Professional Documents
Culture Documents
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Work in process inventory 55,000 80,000
Module.Ex02.02 Raw Material Used LO3
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Finished goods inventory 10,000 3,000
Fun Central produces a variety of popular board
games. The company has decided to strategically po-
r During the month of January, BMV purchased
sition itself in the industry with unique handcrafted
$140,000 of raw materials. How much raw material
game boards and game pieces. The company’s con-
e
was used in January?
troller has accumulated the following data regard-
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ing raw materials used in production.
Module.Ex02.06 Cost of Goods Manufactured
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Pounds of laminated corrugated material purchased 15,000
LO4
Board games produced 10,000
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Shelly’s Bakery had the following information avail-
Average pounds of laminated corrugated material able for the month of January:
per board 0.80
Beginning Ending
Average cost per pound of laminated corrugated
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Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows M2-1
ACCT_Managerial_Ch02_Module.indd 1 1/19/10 11:06 AM
Module.Ex02.08 Cost of Goods Sold and Costs Incurred
Merchandise Available for Sale in Raw materials purchased $100,000
a Merchandising Company LO4 Direct labor 50,000
Dash Department Store features women’s fashions. Indirect labor 35,000
At the beginning of the year, the store had $514,000 Equipment maintenance 9,000
in merchandise. Total purchases for the year were Insurance on factory 11,000
$463,000.
Rent on factory 40,000
Required Equipment depreciation 20,000
A. Calculate cost of goods sold for the year, assum- Factory supplies 12,000
ing the year-end inventory was $488,000.
Advertising expenses 18,000
B. What was the total amount of merchandise avail-
able for sale during the year? Selling and administrative expenses 25,000
Net revenue 350,000
Module.Ex02.09 Cost of Goods Sold and Beginning Ending
Sales for a Merchandising Company LO4 Inventories Balance Balance
Roy’s Selection is a local men’s clothing store. Roy’s Raw materials $15,000 $18,000
buys clothing and accessories from manufacturers Work in process 20,000 29,000
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and marks them up by 55 percent. Roy’s began the Finished goods 35,000 30,000
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year with $155,000 worth of items ($240,250 retail
value) and bought $350,000 (retail value $542,500) Required
worth of items during the year. Ending inventory is
r A. Calculate the cost of goods manufactured.
$95,000 (retail value $147,250). B. Calculate the cost of goods sold.
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C. Calculate gross margin and operating income.
Required
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A. Calculate Roy’s cost of goods sold for the year.
Module.Prob02.12 Decision Focus:
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B. Calculate Roy’s sales for the year.
Service Company LO3, 5
Mead & Lawson, LLP, is a local CPA firm that pre-
Module.Ex02.10 Product vs. Period Cost
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pares approximately 1,000 tax returns each year for
LO5 its clients. The managing partner of the firm has
Columbia Brick, a manufacturing company, prepays asked for information concerning the costs of pre-
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its insurance coverage for a three-year period. The paring tax returns. He has been provided with the
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premium for the three years is $21,000 and is paid
at the beginning of the first year. Three-fourths of
following data:
Average wage per hour of tax preparation staff $35
the premium relates to factory operations and one-
fourth relates to selling and administrative activities. Average wage per hour of clerical staff $12
Average number of hours per return (preparation) 10
Required
Average number of hours per return (clerical) 2
A. Calculate the amount of the premium that
should be recorded as a product cost each year. Required
B. Calculate the amount of the premium that A. What is Mead & Lawson’s average direct labor
should be recorded as a period cost each year. cost of preparing a tax return?
B. Think creatively about options that might be
used to reduce the cost of preparing tax returns.
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M2-2 Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
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charge of the accounting function. The latest finan- Required
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cial information is as follows: A. Calculate the amount of direct materials trans-
B&B Manufacturing Co. ferred to work in process during the year.
Income Statement r B. Calculate total manufacturing costs for the year.
For the Month Ended May 31 C. Calculate total cost of goods manufactured for
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Sales $325,000 the year.
