Exercise 3-16 (continued) Exercise 3-16

Transcription

1 Exercise The overhead applied to Mrs. Brinksi s account would be computed as follows: Estimated overhead cost (a)... $310,500 $310,500 Estimated professional staff hours (b)... 4,600 4,500 Predetermined overhead rate (a) (b)... $67.50 $69.00 Professional staff hours charged to Ms. Brinksi s account Overhead applied to Ms. Brinksi s account... $ $ If the actual overhead cost and the actual professional hours charged turn out to be exactly as estimated there would be no under- or overapplied overhead Predetermined overhead rate (see above)... $67.50 $69.00 Actual professional staff hours charged to clients accounts (by assumption)... 4,600 4,500 Overhead applied... $310,500 $310,500 Actual overhead cost incurred (by assumption) , ,500 Under- or overapplied overhead... $ 0 $ 0 Exercise 3-16 (continued) 4. If the actual overhead cost and the actual professional staff hours charged to clients accounts turn out to be exactly as estimated there would be underapplied overhead as shown below Predetermined overhead rate (see above) (a)... $51.75 $51.75 Actual professional staff hours charged to clients accounts (by assumption) (b)... 4,600 4,500 Overhead applied (a) x (b)... $238,050 $232,875 Actual overhead cost incurred (by assumption) , ,500 Underapplied overhead... $ 72,450 $ 77,625 The underapplied overhead is best interpreted in this situation as the cost of idle capacity. Proponents of this method of computing predetermined overhead rates suggest that the underapplied overhead be treated as a period expense that would be separately disclosed on the income statement as Cost of Unused Capacity. 3. If the predetermined overhead rate is based on the professional staff hours available, the computations would be: Estimated overhead cost (a)... $310,500 $310,500 Professional staff hours available (b)... 6,000 6,000 Predetermined overhead rate (a) (b)... $51.75 $51.75 Professional staff hours charged to Ms. Brinksi s account Overhead applied to Ms. Brinksi s account... $ $

2 Exercise Harris Chan James Designer-hours Predetermined overhead rate... $90 $90 $90 Manufacturing overhead applied... $10,800 $9,000 $8, Harris Chan Direct materials... $ 4,500 $ 3,700 Direct labour... 9,600 8,000 Overhead applied... 10,800 9,000 Total cost... $24,900 $20,700 Completed Projects*... 45,600 Work in Process... 45,600 * $24,900 + $20,700 = $45, The balance in the Work in Process account will consist entirely of the costs associated with the James project: Direct materials... $ 1,400 Direct labour... 7,200 Overhead applied... 8,100 Total cost in work in process... $16, The balance in the Overhead account can be determined as follows: Overhead Actual overhead costs 30,000 27,900 Applied overhead costs Underapplied overhead 2,100 As indicated above, the debit balance in the Overhead account is called underapplied overhead. Problem The overhead applied to the Verde Baja job is computed as follows: Estimated studio overhead cost (a)... $160,000 $160,000 Estimated hours of studio service (b) ,000 Predetermined overhead rate (a) (b)... $200 $160 Verde Baja job s studio hours Overhead applied to the Verde Baja job... $8,000 $6,400 Overhead is underapplied for both years as computed below: Predetermined overhead rate (see above) (a)... $200 $160 Actual hours of studio service provided (b) Overhead applied (a) x (b)... $100,000 $120,000 Actual studio cost incurred , ,000 Underapplied overhead... $ 60,000 $ 40, If the predetermined overhead rate is based on the hours of studio service at capacity, the computations would be: Estimated studio overhead cost (a)... $160,000 $160,000 Hours of studio service at capacity (b)... 1,600 1,600 Predetermined overhead rate (a) (b)... $100 $100 Verde Baja job s studio hours Overhead applied to the Verde Baja job... $4,000 $4,

