gal.

RX2

46,000.00

gal.

57.5% $ 103,500

Total

80,000.00

gal.

100% $ 180,000

$6.00

2.25

$3.75

11. (LO 6.4, 6.5) Jack’s Lumber produces lumber from pine forests. Processing one batch creates two joint products—Grade A lumber and Grade B lumber—at a cost of $275,000.

During production, 200,000 board feet of Grade A lumber are produced, and can be sold at a price of $2.00 per board foot. In addition, one batch produces 300,000 board feet of Grade B lumber, which can be sold at $1.25 per board foot. Jack’s Lumber accounts for joint costs using the sales value at split-off method.

Required Determine the total profit per batch for Grade A lumber.

Joint Costs $ 275,000

Joint Products

Physical Units

Unit

Proportion of Costs

Cost Allocation

Sales Value at Split-off/unit

Total Sales Value

Total Profit

Grade A

200,000

BdFt

52%

$ 141,935

$2.00

$ 400,000

$

258,065

Grade B

300,000

BdFt

48%

$1.25

$ 375,000

$

241,935

Total

500,000

BdFt

$ 133,065 $ 100% 275,000

$ 775,000

$

500,000

12. (LO 6.4, 6.5) Sunny Inc. uses a joint production process costing $50,000 to produce 60,000 pounds of sunflower oil and 20,000 pounds of sunflower meal. Sunflower oil can be sold for $1.75/pound. Alternatively, Sunny can spend $60,000 to process oil further to produce 40,000 pounds of sunflower cream, which can be sold for $8.00/pound.

Sunflower meal can be sold for $1.00 per pound. Sunny can spend $30,000 to process meal into 15,000 pounds of sunflower flour, which can be sold for $1.50 per pound.

Required Determine the total profit for Sunny Inc.’s products, assuming the company chooses which products to produce based on maximizing profit.

Sales Joint Physical Values Unit Products units at Split-

Total Revenue at Splitoff

Product after Physical additional units processing

Unit

Sales value after additional

Less Cost NRV after of additional additional processing processing

Off

processing

Oil

60,000 lb.

$1.75

$105,000 Cream

40,000 lb.

$8.00

$60,000

$260,000

Meal

20,000 lb.

$1.00

$20,000 Flour

15,000 lb.

$1.50

$30,000

($7,500)

*Cream is produced rather than oil because the additional revenue per unit is greater than the additional cost to process further. Meal is produced rather than flour because the additional revenue per unit is not greater than the additional cost to process further. $280,000 total revenue - $50,000 joint costs = $230,000 total profit.

13. (LO 6.4, 6.5) Florange Growers uses a joint production process costing $75,000 to produce 20,000 pounds of orange juice and 5,000 pounds of pulp. Juice can be sold for $2.00/pound or processed further to make 2,000 pounds of an essential oil. The separable cost to produce the oil is $50,000, and oil can be sold for $100 per pound. Pulp can be sold for $0.50 per pound or processed further to produce 15,000 pounds of pelletized feedstock at a cost of $3,600. These pellets can be sold for $1.25 per pound. Florange Growers uses the Net Realizable Value method to allocate joint costs.

Required Determine the total joint cost allocation for each of Florange’s products, assuming the company chooses which products to produce based on maximizing profit.

Allocation Amount $ 75,000.00

Joint Physical Products Units Oil 2,000

Revenue/ Unit Unit lb. $ 100.00

Feed pellets Total

lb.

15,000

$ 1.25

Less Total Separable Revenue Costs $200,000.00 $ 50,000.00

NRV $ 150,000

Proportion Jo of Costs Al 90.83% $ 6

$18,750.00 $ 3,600.00 $ 15,150 $218,750.00 $ 53,600.00 $ 165,150

9.17% $ 6 100% $ 7

14. (LO 6.4, 6.5) Palm Life uses a joint production process costing $120,000 to produce 50,000 pounds of palm oil and 30,000 pounds of pulp. Palm oil can be sold for $3.00/pound, or processed further to make 30,000 pounds of cosmetics products. The

separable cost to produce the cosmetics is $40,000, and cosmetics can be sold for $7.00 per pound. Pulp can be sold for $0.40 per pound or processed further to produce 25,000 pounds of fuel at a cost of $8,000. Fuel can be sold for $0.50 per pound. Palm Life uses the Net Realizable Value method to allocate joint costs.

Required Determine the total joint cost allocation for each of Palm Life’s products, assuming the company chooses which products to produce based on maximizing profit.

Joint Costs

Joint Products

$ 120,000

oil

Split-off Quantity

Unit

Sales Value at Splitoff/unit

Total Sales Value at Split-off

lb.

$3.00

$150,000.00

50,000.00

Processed quantity

Total sep. costs

Separable Costs/unit

Processed Selling price/unit

Process Further?

New Product

$40,000.00

$1.33

$7.00

Y

Cosmetics

$0.32

$0.50

N

Fuel

30,000.00

pulp

30,000.00

lb.

$0.40

$12,000.00

25,000.00

$8,000.00

Total

80,000.00

lb.

$162,000.00

55,000.00

$48,000.00

Allocation Amount

Final Product

Physical Units

Unit

Revenue/ Unit

Total Revenue

Less Separable Costs

NRV

$120,000

Cosmetics

30,000

lb.

$7.00

$210,000

$40,000

$170,000

93.41%

$112,087.91

Pulp

30,000

lb.

$0.40

$12,000

$0

$12,000

6.59%

$7,912.09

$222,000

$40,000

$182,000

100%

$120,000.00

Total

Proportion of Costs

Joint Cost Allocation

15. (LO 6.4, 6.5) Hobby Hub has joint production costs of $50,000. The production process creates two products and a by-product. The following financial information for the latest period has been compiled:

Product A Product B Total

Revenue $ 40,000 $ 50,000 $ 90,000

Allocated Joint Costs $ 18,000 $ 31,000 $ 49,000

Separable Costs $ 10,000 $ 5,000 $ 15,000

Profit $ 12,000 $ 14,000 $ 26,000

Required Determine the net realizable value of Hobby Hub’s by-product during the period.

Ans: $1,000 Companies can either report the profit of their by-products on the financial statements or use by-product profits to reduce joint costs. In this case, Hobby Hub incurred $50,000 in joint costs but allocated only $49,000, indicating that the profits generated from the by-product were $1,000.

16. (LO 6.1, 6.3; CMA) Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for next year.

Support Departments Operating Departments Maintenance Systems Machining Fabrication Budgeted overhead

$360,000

Total

$95,000

$200,000

$300,000

$955,000

10%

50% 45%

40% 50%

100% 100%

Support work furnished: From Maintenance From Systems 5%

If Adam Corporation uses the step-down method, beginning with the Maintenance Department, to allocate support department costs to production departments, what is the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products?

Ans: $441,898.

Total overhead in the Machining Department is $442,053.63 as presented below.

Machining overhead

$200,000

Maintenance ($360,000 x .5)

180,000

Systems [($95,000 + $36,000*) x .473864**]

61,898

Total overhead

$441,898

*Maintenance allocated to Systems ($360,000 x 10%) **45% systems allocation to machining / 95% total allocation (5% allocation to maintenance is ignored) 17. (LO 6.4, 6.5; CMA) Tempo Company produces three products from a joint process. The three products are sold after further processing as there is no market for any of the products at the split-off point. Joint costs per batch are $315,000. Other product information is shown below.

Product A

Product B

Product C

20,000

30,000

50,000

marketing cost per unit

$ .70

$3.00

$1.72

Final sales value per unit

5.00

6.00

7.00

Units produced per batch Further processing and

If Tempo uses the net realizable value method of allocating joint costs, how much of the joint costs will be allocated to each unit of Product C?

Ans. $3.78 The joint cost per unit of Product C is $3.78 calculated as follows.

Net realizable value: Product A

20,000 x ($5.00 - $.70)

=

$ 86,000

Product B

30,000 x ($6.00 - $3.00)

=

90,000

Product C

50,000 x ($7.00 - $1.72)

=

264,000

Total

Product C allocation

Unit joint cost

$440,000

$264,000 ÷ $440,000

=

60%

$315,000 x 60%

=

$189,000

$189,000 ÷ 50,000

=

$3.78

(Level 1) Problems 1. (LO 6.1, 6.2)

Nicabrew has two production departments that each produce one beverage: Pinolillo and Cacao. The maintenance department is a support department that provides services to both production departments. Support department costs are allocated to Pinolillo and Cacao departments on the basis of support department hours. The maintenance department has fixed costs of $200,000. In addition, the maintenance department incurs a rate of $25 per hour in variable costs. Budgeted and actual maintenance department hours in each production department are as follows:

Production Department Pinolillo Cacao Total

Budgeted Hours 2,500 1,500 4,000

Actual Hours 3,000 1,600 4,600

Required: a. If a single-rate cost allocation method is used, what amount of maintenance cost will be budgeted for each production department?

Pinolillo: $75 rate (=$300,000/4,000 budgeted hours) * 2,500 budgeted hours = $187,500 Cacao: $75 rate (=$300,000/4,000 budgeted hours) * 1,500 budgeted hours = $112,500 b. If a single-rate cost allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage?

Pinolillo: $75 rate (=$300,000/4,000 budgeted hours) * 3,000 actual hours = $225,000 Cacao: $75 rate (=$300,000/4,000 budgeted hours) * 1,600 actual hours = $120,000 c. If a dual-rate cost allocation method is used, what amount of maintenance cost will be budgeted for each department?

Pinolillo: $25.00 VC rate * 2,500 budgeted hours + $50 FC rate (=$200,000/4,000 budgeted hours) * 2,500 budgeted hours = $187,500 Cacao: $25.00 VC rate * 1,500 budgeted hours + $50.00 FC rate ($200,000/4,000 budgeted hours) * 1,500 budgeted hours = $112,500 d. If a dual-rate cost allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage?

Pinolillo: $25.00 VC rate * 3,000 actual hours + $50.00 FC rate ($200,000/4,000 budgeted hours) * 2,500 budgeted hours = $200,000 Cacao: $25.00 VC rate * 1,600 actual hours + $50.00 FC rate ($200,000/4,000 budgeted hours) * 1,500 budgeted hours = $115,000

2. (LO 6.1, 6.3) Posh Bakery has two support departments, machine maintenance (MM) and human resources (HR). Machine maintenance costs for the year total $500,000 and are allocated according to the number of budgeted machine hours expected for each department.

HR costs for the year total $200,000 and are allocated based on employee head count. Use the data below to allocate support department costs to Posh Bakery’s two production departments: Pies and Cakes.

MM: Machine hours HR: Number of employees Costs to allocate

Support Departments Machine Human Maintenance Resources 2,000 — 20 $ 500,000

Production Departments

7 $ 200,000

Pies 15,000

Cakes 5,000

Total 22,000

40 —

40 —

107 $ 700,000

$

$

Required: Prepare a schedule that allocates support department costs using the direct method. Compute the total amount of support costs allocated to each operating department: Pies and Cakes.

Support Departments Machine Maintenance MM: Machine Hours

Pies -

20

Costs to Allocate

$

500,000

Allocation of MM costs

$

(500,000)

$

-

Allocation of HR costs Total Cost Allocation

Human Resources

2,000

HR: Number of employees

Production Departments

200,000

$

(200,000)

$

-

Total

15,000

5,000

22,000

40

40

107

7 $

Cakes

$

-

$

-

$

375,000

$

125,000

$

100,000

$

100,000

-

225,000

700,000

$

475,000

$

$

700,000 -

3. (LO 6.1, 6.3) Posh Bakery has two support departments, machine maintenance (MM) and human resources (HR). Machine maintenance costs for the year total $500,000 and are allocated according to the number of budgeted machine hours expected for each department.

HR costs for the year total $200,000 and are allocated based on employee head count. Use the data below to allocate support department costs to Posh Bakery’s two production departments: Pies and Cakes.

Support Departments Machine Human Maintenance Resources MM: Machine Hours HR: Number of employees Costs to Allocate Required

2,000 20 $ 500,000

Production Departments Pies -

Cakes

Total

15,000

5,000

22,000

7

40

40

$ 200,000

$

107 $ 700,000

-

$

-

Prepare a schedule that allocates support department costs using the step-down method. Posh Bakery has decided to allocate machine maintenance costs first. Compute the total amount of support costs allocated to each operating department: Pies and Cakes.

Support Departments Machine Human Maintenance Resources MM: Machine Hours HR: Number of employees

2,000

Allocation of MM costs

20 $ 500,000 $ (500,000)

Allocation of HR costs

$

Total Cost Allocation

$

Costs to Allocate

Production Departments Pies -

7 $ 200,000 -

-

$ $ (200,000)

-

$

-

Cakes

Total

15,000

5,000

22,000

40

40

107 $ 700,000

$ $ 375,000 $ 100,000 $ 475,000

-

$ $ 125,000 $ 100,000 $ 225,000

-

700,000

4. (LO 6.1, 6.3) Posh Bakery has two support departments, machine maintenance (MM) and human resources (HR). Machine maintenance costs for the year total $500,000 and are allocated according to the number of budgeted machine hours expected for each department.

HR costs for the year total $200,000 and are allocated based on employee head count. Use the data below to allocate support department costs to Posh Bakery’s two production departments: Pies and Cakes.

MM: Machine Hours HR: Number of employees Costs to Allocate

Support Departments Machine Human Maintenance Resources 2,000 20 7 $ 500,000 $ 200,000

Production Departments

$

Pies 15,000 40 -

Cakes 5,000 40 $ -

Required Prepare a schedule that allocates support department costs using the step-down method. Posh Bakery has decided to allocate human resources costs first. Compute the total amount of support costs allocated to each operating department: Pies and Cakes.

Support Departments

Production Departments

$

Total 22,000 107 700,000

MM: Machine hours HR: Number of employees Costs to allocate Allocation of MM costs Allocation of HR costs Total cost allocation

Machine Maintenance NA

Human Resources -

20 $ 500,000 $ (540,000) $ 40,000 $ -

NA $ 200,000 $ (200,000) $ -

Pies 15,000

Cakes 5,000

Total 20,000

40 $ $ 405,000 $ 80,000 $ 485,000

40 $ $ 135,000 $ 80,000 $ 215,000

100 $ 700,000 $ 700,000

5. (LO 6.1, 6.3) Posh Bakery has two support departments, machine maintenance (MM) and human resources (HR). Machine maintenance costs for the year total $500,000 and are allocated according to the number of budgeted machine hours expected for each department.

HR costs for the year total $200,000 and are allocated based on employee head count. Use the data below to allocate support department costs to Posh Bakery’s two production departments: Pies and Cakes.

MM: Machine hours HR: Number of employees Costs to allocate

Support Departments Machine Human Maintenance Resources 2,000 — 20 7 $ 500,000 $ 200,000

Production Departments Pies 15,000 40 $ —

Cakes 5,000 40 $ —

Total 22,000 107 $ 700,000

Required Prepare a schedule that allocates support department costs using the reciprocal method. Identify the equations that should be used to determine the costs that should be allocated by the support departments. Compute the total amount of support costs allocated to each operating department: Pies and Cakes.

Ans: MM = 500,000 + .2 * HR HR = 200,000 + 0*MM

Support Departments

MM: Machine hours HR: Number of employees

Machine Maintenance 2,000 20

Human Resources 7

Production Departments Pies 15,000

Cakes 5,000

Total 22,000

40

40

107

Costs to allocate Allocation of MM costs Allocation of HR costs Total cost allocation

$ 500,000 $ (540,000) $ 40,000 $ -

$ 200,000 $ $ (200,000) $ -

$ $ 405,000 $ 80,000 $ 485,000

$ 700,000 $ 700,000

$ $ 135,000 $ 80,000 $ 215,000

6. (LO 6.1, 6.3) Williams Electric Corp. has two support departments, Human Resources (HR) and Information Technology (IT). HR costs for the year total $300,000 and are allocated based on employee count. IT costs for the year total $420,000 and are allocated according to the number of hours that employees are logged onto the computer network. Use the data below to allocate support-department costs to Williams Electric Corp.’s two production departments: Interior and Exterior.

Support Departments Production Departments Human Information Resources Technology Interior Exterior HR: Number of employees IT: Network hours Costs to allocate

5 40,000 $ 300,000

20 12,000 $ 420,000

35 45,000 $ —

Total

45 15,000 $ —

105 112,000 $ 720,000

Required Prepare a schedule that allocates support department costs using the direct method. Compute the total amount of support costs allocated to each operating department: Interior and Exterior.

HR: Number of employees IT: Network Hours Costs to Allocate Allocation of HR costs Allocation of IT costs Total Cost Allocation

Support Departments Human Information Resources Technology 5 20 40,000 12,000 $ 300,000 $ 420,000 $ (300,000) $ (420,000) $ - $ -

Production Departments Interior

$ $ $ $

35 45,000 131,250 315,000 446,250

Exterior

$ $ $ $

45 15,000 168,750 105,000 273,750

7. (LO 6.1, 6.3) Williams Electric Corp. has two support departments, Human Resources (HR) and Information Technology (IT). HR costs for the year total $300,000 and are allocated based on

Total

$

105 112,000 720,000 720,000

employee count. IT costs for the year total $420,000 and are allocated according to the number of hours that employees are logged on to the computer network. Use the data below to allocate support-department costs to Williams Electric Corp.’s two production departments: Interior and Exterior.

Support Departments Production Departments Human Information Resources Technology Interior Exterior HR: Number of employees IT: Network hours Costs to allocate

5 40,000 $ 300,000

20 12,000 $ 420,000

35 45,000 $ —

Total

45 15,000 $ —

105 112,000 $ 720,000

Required Prepare a schedule that allocates support department costs using the step-down method.

Williams Electric has decided to allocate HR costs first. Compute the total amount of support costs allocated to each operating department: Interior and Exterior.

HR: Number of employees IT: Network Hours Costs to Allocate Allocation of HR costs Allocation of IT costs Total Cost Allocation

Support Departments Human Information Resources Technology 5 20 40,000 12,000 $ 300,000 $ 420,000 $ (300,000) $ 60,000 $ - $ (480,000) $ - $ -

Production Departments Interior

$ $ $ $

35 45,000 105,000 360,000 465,000

Exterior

$ $ $ $

45 15,000 135,000 120,000 255,000

8. (LO 6.1, 6.3) Williams Electric Corp. has two support departments, Human Resources (HR) and Information Technology (IT). HR costs for the year total $300,000 and are allocated based on employee count. IT costs for the year total $420,000 and are allocated according to the number of hours that employees are logged on to the computer network. Use the data below to allocate support-department costs to Williams Electric Corp.’s two production departments: Interior and Exterior.

HR: Number of employees IT: Network hours

Support Departments Production Departments Human Information Resources Technology Interior Exterior

Total

5 40,000

105 112,000

20 12,000

35 45,000

45 15,000

Total

$

105 112,000 720,000 720,000

Costs to allocate

$ 300,000

$ 420,000

$

—

$

—

$ 720,000

Required Prepare a schedule that allocates support department costs using the step-down method.

Williams Electric has decided to allocate IT costs first. Compute the total amount of support costs allocated to each operating department: Interior and Exterior.

HR: Number of employees IT: Network Hours Costs to Allocate Allocation of HR costs Allocation of IT costs Total Cost Allocation

Support Departments Human Information Resources Technology 5 20 40,000 12,000 $ 300,000 $ 420,000 $ (468,000) $ $ 168,000 $ (420,000) $ - $ -

Production Departments Interior

$ $ $ $

35 45,000 204,750 189,000 393,750

Exterior

$ $ $ $

45 15,000 263,250 63,000 326,250

9. (LO 6.1, 6.3) Williams Electric Corp. has two support departments, Human Resources (HR) and Information Technology (IT). HR costs for the year total $300,000 and are allocated based on employee count. IT costs for the year total $420,000 and are allocated according to the number of hours that employees are logged on to the computer network. Use the data below to allocate support-department costs to Williams Electric Corp.’s two production departments: Interior and Exterior.

Support Departments Production Departments Human Information Resources Technology Interior Exterior HR: Number of employees IT: Network hours Costs to allocate

5 40,000 $ 300,000

20 12,000 $ 420,000

35 45,000 $ —

45 15,000 $ —

Total 105 112,000 $ 720,000

Required Prepare a schedule that allocates support department costs using the reciprocal method. Identify the equations that should be used to determine the costs that should be allocated by the support departments. Compute the total amount of support costs allocated to each operating department: Interior and Exterior.

Answer HR = 300,000 + .4IT

Total

$

105 112,000 720,000 720,000

IT = 420,000 + .2HR IT = 420,000 + .2(300,000 + .4IT) IT = 420,000 + 60,000 + .08IT .92IT = 480,000 IT = 521,739.1304 HR = 300,000 + .4(521,739.1304) HR = 508,695.6522

HR: Number of employees IT: Network Hours Costs to Allocate Allocation of HR costs Allocation of IT costs Total Cost Allocation

Support Departments Human Information Resources Technology 5 20 40,000 12,000 $ 300,000 $ 420,000 $ (508,696) $ 101,739 $ 208,696 $ (521,739) $ - $ -

Production Departments Interior

$ $ $ $

35 45,000 178,043 234,783 412,826

Exterior

$ $ $ $

45 15,000 228,913 78,261 307,174

10. (LO 6.4, 6.5) Tactile Inc. uses a joint production process to produce two bonding agents, Holdtight and Tilelock, used in the masonry industry. Joint costs are $30,000 per batch. The joint production process produces 40,000 pounds of Holdtight, which can be sold for $1.50/pound, and 60,000 pounds of Tilelock, which can be sold for $2.00/pound. Holdtight can be processed further to produce 30,000 pounds of Holdtight Plus at a cost of $20,000. Holdtight Plus sells for $2.50 per pound. Tilelock can be processed further to produce 50,000 pounds of Tilelock Plus at a cost of $40,000. Tilelock Plus sells for $4.00 per pound. Tactile uses the physical units method to allocate joint costs.

Required a. What proportion of joint costs should be allocated to Holdtight and Tilelock?

Ans: 40% Holdtight and 60% Tilelock respectively b. Determine how the joint costs should be allocated to each product by using the physical units method.

Allocation Amount

Proportion of Costs*

Cost Allocation

Holdtight 40,000 lb.

40% Tilelock 60,000 lb.

60% Total 100,000 lb.

100% *Proportion calculated as physical units at split-off of each product / total physical units.

$ 12,000 $ 18,000 $ 30,000

$ 30,000.00

Joint Products

Physical Units

Unit

Total

$

105 112,000 720,000 720,000

11. (LO 6.4, 6.5) Tactile Inc. uses a joint production process to produce two bonding agents, Holdtight and Tilelock, used in the masonry industry. Joint costs are $30,000 per batch. The joint production process produces 40,000 pounds of Holdtight, which can be sold for $1.50/pound, and 60,000 pounds of Tilelock, which can be sold for $2.00/pound. Holdtight can be processed further to produce 30,000 pounds of Holdtight Plus at a cost of $20,000. Holdtight Plus sells for $2.50 per pound. Tilelock can be processed further to produce 50,000 pounds of Tilelock Plus at a cost of $40,000. Tilelock Plus sells for $4.00 per pound. Tactile uses the sales value at split-off method to allocate joint costs.

Required a. What proportion of joint costs should be allocated to Holdtight and Tilelock?

Ans: 33.3% Holdtight and 66.7% Tilelock respectively

b. Determine how the joint costs should be allocated to each product by using the sales value at split-off method.

Allocation Amount

$ 30,000.00

Joint Products

Physical Units

Unit

Sales Value at Splitoff/Unit $1.50 $2.00

Total Sales Value at Split-off

Proportion Cost Allocation of Costs*

Holdtight 40,000 lb. $ 60,000.00 33% Tilelock 60,000 lb. $ 120,000.00 67% Total 100,000 lb. $ 180,000.00 100% *Proportion calculated as sales value at split-off of each product / total sales value.

$ 10,000 $ 20,000 $ 30,000

12. (LO 6.4, 6.5) Tactile Inc. uses a joint production process to produce two bonding agents, Holdtight and Tilelock, used in the masonry industry. Joint costs are $30,000 per batch. The joint production process produces 40,000 pounds of Holdtight, which can be sold for $1.50/pound, and 60,000 pounds of Tilelock, which can be sold for $2.00/pound. Holdtight can be processed further to produce 30,000 pounds of Holdtight Plus at a cost of $20,000. Holdtight Plus sells for $2.50 per pound. Tilelock can be processed further to produce 50,000 pounds of Tilelock Plus at a cost of $40,000. Tilelock Plus sells for $4.00 per pound. Tactile uses the net realizable value method to allocate joint costs.

Required

a. Determine which products should be produced. In other words, should products be sold as is or processed further?

Ans: Holdtight and Tilelock Plus should be produced. Tactile can maximize profit by selling Holdtight as is (producing Holdtight Plus results in $5,000 less in profit), and producing Tilelock Plus from Tilelock (producing Tilelock Plus results in $40,000 more in profit).

b. What proportion of joint costs should be allocated to Holdtight and Tilelock?

Ans: 27.27% and 72.73% respectively

c. Determine how the joint costs should be allocated to each product by using the net realizable value method. *Proportion calculated as NRV of each product / total NRV Allocation Amount

Joint Products

Physical Units

Un it

Revenue /Unit

Total Revenue

Less Separable costs

NRV

Proportio n of Costs*

Cost Allocation

$ 30,000.00

Holdtight

40000

lb.

$ 1.50

$60,000.00

$ -

27.27%

$ 8,181.82

Tilelock Plus

50000

lb.

$ 4.00

$200,000.0 0

$40,000.0 0

$ 60,000 $ 160,00 0 $ 220,00 0

72.73%

$ 21,818.18

100%

$ 30,000.00

Total

13. (LO 6.4, 6.5) Tactile Inc. uses a joint production process to produce two bonding agents, Holdtight and Tilelock, used in the masonry industry. Joint costs are $30,000 per batch. The joint production process produces 40,000 pounds of Holdtight, which can be sold for $1.50/pound, and 60,000 pounds of Tilelock, which can be sold for $2.00/pound. Holdtight can be processed further to produce 30,000 pounds of Holdtight Plus at a cost of $20,000. Holdtight Plus sells for $2.50 per pound. Tilelock can be processed further to produce 50,000 pounds of Tilelock Plus at a cost of $40,000. Tilelock Plus sells for $4.00 per pound. Tactile uses the constant gross margin method to allocate joint costs.

Required a. Determine which products should be produced. In other words, should products be sold as is or processed further?

Ans: Holdtight and Tilelock Plus should be produced. Tactile can maximize profit by selling Holdtight as is (producing Holdtight Plus results in $5,000 less in profit), and producing Tilelock Plus from Tilelock (producing Tilelock Plus results in $40,000 morein profit).

b. What is the company’s gross margin percentage?

Ans: 73.08%

c. Determine how the joint costs should be allocated to each product by using the constant gross margin method.

Allocation Joint Amount Products $ 30,000.00

Physical Unit Revenue/ Total Units Unit Revenue

Holdtight 40000

lb.

Separable Allocated Costs Joint Costs

Gross Profit

$ 1.50

Gross Margin

$ $ $16,153.85 $43,846.15 73.08% 60,000.00 Tilelock 50000 lb. $ 4.00 $ $ $13,846.15 $ 73.08% Plus 200,000.00 40,000.00 146,153.85 Total $ $ $30,000.00 $ 73.08% 260,000.00 40,000.00 190,000.00 *Gross margin for the company is calculated by dividing gross profit by revenue. The same gross margin is used for each product to determine gross profit (revenue * gross margin) for each individual product.

Allocated joint costs are calculated by using the following formula: Gross profit – revenue – separable costs.

14. (LO 6.4, 6.5) Deep Sea Drilling extracts oil from the seabed. Each week, oil is extracted and processed at a cost of $100,000. From this process, Deep Sea Drilling produces 50,000 gallons of Product A, which sells for $1.00 per gallon, and 30,000 gallons of Product B, which sells for $1.25 per gallon. Each of these products can be processed further into more valuable products.

Product A can be processed to produce 50,000 gallons of petroleum for an additional $40,000 in costs, while Product B can be processed into 25,000 gallons of diesel for an additional $30,000 in costs. Petroleum can be sold for $2.50 per gallon, and diesel sells for $3.00 per gallon. Deep Sea Drilling allocates joint costs using the physical units method.

Required a. What proportion of joint costs should be allocated to Product A and Product B? Ans: Product A 62.5% and Product B 37.5% respectively

b. Determine how the joint costs should be allocated to each product by using the physical units method.

Allocation Amount

Joint Products

Physical Units

Unit Proportion of Costs*

Cost Allocation

$ 100,000.00 Petroleum 50,000 gal. 62.5% $ 62,500 Diesel 30,000 gal. 37.5% $ 37,500 Total 80,000 gal. 100% $ 100,000 *Proportion calculated as physical units at split-off of each product / total physical units.

15. (LO 6.4, 6.5) Deep Sea Drilling extracts oil from the seabed. Each week, oil is extracted and processed at a cost of $100,000. From this process, Deep Sea Drilling produces 50,000 gallons of Product A, which sells for $1.00 per gallon, and 30,000 gallons of Product B, which sells for $1.25 per gallon. Each of these products can be processed further into more valuable products.

Product A can be processed to produce 50,000 gallons of petroleum for an additional $40,000 in costs, while Product B can be processed into 25,000 gallons of diesel for an additional $30,000 in costs. Petroleum can be sold for $2.50 per gallon, and diesel sells for $3.00 per gallon. Deep Sea Drilling allocates joint costs using the sales value at split-off method.

Required a. What proportion of joint costs should be allocated to Product A and Product B? Ans: Product A 57.14% and Product B 42.86% respectively

b. Determine how the joint costs should be allocated to each product by using the sales value at split-off method.

Allocation Amount $ 100,000.00

Joint Product s

Physical Units

Uni t

Sales Value at Splitoff/Unit

Total Sales Value at Split-off

Proportion of Costs*

Product 50,000 gal. $ 1.00 $50,000.00 57.14% A Product 30,000 gal. $ 1.25 $37,500.00 42.86% B Total 80,000 gal. $87,500.00 100% *Proportion calculated as sales value at split-off of each product / total sales value.

Cost Allocation $ 57,143 $ 42,857 $ 100,000

16. (LO 6.4, 6.5) Deep Sea Drilling extracts oil from the seabed. Each week, oil is extracted and processed at a cost of $100,000. From this process, Deep Sea Drilling produces 50,000 gallons of Product A, which sells for $1.00 per gallon, and 30,000 gallons of Product B, which sells for $1.25 per gallon. Each of these products can be processed further into more valuable products.

Product A can be processed to produce 50,000 gallons of petroleum for an additional $40,000 in costs, while Product B can be processed into 25,000 gallons of diesel for an additional $30,000 in

costs. Petroleum can be sold for $2.50 per gallon, and diesel sells for $3.00 per gallon. Deep Sea Drilling allocates joint costs using the net realizable value method.

Required a. Determine which products should be produced. In other words, should products (Product A and B) be sold as is or processed further (into Petroleum and Diesel)?

Ans: Producing Petroleum and Diesel maximizes profit because the additional revenue that these products generate is greater than the processing costs required to process the products further. Producing Petroleum results in $35,000 in additional profit and producing diesel results in $7,500 in additional profit.

b. What proportion of joint costs should be allocated to Product A and Product B? Ans: Product A 65.38% and Product B 34.62% respectively

c. Determine how the joint costs should be allocated to each product by using the net realizable value method.

Allocation Amount

Joint Products

Physical Units

Unit

Revenue/ Unit

Total Revenue

Less Separable Costs

NRV

Proportion of Costs*

Cost Allocation

$ 100,000.00

Petroleum

50,000

gal.

$ 2.50

$ 125,000.00

$ 40,000.00

$ 85,000

65.38%

$ 65,384.62

Diesel

25,000

gal.

$ 3.00

$ 75,000.00

$ 30,000.00

$ 45,000

34.62%

$ 34,615.38

$ 130,000

100%

$ 100,000.00

Total

*Proportion calculated as NRV of each product / total NRV.

17. (LO 6.4, 6.5) Deep Sea Drilling extracts oil from the seabed. Each week, oil is extracted and processed at a cost of $100,000. From this process, Deep Sea Drilling produces 50,000 gallons of Product A, which sells for $1.00 per gallon, and 30,000 gallons of Product B, which sells for $1.25 per gallon. Each of these products can be processed further into more valuable products.

Product A can be processed to produce 50,000 gallons of petroleum for an additional $40,000 in costs, while Product B can be processed into 25,000 gallons of diesel for an additional $30,000 in costs. Petroleum can be sold for $2.50 per gallon, and diesel sells for $3.00 per gallon. Deep Sea Drilling allocates joint costs using the constant gross margin method.

Required a. Determine which products should be produced. In other words, should products (Product A and B) be sold as is or processed further (into Petroleum and Diesel)?

Ans: Producing Petroleum and Diesel maximizes profit because the additional revenue that these products generate is greater than the processing costs required to process the products further. Producing Petroleum results in $35,000 in additional profit and producing diesel results in $7,500 in additional profit. b. What is the company’s gross margin?

Ans: 15.0% c. Determine how the joint costs should be allocated to each product by using the constant gross margin method.