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Less: Raw materials purchased $140,000 D. Calculate cost of goods sold for the year.
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Direct labor 75,000
Module.Prob02.15 Basic Cost Flows, Income
Indirect labor 10,000
Statement LO4, 5
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Utilities 25,000 Business managers frequently operate in a world
Depreciation 30,000 where data are not readily available. Two indepen-
Insurance 15,000 dent situations follow:
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Rent
Selling & administrative
Le12,000
30,000
Direct materials used
Company 1 Company 2
$10,000 $20,000
Advertising 25,000 Direct labor 5,000 13,000
362,000 Manufacturing overhead 12,000 ?
Net loss $ (37,000) Total manufacturing costs ? 35,000
Other Information Beginning work in process ? 15,000
May 1 May 31 Ending work in process 6,000 17,500
Inventory Balance Balance Cost of goods manufactured $23,000 ?
Raw materials $10,000 $30,000 Sales $35,000 $50,000
Work in process 15,000 22,000 Beginning finished goods 10,000 ?
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Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows M2-3
ACCT_Managerial_Ch02_Module.indd 3 1/19/10 11:06 AM
Module.Prob02.16 Basic Cost Flows, Income Module.Prob02.17 Cost Flows and Financial
Statement LO4, 5 Statements LO4, 5
Venus Corporation’s accounting manager recently New River Computer Company began manufac-
left the company without completing the company’s turing personal computers for small businesses at
schedule of cost of goods manufactured. The com- the beginning of 2009. During the year, New River
pany’s president is unsure what to do. He is unable purchased 30,000 mouse pads with the company’s
to complete the schedule and has turned to you for name and logo at a cost of $2.50 each. The market-
help. ing manager used 2,500 of the pads as an advertis-
Venus Corporation ing gimmick at a local trade show, and 25,000 of
Schedule of Cost of Goods Manufactured the pads were packaged with computers that were
For the Month Ended December 31, 2009 manufactured during 2009. Eighty percent of the
Direct Materials: computers were finished during the year; of that
Beginning raw materials $ 16,000 amount, 90 percent were sold.
Raw material purchases ? Required
Raw materials available 164,000 A. Determine the cost of the mouse pads that
would be included in the following accounts as
Ending raw materials ?
of December 31, 2009:
Raw materials used in production $154,500 a. Raw materials
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Direct Labor ?
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b. Work in process
Manufacturing Overhead: c. Finished goods
Indirect labor $ ? d. Cost of goods sold
Glue and fasteners
Equipment depreciation
1,080
11,210
e r e. Advertising expense
B. On which basic financial statement do the ac-
counts in question A appear? Why does it matter
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Factory depreciation 4,300 on which basic financial statement the amounts
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Factory insurance 2,420 associated with purchasing the computer mouse
Property taxes 3,600 pads appear?
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Utilities 2,100
Total manufacturing overhead 52,010
Total manufacturing costs $269,760
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Add: Beginning work in process
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$288,590
Deduct: Ending work in process 12,940
Cost of goods manufactured $ ?
Beginning Ending
Inventories Balance Balance
Raw materials $ 16,000 $ ?
Work in process 12,940
Finished goods 23,000 17,830
Required
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M2-4 Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
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is $250. If the mileage ranges between 1,001 and October 19,800 3,650
1,500 miles, the lease payment becomes $300. If the November 17,600 2,670
mileage ranges between 1,501 and 2,000 miles, the
r December 18,500 2,650
lease payment rises to $350.
$101,520 16,920
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Required
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A. What type of cost is the lease? Required
B. If Sara only drives the car between 1,200 and A. Use the high/low method to calculate the esti-
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1,400 miles per month, then what type of cost mated variable cost of steam per direct labor
does the lease effectively become? hour.
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B. Prepare a graph of the cost of steam and the
Module.Ex03.03 Fixed and Variable Cost direct labor hours. Show labor hours on the x-axis
and costs on the y-axis. What can you observe
Behavior LO1
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new cost equation? taxes for the anticipated net income without the
B. Given the new cost equation, determine estimated lease of the equipment?
total costs if production remains at 12,000 units. B. What are the tax expense and net income after
taxes if the equipment is leased?