3 Problem 3-28 (continued) Overhead is underapplied for both years under this method as well: Predetermined overhead rate (see above) (a)... $100 $100 Actual hours of studio service provided (b) Overhead applied (a) x (b)... $ 50,000 $ 75,000 Actual studio cost incurred , ,000 Underapplied overhead... $110,000 $ 85, When the predetermined overhead rate is based on capacity, the underapplied overhead is interpreted as the cost of idle capacity. Indeed, proponents of this method suggest that the underapplied overhead should be treated as a period expense that would be separately disclosed on the income statement as Cost of Unused Capacity. 4. Platinum Track s fundamental problem is the competition that is drawing customers away. The competition is able to offer the latest equipment, excellent service, and attractive prices. The company must do something to counter this threat or it will ultimately face failure. Under the conventional approach in which the predetermined overhead rate is based on the estimated studio hours, the apparent cost of the Verde Baja job has increased between 2004 and That happens because the company is losing business to competitors and therefore the company s fixed overhead costs are being spread over a smaller base. This results in costs that seem to increase as the volume declines. Under this method, Platinum Track s managers may be misled into thinking that the problem is rising costs and they may be tempted to raise prices to recover their apparently increasing costs. This would almost surely accelerate the company s decline. Problem 3-28 (continued) Under the alternative approach, the overhead cost of the Verde Baja job is stable at $4,000 and lower than the costs reported under the conventional method. Under the conventional method, managers may be misled into thinking that they are actually losing money on the Verde Baja job and they might refuse such jobs in the future another sure road to disaster. This is much less likely to happen if the lower cost of $4,000 is reported. It is true that the underapplied overhead under the alternative approach is much larger than under the conventional approach and is growing. However, if it is properly labeled as the cost of idle capacity, management is much more likely to draw the appropriate conclusion that the real problem is the loss of business (and therefore more idle capacity) rather than an increase in costs. While basing the predetermined rate on capacity rather than on estimated activity will not solve the company s basic problems, at least this method is less likely to send managers misleading signals. 5 6

4 Exercise 4-13 Weighted-Average Method 1. For the sake of brevity, only the portion of the quantity schedule from which the equivalent units are computed is shown below. Quantity Equivalent Units (EU) Schedule Materials Conversion Units accounted for as follows: Transferred to the next process , , ,000 Work in process, May 31 (materials 100% complete, conversion 30% complete)... 10,000 10,000 3,000 Total units accounted for , , , Total Whole Cost Materials Conversion Unit Cost to be accounted for: Work in process, May 1... $ 5,500 $ 1,500 $ 4,000 Cost added by the department ,000 54, ,000 Total cost to be accounted for (a)...$411,500 $55,500 $356,000 Equivalent units (b) , ,000 Cost per equivalent unit (a) (b)... $ $2.00 = $2.30 Exercise 4-14 Weighted-Average Method Total Equivalent Units (EU) Cost Materials Conversion Cost accounted for as follows: Transferred to the next process (175,000 units x $2.30 per unit)... $402, , ,000 Work in process, May 31: Materials, at $0.30 per EU... 3,000 10,000 Conversion, at $2.00 per EU... 6,000 3,000 Total work in process... 9,000 Total cost accounted for... $411,

5 Exercise 4-15 FIFO Method 1. Quantity schedule and equivalent units: Quantity Schedule Units to be accounted for: Work in process, May 1 (materials 100% complete, conversion 40% complete)... 5,000 Started into production ,000 Total units to be accounted for ,000 Equivalent Units (EU) Materials Conversion Units accounted for as follows: Transferred to the next process: From the beginning inventory... 5, ,000 * Started and completed this month** , , ,000 Work in process, May 31 (materials 100% complete, conversion 30% complete)... 10,000 10,000 3,000 Total units accounted for , , ,000 * Work needed to complete the units in beginning inventory. ** 180,000 units started into production 10,000 units in ending work in process = 170,000 units started and completed Exercise 4-15 (continued) 2. Total Cost Materials Conversion Whole Unit Cost to be accounted for: Work in process, May 1... $ 5,500 Cost added by the department (a) ,000 $54,000 $352,000 Total cost to be accounted for... $411,500 Equivalent units (b) , ,000 Cost per equivalent unit (a) (b)... $ $2.00 = $