Allocation Amount

Joint Products

Physical Unit Revenue/ Total Units Unit Revenue

$ Petroleum 50,000 100,000.00 Diesel 25,000

gal.

Separable Costs

Allocated Joint Costs

Gross Profit

$ 2.50

$ $ 40,000.00 $ 66,250.00 $ 18,750.00 125,000.00 gal. $ 3.00 $ $ 30,000.00 $ 33,750.00 $ 11,250.00 75,000.00 Total $ $ 70,000.00 $ 100,000.00 $ 30,000.00 200,000.00 *Gross margin for the company is calculated by dividing gross profit by revenue. The same gross margin is used for each product to determine gross profit (revenue * gross margin) for each individual product.

Allocated joint costs are calculated by using the following formula: Gross profit – revenue – separable costs.

18. (LO 6.4, 6.5; CMA) Sonimad Sawmill Inc. (SSI) purchases logs from independent timber contractors and processes the logs into the following three types of lumber products:  Studs for residential building (walls, ceilings)  Decorative pieces (fireplace mantels, beams for cathedral ceilings)  Posts used as support braces (mine support braces, braces for exterior fences around ranch properties) These products are the result of a joint sawmill process that involves removal of bark from the logs, cutting the logs into a workable size (ranging from 8 to 16 feet in length), and then cutting the individual products from the logs, depending on the type of wood (pine, oak, walnut, or maple) and the size (diameter) of the log. The joint process results in the following costs and output of products for a typical month.

Joint production costs:

Materials (rough timber logs) Debarking (labor and overhead) Sizing (labor and overhead) Product cutting (labor and overhead) Total joint costs

$ 500,000 50,000 200,000 250,000 $1,000,000

Product yield and average sales value on a per-unit basis from the joint process are as follows.

Product Monthly Output Fully Processed Sales Price Studs Decorative pieces Posts

75,000 5,000 20,000

$ 8 100 20

The studs are sold as rough-cut lumber after emerging from the sawmill operation without further processing by SSI. Also, the posts require no further processing. The decorative pieces must be planed and further sized after emerging from the SSI sawmill. This additional processing costs SSI $100,000 per month and normally results in a loss of 10% of the units entering the process. Without this planning and sizing process, there is still an active intermediate market for the unfinished decorative pieces where the sales price averages $60 per unit.

Required a. Based on the information given for Sonimad Sawmill Inc., allocate the joint processing costs of $1,000,000 to each of the three product lines using the 1. relative sales value method at split-off.

2. physical output (volume) method at split-off.

3. estimated net realizable value method.

ANSWER 1. Relative sales value method at split-off Product

Monthly Output Sales Price Split-off Value % of Sales

Studs Decorative pieces Posts Totals

75,000 5,000 20,000

$ 8 60 20

$ 600,000 300,000 400,000 $1,300,000

2. Physical output (volume) method at split-off Product

Monthly Output % of Output Allocated Costs

Studs Decorative pieces Posts Totals

75,000 5,000 20,000 100,000

75.00% 5.00% 20.00% 100.00%

$ 750,000 50,000 200.000 $1,000,000

46.15% 23.08% 30.77% 100.00%

Allocated Costs $ 461,539 230,769 307,692 $1,000,000

3. Estimated net realizable value method Product

Monthly Output Sales Price

Studs Decorative pieces Posts Totals

75,000 4,5001 20,000

$ 8 100 20

Net Value % of Net Value Allocated Costs $ 600,000 350,0002 400,000 $1,350,000

44.44% 25.93% 29.63% 100.00%

$ 444,445 259,259 296,296 $1,000,000

Notes: (1) 5,000 monthly units of output – 10% normal spoilage = 4,500 good units (2) 4,500 good units x $100 = $450,000 – further processing costs of $100,000 = $350,000

b. Prepare an analysis for Sonimad Sawmill Inc. to compare processing the decorative pieces further, as it presently does, with selling the rough-cut product immediately at split-off. Recommend which action the company should take, and be sure to provide all calculations.

ANSWER Presented below is an analysis for Sonimad Sawmill comparing the processing of decorative pieces further versus selling the rough-cut product immediately at split-off. Based on this analysis, it is recommended that Sonimad further process the decorative pieces because this action results in an additional contribution of $50,000.

Units Dollars Monthly unit output 5,000 Less normal further processing shrinkage 500 Units available for sale 4,500 Final sales value (4,500 units @$100 each) Less sales value at split-off Differential revenue Less further processing costs Additional contribution from further processing

$450,000 300,000 150,000 100,000 $ 50,000

Chapter 7 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 24. (LO 7.1) Which of the following products is most likely to be accounted for using process costing rather than job costing? a. Paint b. Furniture c. Hand-made jewelry d. Sculptures 25. (LO 7.1) All of the following products are suitable for process costing except: a. cereal.

b. gasoline. c. fruit punch. d. portraits.

26. (LO 7.1) Under process costing, all of the following are production costs except: a. Direct materials. b. Advertising and marketing. c. Direct labor. d. Manufacturing overhead.

27. (LO 7.1) Under process costing, why are direct materials tracked separately from conversion costs? a. Conversion costs are generally higher than direct materials. b. Direct materials are generally higher than conversion costs. c. Direct materials are generally incurred at a different pace than conversion costs. d. Conversion costs include all traced costs.

28. (LO 7.1) Process costing is often used by companies that produce highly customized products. a. True b. False 29. (LO 7.2) In general, when calculating equivalent units, it is easier to estimate the percentage completion for: a. Direct materials. b. Conversion costs.

30. (LO 7.2) Under the weighted-average method of process costing, beginning work-in-process completion estimates can be ignored because these units are always grouped together with units that are started and completed during the period. a. True b. False 31. (LO 7.2) Canvas Engine generally produces 5,000 units per month. During March, Canvas started 4,000 units but finished only 1,000. Canvas Engine uses process costing to account for product costs. For the purpose of assigning production costs in March, Canvas Engine must divide production costs by: a. average monthly units completed. b. units completed in March. c. units started in March. d. March equivalent units.

32. (LO 7.3) Which of the following costs are not considered conversion costs? a. Direct materials b. Direct labor c. Factory rent d. Factory utilities

33. (LO 7.3) Which of the following categories of costs are considered only when a company has multiple production processes? a. Production costs b. Direct Materials c. Conversion costs d. Transferred-in costs 34. (LO 7.3) Which method of process costing considers the costs incurred by the end of an accounting period? a. Weighted-average method b. FIFO method 35. (LO 7.3) Which method of process costing divides total production costs by equivalent units to calculate cost per equivalent unit? a. Weighted-average method b. FIFO method 36. (LO 7.3) Which method of process costing subdivides completed units into those units started in the previous period and those units started in the current period? a. Weighted-average method b. FIFO method 37. (LO 7.3) Which method of process costing considers only the costs incurred during an accounting period to determine equivalent cost per unit? a. Weighted-average method b. FIFO method 38. (LO 7.3) The calculation for the equivalent units of transferred-in costs is equivalent to the calculation for the equivalent units of: a. Direct materials that are 100% complete. b. Direct materials that are 50% complete. c. Conversion costs that are 50% complete. d. Conversion costs that are 0% complete.

39. (LO 7.2, 7.3) In April, True Colors Paint Co. has ending work-in-process inventory that is 30% complete with respect to conversion costs. True Colors uses the weighted-average method of process costing. When calculating May’s equivalent units of production for these units, what percentage will True Colors Paint Co. use (assume that all of April’s ending work-in-process was completed in May)? a. 0% b. 30% c. 70% d. 100% 40. (LO 7.2, 7.3) In April, True Colors Paint Co. has ending work-in-process inventory that is 30% complete. True Colors uses the FIFO method of process costing. When calculating May’s equivalent units of production for these units, what percentage will True Colors Paint Co. use (assume that all of April’s ending work-in-process was completed in May)?

a. b. c. d.

0% 30% 70% 100%

41. (LO 7.4) Hobby Capsule accounts for costs using process costing. Hobby Capsule has significant changes in production costs across time, and it seeks to respond to these changes as soon as possible. Which process costing method is most appropriate for Hobby Capsule? a. Weighted-average method b. FIFO method 42. (LO 7.4) Which process costing method will provide a lower reported net income during times of inflation? a. Weighted-average method b. FIFO method 43. (LO 7.4) Which process costing method will provide higher reported production costs during times of inflation? a. Weighted-average method b. FIFO method

(Level 1) Discussion Questions 1. (LO 7.1) What types of products are more suitable for process costing than job costing?

Suggested Solution: Process costing is more suitable than job costing for companies that have high volumes, low variation in products, and little or no customization.

2. (LO 7.2) Explain why process costing is generally not used for customizable products.

Suggested Solution: Process costing is not generally used for customizable products because, as the variation between products increase, so too do the variation in product costs and the need to trace those costs to individual products. If process costing is used for customizable products, companies are likely to have cross subsidization between products.

3. (LO 7.1) Describe how process costing differs from job costing in terms of which costs are considered product costs.

Suggested Solution:

There is no difference between process costing and job costing in terms of which costs are classified as product costs. Under both systems, products costs include direct materials, direct labor, and manufacturing overhead.

4. (LO 7.1) Describe how process costing differs from job costing in terms of how production costs are accumulated.

Suggested Solution: Under a job costing system, costs are accumulated by the job or order. Under a process costing system, costs are accumulated by process. To assign production costs to individual products in a process costing system, production costs are divided by the number of equivalent units produced.

5. (LO 7.2) What are equivalent units and why are they necessary when using process costing?

Suggested Solution: Equivalent units are a concept management accountants use to deal with partially completed units. It is a measure of production that accounts for partially completed units by calculating the equivalent number of completed units a given amount of inputs (direct materials and conversion costs) could have produced. They are necessary in process costing because there are commonly units that are only partially complete at the end of an accounting period.

6. (LO 7.2) Explain why direct materials are tracked separately from conversion costs in a process costing system.

Suggested Solution: Direct materials are tracked separately from conversion costs because theoretically, they are consumed differently during production. A common assumption in process costing is that direct materials are all added at the beginning of the process (though this isn’t always the case), while conversion costs (direct labor and manufacturing overhead) are applied at a constant rate during production.

7. (LO 7.3) Briefly describe the five steps of process costing.

Suggested Solution: 1. Measuring physical units of production – track how many physical units were started and completed during the period.

2. Computing equivalent units of production – determine how many equivalent units of production were completed by multiplying physical units by the percent completed.

3. Summing production costs – Sum prior period and current period production costs.

4. Calculating cost per equivalent unit – Divide production costs by equivalent units to determine cost per equivalent unit 5. Assigning costs to completed and in-process units – Determine cost transferred out and ending work-in-process balance based on cost per equivalent unit, the number of units transferred out of production, and the remaining units in ending work-in-process.

8. (LO 7.3) Process costing results in an assignment of production costs to costs transferred out and ending work-in-process. How does this assignment manifest in a company’s financial statements?

Suggested Solution: Costs transferred out of one production process are either transferred into another production process or transferred to finished goods. Until these products are sold, they are an asset (workin-process inventory or finished goods inventory) on the balance sheet. Once the products are sold, the cost associated with the products is recorded as cost of goods sold on a company’s income statement. Ending work-in-process costs are recorded as an asset on the balance sheet.

9. (LO 7.2, 7.3) The weighted-average method of accounting is concerned with equivalent units completed and costs added by the end of the current period. In contrast, the FIFO method is concerned with equivalent units completed and costs added during the current period. How does this distinction affect the five steps of process costing?

Suggested Solution: Step

Weighted-average Method

FIFO Method

Step 1: Measuring physical units of production

Determine how many units are: 1) completed 2) in ending WIP.

Determine how many units are: 1) started in the previous period and completed in the current period 2) started and completed in the current period 3) in ending WIP.

Step 2: Computing equivalent units of production

Determine how many units are complete to date.

Determine how many units are complete this period. Beginning WIP % complete is ignored.

Step 3: Summing production costs

Sum production costs in beginning WIP and current production costs.

Sum production costs in beginning WIP and current production costs.

Step 4: Calculating cost per equivalent unit

Divide total costs by equivalent units.

Divide current period costs by equivalent units.

Step 5: Assigning costs to completed and inprocess units

For each of the categories listed in Step 1, multiply equivalent units by the cost per equivalent unit calculated in Step 4.

For each of the categories listed in Step 1, multiply equivalent units by the cost per equivalent unit calculated in Step 4. For the units started in the previous period and completed in the current period, add current-period production costs.

10. (LO 7.2, 7.3) Step 4 of process costing involves computing equivalent cost per unit. Under the weighted-average method, total production costs are divided by equivalent units. Under the FIFO method, only current-period costs are divided by equivalent units. Explain why this is the case.

Suggested Solution: The weighted-average method is concerned about costs and equivalent units to date. As such, under the weighted-average method, all production costs (which include prior and current period costs) are divided by equivalent units completed to date. The FIFO method is concerned about costs and equivalent units this period. Computing the equivalent cost per unit under the FIFO method is accomplished by dividing only current period production costs by the equivalent units produced this period.

11. (LO 7.3) Explain how completion estimates can be used to shift expenses from one period to the next.

Suggested Solution: Completion estimates are used exclusively for partially-completed units. A higher completion estimate on partially-completed units results in a higher number of equivalent units (physical units * a higher percent estimate) in ending work-in-process. Including more cost in ending work-in-process means that there is less cost in the units that are completed and sold. When the units are sold, the cost is recorded as cost of goods sold and reduces income.

12. (LO 7.3) What steps might a company take to ensure that managers are not manipulating the percent completed for partially completed units in order to affect net income?

Suggested Solution: Companies can avoid manager manipulation by having clear protocols for how completion must be estimated. In addition, companies can avoid tying manager compensation to short-term metrics that can be easily manipulated.

13. (LO 7.4) Explain how reported net income can be affected by a company’s choice to use the weighted-average or FIFO method of accounting in periods of inflation or deflation.

Suggested Solution: In periods of inflation, the FIFO method results in higher profits than the weighted-average method because lower-cost units will be the first to be expensed as cost of goods sold. The opposite holds as well. In periods of deflation, the FIFO method results in lower profits because higher-cost units will be the first to be expensed as cost of goods sold.

14. (LO 7.4) What is the primary advantage of the weighted-average method?

Suggested Solution: The primary advantage of the FIFO method of process costing over the weighted average method is that companies can more quickly determine how production costs change over time.

15. (LO 7.4) Explain how the FIFO method of process costing can make companies more responsive to changes in production costs than the weighted-average method can.

Suggested Solution: Because the FIFO method more clearly delineates between production costs of different accounting periods, it is easier for companies to see changes in production costs under the FIFO method than the weighted-average method, and companies can respond more quickly.

(Level 1) Brief Exercises 76. (LO 7.1) Categorize each of the following products according to whether job costing or process costing would be most appropriate.

Product

Job Costing or Process Costing?

Cereal Jewelry Oil Tabasco sauce Automobiles Mustard Yarn Custom-made furniture Wedding dresses

Process costing Job costing Process costing Process costing Job costing Process costing Process costing Job costing Job costing

77. (LO 7.2) In January, Pinnacle Paintball company has 500 units in beginning WIP, and the company began production on an additional 1,300 units during the month. Ending WIP was 250 units. Pinnacle uses the weighted-average method of process costing. How many units were completed during January?

1,550 units 500 BWIP + 1300 started = 1800 to account for 1800 to account for – 250 EWIP = 1,550 completed

78. (LO 7.2, 7.3) During March, Skyflower Fireworks had 800 units in beginning WIP, and it started an additional 2,600 units during the month. Skyflower completed 3,000 units in March.

Skyflower uses the FIFO method of process costing. a. How many units were both started and completed during the month (that is, 100% of production was undertaken during March)?

2,200 units 3000 units completed – 800 from BWIP = 2200 S&C

b. How many units remain in ending WIP at the end of the year?

400 units 800 BWIP + 2600 started = 3400 to account for 3400 to account for – 3000 units completed = 400 units EWIP 79. (LO 7.2, 7.3) The Still Safe Company began production on 32,000 units during the month. Still Safe completed 35,000 units, and it had 2,500 units in ending WIP. Still Safe uses the weightedaverage method of process costing. How many units were in beginning WIP for the month?

5,500 units 35000 completed + 2500 EWIP = 37250 to account for 37250 – 32,000 started = 5,500 BWIP 80. (LO 7.2, 7.3) The Monacle Peanut Butter Company uses the FIFO method of process costing to account for production costs. During November, Monacle started 2,900 units. In addition, 8,500 units were completed. Monacle has 1,500 units in ending WIP What is the total number of units in beginning WIP process on November 1st?

7,100 units 8500 completed + 1500 EWIP = 10000 to account for 10000 – 2900 units started = 7100 BWIP

81. (LO 7.2, 7.3) The Bacchus Grape Preserves Company had 30,000 units in beginning WIP in July.

Bacchus began production on an additional 175,000 units during the month and completed 160,000 units. Bacchus uses the weighted-average method of process costing. How many units were in ending work-in-process inventory at the end of July?

45,000 units 30,000 BWIP + 175,000 started = 205,000 to account for 205,000 – 160,000 completed = 45,000 EWIP

82. (LO 7.2, 7.3) The Nauvoo Brick Company had 10,000 units in beginning WIP in October. Nauvoo began production on an additional 60,000 units during the month. Ending WIP was 14,000 units at the end of October. The Nauvoo Brick Company uses the weighted-average method of process costing. How many units were completed during October?

56,000 units 10000 BWIP + 60000 Started = 70000 to account for 70000 – 14000 EWIP = 56000 completed 83. (LO 7.2, 7.3) During January, Far North Maple Syrup Company had 108,000 units in beginning WIP, and it started an additional 364,000 units during the month. Far North completed 402,000 units in January. Far North uses the FIFO method of process costing. a. How many units were both started and completed during the month (that is, 100% of production was undertaken during January)?

294,000 units 402,000 units completed – 108,000 from BWIP = 294,000 S&C

b. How many units remain in ending WIP at the end of the month?

70,000 units 108000 BWIP + 364000 started = 472000 to account for 472000 to account for – 402000 units completed = 70000 units EWIP

84. (LO 7.2, 7.3) Glorious Gummies began production on 17,000 units during the month. Glorious completed 28,750 units during the month, and it had 1,850 units in ending WIP. Glorious

Gummies uses the weighted-average method of process costing. How many units were in beginning WIP for the month?

13,600 units 28750 completed + 1850 EWIP = 30600 to account for 30600 to account for – 17000 started = 13,600 BWIP 85. (LO 7.2, 7.3) Boss Vase uses the FIFO method of process costing to account for production costs.

During February, Boss Vase started 13,500 units. 19,500 units were completed during the month, including 12,300 units that were started in February. Boss has 1,200 units in ending WIP. What is the total number of units in beginning WIP process on February 1st?

7,200 units 19500 completed + 1200 EWIP = 20700 to account for 20700 to account for – 13500 started = 7200 BWIP 86. (LO 7.2, 7.3) En Garde Fencing Company completed 27,500 units in September, of which 22,000 were also started in September. En Garde uses the FIFO method of process costing. How many units were in beginning work-in-process in September?

5,500 units 27500 completed – 22000 S&C = 5500 BWIP

87. (LO 7.2, 7.3) The Nunya Beeswax Company used the weighted-average method of process costing and calculated that for December, the company had 300 equivalent units for direct materials and 280 equivalent units for conversion costs.

Nunya also reported the following information for process costs in December: Total Equivalent units Beginning WIP costs Costs added during December

Conversion costs

Direct materials 300

$ 3,200 $ 22,000

$ 1,400 $ 10,000

What is the cost per equivalent unit for direct materials and conversion costs for a unit completed in December?

DM: $38.00 (11400 total DM/300 EU) CC: $49.29 (13800 total CC/280 EU)

280 $ 1,800 $ 12,000

88. (LO 7.2, 7.3) Brite Candles Inc. used the FIFO method of process costing and calculated that for December, the company had 20,050 equivalent units for direct materials and 23,000 equivalent units for conversion costs.

Total Equivalent units Beginning WIP costs Costs added during December

$ 5,500 $ 340,800

Conversion Direct materials costs 20,050 23,000 $ 1,900 $ 3,600 $ 220,000 $ 120,800

What is the cost per equivalent unit for direct materials and conversion costs for a unit completed in December?

DM: $10.97 (220000 current DM/20,050 EU) CC: $5.25 (120800 current CC/23,000 EU) 89. (LO 7.2, 7.3) Bings Jar Company uses the FIFO method of process costing. With regard to direct materials, the company calculated 9,000 equivalent units in February and reported an $8.50 equivalent cost per unit. Direct materials costs in January for February’s beginning work-inprocess inventory were $14,000. How many dollars of additional direct materials costs did Bings incur during February? $76,500 Total DM costs/Equivalent Units = DM cost/EU Current costs/Equivalent Units = DM cost/EU current costs/9000 = 8.50 Current costs = 76500

90. (LO 7.2, 7.3) Valley Mills Flour Company uses the weighted-average method of process costing.

With regard to direct materials, the company calculated 11,500 equivalent units in April and reported a $13.25 equivalent cost per unit. Direct materials costs in March for April’s beginning work-in-process inventory were $25,000. How many dollars of direct materials costs did Bings incur during April? $127,375 Total DM costs/Equivalent Units = DM cost/EU

(BWIP costs + Current costs)/Equivalent Units = DM cost/EU (25000 + Current costs)/11500 = 13.25 25000 + Current costs = 152375 Current costs = 127375

91. (LO 7.4) Young Co. produces wagons and uses the FIFO method of process costing to account for production costs. In the most recent quarter, Young reported direct materials cost per equivalent unit of $224.00. Young has experienced significant decreases in raw materials prices over the past several months, and it expects the trend to continue. If Young were to recalculate direct materials cost per equivalent unit under the weighted-average method, how would the new cost compare to the reported $224 per unit (higher, lower, or equal)? Why? The cost per equivalent unit will be higher under the weighted-average method than under the FIFO method when input prices are decreasing. This is because the FIFO method keeps product costs for each period distinct, while the weighted average method blends period prices together. Thus, the most recent month would also include costs from a previous, higher-cost month.

92. (LO 7.2, 7.3; CMA) Mack Inc. uses a weighted-average process costing system. Unlike most manufacturing processes, Mack Inc.’s has a process for which both direct materials and conversion costs are incurred evenly during the production process. During the month of October, the following costs were incurred: Direct materials Conversion costs

$ 39,700 $ 70,000

The work-in-process inventory as of October 1 consisted of 5,000 units, valued at $4,300, that were 20% complete. During October, 27,000 units were transferred out. Inventory as of October 31 consisted of 3,000 units that were 50% complete. What is Mack’s weighted-average inventory cost per unit completed in October?

The weighted average inventory cost per unit completed in October is $4.00, calculated as follows.

Equivalent units:

Units transferred out Ending inventory (3,000 x .5) Total

27,000 1,500 28,500

Cost incurred: $4,300 + $39,700 + $70,000 = $114,000 Unit cost: $114,000 ÷ 28,500 = $4.00/unit

93. (LO 7.2, 7.3; CMA) Colt Company uses a weighted-average process cost system to account for the cost of producing a chemical compound. As part of production, Material B is added when the goods are 80% complete. Beginning work-in-process inventory for the current month was 20,000 units, 90% complete. During the month, 70,000 units were started in process, and 65,000 units were completed. There were no lost or spoiled units. If the ending inventory was 60% complete, what are the total equivalent units for Material B for the month?

65,000 units The 65,000 units that were started and completed during the month represent the equivalent units for Material B. Material B was previously added to the beginning work-in-process and the ending work-in-process had not yet reached 80%, where Material B would have been added.

94. (LO 7.2, 7.3; CMA) San Jose Inc. uses a weighted-average process costing system. All materials are introduced at the start of manufacturing, and conversion cost is incurred evenly throughout production. The company started 70,000 units during May and had the following work-inprocess inventories at the beginning and end of the month.

May 1

30,000 units, 40% complete

May 31

24,000 units, 25% complete

What are the total equivalent units used to assign costs for May for direct materials and conversion costs?

100,000 equivalent units for direct materials; 82,000 equivalent units for conversion costs 30,000 units in BWIP + 70,000 started - 24,000 units in EWIP = 76,000 started and completed 76,000 started and completed + 24,000 in EWIP = 100,000 equivalent units for direct materials 76,000 started and completed + 24,000 x 25% in EWIP = 82,000 equivalent units for conversion costs.

95. (LO 7.2, 7.3; CMA) During December, Krause Chemical Company had the following selected data concerning the manufacture of Xyzine, an industrial cleaner.

Production Flow Physical Units Completed and transferred to the next department Add:

Ending work-in-process inventory Total units to account for

Less: Beginning work-in-process inventory Units started during December

100 10 (40% complete as to conversion) 110 20 (60% complete as to conversion) 90

All material is added at the beginning of processing in this department, and conversion costs are added uniformly during the process. The beginning work-in-process inventory had $120 of raw material and $180 of conversion costs incurred. Material added during December was $540, and conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing method. What are the total conversion costs transferred out in December? $1,600 The total conversion cost transferred to the next department is $1,600, calculated as follows.

Equivalent conversion units

Conversion costs

Unit conversion cost

Cost transferred

=

100 + (10 x 40%)

=

104 units

=

$180 + $1,484

=

$1,664

=

$1,664 ÷ 104

=

$16

=

$1,664 – (4 x $16)*

=

$1,600

*Ending work-in-process equivalent units (Level 1) Problems 1. (LO 7.1, 7.2, 7.3) TruVu is a manufacturer of contact lenses and uses the weighted-average method of process costing. TruVu’s production facility produces millions of lenses every month.

Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In March, TruVu had 40,000 units in beginning work-in-process and began production on another 2,200,000 units. At the end of the month, TruVu had 60,000 units in ending work-in process that were 75% complete with respect to conversion costs.

TruVu incurred $65,000 of direct materials costs and $75,000 of conversion costs in February for March’s beginning work-in-process units. TruVu incurred an additional $3,000,000 in direct materials costs and $1,400,000 in conversion costs in March.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. Why are contact lenses a good candidate for process costing?

Process costing is useful for costing contact lenses because they are mass-produced and have little to no customization.

b. What are the equivalent units of production for direct materials in March?

2,240,000 equivalent units

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $4,428,070.33 Ending WIP: $111,929.67

Direct Materials

Conversion Costs

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

40,000

Started during period

2,200,000

Total Units to Account for

2,240,000

Completed and transferred out

2,180,000

2,180,000

2,180,000

WIP, endinga

60,000

60,000

45,000

Total Units Accounted for

2,240,000

2,240,000

2,225,000

a

Ending WIP 100% complete with respect to direct materials and 75% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 140,000 $ 4,400,000 $ 4,540,000

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 4,428,070.33 $ 111,929.67 $ 4,540,000.00

$ 65,000 $ 3,000,000 $ 3,065,000

$ 75,000 $ 1,400,000 $ 1,475,000

$ 1.37

$ 0.66

$ 2,982,901.79 $ 82,098.21 $ 3,065,000.00

$ 1,445,168.54 $ 29,831.46 $ 1,475,000.00

2. (LO 7.2, 7.3) LozzaMozza produces artisan cheese wheels and uses the weighted-average method of process costing. Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In September, LozzaMozza had 5,000 units in beginning work-in-process and began production on another 35,000 units. At the end of the month, LozzaMozza had 8,000 units in ending work-in process that were 40% complete with respect to conversion costs.

LozzaMozza incurred $12,000 of direct materials costs and $3,000 of conversion costs in August for September’s beginning work-in-process units. LozzaMozza incurred an additional $80,000 in direct materials costs and $15,000 in conversion costs in September.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What are the equivalent units of production for direct materials in September?

40,000 equivalent units

b. What is September’s cost per equivalent unit for conversion costs? $0.51

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $89,963.64 Ending WIP: $20,036.36 Step 1

Step 2 Equivalent Units Direct Conversion Materials Costs

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

5,000

Started during period

35,000

Total Units to Account for

40,000

Completed and transferred out

32,000

32,000

32,000

WIP, endinga

8,000

8,000

3,200

Total Units Accounted for

40,000

40,000

35,200

a

Ending WIP 100% complete with respect to direct materials and 40% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 15,000 $ 95,000 $ 110,000

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 89,963.64 $ 20,036.36 $ 110,000.00

$ 12,000 $ 80,000 $ 92,000

$ 3,000 $ 15,000 $ 18,000

$ 2.30

$ 0.51

$ 73,600.00 $ 18,400.00 $ 92,000.00

$ 16,363.64 $ 1,636.36 $ 18,000.00

3. (LO 7.2, 7.3) Woodshed Inc. produces toothpicks and uses the weighted-average method of process costing. Woodshed tracks production costs on a weekly basis. Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In Week 11, Woodshed Inc. had 13,000 units in beginning work-in-process and began production on another 50,000 units. Woodshed Inc. completed 48,000 units during Week 11.

Ending work-in process units were 30% complete with respect to conversion costs.

Woodshed Inc. incurred $1,500 of direct materials costs and $2,500 of conversion costs in Week 10 for Week 11’s beginning work-in-process units. Woodshed Inc. incurred an additional $5,000 in direct materials costs and $7,500 in conversion costs in Week 11.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What are the equivalent units of production for conversion costs in Week 11?

52,500 equivalent units

b. What is Week 11’s total production cost per equivalent unit? $0.29

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $14,095.24 Ending WIP: $2,404.76

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

13,000

Started during period

50,000

Total Units to Account for

63,000

Completed and transferred out

48,000

Direct Materials

48,000

Conversion Costs

48,000

WIP, endinga

15,000

15,000

4,500

Total Units Accounted for

63,000

63,000

52,500

a

Ending WIP 100% complete with respect to direct materials and 30% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) $ 4,000 $ 12,500 $ 16,500

WIP, beginning Costs added during period Total costs to account for (Step 3)

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 14,095.24 $ 2,404.76 $ 16,500.00

$ 1,500 $ 5,000 $ 6,500

$ 2,500 $ 7,500 $ 10,000

$ 0.10

$ 0.19

$ 4,952.38 $ 1,544.62 $ 6,500.00

$ 9,142.86 $ 857.14 $ 10,000.00

4. (LO 7.2, 7.3) Memphis Blues produces jeans and uses the weighted-average method of process costing. Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In December, Memphis Blues had 50,000 units in beginning work-in-process and began production on another 400,000 units. Memphis Blues completed 420,000 units during December. Ending work-in process units were 70% complete with respect to conversion costs.

In addition, Memphis Blues reported the following cost information for December:

Beginning WIP costs Costs added in the current period

Direct Materials $ 250,000 $2,250,000

Conversion Costs $100,000 $800,000

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What is the December cost per equivalent unit for direct materials? $5.56

b. What is December cost per equivalent unit for conversion costs? $2.04

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $3,190,476.19 Ending WIP: $209,523.81 Step 1

Step 2 Equivalent Units Direct Conversion Materials Costs

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

50,000

Started during period

400,000

Total Units to Account for

450,000

Completed and transferred out

420,000

420,000

420,000

WIP, endinga

30,000

30,000

21,000

Total Units Accounted for

450,000

450,000

441,000

a

Ending WIP 100% complete with respect to direct materials and 70% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 350,000 $ 3,050,000 $ 3,400,000

$ 250,000 $ 2,250,000 $ 2,500,000

$ 100,000 $ 800,000 $ 900,000

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 3,190,476.19 $ 209,523.81 $ 3,400,000.00

$ 5.56

$ 2.04

$ 2,333,333.33 $ 166,666.67 $ 2,500,000.00

$ 857,142.86 $ 42,857.14 $ 900,000

5. (LO 7.2, 7.3) LaserCat produces laser pointers used to distract and entertain pets. LaserCat accounts for production costs using the weighted-average method of process costing. All direct materials are assumed to be added at the beginning of the period, while conversion costs are added uniformly throughout production. LaserCat had 7,500 units in beginning work-in process on January 1. In addition, LaserCat completed 22,000 units during January and had 8,000 units in ending work-in-process at the end of the month.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 60% for conversion costs. Ending work-in-process inventory is estimated to be 100% complete for direct materials and 20% complete for conversion costs.

Costs incurred during December for January’s beginning WIP units totaled $8,000 for direct materials and $3,500 for conversion costs. During January, production costs included $30,000 in direct materials and $18,000 for conversion costs.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.) a. How many units were started in January?

22,500 units b.What is the January total production cost per equivalent unit? $2.18 c. What are the total costs transferred out of production and the total cost of ending work-in-process inventory?

Transferred out costs: $47,909.04 Ending WIP: $11,590.96

Step 1

Flow of units (Steps 1-2)

Physical Units

Step 2 Equivalent Units Direct Conversion Materials Costs

WIP, beginning

7,500

Started during period

22,500

Total Units to Account for

30,000

Completed and transferred out

22,000

22,000

22,000

WIP, endinga

8,000

8,000

1,600

Total Units Accounted for

30,000

30,000

23,600

a

Ending WIP 100% complete with respect to direct materials and 20% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 11,500 $ 48,000 $ 59,500

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 47,909.04 $ 11,590.96 $ 59,500.00

$ 8,000 $ 30,000 $ 38,000

$ 3,500 $ 18,000 $ 21,500

$ 1.27

$ 0.91

$ 27,866.67 $ 10,133.33 $ 38,000.00

$ 20,042.37 $ 1,457.63 $ 21,500.00

6. (LO 7.2, 7.3) Venture Kayaks produces plastic kayaks for outdoor enthusiasts. Venture Kayaks accounts for production costs using the weighted-average method of process costing. All direct materials are assumed to be added at the beginning of the period, while conversion costs are added uniformly throughout production. Venture Kayaks started production on 500 units in July.

