Exercise 2-3 (15 minutes)

Transcription

1 Exercise 2-3 (15 minutes) Cost Behaviour Cost Variable Fixed 1. Small glass plates used for lab tests in a hospital... X 2. Straight-line depreciation of a building... X 3. Top management salaries... X 4. Electrical costs of running machines... X 5. Advertising of products and services*... X 6. Batteries used in manufacturing trucks... X 7. Commissions to salespersons... X 8. Insurance on a dentist s office... X 9. Leather used in manufacturing footballs... X 10. Rent on a medical centre... X * This particular item may cause some debate. Hopefully, advertising results in more demand for products and services by customers. So advertising costs are correlated with the amount of products and services provided. However, note the direction of causality. Advertising causes an increase in the amount of goods and services provided, but an increase in the amount of goods and services demanded by customers does not necessarily result in a proportional increase in advertising costs. Hence, advertising costs are fixed in the classical sense that the total amount spent on advertising is not proportional to what the unit sales turn out to be. 1

2 Problem 2-14 (60 minutes) 1. Yedder Enterprises Quality Cost Report (in thousands of dollars) This Year Last Year Amount Percent Amount Percent Prevention costs: Systems development... $ % $ % Statistical process control % 0.00 % Quality engineering... 1, % 1, % Total... 2, % 1, % Appraisal costs: Inspection... 2, % 1, % Supplies used in testing % % Cost of testing equipment % % Total... 3, % 2, % Internal failure costs: Net cost of scrap... 1, % % Rework labour... 1, % 1, % Downtime due to quality problems... 1, % % Total... 4, % 2, % External failure costs: Product recalls % 3, % Warranty repairs... 2, % 3, % Customer returns of defective goods % 3, % 2

3 Total... 3, % 10, % Total quality cost... $13, % $16, % * As a percentage of total sales in each year. Note: The figures in the last column on the right are subject to rounding error. 2. See the graph on the following page. 3

4 Problem 2-14 (continued) 18,000 Quality Costs (in thousands) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 External Failure Internal Failure Appraisal Prevention - Last Year This Year 4

5 Quality Costs as a Percentage of Sales 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Last Year This Year External Failure Internal Failure Appraisal Prevention 5

6 Problem 2-14 (continued) 3. During the past year the company has more than doubled its spending on prevention and it has increased its spending on appraisal activities by 60%. This increased emphasis on prevention and appraisal has resulted in a decline of total quality costs from 16.84% of sales last year to 13.4% of sales this year. While the situation has improved, internal and external failure costs still constitute the majority of the quality costs and this does not include the lost sales due to customer perceptions of poor quality. However, if the company continues to emphasize prevention and appraisal, the internal and external failure costs should further decline until they are no longer dominant. Probably due to the increased emphasis on appraisal activities, internal failure costs have actually increased. This is because the increased appraisal activities catch more defects before they are shipped to customers. Thus, the company is incurring more costs for scrap and rework, but it is saving large amounts on external failure costs as a consequence of not releasing defective goods to customers. As better quality is built into products and better defect prevention systems are developed, defects should decrease and appraisal and internal failure costs should also fall. 6

7 Problem 2-20 (60 minutes) 1. SKYLER COMPANY Schedule of Cost of Goods Manufactured For the Month Ended June 30 Direct materials: Raw materials inventory, June 1... $ 17,000 Add: Purchases of raw materials ,000 Raw materials available for use ,000 Deduct: Raw materials inventory, June ,000 Raw materials used in production... $165,000 Direct labour... 90,000 Manufacturing overhead: Rent on facilities (80% $40,000)... 32,000 Insurance (75% $8,000)... 6,000 Utilities (90% $50,000)... 45,000 Indirect labour ,000 Maintenance, factory... 7,000 Depreciation, factory equipment... 12,000 Total overhead costs ,000 Total manufacturing costs ,000 Add: Work in process inventory, June , ,000 Deduct: Work in process inventory, June ,000 Cost of goods manufactured... $450,000 7

8 Problem 2-20 (continued) 2. SKYLER COMPANY Income Statement For the Month Ended June 30 Sales... $600,000 Less cost of goods sold: Finished goods inventory, June 1... $ 20,000 Add: Cost of goods manufactured ,000 Goods available for sale ,000 Deduct: Finished goods inventory, June , ,000 Gross margin ,000 Less operating expenses: Selling and administrative salaries... 35,000 Rent on facilities (20% $40,000)... 8,000 Depreciation, sales equipment... 10,000 Insurance (25% $8,000)... 2,000 Utilities (10% $50,000)... 5,000 Advertising... 80, ,000 Net operating income... $ 50, In preparing the income statement shown in the text, the accountant failed to distinguish between product costs and period costs, and also failed to recognize the change in inventories between the beginning and end of the month. Once these errors have been corrected, the financial condition of the company looks much better and selling the company may not be advisable. 8

9 Problem 2-25 (45 minutes) Case 1 Case 2 Case 3 Case 4 Direct materials... $ 7,000 $ 9,000 $ 6,000 $ 8,000 Direct labour... 2,000 4,000 5,000 * 3,000 Manufacturing overhead... 10,000 12,000 * 7,000 21,000 Total manufacturing costs... 19,000 * 25,000 18,000 32,000 * Beginning work in process inventory... 3,000 * 1,000 2,000 1,500 * Ending work in process inventory... (4,000) (3,500) (4,000) * (2,000) Cost of goods manufactured... $18,000 $22,500 * $16,000 $31,500 * Sales... $25,000 $40,000 $30,000 $50,000 Beginning finished goods inventory... 6,000 8,000 * 7,000 9,000 Cost of goods manufactured... 18,000 * 22,500 * 16,000 * 31,500 Goods available for sale... 24,000 * 30,500 * 23,000 * 40,500 * Ending finished goods inventory... 9,000 4,000 5,000 * 7,000 Cost of goods sold... 15,000 * 26,500 18,000 33,500 * Gross margin... 10,000 * 13,500 * 12,000 * 16,500 * Operating expenses... 6,000 8,000 * 9,000 * 10,000 Net operating income... $ 4,000 * $ 5,500 $ 3,000 $ 6,500 * *Missing data in the problem. 9

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