6 Exercise 4-16 FIFO Method Total Equivalent Units (EU) Cost Materials Conversion Cost accounted for as follows: Transferred to the next process: From the beginning inventory: Cost in the beginning inventory... $ 5,500 Cost to complete these units: Materials, at $0.30 per EU Conversion, at $2.00 per EU... 6,000 3,000 Total cost from beginning inventory.. 11,500 Units started and completed this month: 170,000 units x $2.30 per unit , , ,000 Total cost transferred ,500 Work in process, May 31: Materials, at $0.30 per EU... 3,000 10,000 Conversion, at $2.00 per EU... 6,000 3,000 Total work in process... 9,000 Total cost accounted for... $411,500 Problem 4-21 Weighted-Average Method Quantity Schedule and Equivalent Units Quantity Schedule Units to be accounted for: Work in process, June 1 (materials 100% complete, conversion 75% complete)... 20,000 Started into production ,000 Total units to be accounted for ,000 Equivalent Units (EU) Materials Conversion Units accounted for as follows: Transferred to bottling: , , ,000 Work in process, June 30 (materials 100% complete, conversion 25% complete)... 40,000 40,000 10,000 Total units accounted for , , ,

7 Problem 4-21 (continued) Costs per Equivalent Unit Total Cost Materials Conversion Whole Unit Cost to be accounted for: Work in process, June 1... $ 50,000 $ 25,200 $ 24,800 Cost added during June , , ,700 Total cost to be accounted for (a)... $623,500 $360,000 $263,500 Equivalent units (b) , ,000 Cost per equivalent unit (a) (b)... $ $1.55 = $3.35 Cost Reconciliation Total Equivalent Units (EU) Cost Materials Conversion Cost accounted for as follows: Transferred to bottling: 160,000 units x $3.35 per unit... $536, , ,000 Work in process, June 30: Materials, at $1.80 per EU... 72,000 40,000 Conversion, at $1.55 per EU... 15,500 10,000 Total work in process... 87,500 Total cost accounted for... $623,500 Problem 4-22 FIFO Method Quantity Schedule and Equivalent Units Quantity Schedule Units to be accounted for: Work in process, June 1 (materials 100% complete, conversion 75% complete)... 20,000 Started into production ,000 Total units to be accounted for ,000 Equivalent Units (EU) Materials Conversion Units accounted for as follows: Transferred to bottling: From the beginning inventory... 20, ,000 * Started and completed this month** , , ,000 Work in process, June 30 (materials 100% complete, conversion 25% complete)... 40,000 40,000 10,000 Total units accounted for , , ,000 * 20,000 x (100% 75%) = 5,000 ** 180,000 units started into production 40,000 units in ending work in process = 140,000 units started and completed 13 14

8 Problem 4-22 (continued) Cost per Equivalent Unit Total Cost Materials Conversion Cost to be accounted for: Work in process, June 1... $ 50,000 Cost added during June (a) ,500 $334,800 $238,700 Total cost to be accounted for... $623,500 Whole Unit Equivalent units (b) , ,000 Cost per equivalent unit (a) (b)... $ $1.54 = $3.40 Problem 4-22 (continued) Cost Reconciliation Total Equivalent Units (EU) Cost Materials Conversion Cost accounted for as follows: Transferred to bottling: From the beginning inventory: Cost in the beginning inventory... $ 50,000 Cost to complete these units: Materials, at $1.86 per EU Conversion, at $1.54 per EU... 7,700 5,000 Total cost from beginning inventory... 57,700 Units started and completed during June: 140,000 units x $3.40 per unit , , ,000 Total cost transferred to bottling ,700 Work in process, June 30: Materials, at $1.86 per EU... 74,400 40,000 Conversion, at $1.54 per EU... 15,400 10,000 Total work in process... 89,800 Total cost accounted for... $623,