In addition, Venture Kayaks completed 540 units during July and had 60 units in ending work-inprocess at the end of the month.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 50% for conversion costs. Ending work-in-process inventory is estimated to be 100% complete for direct materials and 80% complete for conversion costs.

In addition, Venture Kayaks reported the following cost information for July:

Beginning WIP costs Costs added in the current period

Direct Materials $ 12,500 $ 80,000

Conversion Costs $ 5,000 $ 55,000

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. How many units were in beginning work-in-process inventory on July 1?

100 units

b. What is the July total production cost per equivalent unit? $256.21

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $138,352.04 Ending WIP: $14,147.96 Step 1

Step 2 Equivalent Units Direct Conversion Materials Costs

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

100

Started during period

500

Total Units to Account for

600

Completed and transferred out

540

540

540

WIP, endinga

60

60

48

Total Units Accounted for

600

600

588

a

Ending WIP 100% complete with respect to direct materials and 80% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 17,500 $ 135,000 $ 152,500

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 138,352.04 $ 14,147.96 $ 152,500.00

$ 12,500 $ 80,000 $ 92,500

$ 5,000 $ 55,000 $ 60,000

$ 154.17

$ 102.04

$ 83,250.00 $ 9,250.00 $ 92,500.00

$ 55,102.04 $ 4,897.96 $ 60,000.00

7. (LO 7.2, 7.3) Long Island Rum accounts for production costs using the FIFO method of process costing. Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In August, Long Island Rum had 8,500 units in beginning work-in-process that were 30% complete with respect to conversion costs. The company began production on another 13,500 units in August and had 4,000 units in ending work-in process that were 75% complete with respect to conversion costs.

Long Island Rum incurred $160,000 of direct materials costs and $30,000 of conversion costs in July for August’s beginning work-in-process units. Long Island Rum incurred an additional $250,000 in direct materials costs and $180,000 in conversion costs in August.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What are the equivalent units of production for direct materials in August?

13,500 equivalent units

b. What is the total per-unit production cost for a unit completed in its entirety in August? $28.27

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $516,657.63 Ending WIP: $103,342.37 Step 1

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

8,500

Started during period

13,500

Total Units to Account for

22,000

Step 2 Equivalent Units Direct Conversion Materials Costs

Completed and transferred out From WIP, beginninga

8,500

Started and completed

9,500

9,500

9,500

Total completed and transferred out

18,000

9,500

15,450

WIP, endingb

4,000

4,000

3,000

Total Units Accounted for

22,000

13,500

18,450

a

-

5,950

Beginning WIP 100% complete with respect to direct materials and 30% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 75% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

Cost per equivalent unit (Step 4) Costs assigned to transferred-out units

$ 190,000 $ 430,000 $ 620,000

$ 160,000 $ 250,000 $ 410,000

$ 30,000 $ 180,000 $ 210,000

$ 18.52

$ 9.76

$ 190,000 $ 58,049 $ 248,049 $ 268,609 $ 516,658 $ 103,342 $ 620,000

Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 160,000 $ $ 160,000 $ 175,926 $ 335,926 $ 74,074 $ 410,000

-

$ 30,000 $ 58,049 $ 88,049 $ 92,683 $ 180,732 $ 29,268 $ 210,000

8. (LO 7.2, 7.3) Star Solar Panels accounts for production costs using the FIFO method of process costing. Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In September, Star Solar Panels had 7,000 units in beginning work-in-process that were 45% complete with respect to conversion costs. The company began production on another 37,000 units in September, and it had 12,500 units in ending work-in process that were 60% complete with respect to conversion costs.

Star Solar Panels Venture Kayaks reported the following production cost information for September:

Beginning WIP costs Costs added in the current period

Direct Materials $ 48,000 $ 960,000

Conversion Costs $ 19,000 $ 260,000

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What are the equivalent units of production for direct materials in September?

37,000 equivalent units

b. What is September’s cost per equivalent unit for conversion costs? $7.25

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $908,282.37 Ending WIP: $378,717.63 Step 1

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

7,000

Started during period

37,000

Total Units to Account for

44,000

Step 2 Equivalent Units Direct Conversion Materials Costs

Completed and transferred out From WIP, beginninga

7,000

Started and completed

24,500

24,500

24,500

Total completed and transferred out

31,500

24,500

28,350

WIP, endingb

12,500

12,500

7,500

Total Units Accounted for

44,000

37,000

35,850

a

-

3,850

Beginning WIP 100% complete with respect to direct materials and 45% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 60% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 67,000 $ 1,220,000 $ 1,287,000

Cost per equivalent unit (Step 4)

$ 48,000 $ 960,000 $ 1,008,000

$ 19,000 $ 260,000 $ 279,000

$ 25.95

$ 7.25

$ 48,000 $

$ 19,000 $

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning

$ 67,000 $

-

Total costs for WIP, beginning Cost of started and completed units Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

27,922 $ 94,922 $ 813,360 $ 908,282 $ 378,718 $ 1,287,000

$ 48,000 $ 635,676 $ 683,676 $ 324,324 $ 1,008,000

27,922 $ 46,922 $ 177,685 $ 224,607 $ 54,393 $ 279,000

9. (LO 7.2, 7.3) HE Double Inc. produces hockey sticks and uses the FIFO method of process costing.

Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In April, HE Double Inc. had 10,000 units in beginning work-in-process and began production on another 35,000 units. HE Double Inc. completed 35,500 units during April. Beginning work-inprocess units were 50% complete with respect to conversion costs on April 1 and ending workin-process units were 80% complete at the end of the month with respect to conversion costs.

HE Double Inc. incurred $45,000 of direct materials costs and $15,000 of conversion costs in March for April’s beginning work-in-process units. HE Double Inc. incurred an additional $145,000 in direct materials costs and $120,000 in conversion costs in April.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What are the equivalent units of production for conversion costs in April?

38,100 equivalent units

b. What is April’s total production cost per equivalent unit? $7.29

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $261,705.85 Ending WIP: $63,294.15 Step 1

Step 2 Equivalent Units

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

10,000

Started during period

35,000

Total Units to Account for

45,000

Direct Materials

Conversion Costs

Completed and transferred out From WIP, beginninga

10,000

Started and completed

25,500

25,500

25,500

Total completed and transferred out

35,500

25,500

30,500

WIP, endingb

9,500

9,500

7,600

Total Units Accounted for

45,000

35,000

38,100

a

-

5,000

Beginning WIP 100% complete with respect to direct materials and 50% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 80% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 60,000 $ 265,000 $ 325,000

Cost per equivalent unit (Step 4)

$ 45,000 $ 145,000 $ 190,000

$ 15,000 $ 120,000 $ 135,000

$ 4.14

$ 3.15

$ 45,000

$ 15,000 $ 15,748 $ 30,748 $ 80,315

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units

$ 60,000 $ 15,748 $ 75,748 $ 185,958

$ $ 45,000 $ 105,643

-

$ 261,706 $ 63,294 $ 325,000

Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 150,643 $ 39,357 $ 190,000

$ 111,063 $ 23,937 $ 135,000

10. (LO 7.2, 7.3) HiFiber produces fiber-optic cable and uses the FIFO method of process costing.

Direct materials are all added at the beginning of production and conversion costs are incurred uniformly during production.

In October, HiFiber had 2,000 units in beginning work-in-process that were 10% complete with respect to conversion costs. HiFiber completed 86,000 units during October, and there were 10,000 units in ending work-in-process inventory (25% completed for conversion costs) at the end of October.

HiFiber reported the following cost information for October production:

Beginning WIP costs Costs added in the current period

Direct Materials $ 150,000 $ 8,000,000

Conversion Costs $ 10,000 $ 4,500,000

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. How many units were started in October?

94,000 units

b. What is the total production cost for a unit produced in October? $136.07

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $11,681,529.60 Ending WIP: $978,470.40 Step 1

Step 2 Equivalent Units

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

2,000

Started during period

94,000

Total Units to Account for

96,000

Direct Materials

Conversion Costs

Completed and transferred out From WIP, beginninga

2,000

Started and completed

84,000

84,000

84,000

Total completed and transferred out

86,000

84,000

85,800

WIP, endingb

10,000

10,000

2,500

Total Units Accounted for

96,000

94,000

88,300

a

-

1,800

Beginning WIP 100% complete with respect to direct materials and 10% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 25% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 160,000 $ 12,500,000 $ 12,660,000

Cost per equivalent unit (Step 4)

$ 150,000 $ 8,000,000 $ 8,150,000

$ 10,000 $ 4,500,000 $ 4,510,000

$ 85.11

$ 50.96

$ 150,000

$ 10,000 $ 91,733 $ 101,733 $ 4,280,861

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units

$ 160,000 $ 91,733 $ 251,733 $ 11,429,797

$ $ 150,000 $ 7,148,936

-

Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 11,681,530 $ 978,470 $ 12,660,000

$ 7,298,936 $ 851,064 $ 8,150,000

$ 4,382,593 $ 127,407 $ 4,510,000

11. (LO 7.2, 7.3) ChowBella produces pasta noodles and accounts for production costs using the FIFO method of process costing. All direct materials are assumed to be added at the beginning of the period, while conversion costs are added uniformly throughout production. ChowBella had 40,000 units in beginning work-in process on November 1. In addition, ChowBella started 390,000 units during November and had 50,000 units in ending work-in-process at the end of the month.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 40% complete for conversion costs. Ending work-in-process inventory was estimated to be 100% complete for direct materials and 90% complete for conversion costs.

Costs incurred during October for November’s beginning WIP units totaled $150,000 for direct materials and $52,000 for conversion costs. During November, production costs included $1,250,000 in direct materials and $1,500,000 for conversion costs.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What is the average production cost of a unit produced entirely during November? $6.87

b. What is the average production cost of a unit started in October and completed in November? $7.25

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $2,626,706.91 Ending WIP: $325,293.09 Step 1

Step 2 Equivalent Units

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

40,000

Started during period

390,000

Total Units to Account for

430,000

Direct Materials

Conversion Costs

Completed and transferred out From WIP, beginninga

40,000

Started and completed

340,000

340,000

340,000

Total completed and transferred out

380,000

340,000

364,000

WIP, endingb

50,000

50,000

45,000

Total Units Accounted for

430,000

390,000

409,000

a

-

24,000

Beginning WIP 100% complete with respect to direct materials and 40% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 90% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 202,000 $ 2,750,000 $ 2,952,000

Cost per equivalent unit (Step 4)

$ 150,000 $ 1,250,000 $ 1,400,000

$ 52,000 $ 1,500,000 $ 1,552,000

$ 3.21

$ 3.67

$ 150,000

$ 52,000 $ 88,020 $ 140,020 $ 1,246,944

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units

$ 202,000 $ 88,020 $ 290,020 $ 2,336,687

$ $ 150,000 $ 1,089,744

-

$ 2,626,707 $ 325,293 $ 2,952,000

Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 1,239,744 $ 160,256 $ 1,400,000

$ 1,386,963 $ 165,037 $ 1,552,000

12. (LO 7.2, 7.3) Shroom and Board produces mushrooms that are sold to grocery stores throughout the Southeast United States. Shroom and Board accounts for production costs using the FIFO method of process costing. All direct materials are assumed to be added at the beginning of the period, while conversion costs are added uniformly throughout production. Shroom and Board started production of 24,500 units in July. 25,000 units were completed during July, while 1,000 units remained in ending work-in-process.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 60% complete for conversion costs. Ending work-in-process inventory was estimated to be 100% complete for direct materials and 30% complete for conversion costs.

The company reported the following production costs for July:

Beginning WIP costs Costs added in the current period

$ $

Direct Materials 3,500 60,000

Conversion Costs $ $

2,500 60,000

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. How many units were in beginning work-in-process inventory on July 1?

1,500 units

b. What is the total production cost per equivalent unit for units produced entirely in July? $4.91

c. What are the total costs transferred out of production and the total cost of ending work-inprocess inventory?

Transferred-out costs: $122,813.32 Ending WIP: $3,186.68 Step 1

Step 2

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

1,500

Started during period

24,500

Total Units to Account for

26,000

Equivalent Units Direct Conversion Materials Costs

Completed and transferred out From WIP, beginninga

1,500

Started and completed

23,500

23,500

23,500

Total completed and transferred out

25,000

23,500

24,100

WIP, endingb

1,000

1,000

300

Total Units Accounted for

26,000

24,500

24,400

a

-

600

Beginning WIP 100% complete with respect to direct materials and 25% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 75% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 6,000 $ 120,000 $ 126,000

Cost per equivalent unit (Step 4)

$ 3,500 $ 60,000 $ 63,500

$ 2,500 $ 60,000 $ 62,500

$ 2.45

$ 2.46

$ 3,500

$ 2,500 $ 1,475 $ 3,975 $

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units

$ 6,000 $ 1,475 $ 7,475 $

$ $ 3,500 $

-

Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

115,338 $ 122,813 $ 3,187 $ 126,000

57,551 $ 61,051 $ 2,449 $ 63,500

57,787 $ 61,762 $ 738 $ 62,500

13. (LO 7.2, 7.3) BigSmoker Inc. produces hardwood pellets for barbecue aficionados. BigSmoker uses the weighted-average method of process costing. All direct materials are assumed to be added at the beginning of the period, while conversion costs are added uniformly throughout production. BigSmoker had 20,000 units in beginning work-in-process inventory on February 1st.

During February, production was started on an additional 320,000 units. Ending WIP at the end of February was 40,000 units.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 25% complete for conversion costs. Ending work-in-process inventory was estimated to be 100% complete for direct materials and 75% complete for conversion costs.

Costs incurred during January for February’s beginning WIP units totaled $120,000 for direct materials and $50,000 for conversion costs.

During February, production costs included $2,200,000 in direct materials and $1,500,000 for conversion costs.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. How many units were completed in February?

300,000 units b. What are BigSmoker equivalent units for direct materials?

340,000 equivalent units

c. What are BigSmoker equivalent units for conversion costs?

330,000 equivalent units

d. What are the total costs to account for? $3,870,000

e. What is the cost per equivalent unit for direct materials? $6.82

f. What is the cost per equivalent unit for conversion costs? $4.70

g. What is the cost of producing a complete unit in the current period? $11.52

h. What is the cost of direct materials transferred out of production during the period? $2,047,058.82

i. What are the total conversion costs transferred out of production during the period? $1,409,090.91

j. What are the total conversion costs in ending WIP at the end of the period? $140,909.09 Step 1

Step 2 Equivalent Units Direct Conversion Materials Costs

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

20,000

Started during period

320,000

Total Units to Account for

340,000

Completed and transferred out

300,000

300,000

300,000

WIP, endinga

40,000

40,000

30,000

Total Units Accounted for

340,000

340,000

330,000

a

Ending WIP 100% complete with respect to direct materials and 75% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 170,000 $ 3,700,000 $ 3,870,000

Cost per equivalent unit (Step 4)

Costs assigned to transferred-out units Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 3,456,149.73 $ 413,850.27 $ 3,870,000.00

$ 120,000 $ 2,200,000 $ 2,320,000

$ 50,000 $ 1,500,000 $ 1,550,000

$ 6.82

$ 4.70

$ 2,047,058.82 $ 272,941.18 $ 2,320,000.00

$ 1,409,090.91 $ 140,909.09 $ 1,550,000.00

14. (LO 7.2, 7.3) BigSmoker Inc. produces hardwood pellets for barbecue aficionados. BigSmoker uses the FIFO method of process costing. All direct materials are assumed to be added at the beginning of the period, while conversion costs are added uniformly throughout production.

BigSmoker had 20,000 units in beginning work-in-process inventory on February 1st. During February, production was started on an additional 320,000 units. Ending WIP at the end of February was 40,000 units.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 25% complete for conversion costs. Ending work-in-process inventory was estimated to be 100% complete for direct materials and 75% complete for conversion costs.

Costs incurred during January for February’s beginning WIP units totaled $120,000 for direct materials and $50,000 for conversion costs.

During February, production costs included $2,200,000 in direct materials and $1,500,000 for conversion costs.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. How many units were completed in February?

300,000 units

b. What are BigSmoker equivalent units for direct materials?

320,000 equivalent units c. What are BigSmoker equivalent units for conversion costs?

325,000 equivalent units d. What are the total costs to account for? $3,870,000 e. What is the cost per equivalent unit for direct materials? $6.88 f. What is the cost per equivalent unit for conversion costs? $4.62 g. What is the average production cost of a unit started in January and completed in February? $11.96 h. What is the cost of producing a complete unit in the current period? $11.49 i. What is the cost of direct materials transferred out of production during the period? $2,045,000.00 j. What are the total conversion costs in ending WIP at the end of the period? $138,461.54 Step 1

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

20,000

Started during period

320,000

Total Units to Account for

340,000

Completed and transferred out

Step 2 Equivalent Units Direct Conversion Materials Costs

From WIP, beginninga

20,000

Started and completed

280,000

280,000

280,000

Total completed and transferred out

300,000

280,000

295,000

WIP, endingb

40,000

40,000

30,000

Total Units Accounted for

340,000

320,000

325,000

a

-

15,000

Beginning WIP 100% complete with respect to direct materials and 25% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 75% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 170,000 $ 3,700,000 $ 3,870,000

Cost per equivalent unit (Step 4)

$ 120,000 $ 2,200,000 $ 2,320,000

$ 50,000 $ 1,500,000 $ 1,550,000

$ 6.88

$ 4.62

$ 120,000

$ 50,000 $ 69,231 $ 119,231 $ 1,292,308 $ 1,411,538 $ 138,462 $ 1,550,000

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5)

$ 170,000 $ 69,231 $ 239,231 $ 3,217,308 $ 3,456,538 $ 413,462 $ 3,870,000

$ $ 120,000 $ 1,925,000 $ 2,045,000 $ 275,000 $ 2,320,000

-

15. (LO 7.2, 7.3, 7.4) Big Air Boards produces skateboards and accounts for production costs using the FIFO method of process costing. All direct materials are assumed to be added at the

beginning of the period, while conversion costs are added uniformly throughout production. Big Air Boards had 6,000 units in beginning work-in process on December 1. In addition, Big Air Boards completed 23,000 units during December and had 5,000 units in ending work-in-process at the end of the month.

Management estimates that beginning work-in-process inventory was 100% complete for direct materials and 50% complete for conversion costs. Ending work-in-process inventory was estimated to be 100% complete for direct materials and 40% complete for conversion costs.

Costs incurred during November for December’s beginning WIP units totaled $50,000 for direct materials and $35,000 for conversion costs. During December, production costs included $300,000 in direct materials and $150,000 for conversion costs.

Required (Do not round your intermediate calculations. Round your final answer to 2 decimals.)

a. What is the average production cost of a unit produced entirely during December? $20.45 $13.636 DM + $6.818 CC = $20.45 (rounded) b. What is the average production cost of a unit started in November and completed in December? $17.58 $105,000 total costs spent on BWIP units / 6000 BWIP units = $17.58 c. Management believes the changes in production costs are a result of inflationary pressures.

How would production costs under the weighted-average method of process costing compare with those you calculated? Would costs under the weighted-average method be lower or higher? Why? Costs under the weighted-average method would be lower because costs from November and December would be combined. FIFO enables management to better recognize and respond to changes in input costs.

Step 1

Flow of units (Steps 1-2)

Physical Units

WIP, beginning

6,000

Started during period

22,000

Total Units to Account for

28,000

Step 2 Equivalent Units Direct Conversion Materials Costs

Completed and transferred out From WIP, beginninga

6,000

Started and completed

17,000

17,000

17,000

Total completed and transferred out

23,000

17,000

20,000

WIP, endingb

5,000

5,000

2,000

Total Units Accounted for

28,000

22,000

22,000

a

-

3,000

Beginning WIP 100% complete with respect to direct materials and 50% with respect to conversion costs

b

Ending WIP 100% complete with respect to direct materials and 40% with respect to conversion costs

Total Costs

Direct Materials

Conversion Costs

Flow of Costs (Steps 3-5) WIP, beginning Costs added during period Total costs to account for (Step 3)

$ 85,000 $ 450,000 $ 535,000

Cost per equivalent unit (Step 4)

$ 50,000 $ 300,000 $ 350,000

$ 35,000 $ 150,000 $ 185,000

$ 13.64

$ 6.82

$ 50,000

$ 35,000 $ 20,455 $ 55,455 $ 115,909 $ 171,364 $ 13,636 $ 185,000

Costs assigned to transferred-out units Costs from WIP, beginning Costs to complete WIP, beginning Total costs for WIP, beginning Cost of started and completed units Total costs transferred out Costs assigned to WIP, ending Total costs accounted for (Step 5) Chapter 8 End-of-Chapter Assignment Solutions

$ 85,000 $ 20,455 $ 105,455 $ 347,727 $ 453,182 $ 81,818 $ 535,000

$ $ 50,000 $ 231,818 $ 281,818 $ 68,182 $ 350,000

-

(Level 1) Multiple-Choice Questions 96. (LO 8.1) Which of the following describes the policies, procedures, rules, and incentive structure of an organization? a. Informal controls b. Formal controls c. Output controls d. Quality management system

97. (LO 8.1) What system is designed to aggregate, report, and monitor data about the organization’s revenue and costs? a. Cost accounting system b. Human resources system c. Quality management system d. Management control system

98. (LO 8.2) Acme Co. is a large corporation with 4 divisions. Management at each division has the autonomy and decision rights to make changes to the product mix and prices offered to its customers. Which organizational structure best describes Acme? a. Centralized b. Consolidated c. Decentralized d. Isolated 99. (LO 8.2) Summit Co. is a large corporation with 4 divisions. Senior management makes product mix and pricing decisions centrally so that all customers have the same experience regardless of where they shop. Which organizational structure best describes Summit? a. Centralized b. Consolidated c. Decentralized d. Isolated 100.

(LO 8.2) Which of the following is a challenge associated with decentralized organizational structures? a. Competition among business units b. Diminished ability to respond to customer needs c. Less-sensitive performance measures d. Diminished leadership advancement opportunities 101.

(LO 8.3) A cost center manager is responsible for which of the following?

a. b. c. d.

Revenues Profitability Investments Costs

102.

(LO 8.4) Which of the following characteristics is NOT necessary for effective performance measures? a. Results are provided in a timely manner. b. Results are controllable by the employee being evaluated. c. Results are attainable by the employee being evaluated. d. Results are based on different measures each period.

103.

(LO 8.5) Au Croissant, a local bakery, has operating income of $175,000, sales of $900,000, and assets valued at $600,000. It expects a 9% minimum rate of return and has a 30% tax rate. Calculate the ROI for Au Croissant. a. 22% b. 29% c. $94,000 d. $121,000 104.

(LO 8.5) Au Croissant, a local bakery, has operating income of $175,000, sales of $900,000, and assets valued at $600,000. It expects a 9% minimum rate of return. Calculate the residual income for Au Croissant. a. 22% b. 27% c. $94,000 d. $121,000

105. a. b. c. d.

(LO 8.6) Which of the following best defines a hybrid transfer price?

The internal price is set based on the prices available from outside suppliers.

The internal price is set so the sub-unit recovers its fixed costs.

The internal price is set so the sub-unit recovers its fixed and variable costs.

The internal price is set by considering both the costs and outside prices available.

106.

(LO 8.5) Return on investment focuses on income as a percentage of investment, while residual income focuses on: a. the capital charge. b. operating income less a capital charge. c. management decisions. d. cost of capital times the amount of investment.

107.

(LO 8.5) Residual income is often preferred over return on investment (ROI) as a performance evaluation measure because: a. the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI. b. average investment is employed with residual income while year-end investment is employed with ROI. c. residual income concentrates on maximizing the amount of income rather than a percentage return as with ROI. d. residual income is a measure over time while ROI represents the results for a single time period.

108. a. b. c. d.

(LO.6) Which one of the following is an incorrect description of transfer pricing?

It measures the value of goods or services furnished by a profit center to other responsibility centers within a company.

If a market price exists, this price may be used as a transfer price.

It measures exchanges between a company and external customers.

If no market price exists, the transfer price may be based on cost.

109.

(LO 8.6) Showtime Incorporated has a decentralized structure with multiple business units, with each unit reporting costs and profits separately. It has several products that are transferred from one business unit to another. Showtime wants to motivate the manager of the selling division to produce efficiently. Assume that all transfer pricing methods are available.

Which is the optimal transfer pricing method that should be used? a. Cost-based transfer price that uses actual amounts b. Cost-based transfer price that uses budgeted amounts c. Variable cost-based transfer price that uses actual amounts d. Market-based transfer price 110.

(LO 8.6) The roasting division of Jittery Joe’s Coffee, a profit center, sells its products to external customers as well as to other internal profit centers (e.g., Jittery Joe’s coffee shops).

Which one of the following circumstances would justify the roasting division selling to another profit center at a price below the market-based transfer price? a. The buying unit has excess capacity. b. The selling unit is operating at full capacity. c. Routine sales commissions and collection costs would be avoided. d. The profit centers’ managers are evaluated on the basis of unit operating income.

(Level 1) Discussion Questions 47. (LO 8.1) Define a cost accounting system, human resource system, and quality management system.

The cost accounting, human resources, and quality management systems are all integral parts of an organization’s formal control system. They generate the data that the organization uses to measure and evaluate performance. 

The cost accounting system aggregates, monitors, and reports information about revenues, costs, and profitability through the use of forms, processes, controls, and reports.



The human resources system helps the organization manage all aspects of human resources, including compliance with employment laws. It includes information about compensation and benefits, time and attendance, and employee training.



The quality management system records and tracks product quality, including production, defects, and customer service data, such as late deliveries and product ratings.

48. (LO 8.1) Do you think organizations need to rely primarily on formal controls, informal controls, or a combination of both? How do you think different types of controls affect employees?

Organizations generally rely on a combination of formal and informal controls. The formal controls include the formal structures, guidelines, performance measures, and physical constraints (e.g., locks and passwords) that help the organization function effectively. However, organizations also need informal controls, like a strong corporate culture, a positive tone from the top, and an ethical climate to ensure that the employees perform their responsibilities in line with the goals of the organization. Even the most well controlled organization cannot implement formal controls to mitigate all organizational risk, it would be too costly, and may make the organization run inefficiently. Informal controls can help supplement the formal controls such that they operate even when there are gaps in the formal control system. In addition, formal controls can sometimes negatively impact employees’ morale – it can make them feel that the organization does not trust them – so, informal controls, like a positive, supportive company culture can counteract those negative effects.

49. (LO 8.1) What is the difference between behavior and output controls? Provide examples of each.

A behavioral control directs or restricts the way employees carry out their jobs. Examples of behavior controls include policies and procedures and also passwords and workflows. Each of these control examples define or restrict how employees perform their jobs.

Output controls allow employees to complete their responsibilities without restriction, but measure the results of the employees’ work, which ultimately directs employee productivity. For example, salespeople may be paid based on the total value of the sales they complete during a period. Managers would review the output of the salespeople’s effort to determine if they had achieved their sales target.

50. (LO 8.2) Describe the differences between a centralized organizational structure and a decentralized organizational structure. Summarize their strengths and weaknesses.

In a centralized structure, all major strategic decisions (including performance measures) are made/set by a central group (e.g., the president/CEO). Also, supporting activities like human resources, IT, marketing, and accounting are performed for the whole company by departments also located within the central administrative function. The strengths of a centralized structure include, standardized processes, performance measures, and product (for customers) across the company. Because all decisions are made by one centralized group, change can be implemented quickly. However, a weakness is that the central decision-makers may be out of touch with the customers of each division.

In a decentralized structure, each division (e.g., geographic location) makes its own strategic decisions (in line with the overall mission and strategy of the organization, of course). Each division also maintains its own supporting activities such as human resources, IT, marketing and accounting. The benefit of a decentralized structure is that the divisions can be more in touch with and responsive to customers.

51. (LO 8.3) Describe the differences between the four types of responsibility centers.

There are four types of responsibility centers: A cost center is a sub-unit that does not generate revenue but supports the business and incurs costs. Examples of cost centers include accounting, human resources, marketing, and research and development. The manager of a cost center is only responsible for the costs, but not any of the revenue.

A revenue center is a sub-unit responsible for sales, which may be defined by the product line or the geographic region served. Managers of revenue centers are responsible for the sales from their specific sub-units.

In a profit center, the manager is responsible for both the costs and the revenues (sales) associated with that sub-unit.

In an investment center, the manager is responsible for the costs, revenues, and investment decisions. Investments are the assets or working capital used to generate income.

52. (LO 8.3) How might managers’ behavior be different if their sub-unit is classified as a revenue center instead of a cost center?

When a responsibility center is defined as a cost center, managers are only responsible for keeping costs low. Therefore, they are incentivized to pay the least amount for direct materials, direct labor and various overhead. Alternatively, if the responsibility center is a revenue center, managers are responsible for revenues (i.e., sales). If a manager is responsible for sales, not costs, she may not always opt for the lowest cost materials/labor because the lower cost inputs may result in lower quality outputs that are less demanded by customers, yielding lower sales. In fact, managers at revenue centers are only responsible for revenues, so they may be incentivized to buy expensive materials if it means that they can get a higher price or sell more outputs.

53. (LO 8.3) How might managers’ behavior be different if their sub-unit is classified as a cost center instead of a profit center?

When a responsibility center is defined as a cost center, managers are only responsible for keeping costs low. Therefore, they are incentivized to pay the least amount for direct materials, direct labor and various overhead. Alternatively, if the responsibility center is a profit center, managers are also responsible for revenues (i.e., sales). If a manager is responsible for sales, as well as costs, she may not always opt for the lowest cost materials/labor because the lower cost inputs may result in lower quality outputs that are less demanded by customers, yielding lower sales. Managers of a profit center must balance the costs with the sales to maximize profit.

54. (LO 8.4) Describe the steps for establishing effective performance measures.

There are four steps to establishing effective performance measures: Step 1. Identify goals. Organizations can have many different goals, including earning a profit, embracing sustainability, or achieving high customer-satisfaction scores.

Step 2. Create performance measures that closely align with goals. For example, if the goal is profitability, the performance measure may be the amount of sales made by each division. If the goal is high customer satisfaction, the performance measure might be the rating given on a customer satisfaction survey. For a sustainability goal, the organization may measure its energy consumption.

Step 3. Create specific performance targets for employees related to each performance target (for example, monthly sales targets). These targets will most likely vary by employee based on the employee’s specific job and other factors, such as location or historic performance.

Step 4. To motivate employees, assign rewards and recognition to employees based on their achievement of these performance targets. Awards and recognition could include bonuses for achieving sales targets and employee-of-the-month designations.

55. (LO 8.4) What are the characteristics of effective performance measures?

Performance measures are most effective when:  The organization knows the desired results,  The results can be clearly measured in a timely manner, and  The results are attainable and controllable by the employees responsible for the performance.

56. (LO 8.5) How are ROI, residual income, and EVA used to evaluate the success of investment centers?

ROI, Residual Income, and EVA are three of the most common financial performance measures used to evaluate an organization’s (financial) success. Each evaluates the profitability of the organization or division relative to the investment made.

When evaluating ROI, a higher ROI indicates that the investment center is generating more profit relative to the amount of resources invested. A lower ROI may indicate that the investment center is not generating enough profit to justify the resources invested. ROI is generally calculated as a percentage and therefore is easily comparable across units.

For Residual Income, a positive residual income indicates that the investment center is generating economic value and contributing to the overall profitability of the company. A negative residual income suggests that the investment center is not generating enough value to justify the cost of capital invested.

EVA is very similar to residual income, both measures only recognize return on investment after the cost of capital has been recovered. The main difference between the residual income and EVA calculations is the way operating income is calculated. EVA includes the effect of taxes on operating profit. A positive EVA indicates that the investment center is generating economic value and contributing to the overall value of the company. A negative EVA suggests that the investment center is not generating enough value to justify the cost of capital invested.

57. (LO 8.5) Describe the differences among ROI, RI, and EVA. ROI (Return on Investment) is a financial ratio that measures the return earned on an investment relative to its cost. It is calculated by dividing the net profit (or net income) generated by an investment by the investment's cost. The resulting figure is expressed as a percentage, which makes it easy to compare across divisions and/or organizations. ROI is a widely used performance metric because it provides a simple way to evaluate the profitability of an investment.

Residual income (RI) is essentially the amount of income earned after the sub-unit has been “charged” to repay the investment made by the organization. The charge is the implicit cost of using the asset and is calculated as the desired minimum rate of return multiplied by the investment amount.

ROI and residual income are both designed to help organizations evaluate the profitability of projects, taking into consideration the investment that the organization must make to implement the project. Often, organizations use these measures when they are considering whether to take on a new project. However, focusing solely on either ROI or residual income may cause managers to make different choices about whether to pursue that new venture. Specifically, focusing solely on ROI may give managers a distorted view of the benefits of a new project and make them less inclined to invest in it.