Module.Ex03.04 Mixed Costs Using High/Low
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January 13,600 $34,500 3,500 of them. They had no candy bars at the begin-
February 11,500 29,500 ning of the year. The company has the following
March 12,750 30,100 costs:
April 14,300 35,900
May 13,250 32,650
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Fixed S&A costs $10,000
Variable costs per unit:
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Production $ 4.00 During 2009, Simmons produced 5,000 units, out of
Selling and administrative $ 1.00 r which 4,600 units were sold for $30 each.
Fixed costs in total:
Required
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Production $12,000 A. Calculate Simmons’s net income, assuming the
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Selling and administrative $ 8,000 company uses variable costing.
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B. Calculate Simmons’s net income, assuming the
Required
company uses absorption costing.
Calculate the unit product cost, assuming that the
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company uses absorption costing.
Module.Ex03.12 Variable Costing and
Module.Ex03.09 Variable Costing: Calculation Absorption Costing: Calculation
of Net Income LO7, 8
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Required Required
Calculate Bostock Boutique’s net income, assuming A. Calculate Warner’s Watches’ net income using
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ing.
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B. Will income be higher or lower if calculated using Module.Ex03.16 Absorption vs. Variable
absorption costing?
C. By how much?
Costing: Benefits and Calculation of
r Net Income LO5, 6
Hammond Tire Manufacturing produces truck
Module.Ex03.14 Variable Costing and
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tires. Current market conditions indicate a signifi-
Absorption Costing: Calculation of
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cant increase in demand in 2009 for their tires. In
Net Income LO5, 6 anticipation of that increase, the CEO has ordered
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Entel Corporation creates an accounting computer the production plants to increase production by 25
program. This year, Entel Corporation produced
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percent in 2008. Since sales are projected to re-
20,000 units of their program and sold 22,000 units. main stable in 2008, that will result in a 25 percent
Each unit sells for $250. Selected operational and increase in inventory levels by the end of 2008.
financial data are shown below.
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costing.
B. Will income be higher or lower if calculated
using variable costing? problems
C. By how much?
Module.Prob03.17 Basic Cost Behavior,
Module.Ex03.15 Absorption vs. Variable
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beginning inventory. The company had the follow- lieves his business has lower fixed costs than Garfun-
ing costs: kel’s business. Of course, Garfunkel disagrees, saying
that his business has lower fixed costs. The two have
accumulated the following activity and cost data and
have asked that you help them resolve their debate.
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Required
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D. If Garfunkel produces 9,000 units, what would his
total costs be? A. Perform a regression analysis on the above data.
What maintenance costs should be budgeted for
Module.Prob03.18 Regression Analysis
LO1, 2
e r a month in which 430 maintenance hours will be
worked?
B. What is the percentage of the total variance that
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Same Day Delivery wants to determine the cost
can be explained by your analysis?
behavior pattern of maintenance costs for its deliv-
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C. Use the high/low method to estimate a cost for-
ery vehicles. The company has decided to use linear
mula for Pine View. How similar is your high/low
regression to examine the costs. The prior year’s data
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solution to the regression solution?
regarding maintenance hours and costs are as follows:
Hours of Activity Maintenance Costs
Module.Prob03.20 Regression Analysis:
January 480 $4,200 Impact of Outliers LO1, 2
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February
March
320
400
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3,600
Chris Gill founded Gill’s Grill over 20 years ago. The
business has grown so much and been so successful
April 300 2,820 that Chris is now considering selling franchises. Chris
May 500 4,350 knows that potential franchisees will want access
to certain operational data. Gill’s Grill is probably
June 310 2,960
best known for its incredible “potato flats,” a french
July 320 3,030 fry-like item served with a special secret sauce. Chris
August 520 4,470 is concerned that some of the potato flats data
September 490 4,260 are unusual and out of the ordinary. The following
October 470 4,050 production data related to “potato flats” have been
November 350 3,300 compiled.