9 Problem Year 1 Year 2 Year 3 Sales... $800,000 $ 640,000 $800,000 Less variable expenses: Variable cost of goods $2 per unit ,000 80, ,000 Variable selling and administrative $1 per unit... 50,000 40,000 50,000 Total variable expenses , , ,000 Contribution margin , , ,000 Less fixed expenses: Fixed manufacturing overhead , , ,000 Fixed selling and administrative expenses , , ,000 Total fixed expenses , , ,000 Operating income (loss)... $ 30,000 $(100,000) $ 30,000 Problem 7-17 (continued) 2. a. Year 1 Year 2 Year 3 Variable manufacturing cost... $ 2.00 $ 2.00 $ 2.00 Fixed manufacturing cost: $480,000 50,000 units $480,000 60,000 units $480,000 40,000 units Unit product cost... $11.60 $10.00 $14.00 b. Variable costing operating income (loss)... $30,000 $(100,000) $ 30,000 Add (Deduct): Fixed manufacturing overhead cost deferred in inventory from Year 2 to Year 3 under absorption costing (20,000 units x $8.00 per unit) ,000 (160,000) Add: Fixed manufacturing overhead cost deferred in inventory from Year 3 to the future under absorption costing (10,000 units x $12.00 per unit).. 120,000 Absorption costing operating income (loss)... $30,000 $ 60,000 $ (10,000) 3. Production went up sharply in Year 2 thereby reducing the unit product cost, as shown in (2a) above. This reduction in cost per unit, combined with the large amount of fixed manufacturing overhead cost deferred in inventory for the year, more than offset the loss of revenue. The net result is that the company s operating income increased when determined using absorption costing. 4. The fixed manufacturing overhead cost deferred in inventory from Year 2 was charged against Year 3 operations, as shown in the reconciliation in (2b). This added charge against Year 3 operations was offset somewhat by the fact that part of Year 3 s fixed manufacturing overhead costs were deferred in inventory to future years [again see (2b)]. Overall, the added costs charged against Year 3 were greater than the costs deferred to future years, so the company reported less income for the year even though the same number of units was sold as in Year

10 Problem 7-17 (continued) 5. a. With JIT, production would have been geared to sales in each year so that little or no inventory of finished goods would have been built up in either Year 2 or Year 3. b. If JIT had been in use, the operating income under absorption costing would have been the same as under variable costing in all three years. With production geared to sales, there would have been no ending inventory, and therefore there would have been no fixed manufacturing overhead costs deferred in inventory to other years. Assuming that the company expected to sell 50,000 units in each year and that unit product costs were set on the basis of that level of expected activity, the income statements under absorption costing would have appeared as follows: Year 1 Year 2 Year 3 Sales... $ 800,000 $ 640,000 $ 800,000 Less cost of goods sold: Cost of goods $11.60 per unit , ,000 * 580,000 Add underapplied overhead.. 96,000 ** Cost of goods sold , , ,000 Gross margin ,000 80, ,000 Less selling and administrative expenses , , ,000 Operating income (loss)... $ 30,000 $(100,000) $ 30,000 * 40,000 units x $11.60 per unit = $464,000. ** 10,000 units not produced x $9.60 per unit fixed manufacturing overhead cost per unit = $96,000 fixed manufacturing overhead cost not applied to products. Exercise 13-8 No, the bilge pump product line should not be discontinued. The computations are: Contribution margin lost if the line is dropped... (460,000) Fixed costs that can be avoided: Advertising ,000 Salary of the product line manager... 32,000 Insurance on inventories... 8, ,000 Net disadvantage of dropping the line... (150,000) The same solution can be obtained by preparing comparative income statements: Keep Product Line Drop Product Line Difference: Operating Income Increase or (Decrease) Sales ,000 0 (850,000) Less variable expenses: Variable manufacturing expenses , ,000 Sales commissions... 42, ,000 Shipping... 18, ,000 Total variable expenses , ,000 Contribution margin ,000 0 (460,000) Less fixed expenses: Advertising , ,000 Depreciation of equipment... 80,000 80,000 0 General factory overhead , ,000 0 Salary of product line manager... 32, ,000 Insurance on inventories... 8, ,000 Purchasing department expenses... 45,000 45,000 0 Total fixed expenses , , ,000 Operating loss... (80,000) (230,000) (150,000) 19 20

11 Exercise 13-9 The costs that are relevant in a make-or-buy decision are those costs that can be avoided as a result of purchasing from the outside. The analysis for this exercise is: Per Unit Differential Costs 30,000 Units Make Buy Make Buy Cost of purchasing... $21.00 $630,000 Cost of making: Direct materials... $ 3.60 $108,000 Direct labour ,000 Variable overhead ,000 Fixed overhead * 90,000 Total cost... $19.00 $21.00 $570,000 $630,000 * The remaining $6 of fixed overhead cost would not be relevant, since it will continue regardless of whether the company makes or buys the parts. The $80,000 rental value of the space being used to produce part S-6 represents an opportunity cost of continuing to produce the part internally. Thus, the completed analysis would be: Make Buy Total cost, as above... $570,000 $630,000 Rental value of the space (opportunity cost)... 80,000 Total cost, including opportunity cost... $650,000 $630,000 Net advantage in favour of buying... $20,000 Exercise 13-9 (continued) Alternatively the analysis could be conducted on a per unit basis as follows: Per Unit Costs Make Buy Cost of purchasing... $21 Cost of making... $19.00 Opportunity cost-space that could be rented to another company Total cost... $21.67 $21 Difference in favour of purchasing from the outside supplier 1 $80,000/30,000 units $.67/unit 21 22