Economic value added (EVA) focuses on the profit generated by the business unit during a period. Its calculation is very similar to the RI calculation. As with RI, business units do not recognize any return on investment until the cost of capital has been recovered. The primary difference between RI and EVA is how operating income is calculated. EVA uses the after-tax operating income to measure performance.

58. (LO 8.6) What is the purpose of transfer prices? Why might companies charge different prices to internal customers compared to external customers?

Transfer prices are the prices that divisions charge (pay) to other divisions for component parts.

Transfer prices are, therefore, most commonly used in organizations that are vertically integrated, such that the same company can make finished goods and component parts. Transfer prices are often used to lower tax liabilities when the company operates in multiple tax jurisdictions. When it is beneficial to the organization as a whole, it may make sense to charge different amounts to internal customers compared to external customers.

59. (LO 8.6) Describe the methods management can use to set transfer prices.

Management can use three different methods for setting its transfer price: 1. In market-based transfer pricing, sub-unit management sets a transfer price based on the prices outside suppliers are currently charging.

2. In cost-based transfer pricing, management sets a transfer price that allows the sub-unit to recover its costs. The cost-based transfer price could cover the variable production costs, the variable and fixed costs, or the full cost of production.

3. In hybrid transfer pricing, the transfer price takes into consideration both the market price and the production costs. Often the price is set through negotiations between the buying and selling sub-units.

When determining which transfer pricing approach to use, the organization must consider whether the transfer price will be beneficial to the organization: Will it motivate an internal or external sale when appropriate?

To set the transfer price, organizations must consider:(1) whether there is an external supplier, (2) if the selling division’s costs are greater or less than the external supplier’s costs, and (3) if the selling division has product to sell, whether it can sell all of its inventory to external parties at a higher price.

60. (LO 8.6) How do organizations encourage sub-units to set transfer prices that do not provide the greatest amount of revenue to that sub-unit?







Organizations must ensure that the performance measures used align the interest of the divisions with the interest of the organization as a whole. This will allow sub-units to set transfer prices that may reduce the sub-unit’s profitability while simultaneously increasing the profitability of the company as a whole. The organization should therefore establish performance metrics that are shared across different sub-units to encourage cooperation and coordination. For example, sub-units may be evaluated based on the overall profitability of the organization, rather than their individual profits.

Other ways of encouraging collaboration across sub-units that benefits the organization as a whole include: Profit-sharing arrangements: Profit-sharing arrangements can incentivize sub-units to work together to maximize the overall profitability of the organization. This can be achieved by sharing profits among different sub-units based on their contributions to the organization's overall success.

Negotiation and dispute resolution procedures: Organizations can establish clear negotiation and dispute resolution procedures to facilitate fair and transparent transfer pricing agreements.

This can help to ensure that transfer prices are based on objective criteria and reflect the true economic value of the goods or services being transferred.

Independent review: Organizations can use independent third-party reviewers to evaluate transfer pricing agreements and ensure that they are fair and consistent with market prices.

61. (LO 8.6) How are transfer prices used to increase profitability?

In organizations that operate in multiple tax jurisdictions, it can be advantageous to locate more of its profits in lower tax jurisdictions. Therefore, transfer prices can be set in a way that shields more of the profit from higher taxes.

(Level 1) Brief Exercises 1. (LO 8.1) Indicate whether each control activity is a formal control or informal control. a. Code of ethics b. Policy manual c. Sales bonus plan d. Passwords on data files e. Employee evaluations f. Company culture g. Review of sales trends over time h. Mentoring programs Answer: formal controls – a, b, c ,d ,e , g informal controls – f, h

2. (LO 8.1) Indicate whether each control activity is a behavioral control or output control. a. Code of ethics b. Policy manual c. Sales bonus plan d. Passwords on data files e. Employee evaluations f. Review of sales trends over time Answer: behavioral controls – a, b, c, d output controls – e, f

3. (LO 8.2) Assume ChromaCoat is a global paint company that has multiple business segments including: a. b. c. d. e.

Paints and Coatings Performance Coatings Consumer Brands Latin America Coatings Global Finishes

It also has the following divisions that support its operations: i. ii. iii. iv. v. vi. vii.

Finance Legal Human Resources Information Technology Marketing Research and Development Supply Chain

The entire ChromaCoat organization is run by the President and CEO, William Raza.

Required: a. Draw an organizational chart for ChromaCoat assuming the company has a decentralized structure.

Solution:

b. Draw an organizational chart for Chroma Coat assuming the company has a centralized structure.

Solution:

4. (LO 8.6) Match the type of responsibility center to its definition: Type of center: a. Cost center b. Investment center c. Profit center d. Revenue center

Definitions: i. ii. iii. iv.

Sub-unit management is responsible for sales.

Sub-unit management is responsible for costs, sales, and investment decisions.

Sub-unit management is responsible for costs.

Sub-unit management is responsible for costs and sales.

Solution: a. b. c. d.

iii ii iv i

5. (LO 8.5) Mountaineer Outfitters, a fictitious company, has locations in Asheville, NC; Lexington, KY; and Charlottesville, VA. Mountaineer’s management wants to evaluate and compare performance at each of the three locations. Use the following data to calculate the ROI for each and determine which location has had the strongest performance.

Asheville, NC Lexington, KY Charlottesville, VA

Minimum Rate of Return 10% 10% 10%

Operating Income

Sales

Assets

$325,000 $330,000 $415,000

$875,000 $910,000 $920,000

$800,000 $750,000 $825,000

ROI = Operating Income/investments ROI Calculation

ROI

Asheville, NC

=325000/800000

41%

Lexington, KY

=330000/750000

44%

Charlottesville, VA

=415000/825000

50%

Based on the ROI calculations above, Charlottesville has the strongest performance.

6. (LO 8.5) Mountaineer Outfitters, a fictitious company, has locations in Asheville, NC; Lexington, KY; and Charlottesville, VA. Mountaineer’s management wants to evaluate and compare performance at each of the three locations. Use the following data to calculate the residual income for each and determine which location has had the strongest performance.

Minimum

Operating Income

Sales

Assets

Rate of Return Asheville, NC Lexington, KY Charlottesville, VA

10% 10% 10%

$325,000 $330,000 $415,000

$875,000 $910,000 $920,000

$800,000 $750,000 $825,000

Solution: Residual Income = Operating Income - (Min Rate Return X Investment) Minimum Rate of Return

Operating Income

Sales

Asheville, NC

10%

$325,000

$875,000

$800,000

Lexington, KY

10%

$330,000

$910,000

$750,000

Charlottesville, VA

10%

$415,000

$920,000

$825,000

Assets

RI Calculation

Residual Income

=325000 - (0.1 X 800000) =330000 - (0.1 X 750000) =415000 - (0.1 X 825000)

$

245,000.00

$

255,000.00

$

332,500.00

Based on the RI calculations above, Charlottesville has the strongest performance.

7. (LO 8.5) Mountaineer Outfitters, a fictitious company, has locations in Asheville, NC; Lexington, KY; and Charlottesville, VA. Mountaineer’s management wants to evaluate and compare performance at each of the three locations. Use the following data to calculate the EVA for each and determine which location has had the strongest performance. Note that there is a 30% tax rate for all locations, and Mountaineer has two sources of capital: (1) long-term debt of $4 million with a 17% interest rate, and (2) equity capital of $7 million with a 10% cost of capital. Assume the company has no current liabilities.

Location Asheville, NC Lexington, KY Charlottesville, VA

Minimum Rate of Return 10% 10% 10%

Operating Income

Sales

Assets

$325,000 $330,000 $415,000

$875,000 $910,000 $920,000

$800,000 $750,000 $825,000

Solution: First, you must calculate WACC: Cost of financing debt for WACC calculation:

= 10.69% (

)

Ashvillle EVA = $325,000 x .70 – 10.69%* x $800,000 =

$141,972.70

Lexington EVA = $330,000 x .70 – 10.69%* x $750,000 =

$150,818.20

Charlottesville EVA = $415,000 x .70 – 10.69%* x $825,000 = *unrounded

$202,300.00

Charlottesville has the strongest performance, based on EVA.

8. (LO 8.6) Heartwood Cabinets is setting its transfer price for cut walnut boards used in some of its most popular cabinet styles. Heartwood’s external supplier of walnut boards, Appleton Sawmill, charges between $250 and $290 per thousand feet for walnut. Heartwood’s sawmill can produce the cut walnut for $235 per thousand board feet. Its senior management negotiated a (potential) hybrid price of $265 per thousand board feet. Assume that Heartwood needs 125,000 board feet to produce enough walnut cabinets to meet anticipated demand. Marketing estimates that Heartwood will sell 5,500 cabinet units at $325 per unit. Assume the manufacturing division has fixed costs of $7,250 and variable costs of $6.50 per cabinet. Also assume the sawmill has purchase costs of $90 per 1,000 board feet and variable costs of $1.25 per 1,000 board feet.

Determine whether a transfer price based on the average market price, cost of manufacturing, or a hybrid yields the best outcome for Heartwood overall, the sawmill division, and the manufacturing division.

Solution: Because there are no tax implications, the overall effect on Heartwood’s operating income is the same regardless of the method.

The sawmill division is best off if it uses the Market Price.

The manufacturing division is best off it uses the Full Cost Price.

Board Feet Needed Appliance division sales (in units):

125,000 5,500

$325 unit

Market Price (per 1,000 ft)=

Full Cost (per 1,000 ft)=

Hybrid Cost (per 1,000 ft) =

$270

$235

$265

Sawmill Revenues from Manufacturing Division Costs Sawmill Purchase Costs Sawmill Fixed Costs Sawmill Variable Costs Total Costs

$

33,750

$

29,375

$

33,125

$

11,250

$

11,250

$

11,250

$ $

156 11,406

$ $

156 11,406

Sawmill Operating Income

$

22,344

$

Manufacturing Division Revenues (5,500 cabinets at $325 per) Costs

$

1,787,500

$

1,787,500

$

33,750

$

29,375

$

35,750

$

$

7,250

$

Total Costs

$

76,750

$

Manufacturing Division Operating Income

$

1,710,750

$

1,715,125

$

1,711,375

Total Operating Income for Both Business Units

$

1,733,094

$

1,733,094

$

1,733,094

Cost from Sawmill Manufacturing Variable Costs ($6.50 per cabinet) Manufacturing Fixed Costs

$ $ $ 17,969 21,719

$

156 11,406

1,787,500

$ 33,125 $ 35,750 35,750 7,250 $ $ 72,375 76,125

7,250

9. (LO 8.6) Refer to your calculations in Brief Exercise 8 for operating income for the sawmill and manufacturing divisions of Heartwood Cabinets. Now assume that the manufacturing division is located in the United States, which has a 26% tax rate, and the sawmill is located in Hungary, which has a 9% tax rate. Determine which transfer price yields the lowest tax obligation.

When you consider the implications of the different tax jurisdictions, Heartwood overall is best off with the Market Value method, despite it yielding the lowest operating income for the manufacturing division.

Board Feet Needed Appliance division sales (in units):

125,000 5,500 $325 unit Market Price

Full Cost

Hybrid Cost

(per 1,000 ft)=

(per 1,000 ft)=

(per 1,000 ft) =

$270

$235

$265

Sawmill Revenues from Manufacturing Division

$33,750

$29,375

$33,125

$11,250

$11,250

$11,250

-

-

Total Costs

156 $11,406

156 $11,406

156 $11,406

Sawmill Operating Income

$22,344

$17,969

$21,719

Sawmill Operating Income after tax (9%)

$20,333

$16,352

$19,764

$1,787,500

$1,787,500

$1,787,500

$33,750

$29,375

$33,125

35,750

35,750

35,750

7,250 $76,750

7,250 $72,375

7,250 $76,125

$1,710,750

$1,715,125

$1,711,375

$1,265,955

$1,269,193

$1,266,418

$1,286,288

$1,285,544

$1,286,182

Costs Sawmill Purchase Costs Sawmill Fixed Costs Sawmill Variable Costs

Manufacturing Division Revenues (5,500 cabinets at $325 per) Costs Cost from Saw Mill Manufacturing Variable Costs ($6.50 per cabinet) Manufacturing Fixed Costs Total Costs Manufacturing Division Operating Income Manufacturing Division Operating Income after tax (26%) Total Operating Income after tax for Both Business Units

10. (LO 8.5) A company’s recent operating results are shown below:

Sales Expenses Operating income Total assets Total liabilities

Operating Results $ $ $ $ $

4,370,000.00 2,728,000.00 1,642,000.00 9,818,000.00 7,663,000.00

The company has set a target return on investment (ROI) of 18%. Management is evaluating the following two plans.

Plan 1: Invest $1,200,000 in a new location that will produce $3,000,000 in additional sales each year.

Operating expenses will increase by $2,781,600 each year.

Plan 2: Reduce company costs by improving technology in the manufacturing process. An equipment investment of $730,000 will reduce annual operating costs by $315,000.

Which plan, if implemented, would result in the company having an ROI at or above the targeted ROI? Answer: Plan 2 Current Plan 1 Plan 2 Sales 4,370,000 7,370,000 4,370,000 Expenses 2,728,000 5,509,600 2,413,000 Operating Income 1,642,000 1,860,400 1,957,000 Total Assets 9,818,000 11,018,000 10,548,000 Total Liabilities 7,663,000 7,663,000 7,663,000 ROI = Operating Income/ Total Assets ROI 16.72% Target ROI 18.00%

16.89%

18.55%

11. (LO 8.5) Sparky’s Chicken Fingers is a (fictitious) regional fast-food restaurant specializing in fried chicken fingers and hot wings. Sparky’s CEO has asked the cost accountants to consider purchasing food trucks to set up some mobile locations around town during peak dining times. Brand-new food trucks with a new kitchen will cost Sparky’s $150,000 each. The cost accountants obtain data from other food-truck businesses in the area and determine that on average, each food truck is expected to increase sales by $60,000 per year, but also to increase expenses by $40,000 per year. Sparky’s has set a 9% minimum rate of return.

Sparky’s current financial data is provided:

Sparky's Current Financial Data Sales $ Expenses $ Operating income $ Total assets $ Total liabilities $ Required: Use Sparky’s current financial data to calculate:

2,000,000.00 1,250,000.00 750,000.00 3,250,000.00 2,663,000.00

(a) Sparky’s current residual income. (b) Sparky’s residual income if it purchases 1, 2, 3, or 4 new food trucks. (c) How many food trucks should Sparky’s purchase to maximize residual income?

Answer: (a) $457,500; (b) $464,000; $470,500; $477,000; $483,500; (c) 4 food trucks

12. (LO 8.5) ShopTime is a (fictitious) multinational retailer that sells groceries and home goods.

Corporate uses EVA to evaluate the financial performance of its regions. Use the data for ShopTime Asia, shown below, to calculate the EVA for this business unit.

Shoptime - Asia Total Assets Total Liabilities Current Liabilities Operating Profit (before tax) Operating Profit (after tax) Weighted-average Cost of Capital

75,000,000 60,000,000 48,000,000 22,000,000 17,000,000 12%

Answer: EVA = After tax operating income - (WACC X (Total Assets - Current Liabilities) EVA = 17,000,000 -(0.12 X (75,000,000 - 48,000,000) EVA = $13,760,000 13 (LO 4). Design effective performance measures for each of the following organizations: a. Tifosi Optics is an eyewear brand offering a wide range of eyewear for various sports, including cycling, running, golf, and baseball. Assume its primary goals are to earn a profit

while becoming the chosen eyewear for youth and collegiate athletics. Currently Tifosi is organized such that it only has one responsibility center. b. BlueRidge Chair Works specializes in producing handcrafted outdoor furniture. Assume its primary goals are to produce durable, unique, high-quality furniture, promote sustainability, and produce high revenues, while maintaining low costs. At BlueRidge Chair Works, the production facilities are a revenue center, while the accounting, human resources, and IT functions are combined into a single cost center. c. Assume General Electric has three business segments: Power, Aviation, and Renewable Energy. Each segment operates as an investment center.

Answer: Performance measures are most effective when the organization knows the desired results, the results can be clearly measured in a timely manner, and results are attainable and controllable by the employees responsible for the performance. a. Because Tifosi Optics only has one responsibility center and its primary goals relate to profitability, we can assume it is a profit center. In this case, the performance measures should relate to maximizing sales and minimizing costs. Performance measures related to sales could also directly address growing the number of athletic associations that exclusively use Tifosi Optics eyewear. b. Blue Ridge Chair Works has a revenue center and a separate cost center. In this case, the managers in the revenue center will be incentivized based on sales, while the managers of the cost centers will be incentivized to keep costs low. In both cases, the managers may make decisions that are suboptimal for the organization because they are singularly focused. Therefore, the organization may supplement those performance measures with other policies or other collaboration/ coordination among the divisions. c. General Electric has three responsibility centers (Power, Aviation, and Renewable Energy) and each operates as an investment center. Therefore, the managers will be responsible for the revenues, costs and investments of their division. The profitability measures, ROI, RI, or EVA all are effective measures of performance commonly used by investment centers because they include the investment the division makes in the assets needed to operate. ROI may be most useful for comparing performance across divisions because it is reported as a percentage.

14. (LO 8.2) Use the internet to research decentralized and centralized organizations. a. Identify one (real) manufacturing organization with a decentralized structure and describe its structure. Comment on whether you think this structure is appropriate (or not) and why. b. Identify one service organization with a centralized structure and describe its structure.

Comment on whether you think this structure is appropriate (or not) and why.

Solution: Student answers will vary based on their internet research.

Example Solution a. One example of a manufacturing organization with a decentralized structure is Nestle, the world’s largest food and beverage company. Nestle has a decentralized operating structure, which allows it to operate in more than 190 countries with a diverse portfolio of products, including coffee, bottled water, chocolate, pet food, and infant nutrition.

The company's operations are divided into geographically-based business units, each with its own manufacturing facilities and management team. For example, Nestle's operations in North America are managed by its Nestle USA business unit, which has manufacturing facilities across the United States and Canada. Similarly, its operations in Europe, Middle East, and North Africa (EMENA) are managed by its Nestle EMENA business unit, which has manufacturing facilities across the region.

Each business unit is responsible for developing and implementing its own strategies and plans, based on the unique market conditions and consumer preferences of its region. This allows Nestle to be more responsive to local market demands and better leverage the expertise and resources of its local teams.

This decentralized structure makes sense for a company like Nestle because the preferences of its customers are likely to vary widely based on their location.

Example Solution b. One example of a service organization with a centralized structure is McKinsey, which is a management consulting firm that provides advisory services to businesses, governments, and non-profit organizations around the world. It is headquartered in New York City. All strategic decisions are made at headquarters and all operations and services are managed from the central location. As a result of its centralized structure, all employees are subjected to similar performance measurement systems. They also receive similar training and are taught consistent methodology, despite being located around the world. This allows McKinsey to provide a consistent quality of service to all clients and allows the company to have a recognizable, respected global brand. A major drawback to centralization is that the company may be inflexible and slow to respond to local markets. However, a global company, like McKinsey (or other consulting companies) can establish local partnerships and affiliations in large markets to better understand and serve the needs of the clients in those regions while maintaining a centralized operating structure.

15.(LO 8. 6) At Anderson Products, the plastics division is a profit center that sells its products to external customers as well as to other internal profit centers. Recently, the sales manager has approved significant sales to another Anderson Products division that is also a profit center for a price that is below the market-based transfer price. Provide a justification for this decision by the sales manager.

Solution: Selling the product internally allows the division to avoid paying sales commissions and incurring the cost of collections thus justifying a transfer price that is lower than the market price.

Other costs such as promotion and advertising might also be avoided.

(Level 1) Problems 1. (LO 8.5) Jittery Joe’s Coffee Roasters produces and sells freshly roasted coffee beans. Assume the company sells everything it produces each month. Management expects the following financial and production results for each month in 2023.

Current assets Long-term assets Total assets

Production Target ROI Fixed costs Variable costs

$ $ $

500,000 1,005,000 1,505,000

$ $

90,000 Cans of roasted coffee per month 25% 300,000 5 per can

What is the minimum that Jittery Joe’s must charge for each can of coffee to achieve its target ROI? Answer: $12.50 ROI = Operating Income/Investment or ROI = Operating Income/ Total Assets 25% = ((90,000 X minimum price)-(90,000 X $5)- $300,000)/$1,505,000

2. (LO 8.5 ) Jittery Joe’s Coffee Roasters produces and sells freshly roasted coffee beans. Assume the company sells everything it produces each month. Also assume that it sells each can of coffee for $12.00. Management expects the following financial and production results for each month in 2023:

Current assets Long-term assets Total assets

Production Target ROI Fixed costs Variable costs

$ $ $

500,000 1,005,000 1,505,000

$ $

90,000 Cans of roasted coffee per month 25% 300,000 5 per can

Required rate of return

14%

Calculate residual income for Jittery Joe’s.

Answer: Residual Income = Operating Income – (required rate of return X investment) RI =((90,000 X $12)-(90,000 X $5) – $300,000) – (0.14 X 1,505,000) RI = $119,300.00

3. (LO 8.5) Assume that Marucci Bats has 4 production facilities in the United States. The average sales price for each bat is $400. The anticipated financial results for each geographic division (separately) are shown below. For each production facility, calculate the ROI (rounded to the nearest whole percentage) and residual income (rounded to the nearest whole number) and answer questions a – d.

$ $ $

North 1,900,000 $ 3,705,000 $ 5,605,000 $

South 1,876,000 $ 3,900,000 $ 5,776,000 $

East 200,000 $ 3,910,000 $ 4,110,000 $

West 1,700,000 3,900,700 5,600,700

Production Target ROI Fixed Costs $ Variable Costs $ Required Rate of Return

28,000 25% 1,900,000 $ 290 $ 20%

30,000 25% 1,910,000 $ 298 $ 20%

27,000 25% 1,899,000 $ 276 $ 20%

32,000 25% 2,300,000 294 20%

Current Assets Long Term Assets Total Asssets

(a) Which production facility has the highest ROI? (b) Which, if any, production facilities do not achieve the target ROI? (c) Which, if any, production facilities do not meet the required rate of return? (d) Which production facility has the lowest residual income?

Answer: ROI = Operating Income/Investment or ROI = Operating Income/ Assets Residual Income = Operating Income – (required rate of return X investment)

Operating Income ROI Residual Income

$ $

North 1,180,000 21% 59,000.00

$ $

South 1,150,000 20% (5,200.00)

$ $

East 1,449,000 35% 627,000.00

$ $

West 1,092,000 19% (28,140.00)

(a) East (b) North, South, West (c) West (d) West

4. (LO 8.5) Assume Phipps Chips, a fictious snack company, makes artisan potato chips in a variety of flavors. The company sells 12-ounce bags of a variety of flavors in grocery store chains such as Whole Foods and Fresh Market for $8.00 a bag. Use the following financial data to calculate the ROI, RI, and EVA for Phipps Chips. Round all numbers and percentages to 2 decimal points.

Remember: Interest costs are tax deductible, so you will need to consider the after-tax cost of financing debt when calculating EVA.

(a) What is Phipps Chips’ ROI? Round your answer to two decimal places. (b) What is Phipps Chips’ residual income? Round your answer to the nearest dollar.

(c) What is Phipps Chips’ EVA? For calculations, round numbers to three decimal places (eg., 0.755). Round your answer to the nearest dollar.

Residual Income = Operating Income – (required rate of return X investment) EVA = After Tax Operating Income – (WACC X (Total Assets – Current Liabilities)) For WACC Calculation: Interest Rate X (1-tax rate) WACC = (0.075 X Market value of Debt)+ (Interest Rate X Market Value of Equity)/ (Market Value of Debt + Market Value of Equity) (a) Operating Income = (Production Units X Sales Price) – ((Production Units X Variable Costs)Fixed Costs) Operating Income = (100,000 units X $8.00) – ((100,000 units X $1.50)-$205,000) Operating Income = 445,000

(b) (

)

(c) First, you must calculate WACC: Cost of financing debt for WACC calculation:

Cost of financing debt = 0.075

= 0.825 ( (

) )

$123,375

5. (LO 8.5 ) Deluxxe Burgers operates four restaurants in the Washington, DC area. Use the following data to calculate ROI using the DuPont method to compare the performance of the four restaurants.

Congress Heights Dupont Circle Foggy Bottom Georgetown $ 1,650,000 $ 1,815,000 $ 1,850,000 $ 1,900,500 $ 1,900,000 $ 2,125,000 $ 1,600,000 $ 1,760,000 $ 3,550,000 $ 3,940,000 $ 3,450,000 $ 3,660,500

Current Assets Long Term Assets Total Assets

Monthly Sales Target ROI Fixed Costs Variable Operational Costs (per $100,000 in sales) Required Rate of Return ROI Residual Income Income

$

1,000,000 $ 11% 800,000 $ 3,000 $ 12%

1,250,000 $ 12% 700,000 $ 2,500 $ 12%

1,250,000 $ 10% 800,000 $ 3,250 $ 12%

1,250,000 13% 750,000 5,000 12%

5% (256,000.00) $ 170,000 $

13% 45,950.00 $ 518,750 $

12% (4,625.00) $ 409,375 $

12% (1,760.00) 437,500

$ $

$ $

Answer: The Dupont method calculates ROI as the product of return on sales and asset turnover.

Congress Heights

Dupont Circle

Foggy Bottom

Georgetown

Investment

$3,550,000

$3,940,000

$3,450,000

$3,660,500

Revenues

$1,000,000

$1,250,000

$1,250,000

$1,250,000

Income

$170,000

$518,750

$409,375

$437,500

Return on Sales: Income/Revenues

17.00%

41.50%

32.75%

35.00%

Asset Turnover: Revenues/Investme nt

28.17%

31.73%

36.23%

34.15%

4.79%

13.17%

11.87%

11.95%

ROI Using Dupont Method: Return on Sales x Asset Turnover

6. (LO 8.5 ) Precision Iron Works services large industrial clients in the southwest United States.

Annual financial results from last year are as follows:

Executive management has offered each division the opportunity to invest $1.1 million in new equipment that will result in an additional 1,500 units in sales. Calculate the ROI and RI for each division currently and with the proposed new investment. Answer the following questions related to which, if any, division will make the investment. a. Assume division management is incentivized based on trends in ROI only. Explain why each division would or would not choose to invest. b. Assume division management is incentivized based on RI only. Explain why each division would or would not choose to invest. c. What do your results reveal about differences between ROI and RI as methods for incentivizing management?

Answer: ROI = Operating Income/Investment or ROI = Operating Income/ Assets Residual Income = Operating Income – (Required rate of return x Investment)

ROI Residual Income

Detailed calculations:

Division A A with new Project Division B B with New Project 21% 20% 21% 20% $ 59,000.00 $ 4,000.00 $ 69,300.00 $ (700.00)

a. Neither division is likely to invest if management is incentivized using trends ROI only because the investment results in a decrease in ROI for both. Importantly, the ROI for both divisions, while lower with the investment, still meets both the target ROI and the required rate of return.

Therefore, if management is more focused on the actual ROI and not the trend in ROI, then both should make the investment. b. Residual income for both divisions decrease with the investment. Therefore, when incentivized with residual income alone, managers of both divisions are unlikely to invest.

c. ROI can lead to distorted incentives because managers may be disincentivized to accept good projects that lead to a good return for the company when taking on those good projects makes their individual performance appear weaker.

7. (LO 8.2) Microdata is a fictional electronics manufacturing company that specializes in the production of electronic components such as microchips and circuit boards. It has long operated as a centralized organization, with all divisions and operations managed by one central control system. But, as the company has grown, and increased its international presence, there is growing support for reorganizing with a decentralized structure.

The CEO, Dr. Asif Ahmed, has turned to you, Microdata’s head cost accountant to prepare a memo explaining the following: (1) The benefits of a decentralized structure.

(2) The drawbacks of a decentralized structure.

(3) The specific changes that Microdata would make to change from a centralized to a decentralized structure.

Note that Microdata has significant operations in the United States, Argentina, and Germany and if the company transforms to a decentralized structure it would organize around these three geographic locations.

Solutions will vary. Example: Subject: Considerations for Decentralizing Microdata's Organizational Structure From: [Your Name] To: Dr. Asif Ahmed, CEO Microdata Dear Dr. Ahmed, Thank you for the opportunity to share my insights on Microdata’s potential transition from a centralized to a decentralized organizational structure. This shift can undoubtedly impact our operation's efficiency and profitability, so I have provided a discussion below of the potential benefits, drawbacks, and some essential changes we would need to make for this transition.

Benefits of a Decentralized Structure Increased responsiveness to customers: In a decentralized structure, local managers have greater autonomy to make decisions. This could enable quicker responses to market changes in different geographic regions, particularly in our case - the U.S., Argentina, and Germany.

Enhanced motivation for managers: Performance measures are most effective in motivating managers when those measures are based on activities within the managers’ control. By treating our business units as separate operating divisions, the outcomes will be more controllable by the individual managers and therefore more motivating.

Increased training and advancement opportunities for managers: Because business-unit managers have responsibility and authority over their business units, they are likely to be more focused on developing their skills. This will help the company, as a whole, develop a larger base of future organizational leaders. Also, these opportunities will be appealing and motivational for current employees, hopefully leading to better retention, allowing us to promote from within.

Clearing the way for senior management to focus on strategic decisions: Because business-unit managers are responsible for business-unit decisions, senior management can focus on strategic decisions that affect the organization as a whole.

Drawbacks of a Decentralized Structure Business units may engage in dysfunctional competition: In a decentralized organization, business-unit managers may see themselves as being in competition with other business-unit managers. This competition may lead them to prioritize the performance of their business unit over the success of the organization as a whole, and they may be unwilling to help other business units. They may, therefore, make decisions that are not best for the organization overall.

Business units may duplicate activities, causing inefficient redundancies: In decentralized organizations, some jobs and activities are done in each business unit. For example, each sub-unit will probably have its own IT department and may have its own human resources department. As a result, the overall organization will have more employees dedicated to these activities than it might need if all operations were centralized.

Business units might find it difficult to coordinate activities and data across the organization: As a centralized organization, Microdata is able to leverage its knowledge and power to its advantage – providing us with the opportunities to influence supplier pricing, etc. However, if we decentralize, our business-unit managers may not have the knowledge or power to get preferred pricing. Also, when each business unit maintains its own data, it can be more difficult to make decisions that are optimal for the entire organization.

Necessary Changes to transition from a Centralized to a Decentralized Structure Restructuring of management: Each geographic region (U.S., Argentina, and Germany) would require its own management team. These teams would be responsible for their respective regional operations, sales, marketing, HR, and finance.

Implementing New Systems and Processes: To ensure effective communication and coordination across different regions, we would need to implement robust information systems, clear reporting lines, and procedures.

Financial Management: We would need to create systems for tracking and evaluating the performance of each region independently. This would involve designing region-specific budgets, targets, and performance metrics.

Policy Alignment: To ensure consistency across regions and maintain our corporate culture and ethics, we would need to establish global policies and guidelines that all regions would need to follow.

The proposed organizational shift demands significant changes, and its success will be largely contingent on careful planning and execution.

I am happy to discuss this further if you are available to delve deeper into any aspect you want to explore further.

Best Regards, [Your Name] Head Cost Accountant, Microdata

8. (LO 8.3) Piedmont Pharmaceuticals is a multinational healthcare products company. The company has four divisions, each with its own research, manufacturing operations, and management teams. Division

1 has its own production facility, located in a major industrial park near the city of Shenzhen China.

Division 1 produces the generic drugs that Piedmont sells. Division 2 is located near Raleigh, North Carolina, in the United States. Here Piedmont has extensive R & D facilities and focuses on the development of new and improvement of existing vaccines. Division 3 is located outside of Tokyo, Japan, and also has an extensive R & D facility and focuses on the development and production of drugs derived from living organisms, such as bacteria or mammalian cells. These drugs are generally used to treat complex medical conditions such as cancers, autoimmune disorders and genetic diseases. Finally, Division 4 is located near Frankfurt, Germany, and branded (prescription) drugs and various over the counter (OTC) drugs are developed in this facility.

Each division sets its own production schedules and develops performance measures based on cost variances, product quality, sales, and development of new patents, if applicable. a. Is Piedmont Pharmaceuticals organized with a centralized or decentralized structure? b. Is each of the four divisions a cost center, revenue center, or profit center? c. If Piedmont were to restructure such that senior management of the entire company set the production schedules and evaluated each of the divisions using the same performance metrics, how would this change your answers to a, and b? d. Do you think Piedmont Pharmaceuticals should be set up as a centralized or decentralized organization? Explain your answer.

Solution: a. Decentralized b. Divisions 1, 3 and 4 are profit centers. Division 2 is a cost center. c. Piedmont would adopt a centralized structure. Based on the information provided, it is likely that the divisions would still be classified in the same way. However, if the divisions are no longer responsible for sales, they may all shift to cost centers. d. While Piedmont could be successful if set up as either a centralized or a decentralized organization. However, with a decentralized structure, management has the ability to be more responsive to customers. Given the different needs of the customers for each facility, a decentralized structure makes sense.