12 Exercise Annual profits will be increased by $39,000: 15,000 Per Unit Units Incremental sales... $14.00 $210,000 Incremental costs: Direct materials ,500 Direct labour ,000 Variable manufacturing overhead ,000 Variable selling and administrative ,500 Total incremental costs ,000 Incremental profits... $ 2.60 $ 39,000 The fixed costs are not relevant to the decision, since they will be incurred regardless of whether the special order is accepted or rejected. 2. The relevant cost is $1.50 (the variable selling and administrative expenses). All other variable costs are sunk, since the units have already been produced. The fixed costs would not be relevant, since they will not change in total as a consequence of the price charged for the leftover units. Exercise The company should accept orders first for C, second for A, and third for B. The computations are: A B C (1) Direct materials required per unit... $24 $15 $9 (2) Cost per kilogram... $3 $3 $3 (3) Kilograms required per unit (1) (2) (4) Contribution margin per unit... $32 $14 $21 (5) Contribution margin per kilogram of materials used (4) (3)... $4.00 $2.80 $7.00 Since C uses the least amount of material per unit of the three products, and since it is the most profitable of the three in terms of its use of materials, some students will immediately assume that this is an infallible relationship. That is, they will assume that the way to spot the most profitable product is to find the one using the least amount of the constrained resource. The way to dispel this notion is to point out that product A uses more material (the constrained resource) than does product B, but yet it is preferred over product B. The key factor is not how much of a constrained resource a product uses, but rather how much contribution margin the product generates per unit of the constrained resource

13 Problem Product RG-6 yields a contribution margin of $8 per unit ($22 $14 = $8). If the plant closes, this contribution margin will be lost on the 16,000 units (8,000 units per month x 2 months) that could have been sold during the two-month period. However, the company will be able to avoid certain fixed costs as a result of closing down. The analysis is: Contribution margin lost by closing the plant for two months ($8 per unit x 16,000 units)... $(128,000) Costs avoided by closing the plant for two months: Fixed manufacturing overhead cost $45,000 per month x 2 months = $90,000)... $90,000 Fixed selling costs ($30,000 per month x 10% x 2 months)... 6,000 96,000 Net disadvantage of closing, before start-up costs. (32,000) Add start-up costs... 8,000 Disadvantage of closing the plant... $ (40,000) No, the company should not close the plant; it should continue to operate at the reduced level of 8,000 units produced and sold each month. Closing will result in a $40,000 greater loss over the two-month period than if the company continues to operate. An additional factor is the potential loss of goodwill among the customers who need the 8,000 units of RG-6 each month. By closing down, the needs of these customers will not be met (no inventories are on hand), and their business may be permanently lost to another supplier. Problem (continued) Alternative Solution: Plant Kept Open Plant Closed Difference: Operating Income Increase or (Decrease) Sales (8,000 units x $22 per unit x 2)... $ 352,000 $ 0 $(352,000) Less variable expenses (8,000 units x $14 per unit x 2) , ,000 Contribution margin ,000 0 (128,000) Less fixed costs: Fixed manufacturing overhead costs ($150,000 x 2) , ,000 90,000 Fixed selling costs ($30,000 x 2)... 60,000 54,000 * 6,000 Total fixed costs , ,000 96,000 Operating loss before start-up costs... (232,000) (264,000) (32,000) Start-up costs... 0 (8,000) (8,000) Operating loss... $(232,000) $(272,000) $ (40,000) * $30,000 x 90% = $27,000 x 2 = $54,

14 Problem (continued) 2. Kolbec Company will be indifferent at a level of 11,000 total units sold over the two-month period. The computations are: Cost avoided by closing the plant for two months (see above)... $96,000 Less start-up costs... 8,000 Net avoidable costs... $88,000 Net avoidable costs Per unit contribution margin = $88,000 $8 per unit Verification: Operate at 11,000 Units for Two = 11,000 units Close for Two Months Months Sales (11,000 units x $22 per unit)... $ 242,000 $ 0 Less variable expenses (11,000 units x $14 per unit) ,000 0 Contribution margin... 88,000 0 Less fixed expenses: Manufacturing overhead ($150,000 and $105,000, x 2) , ,000 Selling ($30,000 and $27,000, x 2)... 60,000 54,000 Total fixed expenses , ,000 Start-up costs ,000 Total costs , ,000 Operating loss... $(272,000) $(272,000) Problem The $90,000 in fixed overhead costs charged to the new product is a common cost that will be the same whether the tubes are produced internally or purchased from the outside. Hence, they are not relevant. The variable manufacturing overhead per box of Chap-Off would be $0.50, as shown below: Total manufacturing overhead cost per box of Chap-Off... $1.40 Less fixed portion ($90, ,000 boxes) Variable overhead cost per box... $0.50 The total variable costs of producing one box of Chap-Off would be: Direct materials... $3.60 Direct labour Variable manufacturing overhead Total variable cost per box... $6.10 If the tubes for the Chap-Off are purchased from the outside supplier, then the variable cost per box of Chap-Off would be: Direct materials ($3.60 x 75%)... $2.70 Direct labour ($2.00 x 90%) Variable manufacturing overhead ($0.50 x 90%) Cost of tube from outside Total variable cost per box... $6.30 Therefore, the company should reject the outside supplier s offer. A savings of $0.20 per box of Chap-Off will be realized by producing the tubes internally

15 Problem (continued) Another approach to the solution would be: Cost avoided by purchasing the tubes: Direct materials ($3.60 x 25%)... $0.90 Direct labour ($2.00 x 10%) Variable manufacturing overhead ($0.50 x 10%) Total costs avoided... $1.15 * Cost of purchasing the tubes from the outside... $1.35 Cost savings per box by making internally... $0.20 * This $1.15 is the cost of making one box of tubes internally, since it represents the overall cost savings that will be realized per box of Chap-Off by purchasing the tubes from the outside. 2. The maximum purchase price would be $1.15 per box. The company would not be willing to pay more than this amount, since the $1.15 represents the cost of producing one box of tubes internally, as shown in Part 1. To make purchasing the tubes attractive, however, the purchase price should be less than $1.15 per box. Problem (continued) 3. At a volume of 120,000 boxes, the company should buy the tubes. The computations are: Cost of making 120,000 boxes: 120,000 boxes x $1.15 per box... $138,000 Rental cost of equipment... 40,000 Total cost... $178,000 Cost of buying 120,000 boxes: 120,000 boxes x $1.35 per box... $162,000 Or, on a total cost basis, the computations are: Cost of making 120,000 boxes: 120,000 boxes x $6.10 per box... $732,000 Rental cost of equipment... 40,000 Total cost... $772,000 Cost of buying 120,000 boxes: 120,000 boxes x $6.30 per box... $756,000 Thus, buying the boxes will save the company $16,000 per year

16 Problem (continued) 4. Under these circumstances, the company should make the 100,000 boxes of tubes and purchase the remaining 20,000 boxes from the outside supplier. The costs would: Cost of making: 100,000 boxes x $1.15 per box... $115,000 Cost of buying: 20,000 boxes x $1.35 per box... 27,000 Total cost... $142,000 Or, on a total cost basis, the computation would be: Cost of making: 100,000 boxes x $6.10 per box... $610,000 Cost of buying: 20,000 boxes x $6.30 per box ,000 Total cost... $736,000 Since the amount of cost under this alternative is $20,000 less than the best alternative in Part 3, the company should make as many tubes as possible with the current equipment and buy the remaining tubes from the outside supplier. 5. Management should take into account at least the following additional factors: a) The ability of the supplier to meet required delivery schedules. b) The quality of the tubes purchased from the supplier. c) Alternative uses of the capacity that would be used to make the tubes. d) The ability of the supplier to supply tubes if volume increases in future years. e) The problem of alternative sources of supply if the supplier proves undependable. 31