9. (LO 8.4) Caliber Consulting is a fictitious consulting firm headquartered in San Jose, California. It specializes in the tech sector, but accepts clients from all industries around the world. It has a centralized structure, but has vice presidents that oversee operations in each of its four major geographic region so that it can respond quickly to changing customer needs. You have been tasked with helping Caliber develop an effective performance measurement program. Use the four-step plan for establishing effective performance measures and design an effective performance measurement program.

Solution: The four step process is:

1.

2.

3.

4.

Identify goals Create performance measures that closely align with goals Create specific performance targets for employees related to each performance target Assign rewards and recognition to employees based on their achievement of these performance targets

Student solutions may vary, but an example includes: Step 1: Identify Goals

Potential goals for Caliber Consulting: a. Business Growth: Increase company revenue by 20% over the next fiscal year. b. Client Satisfaction: Achieve a client satisfaction rating of at least 90%. c. Market Expansion: Expand client base in new sectors, with a target of acquiring 15 new clients outside the tech sector in the next fiscal year. d. Employee Retention: Maintain an employee retention rate of 90% or higher.

Step 2: Create Performance Measures Aligned with Goals Goal A Business Growth: B

Client Satisfaction:

C

Market Expansion:

D

Employee Retention:

Performance Measures Monitor quarterly revenue and compare it against previous periods and projected forecasts.

Use client satisfaction surveys and feedback forms to quantify client satisfaction.

Track the number and type of new clients acquired outside the tech sector.

Monitor employee turnover rates and gather data on reasons for departure when possible.

Step 3: Create Specific Performance Targets for Employees Goal A Business Growth:

Specific Performance Targets for Employees Each consultant should aim to increase their billable hours or sales by a set percentage. Each regional VP should aim for a specific increase in revenue from their region.

B

Client Satisfaction:

Each consultant should aim for a client satisfaction rating of 90% or higher in their post-project reviews.

C

Market Expansion:

D

Employee Retention:

Sales and marketing teams should aim to acquire a set number of new clients outside the tech sector each quarter.

HR and management should aim to maintain an employee retention rate above 90%, implementing initiatives to boost morale, professional development, and job satisfaction.

Step 4: Assign Rewards and Recognition Goal A Business Growth:

B

Client Satisfaction:

C

Market Expansion:

D

Employee Retention:

Rewards for Achievement of Specific Performance Targets Consultants who meet or exceed their growth targets receive a performance bonus. Regional VPs achieving their regional growth targets could be recognized at company meetings and potentially receive a larger annual bonus.

Consultants with high client satisfaction scores (90% or above) receive public recognition, and those consistently achieving excellent feedback could be considered for promotions.

Sales and marketing teams successfully expanding into new sectors could receive a team bonus or other perks like an extra vacation day.

HR representatives and managers who successfully implement initiatives to boost retention rates (above 90%) can be acknowledged through company-wide communications, and successful strategies could be shared across regions.

10. (LO 8.1) For each of the following controls, identify if it is a formal or informal control, and if it is a behavioral or output control.

Control Quality control procedures Training and development programs Code of Conduct Employee Incentives Quality inspections Customer satisfaction surveys Inventory tracking systems Company culture Open communication Customer feedback Standard operating procedures

Formal or Informal Control or Neither Formal Formal

Behavioral or Output or Neither

Formal Formal Formal Formal Formal Informal Informal Informal Formal

Behavioral Behavioral Output Output Output Behavioral Behavioral Output Behavioral

Behavioral Behavioral

11. (LO 8.6) Assume NovaTech Innovations is a technology company that produces a variety of “smart” household appliances, like refrigerators and dishwashers that connect to the internet. NovaTech has a decentralized structure. The smart tech division produces the technology that can be embedded in various household appliances. This technology can be sold to external producers of appliances (like GE

or Whirlpool) or can be transferred internally to NovaTech’s own appliance divisions. Similarly, NovaTech’s appliance divisions can buy similar smart tech from external supplier for $15 per unit. Use the following data to calculate the effects of an internal transfer of technology using a (a) market-based, (b) cost-based and (c) hybrid transfer price.     

NovaTech sells its smart technology to external customers for $18 per unit.

NovaTech’s appliance division’s production budget plans for 750,000 appliances sold per year.

NovaTech’s smart tech division produces 1,500,000 smart technology devices per year.

The smart tech division has $50,000 in fixed costs and variable costs average $7.00 per unit.

The appliance division sells appliances for $2500. Fixed manufacturing costs are $75,000. The cost of the smart technology will vary based on the agreed-upon price. Other variable costs amount to $150 per unit.

Required: Calculate the operating income for the smart tech division, appliance division, and NovaTech overall based only on the internal sales between the smart tech and appliance divisions using: (a) Market Price (b) Full Cost Price (c) Hybrid Price of $17 per unit Smart Tech production (in units): Appliance division sales (in units):

1,500,000 750,000 Market Price (per unit)=

Smart Tech Division Revenues from Appliance Division Costs Smart Tech Fixed Costs Smart Tech Variable Costs ($7 per unit) Total Costs Smart Tech Operating Income Appliance Division Revenues (750,000 appliances at $2,500 per) Costs Cost of Smart Tech Appliance Variable Costs Appliance Fixed Costs Total Costs Appliance Division Operating Income

Full Cost (per unit)=

Hybrid Cost (per unit) =

$

18

$

10

$

17

$

13,500,000

$

7,500,000

$

12,750,000

$

50,000

$

50,000

$

50,000

$

5,250,000

$

5,250,000

$

5,250,000

$ $

5,300,000 8,200,000

$ $

5,300,000 2,200,000

$ $

5,300,000 7,450,000

$

1,875,000,000

$

1,875,000,000

$

1,875,000,000

$ $ $ $ $

13,500,000 112,500,000 75,000 126,075,000 1,748,925,000

$ $ $ $ $

7,500,000 112,500,000 75,000 120,075,000 1,754,925,000

$ $ $ $ $

12,750,000 112,500,000 75,000 125,325,000 1,749,675,000

Total Operating Income for Both Business Units

$

1,757,125,000

$

1,757,125,000

$

1,757,125,000

12. (LO 8.6) Use the same data described in Problem 11 to calculate and compare the impact of using Market Price, Full Cost Price, and Hybrid Price as the transfer price between the Smart Tech and Appliance Divisions. However, now assume that NovaTech is a global enterprise with the Smart Tech division located in the U.S., where there is a 21% tax rate, and the appliance division located in Germany, where there is a 30% tax rate.

Required: Calculate the operating income for the smart tech division, appliance division, and NovaTech overall based only on the internal sales between the smart tech and appliance divisions using: (a) Market Price (b) Full Cost Price (c) Hybrid Price of $17 per unit (d) Determine which transfer price generates the largest operating income for NovaTech overall when the international tax rates are applied. (The largest operating income is shown with shading) Smart Tech production (in units): Appliance division sales (in units):

1,500,000 750,000 Market Price (per unit)= $18

Smart Tech Division Revenues from Appliance Division Costs Smart Tech Fixed Costs

13,500,000

$

7,500,000

$

12,750,000

$

50,000 $ 5,250,000 $ 5,300,000 8,200,000 6,478,000

$

50,000 $ 5,250,000

$

50,000 $ 5,250000 $ 5,300,000 7,450,000 5,885,500

Total Costs

Appliance Division Revenues ($2,500 per unit) Costs Cost of Smart Tech Appliance Variable Costs Appliance Fixed Costs Total Costs Appliance Division Operating Income

Hybrid Cost (per unit) = $17

$

Smart Tech Variable Costs ($7 per unit)

Smart Tech Operating Income Income after taxes of 21%

Full Cost (per unit)= $10

$ $

$

5,300,000 $ $

2,200,000 1,738,000

$ $

$ 1,875,000,000

$ 1,875,000,000

$ 1,875,000,000

$ 13,500,000 $ 112,500,000 $ 75,000 $ 126,075,000 $ 1,748,925,000

$ 7,500,000 $ 112,500,000 $ 75,000 $ 120,075,000 $ 1,754,925,000

$ 12,750,000 $ 112,500,000 $ 75,000 $ 125,325,000 $ 1,749,675,000

Income after Corporate Tax Rate of 30%

$ 1,224,247,500

$ 1,228,447,500

$ 1,224,772,500

Total Operating Income for Both Business $ 1,230,725,500 $ 1,230,185,500 $ 1,230,658,000 Units 13. (LO 8.6) Use the same data described in Problem 11 to calculate and compare the impact of using Market Price, Full Cost Price, and Hybrid Price as the transfer price between the Smart Tech and Appliance Divisions. However, assume that NovaTech is considering moving its Smart Tech operations to Ireland (with a 12.5% tax rate), Dubai (with a 9% tax rate) or Mexico (with a 30% tax rate). The company has already decided to move the appliance division to Mexico.

Required: Consider the impact of the different tax rates on overall operating income for NovaTech using a Market Price, Full Cost Price, or Hybrid Price transfer price. a. Current results (with 21% tax for Smart Tech Division and 30% tax for Appliance Division) Smart Tech production (in units): Appliance division sales (in units):

1,500,000 750,000 Market Price (per unit)=

Smart Tech Division Revenues from Appliance Division Costs Smart Tech Fixed Costs

18

$

10

$

17

$

13,500,000

$

7,500,000

$

12,750,000

$

50,000

$

50,000

$

50,000

$ $

$5,250,000 $ 5,300,000 2,200,000 1,738,000

$5,250,000 $ 5,300,000 $ 7,450,000 $ 5,885,500

$ 1,875,000,000

$ 1,875,000,000

$ 1,875,000,000

$ 13,500,000 $ 112,500,000 $ 75,000 $ 126,075,000 $ 1,748,925,000

$ 7,500,000 $ 112,500,000 $ 75,000 $ 120,075,000 $ 1,754,925,000

$ 12,750,000 $ 112,500,000 $ 75,000 $ 125,325,000 $ 1,749,675,000

$5,250,000

Total Costs Income after taxes of 21%

Appliance Division Revenues ($2,500 per unit) Costs Cost of Smart Tech Appliance Variable Costs Appliance Fixed Costs Total Costs Appliance Division Operating Income

Hybrid Cost (per unit) =

$

Smart Tech Variable Costs ($7 per unit)

Smart Tech Operating Income

Full Cost (per unit)=

$ $

$ 5,300,000 8,200,,000 6,478,000

Income after Corporate Tax Rate of 30%

$ 1,224,247,500

$ 1,228,447,500

$ 1,224,772,500

Total Operating Inc after Tax for NovaTech

$ 1,230,725,500

$ 1,230,185,500

$ 1,230,658,000

(1) [Connect Required 1-3] Recalculate the Income after taxes for each tax rate (for Smart Tech):

(2) [Connect Required 4-7] Because the tax rate in Mexico is the same as the tax rate in Germany, the after tax income for the appliance division has not changed.

Add that to the Income after taxes for the appliance division assuming a 30% tax rate in Mexico:

b) [Connect Required 8] Which location and transfer price decision yields the largest overall income?

As shown in the table above, using the Market Price while locating the Smart Tech division in Dubai yields the largest overall income for Nova Tech.

14. (LO 8.5) Assume that Big League Bats has 4 production facilities in the United States. The average sales price for each bat is $325. The anticipated financial results for each division (separately) are shown below. Calculate the ROI and residual income for each production facility and answer questions a – f.

Current Assets Long Term Assets Total Assets

Division 1 $2,000,00 0 $3,000,00 0 $5,000,00

Division 2 $1,900,000 $4,500,000 $6,400,000

Division 3 $2,500,00 0 $3,595,00 0 $6,095,00

Division 4 $2,250,000 $4,000,000 $6,250,000

0 Production Target ROI Fixed Costs Variable Costs Required Rate of Return

46,000 25% $3,000,00 0 $250

0 48,000 25%

$225

38,000 25% $3,500,00 0 $215

10%

10%

$3,200,000

10%

52,000 25% $2,980,000 $250 10%

Solution:

(a) Which production facility has the highest ROI (rounded to the closest percentage)?

Division

ROI Calculation

ROI

ROI = Operating Income/ Total Assets 1

$450,000 / $5,000,000

9%

2

$1,600,000/$6,400,000

25%

3

$680,000/$6,095,000

11%

4

$920,000/$6,250,000

15%

Division 2 has the highest ROI with 25% (b) Which production facility has the lowest residual income?

Division Residual Income Calculation

Residual Income

1

Residual Income = Operating Income – (Required rate of return * Total Assets) $450,000 – (10%* $5,000,000)

$(50,000)

2

$1,600,000 – (10% * $6,400,000)

$960,000

3

$680,000 – (10% * $6,095,000)

$70,500

4

$920,000 – (10% * $6,250,000)

$295,000

Division 1 has the lowest residual income with negative $50,000. (c) If Big League decided to sell off 25% of its long-term assets from Division 4, how does that change its ROI and Residual income? Assume that long-term assets is reduced by 25 percent but no other balance sheet items are changed. Provide the percentage and dollar value impacts of the change and a written description of why this change affects ROI and residual income in this way.

Average Sales Price

Current Assets Long-Term Assets Total Assets Production Target ROI Fixed Costs Variable Costs Required Rate of Return Operating Income ROI Residual Income

$325.00 Division 4 $2,250,000 $4,000,000 $6,250,000

Division 4 after sale of assets $2,250,000 $3,000,000 $5,250,000

52,000 25% $2,980,000 $250 10%

52,000 25% $2,980,000 $250 10%

$920,000 15% $295,000

$920,000 18% $395,000

ROI increases (from 15% to 18%) Residual Income increases by $100,000 Because ROI is a measure of how well Big League’s assets have performed, by decreasing the amount of assets it uses without any change in the operating income, the company has essentially done more with less. Thus, ROI increases.

Residual Income is a measure of income the company has left after it has paid its debts. In this case, when the amount of assets decreases, the required rate of return is applied to a smaller amount and therefore the amount of income dedicated to repaying its debts is reduced, leaving a greater amount of income as residual.

Before the change:

Operating income: (52,000*$325) – (52,000*$250) - $3,000,000 = $920,000 ROI : $920,000/$6,250,000 = 15% Residual Income: $920,000 – (10% * $6,250,000) = $295,000 After the change: Operating income: (52,000*$325) – (52,000*$250) - $3,000,000 = $920,000 ROI : $920,000/$5,250,000 = 18% Residual Income: $920,000 – (10% * $5,250,000) = $395,000

(d) Assume Division 1 management is able to reduce its variable costs by $10 per bat, how does this change its ROI and Residual income? Provide the percentage and dollar value impacts of the change and a written description of why this change affects ROI and residual income in this way.

Average Sales Price

$325.00 Division 1 $2,000,000 $3,000,000 $5,000,000

Division 1 after reduction of variable cost $2,000,000 $3,000,000 $5,000,000

Production Target ROI Fixed Costs Variable Costs Required Rate of Return

46,000 25% $3,000,000 $250

46,000 25% $3,000,000 $250

10%

10%

Operating Income ROI Residual Income

$450,000 9% ($50,000)

$910,000 18% $410,000

Current Assets Long-Term Assets Total Assets

ROI increases to 18% Residual income increases to $410,000 Both ROI and Residual income are measures of how strong the company’s income is in comparison to its assets. By decreasing variable cost, the operating income increases which improves both ROI and Residual income.

Before the change:

Operating income: (46,000*$325) – (46,000*$250) - $3,000,000 = $450,000 ROI : $450,000/$5,000,000 = 9% Residual Income: $450,000 – (10% * $5,000,000) = ($50,000) After the change: Operating income: (46,000*$325) – (46,000*$240) - $3,000,000 = $910,000 ROI : $910,000/$5,000,000 = 18% Residual Income: $910,000 – (10% * $5,000,000) = $410,000

e) Assume Division 2 has production problems and shuts down operations for approximately two weeks, reducing production by 2,000 units. How does this change its ROI and Residual income? Include the percentage or dollar value impact. Provide the percentage and dollar value impacts of the change and a written description of why this change affects ROI and residual income in this way.

ROI decreases from 25% to 22% Residual income reduces by $200,000 (from $960,000 to $760,000).

A decrease in production decreases operating income. Because both ROI and Residual income are measures of how strong the company’s income is in comparison to its assets, a reduction in operating income results in weaker performance.

Before the change: Operating income: (48,000*$325) – (46,000*$225) - $3,000,000 = $1,600,000 ROI : $1,600,000/$6,400,000 = 25% Residual Income: $1,600,000 – (10% * $6,400,000) = $960,000 After the change: Operating income: (48,000*$325) – (46,000*$225) - $3,000,000 = $1,400,000 ROI : $1,400,000/$6,400,000 = 22% Residual Income: $1,400,000 – (10% * $6,400,000) = $760,000 f)

Assume Division 3 actually has a lower required rate of return than the other divisions.

The required rate or return is 9% instead of 10%. How does this change its ROI and Residual income? Include the percentage or dollar value impact. Provide the percentage and dollar value impacts of the change and a written description of why this change affects ROI and residual income in this way.

ROI has no change Residual income increases from $70,500 to $131,450.

Before the change: Operating income: (52,000*$325) – (52,000*$250) - $3,000,000 = $680,000 ROI : $680,000/$6,095,000 = 11% Residual Income: $680,000 – (10% * $6,095,000) = $70,500

After the change: Operating income: (52,000*$325) – (52,000*$250) - $3,000,000 = $680,000 ROI : $680,000/$6,095,000 = 11% Residual Income: $680,000 – (9% * $6,095,000) = $131,450 The required rate of return is the minimum amount of profit that the company must earn to repay its debts. It is not used in the calculation of ROI and therefore a change to it does not affect the ROI for the company. Required rate of return is a percentage that is multiplied by the total assets of the company and then this product is subtracted from operating income in the calculation of residual income. Therefore, decreasing the required rate of return increases residual income.

15. (LO 8.5) Hibo makes hibiscus-based all natural energy drinks in a variety of flavors. The company sells four packs of the beverage at grocery store chains such as Target and EarthFare for $11 each Use the following financial data to calculate the ROI, RI, and EVA for Hibo. Remember: Interest costs are tax deductible, so you will need to consider the after-tax cost of financing debt when calculating EVA.

Hibo Projected Financial Data Current Assets $2,000,000 Long-Term Assets $3,000,000 Total Assets $5,000,000 Current Liabilities Long-Term Liabilities Total Liabilities Equity Production units Sales Price Target ROI Fixed Costs Variable Costs Required Rate of Return Income Tax Rate Interest Rate

(a) What is Hibo’s ROI?

$2,500,000 $1,500,000 $4,000,000 $1,000,000 195,000 $11 15% $700,000 $3.50 14% 25% 10%

ROI = 15% (b) What is Hibo’s residual income? (

)

(c) What is Hibo’s EVA? First, you must calculate the weighted average cost of capital (WACC): Cost of financing debt for WACC calculation:

Cost of financing debt = 0.075

WACC = 0.085 ( ((

) )

)

(

EVA = (($2,145,000 - $682,500 - $700,000) X 0.75) - $212,500 EVA = $359,375 (d) If Hibo reduced its long-term assets by 50%, would it increase, decrease, or have no impact on ROI, Residual Income and EVA? ROI, Residual Income and EVA will all increase as shown in the following table:

)

Hibo Projected Financial Data Assumes 50% decrease in LT Assets Current Assets Long-Term Assets Total Assets

$2,000,000 $3,000,000 $5,000,000

$2,000,000 $1,500,000 $3,500,000

Current Liabilities Long-Term Liabilities Total Liabilities

$2,500,000

$2,500,000

$1,500,000

$1,500,000

$4,000,000

$4,000,000

Equity Production units Sales Price Target ROI Fixed Costs Variable Costs Required Rate of Return Income Tax Rate Interest Rate

$1,000,000 195,000 $11 15% $700,000 $3.50

$1,000,000 195,000 $11 15% $700,000 $3.50

14%

14%

25% 10%

25% 10%

Operating Income ROI Residual Income WACC EVA

$762,500 15% $62,500 8.5% $359,375

$762,500 22% $272,500 8.5% $486,875

Chapter 9 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 1. (LO 9.1) Which of the following does not describe a purpose of a budget? a. Provides a benchmark to compare actual performance b. Provides a mechanism for communication c. Used to motivate employees d. Used to prevent negative performance 2. (LO 9.3) When preparing an operational budget, which one of the following is the order in which the component budgets are commonly prepared? (CMA adapted) a. Sales, production, direct materials purchased, cost of goods manufactured,

income statement, capital, cash, and balance sheet b. Production, sales, cost of goods manufactured, selling and administrative c. Sales, production, cost of goods manufactured, direct materials purchased, administrative d. Production, sales, selling and administrative, cost of goods manufactured 3. (LO 9.3) Which of the following best describes a budget that expresses the operating and financial plans of management for a fiscal year? (CMA adapted) a. b. c. d.

Flexible budget Rolling budget Master budget Strategic budget

4. (LO 9.3) Which of the following best describes a budget that includes all of the resources a company needs to execute sales, production, purchasing, and marketing? a. Master budget b. Operating budget c. Financial budget d. Materials budget 5. (LO 9.3) A company’s master budget projected the following information.

Sales (25,000 units) Manufacturing costs (1/3 fixed) Other operating costs (all fixed)

$250,000 120,000 100,000

If the company actually sold 27,500 units, the operating income when using a flexible budget will be: (CMA Adapted) a. b. c. d.

$33,000. $43,000. $47,000. $51,000.

6. (LO 9.6) Which of the following is an advantage of participative budgeting? (CMA Adapted) a. b. c. d.

It minimizes the cost of developing budgets.

It yields information known to management but not to employees.

It encourages acceptance of the budget by employees.

It reduces the effect on the budgetary process of employee biases.

7. (LO 9.3) SoundTrak produces and sells high-quality noise cancelling headphones. The accountants have used forecasting techniques and predict the following monthly sales:

Assume that the company’s goal is to have 5% of the next month’s predicted sales on hand as finished goods inventory. What would be the budgeted production for March 2026? a. 27,000 b. 27,050 c. 28,000 d. 29,800 8. (LO 9.3) Which of the following describes the budget that lists all of the raw materials and their quantities required to produce one unit of an item? a. Direct materials cost budget b. Bill of materials c. Production budget d. Manufacturing overhead budget 9. (LO 9.3) The sales team at Regional Home Décor Company has prepared the following sales forecast using two years of sales data.

Which of the following best describes the predicted sales based on the forecast? a. Increasing sales with no clear seasonal trend b. Increasing sales with a seasonal trend in the winter c. Increasing sales with a seasonal trend in the summer d. No predictable trend

10. (LO 9.3) Which of the following best describes the data contained on a route sheet? a. The planned production for the period b. The cost of materials required for the production c. The employees who will complete each step of the production process d. The workstation where each step of the production process is performed and the time budgeted for each step 11. (LO 9.3) Which of the following would not be classified as a fixed overhead cost in most organizations? a. Utilities b. Rent c. Indirect materials d. Supervisor labor 12. (LO 9.3) Which of the following would not be classified as a variable overhead cost in most organizations? a. Direct labor b. Indirect labor c. Indirect materials d. Materials handling

13. (LO 9.3) Which of the following best describes the costs associated with product development (R & D), marketing, and distribution? a. Operating costs b. Manufacturing operating costs c. Non-manufacturing operating costs d. Budgeted costs 14. (LO 9.3) Which of the following budgets does not provide input for the Cost of Goods Sold budget? a. Beginning inventory budget b. Direct materials cost budget c. Direct labor cost budget d. Non-manufacturing costs budget 15. (LO 9.3) Heartwood Cabinets plans to produce 10,000 Walnut–Arch cabinets and budgets the following direct labor costs (per unit): Heartwood Direct Manufacturing Labor Costs Budget Walnut - Arch Minutes Hourly Work Required Wage Station Activity (for 1 unit) Rate A.1 Trim & Sand Door 10 $ 18.00 B.1 Attach handle 5 $ 15.00 C.1 Attach lever and Hinges 12 $ 21.00

a. What is the total direct labor cost for the planned production? b. $84,500 c. $246,000 d. $507,000 e. $5,070,000 16. (LO 9.3) TechConnect (a fictitious company) sells copiers, fax machines, and other computer equipment to companies throughout the United States. Management is interested in which factors are associated with the number of sales made each month. TechConnect collects data on several key factors, and its cost accountants have used regression analysis to see which factors are significantly associated with monthly sales. The dependent variable is number of sales per month. The independent variables include the number of sales calls, the season (winter or summer), and whether a 50% discount coupon on the first month’s cost is available to new customers. Here is a sample of the data:

The regression output is shown below: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations

0.69 0.48 0.45 4.37 60

ANOVA Regression Residual Total

df 3.00 56.00 59.00

SS 988.29 1067.68 2055.97

MS 329.43 19.07

F 17.28

Significance F 0.001

Intercept Sales Calls Season Coupon

Coefficients 10.39 0.65 -1.50 4.04

Standard Error 4.63 0.15 1.14 1.26

t Stat 2.25 4.19 -1.31 3.20

P-value 0.03 0.02 0.19 0.04

Lower 95% 1.12 0.34 -3.79 1.51

Upper 95% 19.66 0.96 0.79 6.57

Lower 95.0% Upper 95.0% 1.12 19.66 0.34 0.96 -3.79 0.79 1.51 6.57

Which of the independent variables is not significantly related to the number of sales made? a. Sales calls b. Season c. Coupon d. All independent variables are significantly related to the number of sales made.

17. (LO 9.3) Refer to the regression output prepared by the cost accountants for TechConnect (described in Multiple-Choice Question 16). How can you tell that this regression model provides a good fit for describing the data and that the null hypothesis is rejected? a. b. c. d.

Multiple R statistic is greater than 0.50.

Standard error is greater than 1.

F statistic has a significance less than 0.05.

P-value for the Intercept is less than 0.05.

18. (LO 9.3) Refer to the regression output prepared by the cost accountants for TechConnect (described in Multiple-Choice Question 16). How many years of data are used in the regression analysis? a. 1 b. 3 c. 5 d. Not enough information is provided to answer this question.

19. (LO 9.3) Assume Toybox 3D Printers (a fictitious company) has developed a simple regression model to forecast quarterly sales. The model explains the relationship between the company’s sales and the amount it spends on marketing activities. This is the regression equation for the model: s = $3m + $950,000 where: s = sales per quarter m = dollars spent on marketing activities per quarter If the company has forecasted sales of $989,000 for the next quarter, what amount is it planning to spend on marketing activities in the next quarter? (CMA adapted) a. b. c. d.

$13,000 $39,000 $63,000 $113,000

20. (LO 9.5) Which one of the following statements is not true regarding flexible budgets? a. Variable costs must be calculated on a per-unit basis. b. Fixed costs vary with predicted sales. c. They allow objective comparisons between budget and actual. d. Per-unit revenues are multiplied by the expected sales.

21. (LO 9.2) Which of the following budgets covers all of the resources needed to execute the organization’s plans? a. Master budget b. Operating budget c. Financial budget d. Planned budget 22. (LO 9.4) Heartwood cabinets has prepared the following sales budget:

The cost accountants have run a sensitivity analysis using the What-If Analysis function in Excel which generated the following scenario summary table:

Which of the following most likely describes the change the cost accountants were trying to predict? a. One of Heartwood’s key oak suppliers intends to offer its loyal customers a discount on oak that will reduce direct materials cost by 2%. b. Heartwood has recently announced a pay increase for all hourly employees. c. Heartwood is dramatically reducing the cost of its Oak - Beadboard style door. d. Heartwood intends to increase production of all styles of oak doors.

23. (LO 9.7) Which of the following components would be important considerations for companies that are preparing a budget of their carbon emissions? i.

ESG related goals ii.

Identification of carbon producing processes/equipment iii. Calculation of amount of carbon produced by carbon emitting processes iv.

Estimate of financial savings due to emissions reduction initiatives v.

Quantification of carbon credits available a. ii, v b. ii, iii, v

c. ii, iii, iv, v d. i, ii, iii, iv, v (Level 1) Discussion Questions 1. (LO 9.3) Describe the factors that might influence an organization’s sales forecasts.

The factors that influence an organization’s sales forecast are likely to depend on the industry in which the organization is in. However, the following are common factors that should be considered when forecasting sales:        

Prior period sales Economic conditions such as inflation, interest rates, consumer confidence, jobs reports Market trends such as consumer preferences Competition, especially changes in in competitors Planned marketing and promotional activities Seasonality Product availability Supply chain constraints

2. (LO 9.3) The data available to organizations for budgeting are increasingly precise and diverse. Imagine you are forecasting product demand for a new athletic shoe endorsed by an online fitness influencer. Describe the various types of data you could use to forecast demand?

The same factors that should be considered for traditional sales forecasts would also be relevant in this scenario. However, there is additional useful data that can be used related to the online influencer, including:   

The number of followers the influencer has, including any notable changes in the number over time.

The amount of engagement followers have with the influencer.

Click-through traffic from influencers’ online posts

3. (LO 9.5) Describe the flexible budgeting process, including the people involved in the budgeting process and the data they need to prepare accurate budgets.

When preparing a flexible budget, the cost accountants need to know the per unit cost of producing an item. This includes:

   

Labor costs, which requires payroll data from human resources or the payroll department Direct materials costs, which requires data from production and purchasing Manufacturing overhead costs, which requires cost data from production and purchasing Cost driver data (e.g., machine hours, labor hours), which comes from production

Cost accountants also need the fixed manufacturing costs, which come from production and purchasing, and sales forecast data, which come from the sales and marketing division.

4. (LO 9.5) What is the difference between a static budget and a flexible budget? What different information do they convey?

A static budget is set at the beginning of the period, using the predicted sales quantities, and does not change until the budget period is over. In contrast, a flexible budget reproduces the budget at various levels of expected sales for the organization. The cost accountants who prepare it start with the static budget and vary the number of units sold.

The revenue and variable costs will change accordingly. The flexible budget is useful for evaluating future performance under various scenarios that are likely to affect sales.

5. (LO 9.4) How is sensitivity analysis used to improve budgeting?

Sensitivity analysis is a financial modeling tool used to examine how changes to the underlying assumptions in the model may affect the outcome. In the case of budgets, management accountants may consider how changes to the expected sales or the costs of raw materials or labor may impact the company’s financial performance. Sensitivity analysis provides managers with likely outcomes under different scenarios which helps them plan for future production.

6. (LO 9.3) Why do organizations prepare a pro forma operating budget?

The pro forma financial statements include the planned revenue and cost of goods sold based on budgets. They provide the organization with a sneak peek at the future financial performance that will result from the planned production.

7. (LO 9.6) Define participative budgeting. What are its benefits and drawbacks?

Participative budgeting is a management and budgeting technique in which the employees who are affected by the budget (i.e., are held accountable for it) are involved in its development. The employees provide input to set reasonable sales goals and help to gather realistic cost data.

Benefits of participative budgeting include better communication and more acceptance of performance targets. Employees are also more motivated to perform because they feel that they have a voice in the budgeting process.

A primary drawback of participative budgeting is that employees are incentivized to build budgetary slack into the budget so that they are more likely to achieve their budget targets.

Examples of budgetary slack include setting lower sales targets than is likely achievable or overestimating costs required to complete production.

8. (LO 9.6) Describe the unintended consequences that may arise if organizations overrely on comparing budget to actual performance when evaluating employees.

While budgets are important planning and monitoring tools, overreliance on them for evaluating employees may have negative behavioral consequences. Budgets can promote a short-term focus, whereby employees make decisions and perform activities that will allow them to meet the current budget but may not help the organization succeed longterm. Budgets can also be perceived as rigid and can hinder the ability of employees to adjust their plans or to consider new and innovative ways to conduct their activities. To the extent that employees cannot meet the budgeted goals, or the goals stifle innovation, the budgets may diminish employees’ morale.

9. (LO 9.7) How do organizations use budgeting for environmental, sustainability, and governance? How does this practice influence the behavior of the organization, its shareholders, and its customers?

Organizations follow a similar approach to regular budgeting when budgeting for ESG. First, they must identify their ESG goals. Second, they must consider the activities that relate to the achievement of those goals. Third, they must develop expectations about the activities, income, and cash flow that relate to the achievement of those goals.

For example, if the organization is focused on budgeting its carbon use, this process would include: 1. Identifying its carbon-based goals (e.g., to be carbon neutral within five years) 2. Determining the specific activities that increase carbon emissions (e.g., production and travel) and those initiatives that might decrease the company’s carbon footprint (e.g., purchasing carbon offsets, planting trees, reducing nonessential travel, investing in lower carbon-producing equipment).

3. Quantifying the amount of carbon produced and offset based on production and the various planned initiatives, as well as the financial cost of the new initiatives.

Budgeting for ESG activities makes the organization think carefully about how they will approach their ESG goals. As part of the budgeting process they must articulate and

quantify their current activities and their future plans. This makes the organization more accountable for achieving those goals and increases the likelihood it will change its production practices to achieve those goals. The budget also provides a communication device for the employees in the organization. It helps everyone get on the same page regarding the organization’s goals and promotes accountability.

Many organizations report their ESG goals and progress to external stakeholders like investors and customers. This further increases the organization’s accountability to its goals. Additionally, investors and customers have been shown to care about the ESG activities of the companies with which they interact, therefore, establishing (and promoting) those budgets and goals can increase stakeholders’ commitment to the organization and, subsequently, the amount they purchase from it (assuming that the stakeholders are happy with the organization’s goals and progress).

10. (LO 9.2) Refer back the regression analysis for TechConnect, described in MultipleChoice Question 16. Which other factors, besides those analyzed, could the company include in its regression analysis to predict the number of sales made each month?

Currently Tech Connect includes the number of sales calls, an indicator variable identifying the season, and whether a coupon is available to predict sales. Other useful variables that could be included in the regression would include prior period sales performance, the sales channel (e.g., online, in-store, to consumer, or to businesses) and economic indicators (e.g., changes in inflation). Depending on the structure of the organization, variables like region or business unit indicators might also be useful.

11. (LO 9.4) Toybox 3D Printers is a company that manufactures and sells 3D printers that are the perfect size and complexity for beginners and children. Users can 3Dprint a wide variety of toys and collectibles using the pre-developed instructions that come loaded in the Toybox app. The marketing and sales departments at Toybox have been working hard to establish contracts with school districts, which could purchase 3D printers for their STEM (science, technology, engineering and math) labs and media centers.

Without establishing new contracts with school districts, Toybox estimates it will sell 750,000 units.  Materials cost per unit is $75.  Labor cost per unit is $24.00.  Overhead cost per unit is $8.80.  Fixed non-manufacturing costs are $600,000.

The cost accountants have used the Excel Scenario Manager tool to estimate some potential outcomes if they are able to establish contracts with large school districts in the future. Here is the output from the analysis:

Scenario Summary Current Values:

School District 25% School District - 50%

Changing Cells: $B$2 750,000 937,500 1,125,000 Result Cells: $B$9 $ 181,050,000.00 $ 226,462,500.00 $ 271,875,000.00 Notes: Current Values column represents values of changing cells at time Scenario Summary Report was created. Changing cells for each scenario are highlighted in gray.

Describe the results of this analysis. Which variables would the accountants have changed for each scenario? Which variables would have remained the same?

In each of these scenarios, only the number of units sold has changed. In scenario 1, the school district will purchase 25% more than the planned sales of 750,000. In scenario 2, the school district will purchase 50% more than the planned sales. When planned sales increase, the change (generally) requires additional production. Thus, the total variable costs will increase because of the increased production. Fixed production costs and other nonproduction costs, like marketing, will not change.

12. (LO 9.1) Use the three-step process described in section 9.1 to develop an annual budget for yourself or your family. Be sure to include:  Your goals and objectives  The activities you will carry out during each month.  Estimate income and cash flows.  Summarize the factors that will affect your ability to achieve your goals.

Step 1: Goals are to make enough money to cover all expenses and to save 25% of salary.

Step 2: Revenue generating activities include earnings from a part-time job at a dress shop.

Expense related activities include: rent, utilities, car, travel and entertainment, clothing, and school.

Step 3: Estimate income and cash flows.

Salary

My Annual Budget ($15 x 20 hours per week, 50 weeks a year)

Expenses Rent ($400 per month, 12 months) Utilities ($45 per month, 12 months) Car ($40 per month, 12 months) School ($4,000 per year) Travel and Entertainment Clothing Total Expenses

$ 15,000.00

$

4,800.00 540 480 4000 950 500 $ 11,270.00

Profit Savings Goal

$ $

3,730.00 3,750.00

Currently do not have enough to meet savings goals

$

(20.00)

Factors that may affect my ability to meet goals:     

Increased requirements at school may diminish opportunities to work at the dress shop.

Opportunities for travel, including for study abroad programs, may reduce savings.

Unexpected expenses, like car repairs, may reduce savings.

Opportunities for extra shifts at the dress shop could increase revenue.

Opportunities for scholarships could increase revenue.

13. (LO 9.6) Describe budgetary slack, including how it can incentivize dysfunctional behavior.

Budgetary slack is cushion built into budgets to help employees meet budget expectations.

Examples of budgetary slack include setting low estimated sales targets and using higher than realistic cost estimates for production. Budgetary slack is most likely to exist when the employees who are accountable for budget to actual performance participate in the budgeting process. Including budgetary slack in budgets is problematic because it means the organization is not using realistic data. For example, if real sales demand far exceeds the sales goals that were set, the company may not be able to produce enough to meet demand which may result in the loss of customers.

14. (LO 9.6) Many organizations budget for equity and inclusion initiatives within their environmental, social, and governance (ESG) programs. Search online for information about preparing a budget for racial equity and describe the process, including the challenges and opportunities presented by this process.

Preparing a budget for racial equity requires a deliberate and intentional approach that prioritizes diversity, equity, and inclusion (DEI) across all aspects of an organization's operations. The process is similar to that for preparing a traditional budget.

1. Set DEI goals and priorities: The organization most likely will need to conduct an assessment of the current state of DEI. Based on that assessment, it can set goals and priorities for improving DEI within the organization. These goals should be specific, measurable, and aligned with the organization's overall mission and values.

2. Identify the activities that relate to DEI performance. This could include investing in diversity training and education, increasing funding for recruitment and retention of diverse talent, or funding community outreach and engagement programs.

3. Quantify the financial impact of the activities identified in step 2 and allocate resources to each initiative to help ensure the organization achieves its goals.

After preparing the DEI budget, the organization will need to track progress and adjust as needed.

15. (LO 9.3) Prepare a flowchart of the budgeting process as described throughout section 9.3 of the chapter. (see next page)

(Level 1) Brief Exercises 111.

(LO 9.3) Longchamp manufactures and sells purses, tote bags, wallets, and other accessories. Assume that the sales department estimates 525,000 in sales of its Le Pliage original shoulder bag in 2025. The bag retails for $155.00. Beginning inventory at the start of 2025 is 70,000 and the target ending inventory at year end is 25,000. Compute the number of bags the company intends to produce during the year.

Solution:

Answer: 480,000 units

112.

(LO 9.3) Using the same information from Brief Exercise 1, assume that each bag requires 2 square yards of canvas, 1 metallic (gold) zipper kit, and half a square yard of leather. Assume that at the beginning of the year the company has 150,000 square yards of canvas on hand and 10,000 square yards of leather. Canvas costs $2.50 per square yard and the leather costs $20 per square yard. The company has no zipper kits on hand. Each kit costs $10. Compute the amount Longchamp will spend on canvas purchases during the year to meet its sales demand, including planned ending inventory.

Part Name canvas zipper kit leather Total

Longchamp BOM Cost per unit of input Quantity 2.5 2 square yards 10 1 20 0.50 square yards

Cost per unit of output $ 5.00 $ 10.00 $ 10.00 $ 25.00

Solution:

Answer: $2,025,000

113.

(LO 9.3) Using the same information from Brief Exercise 2, compute the total cost of materials to be purchased to meet Longchamp’s sales demand, including planned ending inventory.

Solution:

Answer: $11,425,000

114.

(LO 9.3) Rubber Dockie is a fictitious company that produces large floating mats for recreational lake use. The company makes two sizes of mat (18 ft. and 9 x 6 ft.) using a closed cell foam material. The mats are sold by the company online and through bricksand-mortar retailers. In 2024, Rubber Dockie sold 32,340 of its 18 ft. mats and 52,074 of its 9 x 6 mats. The prices were $499.99 and $349.99, respectively. The company expects a 9% increase in sales of both mats in 2025 and another 3% increase in 2026. a. Assume no change in sales price for 2025. Prepare a 2025 sales budget for Rubber Dockie based on sales expectations. b. Assume a 2% price decrease in 2026. Prepare a 2026 sales budget.

Solution:

115.

(LO 9.5) Using the information from Brief Exercise 4, now assume that Rubber Dockie intends to have a finished goods inventory of 5% at the end of a production year.

Beginning inventory at the start of 2025 was 1,500 units of the 18 ft. mat and 1,750 units of the 9 x 6 mat. Calculate the number of units to be produced in 2025 to meet expected demand.

Solution:

116.

(LO 9.3) Jittery Joe’s Coffee, a coffee company based in Georgia, roasts a wide variety of coffee blends. Assume it uses machine hours as the application base for calculating manufacturing overhead. The following chart provides some production details about five of Jittery Joe’s most popular blends. Use the data provided about the quantity of each blend roasted, the number of minutes the machine is used to roast 100 pounds of each blend, and the predetermined overhead rate (applied based on machine hour). Calculate the manufacturing overhead for each blend and for all blends in total.

Jittery Joe's Coffee

Pounds of Coffee Coffee Blends Morning Ride 38,000 Attack the Day 75,000 Travelin' Joe 65,000 Omoiyari 40,000 Summer Brew 50,000 Total Manufacturing Overhead

Machine MInutes for 100 lbs 60 75 70 60 65

Predetermined Overhead Rate (per Machine hour) $ $ $ $ $

Manufacturing Overhead

6.50 6.50 6.50 6.50 6.50

Solution: Jittery Joe's Coffee

Pounds of Coffee Coffee Blends Morning Ride 38,000 Attack the Day 75,000 Travelin' Joe 65,000 Omoiyari 40,000 Summer Brew 50,000 Total Manufacturing Overhead

Machine Hours for 100 lbs 60 75 70 60 65

Predetermined Overhead Rate (per Machine hour) $ $ $ $ $

6.50 6.50 6.50 6.50 6.50

Manufacturing Overhead $ $ $ $ $ $

2,470.00 6,093.75 4,929.17 2,600.00 3,520.83 19,613.75

117.

(LO 9.3) The Maple division at Heartwood Cabinets has prepared the following ending inventories budget:

Maple - Arch Maple - Cathedral Maple - Shaker Maple - Slab Maple - Beadboard

Heartwood Ending Inventories Budget Maple Cabinets Direct Ending materials cost Direct labor inventory per unit cost per unit 800 $ 25.00 $ 7.50 700 $ 23.00 $ 7.50 1,000 $ 20.00 $ 7.95 1,000 $ 24.50 $ 8.00 1,000 $ 26.00 $ 7.00

Manufacturing overhead cost per unit $ 3.00 $ 3.25 $ 3.10 $ 2.90 $ 3.15

Total Cost $ 28,400.00 $ 23,625.00 $ 31,050.00 $ 35,400.00 $ 36,150.00 $ 154,625.00

What is the total cost of ending finished goods inventory for this period?

Answer: $154,625.00

Maple - Arch Maple - Cathedral Maple - Shaker Maple - Slab Maple - Beadboard

Heartwood Ending Inventories Budget Maple Cabinets Direct Ending materials cost Direct labor inventory per unit cost per unit 800 $ 25.00 $ 7.50 700 $ 23.00 $ 7.50 1,000 $ 20.00 $ 7.95 1,000 $ 24.50 $ 8.00 1,000 $ 26.00 $ 7.00

Manufacturing overhead cost per unit $ 3.00 $ 3.25 $ 3.10 $ 2.90 $ 3.15

Total Cost $ 28,400.00 $ 23,625.00 $ 31,050.00 $ 35,400.00 $ 36,150.00 $ 154,625.00

118.

(LO 9.3) Kenworth Manufacturing produces light fixtures. The cost accountants have used prior-year data to prepare the following overhead budget. Based on these data, what is the total amount budgeted for manufacturing overhead? (see next page)

Kenworth Manufacturing Overhead Calculation (based on prior year data) Units to be produced 100,000 units Variable overhead per unit Indirect materials and supplies $ 0.50 $ 50,000.00 Materials handling $ 0.75 $ 75,000.00 Indirect labor $ 0.25 $ 25,000.00 Fixed manufacturing overhead Factory rent Machine depreciation Supervisor labor Utilities Maintenance and repairs Property taxes Others

$ 40,000.00 $ 20,000.00 $ 25,000.00 $ 10,000.00 $ 5,000.00 $ 8,000.00 $ 2,000.00

Total manufacturing overhead

$ 260,000.00

Answer: $260,000 Kenworth Manufacturing Overhead Calculation (based on prior year data) Units to be produced 100,000 units Variable overhead per unit Indirect materials and supplies $ 0.50 $ 50,000.00 Materials handling $ 0.75 $ 75,000.00 Indirect labor $ 0.25 $ 25,000.00 Fixed manufacturing overhead Factory rent Machine depreciation Supervisor labor Utilities Maintenance and repairs Property taxes Others

$ 40,000.00 $ 20,000.00 $ 25,000.00 $ 10,000.00 $ 5,000.00 $ 8,000.00 $ 2,000.00

Total manufacturing overhead

$ 260,000.00

119.

(LO 9.4) Stanley manufactures and sells drinkware, food storage, coolers and jugs, and camping gear. In recent years, sales of its drinkware have increased significantly, primarily due to viral marketing via online influencers. Assume the following table represents the basic assumptions used to calculate Stanley’s overall operating income (ignoring fixed non-manufacturing costs).

Stanley is considering the effects of increasing the price of its drinkware by 20%.

Management recognizes that this price increase will likely decrease the number of sales, and it estimates an approximate decrease of 5%. The cost accountants have used Excel’s Scenario manager to estimate operating income if this price increase goes into effect. The results are shown here:

What is the estimated percentage change in operating income if prices are increased by 20%, which will decrease sales by 5% for each product?

Answer: = (scenario 1 operating income – original operating income)/original operating income = 28,386,000 – 23,200,000 = 5,186,000 = 5,186,000/23,200,000 = 0.2235 22.35% increase in operating income 120.

(LO 9.4) Consider the same assumptions at Stanley as shown described in Brief Exercise 9. Assume the sales department has proposed discontinuing the DayBreak line of drinkware and instead increasing production (and sales) of the Quencher H2.0 Flow State Tumblers, which are their best seller.

The cost accountants have used Excel’s Scenario Manager to estimate operating income assuming that all sales of DayBreak items is reduced to zero, and the Quencher H2.0 tumblers are increased by the 225,000 units (based on the excess capacity left by the discontinuation of the DayBreak line). The resulting scenario manager is shown here:

What is the estimated percentage change in operating income if this strategy is used?

Would you recommend discontinuing the DayBreak line in favor of producing and selling more Quencher H2.0 tumblers?

Answer: = (scenario 2 operating income – original operating income)/original operating income = 29,781,250 – 23,200,000 = 6,581,250 = 6,581,250/23,200,000 = 0.2837

28.37% increase in operating income. Yes, discontinue DayBreak.

121.

Assume Heartwood Cabinets uses ABC costing to apply overhead to its products. The cost accountants have identified two different cost pools. The first includes all the costs associated with manufacturing cabinets. The second includes all the costs associated with machine set-up, as follows: (see next page)

Use the information above to complete the following table allocating the overhead costs to each type of pine cabinet. Do not round intermediate calculations.

Answer:

122.

(LO 9.2, 9.3) Match the budget with its definition: a. b. c. d. e. f. g. h. i. j.

i. ii. iii.

Master budget Operating budget Financial budget Sales budget Production budget Direct manufacturing labor cost budget Direct materials cost budget Direct manufacturing overhead cost budget Cost of goods sold budget Operating costs budget Budget consisting of all of the costs that will be required to achieve planned production.

Identifies expected sales in units and dollars.

Covers all the resources needed to execute the organization’s operations, including sales, production, purchasing, and marketing.

iv. v. vi. vii. viii. ix. x.

Calculates the total units that must be produced during the budget period to allow the company to meet the expected sales requirements.

Uses the planned production amounts to determine the total number of direct labor hours required to achieve production goals.

Contains all of the direct or indirect costs associated with producing the units that have been sold during the budget period.

Contains each direct material item and its cost.

Contains a summary of all of the manufacturing costs other than the direct materials and direct labor costs.

Describes the source and use of funds for planned capital expenditures Establishes management’s financial and operational plans for the budget period

Solution: Budget a.

Master budget b. Operating budget c.

Financial budget d. Sales budget e.

Production budget f.

Direct manufacturing labor cost budget g. Direct materials cost budget h. Direct manufacturing overhead cost budget i.

Cost of goods sold budget j.

Operating costs budget

Definition x iii ix ii iv v vii viii vi i

123.

(LO 9.1) Your university’s entrepreneurship program is conducting a ―Shark Tank‖ style competition and the winner will be awarded $25,000 seed funding to start a business. You and your best friend, Desi, have a great idea for a ride-share program designed for parents who need to transport their children to after-school activities. Desi has not taken any accounting classes, so while she is excited to put together the pitch, she needs your help to develop the budget. In fact, she doesn’t even understand what a budget is. Prepare an email to Desi that carefully explains the purpose of a budget and describes the different components that will be necessary to build a proper budget before your meeting with the ―Sharks‖.

Solution Example: Subject: Developing a Budget for Our “Shark Tank” Pitch Hi Desi, I hope you're doing well and feeling excited about our upcoming “Shark Tank” style competition! I'm thrilled to work with you on our ride-share program idea for

parents. I think it is definitely important that we develop a budget for our company and since you will be doing most of the presentation, I want to make sure you understand what we’re doing and why.

A budget is essentially a financial plan that outlines how we will allocate and manage our resources. It helps us estimate and control our expenses while ensuring we have enough funds to cover our needs and achieve our goals. In our case, the budget will play a crucial role in demonstrating to the sharks how we plan to use the $25,000 seed funding effectively and efficiently to launch and sustain our ride-share program.

Basically, we follow three steps when establishing our budget: Step 1. Identify goals and objectives.

Step 2. Determine the activities that will be carried out to meet those goals and objectives.

Step 3. Develop expectations about the activities, income, and cash flows, as well as the market factors that may affect the company’s ability to achieve those goals.

For our company: Step 1: our goals are to:     

Provide convenient transportation to parents Ensure safety and security of our passengers Build trust and establish reliability Expand our coverage, accessibility, and availability Achieve financial sustainability and growth.

Step 2: the activities we will carry out will be to:     

Launch our ride share app Hire drivers Train/test drivers Pay drivers Conduct customer satisfaction surveys

Step 3: A rough estimate of our revenue and expense budget for the first 6 months is as follows:

I hope this information helps as you finish up our pitch. I look forward to discussing it with you further in person. I think the sharks are going to be really impressed!

124.

(LO 9.6) You recently began working as a cost accountant for an insurance company and the CFO has mentioned that the company is experiencing a high level of turnover in its sales division and is not sure why. They are hoping that you might be able to use your data analysis skills and expertise in cost accounting to help solve this problem. You start by examining the sales targets that have been established and you note that the organization uses an authoritative budgeting process wherein all of the salespeople are assigned the same sales targets. Based on your experience in the industry, the targets seem high to you. You review the performance reports for the last 18 months and note that 72% of the workforce is missing their sales targets by at least 8%. What advice do you have for the CFO? Defend your answer.

You have noted that the organization uses an authoritative budgeting process which means the budget is set by the supervisor and then pushed down to the employees.

The employees do not get a say in the process, which may demotivate them – especially if the targets are high and not achievable. For performance measures (like targets) to be effective they need to be achievable and within the employees’ control.

You should recommend that the CFO revisit the sales targets – most likely to adjust them down, using historical performance as a benchmark.

To the extent that external factors may differ among salespeople, the CFO should also consider setting different targets for each salesperson. In addition, the CFO might want to consider participative budgeting, which allows the employee to set the target – or at least provide a great deal of input on what the target should be, or a negotiated target, whereby the employee and the CFO will negotiate an agreed upon target.

125.

(LO 9.6) ACD Slicer Company is a fictious company that produces an all-in-one kitchen tool for prepping produce. Within one handheld gadget, users have a paring knife, vegetable grater, apple corer, potato peeler, and more. The production managers at ACD Slicer are expected to meet or exceed expectations for keeping manufacturing costs low, which are set forth in the budget. A new cost accountant has just joined ACD Slicer and he remarked that this budgetary expectation might have dysfunctional effects. Explain the dysfunctional effects to which he may be referring.

Solution: If production managers are held accountable for keeping costs low, it may result in myopic decision-making that does not benefit ACD in the long run. For example, to meet the low-cost goal, production managers may buy lower quality materials that do not last, which could hurt consumer satisfaction in the product and lead to lower sales in future periods. Similarly, product managers may employ less experienced labor who may make errors, also leading to lower quality products and potentially diminishing customer satisfaction.

In addition, if the production managers are incentivized to keep costs low, they will not be motivated to innovate or invest in research and development. This may impair ACD’s competitiveness in their industry, as competitors may develop and sell more innovative and cutting-edge products.

(Level 1) Problems 1. (LO 9.7) Review the 2022 ESG report for The Coca-Cola Company, found at https://www.coca-colacompany.com/reports/business-and-sustainability-report. Identify CocaCola’s top ESG priorities and the steps the company is taking to meet its goals.

Solution: Coca-Cola is committed to: Goals: Water leadership

  

Portfolio

 





100% regenerative water Improve health of most critical watersheds Return 2 trillion liters of water to nature/communities Reduce added sugars Increase offerings with nutrition & wellness benefits Provide clear nutrition information on packaging Market drinks responsibly

Examples of Steps taken:  





 



Packaging

  

100% recyclable packaging by 2025 Use 50% recycled content by 2030 Reduce the use of

Identified critical watersheds Exhibited 10% improvement in water efficiency compared to 2015 Reduced 900,000 tons of added sugars via 1,000 beverage reformulations Creation of more teas, juices, waters, dairy & plant-based beverages Marketing focused on zero-sugar drinks Nutrition information is provided on front of packaging & online.

As of 1/1/2022, products are no longer marketed directly to children under 13.  

Testing returnable bottle technology Working with regulators to approve the use of



Climate





virgin plastic by 3 million metric tons (between 2020 – 2025) 25% of beverages sold in refillable/returnable containers (or fountains) Reduce emissions by 25% by 2030 (compared to 2015) Net zero emissions by 2050

Sustainable agriculture



Sustainably source 100% of agricultural ingredients.

People & communities



Mirror the markets served by:  50% female leadership  Align U.S. race/ethnicity representation across job levels.

recycled PET in food and beverage packaging







Analyzing and prioritizing GHG emissions Employing hybrid vehicles for product distribution Developed and disseminated ―principles for sustainable agriculture‖ to our supply chain partners.

Engaged a human rights advisory firm to conduct a review of our human rights program.

Serves as co-chair of human rights coalition.

Expanded partnerships with historically black universities.

Spend $1billion annually with diverse suppliers.

2. (LO 9.3) Toybox 3D Printers manufactures and sells 3D printers that are small and easy to use—perfect for children. Currently it produces only one model of printer. Use the following spreadsheets and facts to prepare the Cost of Goods Sold budget for the Toybox for 2025.   

Expected sales for 2025 and 2026: 750,000 Sales price: $350 per printer Target beginning finished goods inventory is always 10% of expected sales.

Bill of Materials

Part Number T - 2164 T - 2331 T- 1863 M- 5273 M- 1956 P - 2776 P- 2875 P- 2193 M- 7792 P - 5883 P - 7727 Total

Part Name Cost per Unit Quantity Total Wifi Component $ 5.00 1 $ 5.00 Digital Component $ 20.00 1 $ 20.00 Touchscreen $ 3.00 1 $ 3.00 Screw Kits $ 1.50 2 $ 3.00 Metal Dowel Kits $ 2.00 1 $ 2.00 Nozzel $ 4.00 1 $ 4.00 Printer Food Spool $ 1.00 1 $ 1.00 Platform $ 8.00 1 $ 8.00 Motor $ 20.00 1 $ 20.00 Metal Frame $ 6.00 1 $ 6.00 Cord $ 3.00 1 $ 3.00 $ $ 75.00 -

Toybox 3D Printers Nonmanufacturing Costs Units Sold Variable Fixed Total Cost Product Development 750,000 $ 100,000.00 $ 100,000.00 Marketing 750,000 $ 300,000.00 $ 300,000.00 Distribution 750,000 $ 200,000.00 $ 200,000.00 Total Operating Costs $ 600,000.00



The predetermined overhead rate (which includes variable and fixed costs) is $8.80.

Solution:

3. (LO 9.3) Dyson Limited manufactures and sells home appliances such as air purifiers, fans, heaters, hand dryers, vacuum cleaners, and hair stylers. Use the following spreadsheets and facts to develop the pro forma income statement for the hair care division of Dyson Limited for the year 2025.

Dyson Limited Hair Care Division Sales Budget Product Dyson Supersonic hair dryers Dyson Corrale hair straightners/ stylers Dyson Airwrap hair stylers

Expected Sales Selling Price 1,500,000 2,000,000 5,000,000

$ 450.00 $ 500.00 $ 600.00

Direct Materials Direct Labor Cost per Unit Cost per Unit 75,000 $ 40.00 $ 4.10 100,000 $ 45.00 $ 5.45 250,000 $ 50.00 $ 5.00

Beginning Inventoy

Dyson Limited Hair Care Division Nonmanufacturing Costs Units Sold Variable Fixed Total Cost Product Development 8,500,000 $ 100,000.00 $ 100,000.00 Marketing 8,500,000 $ 200,000.00 $ 200,000.00 Distribution 8,500,000 $ 500,000.00 $ 500,000.00 Total Operating Costs $ 800,000.00



Target ending finished goods inventory is always 5% of expected sales.



The predetermined overhead rate (which includes variable and fixed costs) is $6.00 per unit.

Solution: Dyson Limited Hair Care Division Pro Forma Income Statement Revenue Cost of Goods Sold Gross Margin Operating Costs Production Development Marketing Costs Distribution Costs Operating Income

$ 4,675,000,000.00 $ 476,672,500.00 $ 4,198,327,500.00 $ 100,000.00 $ 200,000.00 $ 500,000.00 $ 4,197,527,500.00

COGS is calculated as follows: Dyson Cost of Goods Sold Budget Beginning Finished Goods Inventory Direct Materials Used Direct Manufacturing Labor Direct Manufacturing Overhead Cost of Goods Manufactured Costs of Goods Available for Sale (Less) Ending Inventories Budget Cost of Goods Sold

$ 39,007,500.00 $ 400,000,000.00 $ 42,050,000.00 $ 18,650,000.00

Direct Materials Used is calculated as follows:

$ 460,700,000.00 $ 499,707,500.00 $ 23,035,000.00 $ 476,672,500.00

Cost Per Unit Expected Sales Total Direct Materials Required

Dyson Limited Hair Care Division Direct Materials Budget Dyson Supersonic hair Dyson Corrale hair Dyson Airwrap Total dryers straightners/ stylers hair stylers $ 40.00 $ 45.00 $ 50.00 1,500,000 2,000,000 5,000,000 8,500,000 $ 60,000,000.00 $ 90,000,000.00 $ 250,000,000.00 $ 400,000,000.00

Target Ending Inventory (Plus) Target Ending Inventory Materials Cost End Product Available from Beginning Direct Materials Inventory (Less) Materials Cost for End Product Available from Beginning Inventory

75000 $ 3,000,000.00 $ 75000 $ 3,000,000.00 $

100000 250000 425,000 4,500,000.00 $ 12,500,000.00 20,000,000 100000 250000 425,000 4,500,000.00 $ 12,500,000.00 $ 20,000,000.00

Direct Materials to be used this Period

$ 60,000,000.00 $

90,000,000.00 $ 250,000,000.00

400,000,000

Direct Manufacturing Labor is calculated as follows: Dyson Limited Hair Care Division Dyson Corrale hair Dyson Supersonic straightners/ Dyson Airwrap hair hair dryers stylers stylers Units to Produce 1,500,000 2,000,000 5,000,000 Labor Cost per Unit $ 4.10 $ 5.45 $ 5.00 Total Labor Cost $ 6,150,000.00 $ 10,900,000.00 $ 25,000,000.00 $

Direct Manufacturing Overhead is calculated as follows:

Ending Inventory is calculated as follows:

Total 8,500,000 42,050,000.00

4. (LO 9.5) Dyson Limited (described in Problem 3) would like to prepare a flexible budget for its Dyson Supersonic Hairdryers. The static budget is presented below based on a revised selling price of $350.00 per unit. Complete the 4 columns to the right of the static budget to provide a flexible budget if sales were (1) 25% less than expected, (2) 10% less than expected, (3) 10% greater than expected, and (4) 25% greater than expected.

Answer:

5. (LO 9.5) Tifosi Optics produces high-performance eyewear for cycling, running, hiking, and golfing, as well as fashion frames. You have been given the static budget (below) and

asked to prepare a flexible budget for the company. Complete the 4 columns to the right of the static budget to provide a flexible budget under the following 4 scenarios: a. The number of units sold decreases by 1,000. b. The number of units sold increases by 10% c. The number of units sold increases by 25,000. d. The number of units sold doubles.

Solution:

6. (LO 9.3) Tifosi Optics produces high-performance eyewear for cycling, running, hiking, and golfing, as well as fashion frames. Tifosi has four categories of frames, athletic, fashion, safety, and children’s. Use the following data to prepare the pro forma operating income statement (complete the template provided).

Expected sales and selling price are as follows:

Beginning and ending finished goods inventory are as follows:

Direct materials cost per unit are as follows:

Direct labor cost per unit for each style is calculated using the following data:

The predetermined overhead rate is $6.00 and is applied based on the number of direct labor hours required.

Assume the company has the following operating costs:

Proforma Operating Income Statement Template:

Solution:

7. (LO 9.3) Pelican Recreation produces and sells kayaks for recreational use. The average sales price for a kayak is $250. The company expects to sell 50,000 units this quarter. Ending inventory is planned to be 3% of expected sales, but at the start of this quarter the company had 1,000 units in stock. Direct materials are $15 per unit. The direct labor rate is $19/hour and each kayak requires 30 minutes of labor. Overhead is applied using direct labor hours at $6 per hour. Using this information, prepare the COGS budget by completing the template provided.

COGS template: Pelican Recreation Cost of Goods Sold Budget Beginning Finished Goods Inventory Direct Materials Used Direct Manufacturing Labor Direct Manufacturing Overhead Cost of Goods Manufactured Costs of Goods Available for Sale (Less) Ending Finished Goods Inventory Cost of Goods Sold

Solution:

$ $ $

$

-

$ $ $ $

-

-

Production Budget:

Direct Materials used is calculated as follows:

Direct Manufacturing Labor is calculated as follows:

Manufacturing Overhead is calculated as follows:

8. (LO 9.6) Hughes Allen owns three car dealerships in Memphis, Tennessee: a Ford dealership, a Honda dealership, and a Kia dealership. You have been given quarterly sales data and sales targets for the sales agents that work at each. Use this data to prepare the following visualizations and answer the following questions.

Dealership Ford Honda Ford Kia Ford Honda Kia Ford Honda Kia Honda Ford Honda Ford Honda Kia

Salesperson Daniel Martin Erik Andersson Isaiah Thompson Wang Xia Lucy Karlsson Yang Mei Emma Pettersson Marcus Wright Matthew Wilson Nia Turner Elizabeth Clark John Berg Stephanie Lindqvist Emily Nelson Sierra Robinson Liu Chen

Quarterly Sales Target 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60

Quarterly Sales 30 33 33 45 48 48 48 48 51 54 57 63 63 63 63 66

a) Use Excel, Tableau, or PowerBi to prepare a combo chart that shows each salesperson on the x axis. Quarterly sales for each salesperson should be represented as columns.

Columns should be sorted so that the lowest sales are shown on the left and the highest sales are shown on the right. Each column should be colored to represent the dealership with which the salesperson is associated (i.e., there should be three different colors for the columns). Show the sales target using a solid line. Remove unnecessary gridlines.

Add the title, ―Budget to Actual Sales‖ to your visualization. b) Do you think Hughes Allen uses participative, negotiated, or authoritative budgeting?

Why? c) Do you think the sales targets are reasonable, controllable, and appropriate? Why or why not? d) Describe the behavioral effects that you anticipate will be caused by sales targets and sales performance at these dealerships. Note: You may describe different effects for different people based on your observations. e) Do you think Hughes Allen should continue with the current sales targets? If not, what would you recommend? Defend your answer.

Solution: a) Use Excel, Tableau, or PowerBi to prepare a combo chart that shows each salesperson on the x axis.

b) Do you think Hughes Allen uses participative, negotiated, or authoritative budgeting?

Hughes Allen most likely uses an authoritative budgeting method. This can be inferred because all salespeople have the same target and many of them do not meet, or approach, the target during the period. c) Do you think the sales targets are reasonable, controllable, and appropriate?

Only 5 out of 16 salespeople are meeting the sales targets, which suggests that these are aggressive targets. It seems like they may not be appropriate. d) Describe the behavioral effects that you anticipate would be caused by sales targets and sales performance at these dealerships. Note, you may describe different effects for different people based on your observations.

It is likely that these sales targets are demotivating for the salespeople represented on the left side of the visualization. This is especially true for those who are missing the target by approximately 50%.

Those that are meeting the target are only barely meeting it. Therefore, I suspect that these targets are a challenge and are demotivating to the employees. Those in the middle may still be optimistic and strive to achieve the target. To gain a better understanding of the effects, it would be useful to examine the employees’ performance compared to budget over time. To the extent that missing the target is the norm, rather than the exception, these targets are likely demotivating. e) Do you think Hughes Allen should continue with their current sales targets? If not, what would you recommend? Defend your answer.

Hughes Allen should most likely revisit its sales targets. The company may want to consider other factors to set individualized sales targets. Factors such as a salesperson’s tenure, the busyness of the dealership (including trends during different times of the day or week in which different salespeople may be on duty), and the cost of the cars on the lot, are uncontrollable factors that may contribute to the salesperson’s ability to meet those targets.

9. (LO 9.1, 9.2 ) Budgets are important tools for non-manufacturing organizations as well.

Identify three examples of non-manufacturing uses for budgets and describe their purpose in that context. For each, describe the budgeting process and explain how it would be different from that performed in the manufacturing context. Include discussion of what data would be used.  Consulting firms, like PwC or McKinsey, will use budgets to determine operating income. They will follow the same three-step process as a manufacturing firm and will collect much of the same data. Direct variable costs would be allocated to specific projects or clients, rather than production types. Employees who work on the projects represent the direct labor. Costs such as technology, training, research, travel, etc., may represent direct materials associated with each project.  In recent years, organizations have been actively budgeting for and reporting their progress toward ESG initiatives. They will follow the same three-step process as a manufacturing firm budgeting its production. Important data include not only the financial impact of their activities, but a quantification of the environmental or societal impacts.  Schools prepare budgets to manage their funds received from government funding and grants. They will follow a similar three-step process, in which they establish the goals they hope to achieve with respect to educating students, while also being effective stewards of public money. Schools must identify student success measures and identify the activities and costs associated with achieving that success.

Other student answers are also acceptable.

10. (LO 9.5) Patty Peterson is the proprietor of Puffy Princess Pastries, a fictional donut shop in Asheville, North Carolina. Customers at the shop select a shape (e.g., hearts, stars, crowns, diamonds) for their donut, which is then fried by the pastry chefs on the spot.

Customers then select the color of their icing and choose from an array of fancy toppings, including edible glitter, sprinkles, cookie crumbles, and fresh strawberries. Patty is preparing her budget and has performed several sensitivity analyses to consider different scenarios. Review the data and output from the What-If Analysis from Excel and answer the following questions.

Pastry Donut

Puffy Princess Pastries Expected Sales Sales Price Direct Materials Cost Direct Labor Cost Manufacturing Overhead Budgeted Operating Income 50,000 $ 5.25 $ 1.00 $ 0.50 $ 1.00 $ 137,500.00 Total $ 137,500.00

a. Describe the change that was made to the data for each scenario (note, only one change was made to the data in each scenario).

In scenario one, expected sales increased by 10,000 units.

In scenario two, the sales price for each donut increased $0.75 to $6.00 In scenario three, the cost of toppings (direct materials) decreased by 25% to $0.75.

In scenario three, labor cost per donut decreased to $0.25. b. Which change has the biggest effect on operating income?

The largest increase to operating income comes when the company increases the selling price of the donut to $6.00. c. The scenarios modeled in the What-if Analysis assume only one change has occurred.

In scenario 2, the sales price is increased without any change in the number of sales.

Do you think this is an accurate assumption? As a cost accountant, how would you determine whether this is an accurate assumption?

It seems unlikely that the price of a donut could increase by almost 15% without any reduction in sales. A dozen donuts will cost over $70 which seems cost prohibitive. However, PPP is located in a tourist location and so it is possible that most sales are to vacationers who are splurging and are less price sensitive.

As an accountant, you should look at additional data, such as sales at competitors’ stores (e.g., other gourmet donut shops and gourmet ice cream shops), as well as trends in PPP’s sales over time.

11. (LO 9.3) Stellar Productions is a fictional electronics manufacturer that produces camera equipment, sound systems, and studio lighting equipment. Use the following information to: a) Produce a COGS budget b) Calculate gross margin Stellar Productions Sales Forecast Product Type Expected Sales Selling Price Stellar Cameras 10,000 $ 350 Stellar Sound Systems 7,500 $ 400 Stellar Lighting Solutions 9,500 $ 600 Stellar Productions Production Budget (in units) Stellar Stellar Sound Cameras Systems Budgeted Sales 10,000 7,500 (plus) Target ending finished goods inventory 500 375 Total Required Units 10,500 7,875 (less) Beginning finished goods inventory 450 450 Units to be Produced 10,050 7,425 Stellar Productions Direct Materials Budget

Cost Per Unit

Stellar Sound Stellar Lighting Stellar Cameras Systems Solutions $ 150.00 $ 125.00 $ 200.00

Stellar Lighting Solutions 9,500 475 9,975 525 9,450

Stellar Productions Manufacturing Labor Costs Budget

Activity Stellar Cameras Stellar Sound Systems Stellar Lighting

Minutes Required (for 1 unit) 36 24 12

Labor Cost Hourly Wage Rate per Unit $25 $ 15.00 $25 $ 10.00 $25 $ 5.00

Stellar Productions Manufacturing Overhead Costs Budget Predetermined Minutes Required Overhead Rate Activity (for 1 unit) (per labor hour) Stellar Cameras 36 $20 Stellar Sound Systems 24 $20 Stellar Lighting 12 $20

Solution: a)

b)

12. (LO 9.3) Shampure is a fictious company that produces sustainably sourced and cruelty free hair care products. The company has been trying several new techniques to try to increase sales, including: (1) offering a 10% pay bonus for team members who exceed sales targets, (2) providing limited-time-only coupons for deep discounts to customers during slower months, and (3) increasing its online marketing budget. The cost accountant has performed a regression analysis to determine which, if any, techniques have been successful and should be considered when forecasting future sales. Review the regression output and explain to management what the results tell you about which techniques are or are not effective in increasing sales.

SUMMARY OUTPUT Regression Statistics Multiple R 0.91 R Square 0.83 Adjusted R Square 0.73 Standard Error 402332.06 Observations 12.00 ANOVA df Regression Residual Total

Intercept Holiday Coupons Marketing Spend Sales Incentive

4 7 11

SS MS 5.44083E+12 1.36E+12 1.1331E+12 1.62E+11 6.57393E+12

Coefficients Standard Error 445949.50 1197835.08 1908336.74 383199.08 656619.08 328502.75 71.30 81.98 1634590.24 397899.16

F 8.40

Significance F 0.01

t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 0.37 0.72 -2386480.38 3278379.39 -2386480.38 3278379.39 4.98 0.00 1002214.90 2814458.57 1002214.90 2814458.57 2.00 0.09 -120166.49 1433404.66 -120166.49 1433404.66 0.87 0.41 -122.56 265.16 -122.56 265.16 4.11 0.00 693708.25 2575472.24 693708.25 2575472.24

Solution: The results indicate that sales are influenced by whether it is a holiday month, whether coupons are offered to customers, and whether sales incentives are offered to team members. There is no effect of increasing the monthly marketing budget. Examining the coefficients, sales incentives increase sales more so than coupons do (over twice as much), so the company should consider the net effect of paying employees bonuses during those months to determine if this is a cost effective method to increase sales.

13. (LO9.3) Fire and Flavor produces grilling accessories, most notably cedar plank boards for seasoning and grilling fish. Assume the production facility in Lexington, South Carolina, produces three products: cedar planks, a portable grill set, and a grill accessories kit. The expected sales and selling price for each during the next period are as follows:

Product Type Cedar planks Portable grill set Grill accessories kit

Fire and Flavor Sales Forecast Expected Sales Selling Price (in units) per unit 100,000 $ 15.00 50,000 $ 150.00 25,000 $ 55.00

Total

175,000

Planned production to meet demand is as follows: Fire and Flavor Production Budget (in units) Cedar Grill accessories planks Portable grill set kit Budgeted Sales 100,000 50,000 25,000 (plus) Target ending finished goods inventory 2,000 1,000 500 Total Required Units 102,000 51,000 25,500 (less) Beginning finished goods inventory 1,800 1,200 525

Direct materials cost for each item is summarized in the following table: Fire and Flavor Direct Materials Budget

Cedar planks Portable grill set Grill accessories kit $ 2.00 $ 15.00 $ 5.00 100,000 50,000 25,000 $ 200,000 $ 750,000 $ 125,000

Cost Per Unit Expected Sales (in units) Total Direct Materials Required (in dollars)

A labor rate of $18 per hour is applied to each item, as described in the following table: Fire and Flavor Manufacturing Labor Costs Budget

Work Station Activity 1 Cedar planks 2 Portable grill set 3 Grill accessories kit

Minutes Required (for 1 unit) 2 8 6

Labor Cost Hourly Wage Rate per Unit $18 $ 0.60 $18 $ 2.40 $18 $ 1.80

Finally, the predetermined overhead rate is $2 per hour, applied to each unit based on the labor minutes required to produce the item (as shown in the manufacturing labor costs budget).

Solution:

14. Dagostino produces and sells handmade pasta. They specialize in traditional semolina pasta, as well as specialty Louisiana-themed shaped pasta. The company has budgeted to sell 750,000 units, but some uncertainty in the market exists such that the cost accountants believe actual sales could be as much as 10% higher or lower. i.

Use the following format to prepare the static budget: Dagostino Per Unit Units Sold Revenue Variable Costs Direct Material Direct Labor Variable Manufacturing Overhead Variable SG&A Costs Total Variable Costs Contribution Margin Fixed Costs Fixed Manufacturing Overhead Fixed SG&A Costs Total Fixed Costs Operating Income

ii.

Static Budget 750,000

$ 20.00 $ $ $ $ $

1.00 0.25 0.10 0.05 1.40

$ $

0.10 0.05

Prepare a flexible budget estimating sales under 4 scenarios: 10% below expectations, 5% below expectations, 5% above expectations, and 10% above expectations.

Dagostino (2) -10%

(1) -5%

(3) 5%

(4) +10%

Solution: Dagostino Per Unit

Units Sold Revenue Variable Costs Direct Material Direct Labor Variable Manufacturing Overhead Variable SG&A Costs Total Variable Costs Contribution Margin Fixed Costs Fixed Manufacturing Overhead Fixed SG&A Costs Total Fixed Costs Operating Income

Static Budget 750,000 $ 20.00 $ 15,000,000 $

(1) -5% 712,500 14,250,000 $

Dagostino (2) (3) (4) -10% 5% +10% 675,000 787,500 825,000 13,500,000 $ 15,750,000 $ 16,500,000

$ $ $ $ $

1.00 0.25 0.10 0.05 1.40

$ 750,000 $ 187,500 $ 75,000 $ 37,500 $ 1,050,000 $ 13,950,000

$ $ $ $ $ $

712,500 178,125 71,250 35,625 997,500 13,252,500

$ $ $ $ $ $

675,000 168,750 67,500 33,750 945,000 12,555,000

$ 787,500 $ 196,875 $ 78,750 $ 39,375 $ 1,102,500 $ 14,647,500

$ 825,000 $ 206,250 $ 82,500 $ 41,250 $ 1,155,000 $ 15,345,000

$ $

0.10 $ 75,000 0.05 $ 37,500 $ 112,500 $ 13,837,500

$ $ $ $

75,000 37,500 112,500 13,140,000

$ $ $ $

75,000 37,500 112,500 12,442,500

$ 75,000 $ 37,500 $ 112,500 $ 14,535,000

$ 75,000 $ 37,500 $ 112,500 $ 15,232,500

15. (LO 9.6) As described previously, in problem 9.8, Hughes Allen owns three dealerships and all salespeople are given a sales target of 60 cars per quarter. You have been given quarterly sales data for the sales agents that work at each dealership as well as their sales targets. Use this data to prepare a pivot table that summarizes the quarterly sales by dealership and calculates the percentage of the target achieved by each dealership (label this new calculated field ―Percent of Target‖ and format it as a percentage).

Consider how Hughes Allen may perceive the data when he examines it as aggregated at the dealership level rather than at the individual salesperson level. Comment on your observations.

Solution: Row Labels Ford Honda Kia Grand Total

Sum of Quarterly Sales Target Sum of Quarterly Sales Sum of Percent of Target 360 285 79.17% 360 315 87.50% 240 213 88.75% 960 813 84.69%

Based on the totals, the budget to actual performance actually looks pretty strong.

All three dealerships are approximately at or above 80% of target, and two are close to 90%. This would most likely make the owner of the three dealerships happy.

However, when we look at this in conjunction with the individual data, we see that only 5 out of 16 salespeople are at target, so the strong performance is mostly attributable to a small number of salespeople. The owner should consider the effect these targets are likely to have on morale and motivation. Also, the owner may want to consider the risk of one of the strongest performers leaving the dealership. For example, it would be detrimental if Liu Chen left the Kia dealership, because this employee accounts for 28% of Kia sales.

Chapter 10 End-of-Chapter Assignment Solutions (Level 1) Multiple-Choice Questions 1 (LO 10.1)

Phickles Pickles, a family-owned business, purchases cucumbers, carrots, okra, and other vegetables for pickling from a local farm in northeast Georgia. The standard cost for these raw materials is $6.00 per pound. Phickles usually purchases 1,250 pounds of veggies each spring. Due to drought conditions all winter, the actual price for veggies is $7.50 per pound. Given this information, which variance can you calculate?

a.

Direct labor price variance

b.

Direct labor efficiency variance

c.

Direct material price variance

d.

Direct material efficiency variance

2 (LO 10.2)

Using the information from Multiple-Choice Question 1, which of the following represents the variance at Phickles Pickles?

a.

$ 1,875.00

Unfavorable

b.

$ 1,875.00

Favorable

c.

$ 7,500.00

Unfavorable

d.

$ 7,500.00

Favorable

3 (LO 10.2)

a.

$ 312.50

Unfavorable

b.

$ 312.50

Favorable

c.

$ 375.00

Unfavorable

d.

$ 375.00

Favorable

4 (LO 10.2)

5

Now assume that Phickles Pickles (from Multiple-Choice Question 1) found a new supplier in the Florida panhandle that had not experienced drought conditions and can supply the vegetables for $5.75 per pound but requires that Phickles purchase 1,500 lbs. Which of the following is the direct material price variance during this period?

As described in Multiple-Choice Question 3, Phickles has purchased 1,500 pounds of vegetables from a new supplier for $5.75. Recall that at the start of the year Phickles budgeted using a standard quantity of 1,250 pounds at $6.00 per pound. Assume that the lower price for the vegetables was associated with slightly lower quality than Phickles is used to, so Phickles used all 1,500 pounds of vegetables even though it was more than the company usually purchases. Calculate the direct materials efficiency variance during the period.

a.

$ 1,500.00

Unfavorable

b.

$ 1,500.00

Favorable

c.

$ 375.00

Unfavorable

d.

$ 312.50

Favorable

(LO 10.3)

Which of the following describes how variances are recorded in journal entries?

a.

Favorable variances are debits; unfavorable variances are credits.

b.

Favorable and unfavorable variances are debits.

c.

Unfavorable and favorable variances are credits.

d.

Unfavorable variances are debits; favorable variances are credits.

6

(LO 10.4)

When preparing closing entries at the end of the period, assuming most of the products have been produced and sold, which of the following best describes the journal entry?

a.

Cost of goods sold (COGS) increases to reflect favorable variances.

b.

Cost of goods sold (COGS) increases to reflect unfavorable variances.

c.

Cost of goods sold (COGS) decreases to reflect unfavorable variances.

d.

Cost of goods sold (COGS) does not change to reflect variances.

7 (LO 10.1)

In 2022, the Russian invasion of Ukraine significantly increased the price of gasoline in the United States. What type of unexpected variance would this create for Federal Express, the shipping company?

a.

Favorable direct materials price variance

b.

Unfavorable direct materials price variance

c.

Favorable direct materials efficiency variance

d.

Unfavorable direct materials efficiency variance

8 (LO 10.2)

Assume the following data for Sprouts Market: 1. Standard labor hours required

400

2. Standard labor rate per hour

$9.00

3. Actual labor hours worked

375

4. Actual labor rate per hour

$9.25

Given the above information, which of the following represents the direct labor variances? a.

The direct labor price variance is favorable; the direct labor efficiency variance is favorable.

b.

The direct labor price variance is unfavorable; the direct labor efficiency variance is favorable.

c.

The direct labor price variance is favorable; the direct labor efficiency variance is unfavorable.

d.

The direct labor price variance is unfavorable; the direct labor efficiency variance is unfavorable.

9 (LO 10.2)

Using the data in Multiple-Choice Question 8, which of the following accurately represents the direct labor price variance?

a.

$ 100.00

Favorable

b.

$ 100.00

Unfavorable

c.

$ 93.75

Unfavorable

d.

$ 93.75

Favorable

10 (LO 10.2)

Using the data in Multiple-Choice Question 8, which of the following accurately represents the direct labor efficiency variance?

a.

$ 225.00

Favorable

b.

$ 225.00

Unfavorable

c.

$ 231.25

Favorable

d.

$ 231.25

Unfavorable

11. (LO 10.2) A company budgets to sell 5,000 units of its product. Actual sales are 5,500 units. The product has a standard labor price of $55. When analyzing its direct labor flexible-budget variance for the period, the company determines that its direct labor efficiency variance was an unfavorable variance of $1,000. Which one of the following is closest to the actual price for direct labor if the total direct labor flexible-budget variance was a favorable variance of $10,000? (CMA Adapted) a. $ 40 b. $ 50 c. $ 53 d. $ 55 12. (LO 10.4) A candle company has purchased 10,000 pounds of clear candle wax this month to create 5,000 designer candles. The wax was purchased for $1.75 per pound, which is $0.25 less than was originally expected when the cost accountants created the budget. Which of the following represents how this variance will be recorded at the time the raw materials are purchased? a. b. c. d.

Credit of $2500 to Direct Materials Price Variance Debit of $2500 to Direct Materials Price Variance Credit of $2500 to Direct Materials Efficiency Variance Debit of $2500 to Direct Materials Efficiency Variance

13. (LO 10.4) Assume that in the next month, the same candle company in Multiple-Choice Question 12 used 15,000 pounds of clear candle wax to create 5,000 designer candles. This is 5,000 pounds more than expected. The wax was once again purchased for $1.75 per pound, which is $0.25 less

than was originally expected when the cost accountants created the budget. Which of the following represents how this variance will be recorded at the time the raw materials are purchased? a. b. c. d.

Credit of $10,000 to Direct Materials Price Variance Debit of $10,000 to Direct Materials Price Variance Credit of $10,000 to Direct Materials Efficiency Variance Debit of $10,000 to Direct Materials Efficiency Variance

14. (LO 10.2) Heartwood Cabinets’ Pine division uses the following information to calculate its direct cost variances for the month of March: Standard labor hours Actual labor hours Standard labor rate per hour Actual labor rate per hour

30 minutes per cabinet 35 minutes per cabinet $15 per hour $14 per hour

Based on this information, which of the following is true? a. The labor price and labor efficiency variances are favorable. b. The labor price and labor efficiency variances are unfavorable. c. The labor price variance is favorable and the labor efficiency variance is unfavorable. d. The labor price variance is unfavorable and the labor efficiency variance is favorable.

15. (LO 10.2) Pine division uses the following information to calculate its direct cost variances for the month of March: Standard materials Actual materials required Standard materials cost Actual materials cost

1 yard per cabinet .75 yards per cabinet $10 per cabinet $11 per cabinet

Based on this information, which of the following is true? a. The direct materials price and direct materials efficiency variances are favorable. b. The direct materials price and direct materials efficiency variances are unfavorable. c. The direct materials price variance is favorable and the direct materials efficiency variance is unfavorable. d. The direct materials price variance is unfavorable and the direct materials efficiency variance is favorable.

16. (LO 10.4) Which of the following statements is incorrect? a. Unfavorable variances are recorded as credits b. Unfavorable variances are recorded as debits c. Favorable variances are recorded as credits d. All of these statements are correct 17. (LO 10.4) Pauline’s Pralines records the following journal entry: Work-in-Process Direct Materials Efficiency Variance Direct Materials

500,000 100,000 600,000

Which of the following statements provides a possible explanation for this journal entry? a. b. c. d.

Pauline used less praline ingredients than expected.

Pauline purchased materials at a lower than expected cost.

Pauline paid more than expected for her materials.

Pauline used more praline ingredients than expected.

18. (LO 10.4) Pauline’s Pralines records the following journal entry: Work-in-Process Direct Manufacturing Labor Efficiency Variance Direct Manufacturing Labor Price Variance Wages Payable

200,000 100,000 100,000 400,000

Which of the following statements provides a possible explanation for this journal entry? a. b. c. d.

Pauline’s labor took more time than expected.

Pauline’s labor took less time than expected.

Pauline’s labor was paid a lower wage than expected.

Pauline’s used more direct materials than expected.

19. (LO 10.4) Pauline’s Pralines records the following journal entry to close out the journal entries for the period: COGS

150,000

Direct Materials Price Variance

150,000

Direct Materials Efficiency Variance

100,000

Direct Labor Price Variance

100,000

Direct Labor Efficiency Variance

100,000

Which of the following statements describes the variances that the organization experienced during the period? a. b. c. d.

Pauline’s paid more for direct materials than expected Pauline’s paid less for direct materials than expected Pauline’s labor took less time than expected.

Pauline’s used less direct materials than expected.

20. (LO 10.5) Which of the following statements describes a problematic explanation for a favorable materials price variance? a. The purchasing manager is buying sub-standard materials for a low cost. b. The purchasing manager has negotiated a lower rate for a multi-year contract to purchase materials from a trusted supplier. c. The human resources department has hired less experienced labor that takes longer than expected to complete production. d. The human resources department has hired more experienced labor that takes less time than expected to complete production.

(Level 1) Discussion Questions 1. (LO 10.1) The static budget variance at a Kia manufacturing facility revealed a $5,000,000 unfavorable variance in operating income. Management wants to do more analysis to understand the cause of this difference. Which data would you need to perform a thorough analysis?

Answer: Standard Units Sold Units Produced Sales Price Direct Materials Required Direct Materials Cost Direct Labor Hours Direct Labor Rate per hour Variable Manufacturing Overhead Fixed Costs

Actual Units Sold Units Produced Sales Price Direct Materials Purchased/Used Direct Materials Cost Direct Labor Hours Direct Labor Rate per hour Variable Manufacturing Overhead Fixed Costs

2. (LO 10.5) Should management investigate every variance? Explain your answer.

Management does not necessarily need to investigate every variance. Conducting investigations for every minor variance can be impractical and may consume valuable time and resources that could be better used elsewhere. The decision to investigate variances should be based on their significance, potential impact, and alignment with organizational goals and priorities.

Management should focus investigations on material variances that have a significant impact on financial results, operational performance, or strategic objectives. Material variances can indicate potential issues, risks, or opportunities that require attention and analysis.

Management should consider the cost-benefit analysis of investigating variances. If the cost of investigating a minor variance outweighs the potential benefits or insights gained from the investigation, it may be more prudent to allocate resources to more significant variances or other strategic initiatives.

3. (LO 10.5) Describe the benefits and challenges associated with using variance analysis to motivate and compensate managers.

Benefits:



Variance analysis provides a clear and measurable way to assess managers' performance against predetermined targets or budgets. It helps align managers' efforts with organizational goals and promotes a results-oriented culture.



By tying compensation to variance analysis, managers are held accountable for their performance. It provides a financial incentive for managers to meet or exceed targets, encouraging them to make strategic decisions, control costs, and improve operational efficiency.



Variance analysis enables a structured evaluation of managers' performance. It provides a basis for constructive feedback, allowing managers to identify areas of improvement and take corrective actions. This can lead to professional growth and development.

Challenges:



Variance analysis typically focuses on financial metrics and may not capture all aspects of managerial performance. It may overlook non-financial factors such as customer satisfaction, employee engagement, or long-term strategic initiatives. Overemphasizing financial metrics can create a narrow perspective and potentially lead to short-term decision-making.



Over-reliance on variance analysis for compensation can create unintended consequences.

Managers might manipulate data or engage in short-term tactics to achieve favorable variances, sacrificing long-term sustainability or ethical practices. This underscores the importance of carefully designing incentive structures to align with desired behaviors.



Variance analysis may not fully account for external factors beyond managers' control, such as market conditions or macroeconomic changes. Unforeseen circumstances can impact variances, leading to potential unfairness in compensation if not appropriately considered.



The accuracy and reliability of the underlying data used in variance analysis are crucial.

Inaccurate or incomplete data can distort variance calculations and impact managerial evaluations. Maintaining data integrity and ensuring robust data collection processes are essential for effective variance analysis.

4. (LO 10.3) A purchasing manager entered into a contract with a new supplier who promised higher quality and lower prices than the company’s current supplier. However, at the end of the quarter the cost accountants noted a favorable direct materials price variance and an unfavorable direct materials efficiency variance. Explain this result and its implications for the new supplier.

It appears that the new supplies may have been sold at a lower price but were of lower quality.

Lower quality materials are more susceptible to breakage and thus more may be required to complete the planned production. Management must assess whether the new cost is low enough to make up for the additional materials required, as well as the cost to dispose of the scrap. In addition, if the materials are of low quality, management must consider the risk that their finished goods are also of lower quality than the company’s customers expect. If the finished goods are not high quality it could damage the company’s reputation and cause them to lose customers and market share. Management must understand these risks as they consider whether to continue doing business with the new supplier.

5. (LO 10.3) Suppose you work for a clothing company that has been sourcing its textile manufacturing overseas for many years. Your CEO recently announced a commitment to ethically sourced products. In your industry, this means that you must ensure that products are manufactured in safe environments by workers who are paid fair wages, work legal hours, and have safe and clean working conditions. Cost standards were established last year, months before your CEO made the announcement. Describe how this decision is likely to impact your direct manufacturing and direct labor cost variances.

Unfortunately, in the textiles industry, there are many examples of products being produced in facilities and by suppliers that do not adhere to the safety and human rights standards to which your CEO has committed. Poor working conditions, however, are one of the reasons that costs for production are low. Now that your organization is committed to source only from ethical companies, it is likely that the cost you must incur to produce merchandise will increase.

Because budgets were set using historical costs – which may have included suppliers who did not adhere to your new standards – it is likely that you will experience unfavorable budget variances. In these circumstances, it is important that the organization understand that the unfavorable variances are due to higher ethical standards and are ultimately good for the organization. Future budgets will need to take these new standards into consideration so that the budget more accurately reflects realistic performance.

6. (LO 10.1) Management at Blue Dress Boutique has noted that the sales-volume variance for store revenue has been unfavorable by more than 10% for the past three quarters. The cost accountants have been using historical sales as the primary input for developing sales expectations. Management is concerned that these standards may not be achievable. Which other data could be used to develop more accurate sales forecasts?

Management should consider additional data such as:  Market trends – overall industry and market trends can help predict sales.  Customer behavior data – customers’ purchasing behavior can provide meaningful insight into their preferences and habits and can help you predict demand and manage inventory.  Seasonality – often consumer behavior varies by season, so it is useful to consider the effects of seasonality on sales.  Economic indicators – economic factors such as inflation, unemployment, consumer confidence can affect consumer behavior.  Performance across different sales channels (e.g., online vs. in person)  Marketing and promotions data – information on the effectiveness of past marketing and promotional activities can be helpful in determining the drivers of sales.  Product trends – trends related to your own products as well as general market trends for types of products can provide insights into customer preferences.  External events – political, environmental and socio-cultural events can impact consumer behavior.  Competitor analysis – examining the performance of competitors (especially those in the same geographical area) can provide useful insight into potential sales, and may explain why there have been downturns.

Use the following dashboard to answer Discussion Questions 7 and 8.

7. (LO 10.2) Assume you are the CFO of a multinational company that sells and maintains computer equipment for offices around the world. Your cost accountant has prepared a detailed revenue variance dashboard that includes a variety of visualizations presenting actual performance, actual performance last year (LY), and the budget. Note the filters applied to this dashboard and describe which data are being presented in this report.

This company has three revenue streams (product, maintenance, and service). The dashboard contains revenue data for three years (2024, 2025, and 2026). Based on the filters applied, we

are looking primarily at data from 2026 for the service revenue stream. However, the Total Revenues (Company) YTD viz shows the revenues for all three product lines combined.

8. (LO 10.2) Now that you have examined the data analysis in the dashboard (see Discussion Question 7), what feedback would you provide to the managers of the Maintenance, Service, and Product divisions in their annual performance evaluations?

Only the Revenue by Division visualization shows the individual performance of each division.

Based on this, it appears that the maintenance and service divisions are underperforming compared to the budget consistently throughout the year. So, I would tell them to make the necessary changes to sell more product – OR to update their budgeting process and the data used to develop the budget so that future budgets are more accurate and achievable. The product division is meeting its budget expectations, so perhaps there is an opportunity to increase expectations to motivate increased revenues in the next year.

9. (LO 10.5) Describe the benefits of using an interactive dashboard for monitoring sales and cost variances.

Interactive dashboards can provide a visual representation of the organization’s performance which can easily allow users to glean important insights. There are a number of benefits associated with using interactive dashboards to monitor variances.

(1) Often, dashboards can be connected to data that is updated in real time or frequently.

Frequent updates allow management to see activity as it happens and make timely decisions based on current information. Some dashboards can even be set up with alerts that will activate if performance falls below the preferred level.

(2) Dashboards can highlight KPIs and clearly illustrate performance relative to those KPIs. (3) The interactive nature of dashboards can (generally) allow users to drill down to review more granular data. This allows management to identify specific trends, patterns, or opportunities.

(4) Dashboards allow for comparative analysis across divisions of the organization and over time.

(5) Dashboards can integrate data from various sources – internal and external to the organization.

10. (LO 10.3) In a service organization, which do you believe is more important to examine: direct labor variances or direct materials variances? Explain.

In a service organization, it is more important to examine direct labor variances because most of the cost associated with the revenue earned by the company is related to the labor used to produce the service.

Note, however, there may be some direct materials associated with a service. For example, if a consultant needed to buy specific software or reference materials to perform a service for a client it would be considered a direct material.

11.(LO 10.4) Explain why organizations use standard costing systems to record production costs.

Organizations use standard costing systems so that they have a benchmark to which they can compare actual performance. Those standard costs are based on historical data, industry benchmarks and management’s expectations and therefore are a good estimation of what should occur in the current period (assuming there are no major changes in the market or the organization).

Because there is often a lag between when production begins and when costs are known, using a standard costing system allows the organization to reasonably estimate the value of inventory in a timely manner.

At the end of the period, the organization prepares journal entries to record the variances between standard costs and actual costs. This updates the value of inventory to actual costs.

12. (LO 10.4) At the end of the period, you create a journal entry that increases the COGS balance.

What does this indicate for the company’s performance during the period?

A journal entry that increases the COGS balance indicates that the COGS was higher than anticipated. Since the original costs were posted (in previous journal entries) using standard costs, this means that there were unfavorable variances during the period.

13. (LO 10.3) Explain what a flexible budget is and why it is a useful tool.

A flexible budget calculates the expected revenue and costs for an organization using the actual units produced and sold in a period instead of the budgeted units. A flexible budget therefore helps organizations develop a better understanding of why cost variances occur because otherwise the variances are often largely driven by fluctuations in sales.

Flexible budgets can improve planning and control activities because they adjust for changes in revenue and production levels. They also improve the use of budgets for performance evaluation because management can compare actual performance to budgets, given actual activity levels, which provides a more accurate analysis of company performance. Together, this improves business decision making because management is considering more relevant comparisons. Further, when management can make accurate assessments of performance, it helps them make more informed decisions about costs going forward and more accurate predictions of future profitability.

14.(LO 10.2) Describe the difference between price variances and efficiency variances.

Price variances are the difference between the actual cost of a resource and its standard (or budgeted) cost, multiplied by the actual amount of resource used. This variance is used to measure how well a business keeps unit costs of material and labor in line with its standards or expectations.’

Efficiency variances measure the difference between the actual amount of resources used and the standard amount expected to be used, multiplied by the standard cost. They essentially capture how effectively a company uses its materials or labor.

Organizations need to consider both price and efficiency variances as these provide key insights into different aspects of business performance, helping in identifying problem areas, improving operations, and making informed strategic decisions.

15. What factors might contribute to a favorable direct labor variance?

A direct labor variance is the difference between the actual labor cost incurred and the standard labor cost for the actual production achieved. A favorable direct labor variance means that the actual labor cost incurred was less than the standard cost expected. Several factors can contribute to a favorable direct labor variance: Higher than expected productivity: If workers are more productive than expected, either through increased efficiency or working at a faster pace, fewer hours may be needed to produce the same amount of goods.

Lower than planned wages: If the actual wages paid to labor are less than the standard wage rate set by the company, this can result in a favorable labor rate variance.

Less overtime pay than expected: If employees work less overtime than planned, this could also result in a favorable labor variance. Overtime is usually paid at a premium rate, so less overtime means less labor cost.

Hiring lower skilled workers than planned: If less skilled workers are used instead of more skilled (and more expensive) workers, labor costs may be reduced. However, this might also affect the quality and efficiency of production.

Effective Training and Supervision: Effective training and supervision can lead to higher productivity and efficiency, leading to a reduction in the time required to manufacture products.

(Level 1) Brief Exercises

1. (LO 10.2) Fire and Flavor produces and sells BBQ accessories, including cedar planks used to infuse meat with flavor while grilling. Assume the company’s 2026 static budget and actual performance figures for the cedar plank division are as follows: Fire & Flavor Cedar Grilling Planks Division 2026 Static Budget

Actual

Units produced and sold

10,000 planks

10,500 planks

Sale price

$18 per plank

$19 per plank

Variable costs

$33,000 total

$3 per plank

Fixed costs

$25,000 total

$24,000 total

Calculate Fire and Flavor’s static budget variance for: a. Revenues b. Variable costs c. Fixed costs d. Operating income Solution:

2. (LO 10.2) Use the same data from Fire and Flavor as in Brief Exercise 2: Fire & Flavor Cedar Grilling Planks Division 2026 Budget

Actual

Units produced and sold

10,000 planks

10,500 planks

Sale price

$18 per plank

$19 per plank

Variable costs

$33,000 total

$3 per plank

Fixed costs

$25,000 total

$24,000 total

Prepare a flexible budget for 2026 and calculate Fire and Flavor’s flexible budget variance for: a. Revenues b. Variable costs c. Fixed costs d. Operating income Solution:

Units produced and sold Sale price Variable costs Fixed Costs

Fire & Flavor Cedar Grilling Planks Division 2024 Static Budget Actual 10,000 planks 10, 500 planks $18 per plank $19 per plank $33,000 total $3 per plank $25,000 total $24,000 total

Flexible Budget 10,500 planks $18 per plank $34,650 total $25,000 total

3. (LO 10.2) Use the 2026 Fire and Flavor data from Brief Exercises 1 and 2 to calculate the salesvolume variance for the revenue of the Cedar Planks division.

Solution: Flex Budget Revenue Static Budget Revenue Sales-volume Variance

=actual units sold * budgeted sales price =10,500 *$18 =budgeted units sold * budgeted sales price =10,000 *$18 =flexible budget revenue - Static budget revenue =$189,000 - $180,000

$ $ $

189,000.00 180,000.00 9,000.00 F

4. (LO 10.3) Assume the cost accountants at Fire and Flavor (see Brief Exercises 1–3) now have more detailed data about variable costs, as follows:: Standards

Actual

Employee pay

$15

$15

Direct Labor

Planks per hour

9

10

Direct Materials

Direct materials (per plank)

$1.63

$1.50

Calculate: a. Direct labor price variance b. Direct labor efficiency variance c. Direct materials price variance

Solution:

Direct Labor Price Variance =Actual Quantity of Hours Used * (Actual Price – Standard Price) =10,500/10 *($15-$15) = $0 (None)

Direct Labor Efficiency Variance =Standard Price * (Actual Quantity of Hours Used – Standard Quantity of Hours Planned) =$15.00*((10,500/10) - (10,500/9)) = $1,750.00 Favorable

Direct Materials Price Variance =(Actual Quantity Purchased) * ( Actual Price – Standard Price) =10,500*($1.50 - $1.63) = $1,365.00 Favorable

5. (LO 10.4) Using the Fire and Flavor data from Brief Exercises 1 – 4, prepare the journal entries that the cost accountant will use to record: a) Direct materials price variance b) Direct labor variances Solution:

6. (LO 10.2) The CFO of Heartwood Cabinets intends to evaluate the managers of each division using variance analysis. The cost accountant has collected the following information about the Oak division for March 2026:

Budgeted Sales (cabinets) Sales price per cabinet Materials (yards per cabinet) Materials cost (per yard) Labor Hours per cabinet Labor Cost per Hour Calculate: a. b. c. d. e. f.

Solution:

Sales volume variance Flexible-budget variance Materials price variance Materials efficiency variance Labor price variance Labor efficiency variance

$ $ $

Actual 2,000 125.00 $ 1.00 10.00 $ 0.50 15.00 $

1,900 119.00 1.25 11.25 0.40 14.50

7. (LO 10.4) Using the information in Brief Exercise 6, prepare the journal entries that the cost accountant at Heartwood Cabinets will use to record: (a) Direct materials price variance for the Oak division (b) Direct materials efficiency variance for the Oak division (c) Direct labor variances for the Oak division

Solution:

8. (LO 10.2) The CFO of Heartwood Cabinets intends to evaluate the managers of each division using variance analysis. The cost accountant has collected the following information about the Maple division for March 2026:

Sales (cabinets) Sales price per cabinet Materials (yards per cabinet) Materials cost (per yard) Labor Hours per cabinet Labor Cost per Hour Total Hours Required Calculate: a. b. c. d. e. f.

Sales volume variance Flexible-budget variance Materials price variance Materials efficiency variance Labor price variance Labor efficiency variance

Budgeted 5,000 $ 115.00 $ 1 $ 15.00 $ 0.50 $ 15.00 $ 2,500

Actual 5,200 125.00 1 14.00 0.25 15.50 1,300

Solution:

9. (LO 10.4) Using the information about Heartwood’s Maple Division (from Brief Exercise 7), prepare the journal entries that the cost accountant at Heartwood will use to record: a. Direct materials price variance for the Maple division b. Direct materials efficiency variance for the Maple division c. Direct labor variances for the Maple division

10. (LO 10.3) Saucemoto produces and sells a dip clip that attaches to a car’s air vent to hold fast food sauce. The clips are made from food-grade plastic and silicon. For November 2026, Saucemoto budgeted that it would produce and sell 24,000 individual dip clip units. Actual production and sales were 26,000 units. Dip clips are sold in pairs and the sale price was budgeted at $12.99 per pair. The sale price was reduced to $10.95 in November for holiday sales. Budgeted variable cost is $1.50 per unit. Budgeted fixed costs are $25,000. Actual variable costs were $1.75 per unit. Actual fixed costs were $24.00. a. Prepare a flexible budget variance analysis (similar to the one shown in Exhibit 10.6 in the text).

Solution: SauceMoto Flexible Budget Variance November 2026

Units Sold

Actual Results

FlexibleBudget Variance

Flexible Budget

Sales Volume Variance

Static Budget

1

2

3

4

5

-

26,000

26,000

2,000

F

24,000 $155,880.00

Revenue

$142,350.00

$26,520.00

U $168,870.00

$12,990.00

F

Variable Costs

$45,500.00

$6,500.00

U $39,000.00

$3,000.00

U $36,000.00

Contribution Margin

$96,850.00

$33,020.00

U $129,870.00

$9,990.00

F

Fixed Costs

$24,000.00

$1,000.00

F

Operating Income

$72,850.00

$32,020.00

U $104,870.00

$25,000.00

-

$9,990.00

$119,880.00 $25,000.00

F

$94,880.00

11. (LO 10.3) Comfy developed, produces, and sells a wearable blanket. It looks like an oversized hoodie made from soft microfiber and sherpa materials, with a front pocket big enough for your hands, a book, and some snacks. Comfy has the following data for October 2026.

Budget

Actual

Units to produce/ sell

40,000

45,000

Budgeted sales price (per unit)

$ 59.99

$ 55.00

Materials required Cost of materials

4 yards of fleece 4.25 yards of fleece $ 3 per yard

$ 2.50 per yard

Labor hours per unit

5 minutes

6 minutes

Labor cost per hour

$ 9.00

$ 10.00

Variable overhead (per unit)

$ 0.25

$ 0.30

$ 25,000.00

$ 24,000.00

Budgeted total fixed costs

Compute: a. Sales-volume variance

b. Flexible budget variance c. Price and efficiency variances

Solution:

12. (LO 10.4) Use the October 2026 data from Comfy (from Brief Exercise 10) to prepare the necessary journal entries to record the variances and close them out to COGS at the end of the period.

13. (LO 10.1) Shibumi produces sunshades for the beach. The shades are made from a simple parachute canopy that flows in the wind and aluminum stakes that anchor the shade to the sand.

Assume the following information: Shibumi Standard Costs Standard Direct Materials Costs Parachute Nylon 6 sq. yards Aluminum Poles 4 Cord 3 yards Canvas (for carrying case) 1.5 yards

$4.00 per yard $1.00 per pole $0.10 per yard $2.50 per yard

Standard Direct Labor Costs Manufacturing wages .5 hours

$12 per hour

Standard Variable Manufacturing Costs Variable Costs

$0.75 per shade

Calculate:

a) The total standard cost for a single sunshade. b) The total standard cost for a production run of 20,000 sunshades.

Solution: a) = standard direct materials cost per unit + standard direct labor costs per unit + standard variable costs per unit =(($4 * 6 sq yards)+($1 * 4 poles)+($0.10*3 yards)+($2.50*1.5)) + ($12 *(1*0.5))+$0.75 $ 38.80 b) =standard unit cost * number of units produced =$38.80 * 20,000 $ 776,000.00

14. (LO 10.5) The following dashboard is reproduced from exhibit 10.8 in the chapter:

Based on this dashboard, what feedback would you provide to the purchasing managers of parts A, B, and C respectively?

This disaggregated dashboard shows that materials costs have increased consistently over time, driven primarily by a regular jump in the cost of material C every four years. Assuming a different purchasing manager is responsible for each part, I would commend the purchasing manager responsible for parts A and B for their consistency and predictability. However I would also inquire into whether they have evaluated other suppliers to make sure that they are sourcing products that are not only consistently low priced, but also high quality and “cutting edge” as needed.

For the purchasing manager for part C, the predictable increases every 4 years suggests that there are external factors that drive the cost increases, but I would ask her to confirm that these price increases are appropriate and to consider whether other suppliers could provide the same parts at a lower rate.

15. (LO 10.2) Sunstar Microsystems, a fictitious technology company, is popular for its innovative electronics products, especially its line of smart speakers. The company carefully plans its operations each year, including forecasting sales volumes to manage production and inventory effectively.

At the beginning of the year, Sunstar Microsystems forecasted sales of 100,000 units of their flagship smart speaker, "Beacon", based on past sales data, market trends, and promotional plans. The budgeted selling price was set at $100 per unit, implying an expected revenue of $10 million.

Throughout the year, the company rolled out strategic marketing campaigns, including a successful influencer collaboration and an effective social media marketing drive. Their efforts paid off, and they tapped into the growing trend of smart home automation, making their smart speakers more popular than ever.

By the end of the year, Sunstar Microsystems had sold 120,000 units of "Beacon", 20% higher than their budgeted volume. This increase in sales volume led to a favorable sales-volume variance.

Calculate the sales-volume variance for the Beacon smart speaker and describe the results.

Solution: Sales-volume variance : (Actual Quantity Sold - Budgeted Quantity Sold) x Budgeted Selling Price = (120,000 units - 100,000 units) x $100 = $2,000,000.

Sunstar Microsystems saw a favorable sales volume variance of $2,000,000. Much of this favorable variance can be attributed to the efforts of the marketing department and its innovative sales campaign. The company should also consider whether and how these results

relate to trends in the industry – for example, perhaps they suggest that there is increased demand for smart home products – as they plan for future product development and production.

(Level 1) Problems

1. (LO 10.3, 10.4) Prepare journal entries to record variances at Heartwood Cabinets.

At Heartwood, the standard direct materials cost per unit for the Pine Arch cabinet is $21.87. In the budget period, Heartwood plans to produce 18,000 units. Assume that the actual cost of materials is $23.25 per unit. a. Assume that Heartwood produces 17,500 units in this period instead of the 18,000 originally budgeted. The standard material amount is 4.5 pounds per unit and Heartwood actually used a total of 76,500 pounds. Prepare the journal entry to record the direct materials efficiency variance. b. Prepare the journal entry to record the direct materials price variance. c. Standard labor cost is $6.30 per unit and standard labor hours is 21 minutes per unit (or 0.35 hours per unit). Calculate the standard hourly wage for building Pine Arch cabinets. d. Calculate the standard amount of time planned to produce 18,000 units. e. Assume that it really takes Heartwood 7,000 hours to produce the 17,500 units and that average salary for employees has increased to $19.00. Prepare the journal entry to record the laborprice and labor-efficiency variances. f.

Assume all variances are immaterial. Prepare the journal entry to write off these balances to cost of goods sold.

Solution:

2. (LO 10.2) Review the variances calculated in Problem 1. Indicate whether each variance is favorable or unfavorable and explain your answers: a. Direct materials price variance b. Direct materials efficiency variance c. Direct manufacturing labor price variance d. Direct manufacturing labor efficiency variance Solution: a. The direct material price variance is UNFAVORABLE because the actual price is greater than standard price. b. The direct material efficiency variance is FAVORABLE because the company used fewer materials than budgeted. c. The direct manufacturing labor price variance is UNFAVORABLE because the actual wage required to produce a unit is higher than the standard. d. The direct manufacturing labor efficiency variance is UNFAVORABLE because each unit took longer than the standard amount of time to produce.

3. (LO 10.5) Using the data and analysis you have performed in questions 1 and 2, prepare a presentation for management, containing useful visualization(s), to explain your results.

Solution: This question is left intentionally vague so students can be creative as they prepare visualizations. Student submissions are likely to vary widely.

One potential solution is as follows:

In visualization 1, we see that the actual cost (shown in green) for both materials and labor, exceeds the budget (shown in yellow).

Heartwood Pine - Arch Budget to Actual $393,660.00

$406,875.00

$113,400.00

Cost of Materials

$133,000.00

Cost of Labor Budget

Actual

In visualization 2, we overlay the budgeted and planned units produced as a line graph and which shows that this increase in cost occurs, despite the decrease in the number of units produced.

Heartwood Pine - Arch Budget to Actual $25.00 $20.00

$21.87

18,100

$23.25 18,000

$19.00

$18.00

18,000 17,900 17,800

$15.00

17,700 17,600

$10.00 17,500

17,500 17,400

$5.00

17,300 $-

17,200 Budget Cost of Materials

Actual Cost of Labor

Units Produced

Overall, these results suggest that the Pine Division is inefficiently using its resources, while also spending more than anticipated on a per unit basis.

4. (LO 10.2) The static budget variance at a large meat-packing plant revealed an unfavorable variance in operating income of approximately $500,000. Management wants to do more

analysis to understand the cause of this difference. Assume that you are the cost accountant for the organization and you have collected the following data:

Standard Units sold 100,000 tons Units produced 100,000 tons Sales price $ 3,000 per ton Direct materials 120,000 tons required Direct materials $ 2,200 per ton cost Direct labor hours 20,000 hours Direct labor rate per $12.50 hour Variable $ 1.00 per ton manufacturing overhead Fixed costs $ 25,000

Actual Units sold Units produced Sales price Direct materials purchased/used Direct materials cost

102,000 tons 102,000 tons $ 3,150 per ton 126,300 tons

Direct labor hours Direct labor rate per hour

22,000 hours $ 14.00

Variable manufacturing overhead

$ 1.13 per ton

Fixed costs

$ 26,000

$ 2,250 per ton

Prepare a flexible budget variance analysis using the format from Exhibit 10.6.

ENO Flexible Budget Variance Analysis

Actual Results 1

Flexible-Budget Variance 2

Units Sold Revenue Variable Costs Direct Material Direct Labor Variable Manufacturing Overhead Total Variable Costs Contribution Margin Fixed Costs Total Fixed Costs Operating Income

Total Static Budget Variance: Flexible Budget Variance: Sales Volume Variance:

Solution:

U/F

Flexible Budget 3

Sales - Volume Variance 4

U/F

Static Budget 5

5. (LO 10.3, 10.4) Prepare journal entries to record variances at Condor Chocolates, which produces fine chocolates sold direct to consumers and wholesale to retailers and restaurants.

The following data reflect the standards and actual sales and costs for May 2025.

At Condor Chocolates, the standard direct materials cost per pound of chocolate candy is $11.99. Standard direct materials are 1.2 pounds for each pound of chocolate candy.

Assume that in the current period the actual cost of materials is $11.02 per pound. Condor Chocolates purchases and uses 2,500 pounds of direct materials to produce 2,500 pounds of chocolate candy

a. Prepare the journal entry to record the direct materials efficiency variance. b. Prepare the journal entry to record the direct materials price variance.

Standard labor cost is $15.00 per hour and standard labor hours is 45 minutes per pound of chocolate candy.

Assume that it really takes Condor Chocolates 55 minutes per pound to produce the 2,500 pounds and that average salary for employees has increased to $18.00.

c. Prepare the journal entry to record the labor-price and labor-efficiency variances. Round up to the nearest whole hour. d. Assume all variances are immaterial to Condor Chocolates. Prepare the journal entry to write off these balances to cost of goods sold.

a. Direct materials efficiency variance: Standard direct materials for 2,500 pounds of candy = 1.2 pounds x 2,500 or 3,000 pounds of direct material.

The direct labor efficiency variance is wrong. Standard hours allowed for 2,500 pounds of candy is (2,500 x 45)/60 or 1,875 hours. (2,292 – 1,875) x $15 = $6,255 unfavorable. Journal entry d, also needs to be corrected.

6. (LO 10.1) Velocity Skates is a fictitious company that produces roller skates. As the cost accountants prepare the budget for the upcoming year, they must calculate standard costs.

Assume you have received the following bill of materials, which describes the inputs to Velocity Skates’s most popular skate, the Speedster:

Skate Boot: Leather or synthetic upper material Lining material Insole Outsole Heel Laces Chassis: Aluminum or steel frame Trucks (Pivot points for the wheels) Cushions (Rubber parts within the truck for flexibility) Wheels: Polyurethane wheels Bearings (Allows the wheel to rotate freely) Toe Stop: Rubber stopper Washer Nut Miscellaneous: Screws for attaching chassis to boot Bolts for attaching trucks to the frame Nuts for securing bolts

1 1 1 1 1 2

$10.00 $1.50 $1.00 $3.00 $2.00 $0.50

1 2 4

$7.50 $5.00 $2.00

4 8

$3.00 $0.50

1 1 1

$2.00 $0.50 $0.50

4 4 4

$0.50 $0.50 $0.50

a. What is the standard direct materials cost for one pair of speedster skates? b. Assume Velocity Skates plans to produce and sell 50,000 pairs. What is the total standard direct materials cost for the budget? c. Sales price is $275 per pair of skates. Assume fixed costs are $70,000 for the period. Labor is paid $9.00 per hour and on average 10 pairs are produced per hour. Calculate Velocity’s planned profit.

Solution:

Single Skate Cost

Skate Boot: Leather or synthetic upper material Lining material Insole Outsole Heel Laces Chassis: Aluminum or steel frame Trucks (Pivot points for the wheels) Cushions (Rubber parts within the truck for flexibility) Wheels: Polyurethane wheels Bearings (Allows the wheel to rotate freely) Toe Stop: Rubber stopper Washer Nut Miscellaneous: Screws for attaching chassis to boot Bolts for attaching trucks to the frame Nuts for securing bolts

Pair of Skates Cost Total Cost for Production

1 1 1 1 1 2

$10.00 $1.50 $1.00 $3.00 $2.00 $0.50

$10.00 $1.50 $1.00 $3.00 $2.00 $1.00

$20.00 $3.00 $2.00 $6.00 $4.00 $2.00

$1,000,000.00 $150,000.00 $100,000.00 $300,000.00 $200,000.00 $100,000.00

1 2 4

$7.50 $5.00 $2.00

$7.50 $10.00 $8.00

$15.00 $20.00 $16.00

$750,000.00 $1,000,000.00 $800,000.00

4 8

$3.00 $0.50

$12.00 $4.00

$24.00 $8.00

$1,200,000.00 $400,000.00

1 1 1

$2.00 $0.50 $0.50

$2.00 $0.50 $0.50

$4.00 $1.00 $1.00

$200,000.00 $50,000.00 $50,000.00

4 4 4

$0.50 $0.50 $0.50

$2.00 $2.00 $2.00 $69.00

$4.00 $4.00 $4.00 $138.00

$200,000.00 $200,000.00 $200,000.00 $6,900,000.00

a) $138.00 b) $6,900,000 Planned Revenue = Sales Price * Planned Production = $275 * 50,000 $ 13,750,000 Profit = Planned Revenue - Planned Total Manufacturing Costs - Planned Labor Costs - Planned Fixed Costs = $13,750,000 - $6,900,000 -((50,000/10)*9) - $70,000 $ 6,735,000.00

c) $6,735,000 7. (LO 10.2) Tumi manufactures and sells high-end suitcases. The static budget variance is an unfavorable variance in operating income of approximately $10,000,000. Management wants to do more analysis to understand the cause of this difference. Assume that you are the cost accountant for the organization and you have collected the following data:

Standard Units sold 1,300,000 Units produced 1,300,000 Sales price $ 600 Direct materials required $12 per yard  Leather (3 yards) $1 per zipper  Zipper (5)

Actual Units sold 1,250,000 Units produced 1,250,000 Sales price $ 625 Direct materials purchased (total) 4,500,000 yds  Leather (3 yards) 6,875,000  Zipper (5)



Wheels (4)

$1 per wheel



Wheels (4)

5,005,000

$5,005,000



Handle (1)

$10 per suitcase 325,000 hours



Handle (1)

1,300,000

$13,000,000

Direct labor hours

350,000 hours

$12.50

Direct labor rate per hour Variable manufacturing overhead Fixed costs

$ 12.00

Direct labor hours Direct labor rate per hour Variable manufacturing overhead Fixed costs

$ 1.00 per suitcase $ 125,000

$58,500,000 $6,875,000

$ 0.75 per suitcase $ 126,000

Prepare a flexible budget variance analysis using the format from Exhibit 10.6.

ENO Flexible Budget Variance Analysis

Actual Results 1

Flexible-Budget Variance 2

Units Sold Revenue Variable Costs Direct Material Direct Labor Variable Manufacturing Overhead Total Variable Costs Contribution Margin Fixed Costs Total Fixed Costs Operating Income

Total Static Budget Variance: Flexible Budget Variance: Sales Volume Variance:

Solution:

U/F

Flexible Budget 3

Sales - Volume Variance 4

U/F

Static Budget 5

8. (LO 10.3) Rocketbook produces reusable smart notebooks that connect to the cloud so handwritten notes can be saved and organized digitally. The notebooks are sold online through the Rocketbook website, via other websites (like Amazon), and in stores like Target and Office Depot.

Cost accountants at Rocketbook have prepared the following estimates to budget for the upcoming year. Use this data to calculate the required variances and journal entries.

Budget Units to Produce/ Sell

Actual 18,000,000

18,500,000

Budgeted Sales Price (per unit)

$

36.99

Cost of Materials (per unit)

$

4.50

3.95

200

185

Units produced per hour

$

29.95

Labor Cost per hour

$

12.00

$

11.95

Budgeted Total Fixed Costs

$

120,000

$

135,000

Assume that there is one unit of direct materials required for each unit produced (for budget and actual).

Required: a. Compute the Sales-volume variance b. Prepare the journal entry to record the direct material price variance c. Prepare the journal entry to record the direct material efficiency variance Prepare the journal entry to record the direct labor price and efficiency d. variance e. Prepare the closing entry to close the variances out to COGS.

Solution

(a)

Sales Volume Variance = Standard Price* (Actual Quantity Sold - Standard Quantity Sold) = $36.99* (18,500,000 - 18,000,000) = $ 18,495,000

Note, to prepare the journal entries, you must calculate the variances as follows:

Direct Materials Price Variance = (Actual Quantity Purchased) * ( Actual Price - Standard Price) = (18,500,000) * ( $3.95-$4.50) = $ (10,175,000) Direct Materials Efficiency Variance = Standard Price * (Actual Quantity Used – Standard Quantity) = $4.50*(18,500,000-18,500,000) = $ Direct Labor Price Variance = Actual Quantity * (Actual Price – Standard Price) = (18,500,000/185)*($11.95-$12.00) = $ (5,000.00) Direct Labor Efficiency Variance = Standard Price * (Actual Quantity of Hours Used – Standard Quantity of Hours Planned) = $12*((18,500,000/185) - (18,500,000/200)) = $ 90,000 (b)

(c)

Prepare the journal entry to record the direct materials price variance.

Direct Materials Direct Materials Price Variance Accounts payable

83,250,000 10,175,000 73,075,000

Prepare the journal entry to record the direct materials efficiency variance.

No Entry Required

(d)

Prepare the journal entry to record the labor-price and labor-efficiency variances.

Work-in-Process Direct Manufacturing Labor Price Variance Direc Manufacturing Labor Effiiency Variance Wages Payable

(e)

1,110,000 90,000 5,000 1,195,000

Prepare the journal entry to write off these balances to cost of goods sold.

Direct Manufacturing Labor Effiency Variance Direct Materials Price Variance Direct Manufacturing Labor Price Variance COGS

5,000 10,175,000 90,000 10,090,000

9. (LO 10.5) Referring back to the Rocketbook data in problem 8, prepare a visualization in Excel, Tableau or PowerBi (based on your instructor’s preference), that graphically shows the variances. Assume you are the purchasing manager responsible for purchasing direct materials.

Using the visualization, provide an explanation to management about your performance.

Solution This question is left intentionally vague so students can be creative as they prepare visualizations. Student submissions are likely to vary widely.

One potential solution is as follows:

This visualization shows that the direct materials price variance is quite favorable. Recall that the calculation for this variance is : Actual Quantity * ( actual price – standard price), because the actual price spent on the direct materials for each unit is $0.55 less than the standard, Rocketbook has kept its cost quite low. These results are quite favorable for the purchasing manager responsible for direct materials.

10. (LO 10.5) Again using the Rocketbook data and your analysis from problems 8 and 9, now take management’s perspective and provide feedback about the performance of the purchasing

manager responsible for direct materials within the broader context of the overall cost performance for Rocketbook during the period.

Solution: Rocketbook’s direct materials price variance is significant and favorable. However, there is a relatively large direct materials efficiency variance. This suggests that more materials than expected were used to produce the notebooks. The overall direct materials variance (netting the two variances together) is still large and favorable, but the purchasing manager should be careful to ensure that the less expensive materials that she is purchasing are not of lower quality.

The direct labor price and efficiency variances are rather small, so at this point there is not much to worry about. However, the efficiency variance ($90,000) suggests that the workers are taking longer than expected to complete the production. This may be, in part, because lower quality materials are easily broken, requiring rework and/or time spent disposing of the scrap.

Management should keep an eye on this as well.

In general, management should evaluate the variances collectively because they are generally interdependent.

11. (LO 10.3, 10.4) Olipop produces a soda-style drink made with fiber, prebiotics and botanicals designed with health in mind. Originally sold in health food outlets, Olipop is now widely distributed in stores like Target and on Amazon.

The standard unit of Olipop is a four-count package. Olipop plans to sell 20 million standard units and the standard sales price is $9.50 per unit.

Cost accountants at Olipop have prepared the following estimates to budget for the upcoming year:

Olipop Units to Produce/ Sell Budgeted Sales Price (per unit) Materials (Ozs) per unit Cost of Materials per unit Cost of Materials per oz (rounded to the nearest .00) Units produced per hour Labor Cost per hour Budgeted Total Fixed Costs

$ $ $ $ $

Budget 20,000,000 9.50 50 1.50 0.03 100 13.50 25,000.00

Assume that Olipop produces and sells 22 million units during the year instead of the 20 million units originally budgeted. The company incurred the following actual costs to produce these 22 million units:

Olipop Units to Produce/ Sell Budgeted Sales Price (per unit) Materials (Ozs) per unit Cost of Materials per unit Cost of Materials per oz (rounded to the nearest .00) Units produced per hour Labor Cost per hour Budgeted Total Fixed Costs

$

$ $

Actual 22,000,000 9.49 49 1.75 0.04 105 13.50 35,000.00

(a) Prepare the journal entry to record the direct materials efficiency variance. (b) Prepare the journal entry to record the direct materials price variance. (c) Prepare the journal entry to record the labor-price and labor-efficiency variances. (d) Assume these variances are immaterial. Prepare the journal entry to write off these balances to cost of goods sold.

Solution: To solve this problem, you must first calculate the relevant variances:

Direct Materials Efficiency Variance = Standard Price * (Actual Quantity Used – Standard Quantity) =.03*(22,000,000 units * 49 ozs per unit) -(22,000,000 units * 50 ozs per unit)) $ (660,000) Direct Materials Price Variance

=(Actual Quantity Purchased) * ( Actual Price - Standard Price) =(22,000,000 units *49 ozs per unit) * ( $0.03- $0.04) $ (10,780,000)

Direct Labor Price Variance

= Actual Quantity * (Actual Price – Standard Price) =110*($13.5 - $13.5) 0

Direct Labor Efficiency Variance

=Standard Price * (Actual Quantity of Hours Used – Standard Quantity of Hours Planned) =$13.5*((22,000,000/105)-(22,000,000/100)) $ (141,429)

Then prepare the following journal entries to record those variances:

(a)

Prepare the journal entry to record the direct materials efficiency variance.

Work-in-Process

33,000,000 Direct Materials Efficiency Variance Direct Materials

(b)

©

Prepare the journal entry to record the direct materials price variance.

Direct Materials 32,340,000 Direct Materials Price Variance 10,780,000 Accounts payable

43,120,000

Prepare the journal entry to record the labor-price and labor-efficiency variances.

Work-in-Process Direc Manufacturing Labor Price Variance Wages Payable

(d)

660,000 32,340,000

2,970,000

Prepare the journal entry to write off these balances to cost of goods sold.

COGS 11,298,571 Direct Manufacturing Labor Price Variance 141,429 Direct Materials Price Variance Direct Materials Efficiency Variance

141,429 2,828,571

10,780,000 660,000

12. (LO 10.2, 10.5) Digitize Dynamics is a fictional digital marketing firm which helps clients achieve their goals through various digital marketing strategies including website optimization, pay-per-click advertising, social media marketing, web design, and many others. Because digital marketing is a service, not a manufactured good, the costs Digitize Dynamics incurs are somewhat different from those we've seen in traditional manufacturing firms. However, the same concepts for direct materials and direct labor variances still apply. Use the data below to calculate variances for Digitize Dynamics. Assume that for the set of required direct materials, Digitize Dynamics purchased the same amount as budgeted.

Required:

Calculate a.

Direct Materials Efficiency Variance

b.

Direct Materials Price Variance

c.

Direct Labor Price Variance

d.

Direct Labor Efficiency Variance

Solution:

13. (LO 10.4) Assume that Fujifilm records the following journal entries to record variances. Use the journal entries to complete the data table containing the standard and actual details for production during the month.

The following journal entry is prepared to record the direct materials price variance.

Direct Materials Direct Materials Price Variance

72,000 2,250

Accounts payable

74,250

The following journal entry is prepared to record the labor-price and labor-efficiency variances.

Work-in-Process Direct Labor Price Variance

2,775.00 56.25

Direct Labor Efficiency Variance

693.75

Wages Payable

2,137.50

Required: Identify the missing values in this table: Budget Units to Produce/ Sell

Actual 10,000

Cost of Materials

d

Minutes to complete 1 unit

b

c $

8.25 1.50

Hours to complete all units Labor cost per hour

$

333.33

225-

9.25

a

Solution Budget Units to Produce/ Sell Cost of Materials Minutes to complete 1 unit Hours to complete all units Labor cost per hour

$

$

Actual 10,000 9,000 8.00 $ 8.25 2 1.50 333.33 225.00 9.25 $ 9.50

To complete this table students will need to prepare each direct cost variance.

Direct Materials Price Variance

=(Actual Quantity Purchased) * ( Actual Price - Standard Price) =(9,000) * ( $8.25 - $8.00) $ 2,250.00 Unfavorable

Direct Labor Price Variance

= Actual Quantity * (Actual Price – Standard Price) =225 hours*($9.50-$9.25) $ 56.25 Unfavorable

The direct materials price variance is Unfavorable.

Direct Labor Efficiency Variance (written formula OK) = $9.25 × ((1.5 x 9,000)/60 − (2 x 9,000)/60) = $693.75 Favorable

14. (LO 10.2) Stanley manufactures and sells insulated cups and mugs. The static budget was prepared before an unexpected, viral marketing campaign driven by spontaneous endorsements by online influencers. As a result of this campaign, sales, and therefore production skyrocketed. Importantly, during the year, purchasing managers renegotiated some materials costs during the year, HR negotiated a higher wage for workers who were now working in higher pressure conditions, and the organization leased new facilities for production and inventory.

Required Prepare a flexible budget using the following data:

Solution:

15. (LO 10.5) Consider the scenario at Stanley described in Problem 14. Prepare a static budget

to actual comparison and then describe the importance of the flexible budget in general and in a situation like that experienced by Stanley. (for more information on the rapid increase in

popularity of the Stanley Adventure Quencher Travel Tumbler see: https://www.nytimes.com/2022/05/17/style/stanley-tumbler.html)

Solution:

Flexible budgets are important tools for organizations because they adapt to changes in business activity levels.

They allow for changes in budgeted amounts based on actual activity levels, providing a more accurate and relevant tool for performance evaluation, cost control, planning, and scenario analysis.

In a scenario like the one that occurred at Stanley, a rapid (unanticipated) increase in sales can really skew the organization’s understanding. If the organization only compared the static budget to the actual results, it would appear that there were significant unfavorable variances across all cost categories. However, by applying the standard costs to the actual number of units produced, it is clear that these variances are due to the significant increase in production. On a normal basis, if the variance in units produced was due to bad budgeting, that would also be a problem, but in a situation like the one described at Stanley, the increase in demand was so significant and largely unexpected, it would be unwise and unfair to employees to expect that the budgets should have been accurate. In fact, careful examination of the costs show that purchasing managers were able to skillfully reduce per unit materials cost, labor wages only increased nominally, and the company increased production 20X with only 60% increase in production facilities capacity (i.e., increase in Fixed Costs).