Pounds Food
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of Framing of Mats Costs Income LO4, 5, 6
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January 20,000 7,100 $17,000 Oliver Inc. produces an oak rocking chair that is
February 25,000 8,120 19,500 designed to ease back problems. The chairs sell for
March
April
27,000
22,000
8,500
8,400
e r 21,000
18,000
$200 each. Results from last year’s operations are as
follows:
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May 24,000 8,300 19,000 Inventory and production data:
June 30,000 10,600 24,000 Units in beginning inventory 0
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Units produced during the year 20,000
Required
Units sold during the year 18,000
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A. Use the high/low method to develop a total cost
formula for Ullrich Framing. You will need to Variable costs (unit):
perform two separate calculations, one for feet Direct materials $ 70.00
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costing.
decide whether to close one or both of the stores. C. Compute the unit product cost for one rocking
The following income statements are presented for chair, assuming the company uses absorption
the two stores: costing.
Store One Store Two D. Prepare an income statement based on absorp-
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Advertising 50,000 Advertising 50,000 would be the impact on the two income state-
Corporate expense 75,000 Corporate expense 75,000 ments? In other words, which method provides
Salaries 125,000 Salaries 90,000 the higher net income?
Net income $ (50,000) Net income $ (115,000)
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with maintaining accurate cost data. Determine Module.Ex04.05 Predetermined Overhead
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the amount of labor costs that should be allocated Rate and Applied Overhead LO4, 5
to direct labor and indirect labor as manufacturing Speedy Shoe Factory manufactures running shoes.
overhead.
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Module.Ex04.02 Identification of Cost Drivers
Overhead is applied to the shoes based on direct
labor hours. Last year, total overhead costs were ex-
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pected to be $72,000. Actual overhead costs totaled
LO3 $80,000 for 8,000 actual hours. At the end of the
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Overhead costs are rarely directly linked to the year, overhead was underapplied by $5,000.
production of a specific product or group of prod-
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Required
ucts. Generally, overhead costs are only indirectly A. Calculate the predetermined overhead rate.
linked to production, and so they must be allocated. B. How much overhead should be applied to a job
Understanding the relationship between overhead that was completed in three direct labor hours?
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Mike Aliscad is widely known as an exceptional
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winemaker. He has developed a production process Kenan Mortgage Company has two service depart-
that has several distinct processes including “speed ments (human resources and accounting) and two
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crushing,” which involves the breaking down of the production departments (commercial lending and
grapes’ skin and pulverizing of the grape fruit to consumer lending) that relate to its mortgage writ-
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produce a juice-like product. The following data re- ing and servicing business. The following data are
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late to Aliscad’s crushing process for October. (Note: available from last year.
Service Production
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Production costs include direct material and conver-
sion costs for the department.) Departments Departments
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Pounds Production HR Accounting Commercial Consumer
of Grapes Costs Department
Beginning work in process costs $300,000 $240,000 $800,000 $600,000
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Aliscad uses the weighted average method of com- The costs of the HR department are allocated on the
puting equivalent units and assigning product costs. basis of the number of employees in each depart-
ment, while the costs of the accounting department
Required are allocated on the basis of the number of financial
How many equivalent units were produced during transactions processed in each department.
October?
Required
Module.Ex04.09 Process Costing: Cost per A. Assuming that Kenan Mortgage Company allo
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tions. Arnsparger has developed and patented a allocates service department costs by the step-
process that leads to a substantially stronger rope down method, starting with the HR Department,
than its competitors. The strengthening process is how much overhead would be allocated from
complicated and has increased the time required to each service department to each producing
produce rope, but Arnsparger believes the addi- department?
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perienced the following events during the year:
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Direct labor hours 1,500 1,250 850 950
Purchased $100,000 of raw materials
Required Direct materials used in production amounted to $70,000
A. Calculate Haberman’s predetermined overhead
r Production employees worked 4,500 labor hours
rate based on direct labor hours.
Production employees’ pay averaged $11 per hour
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B. Calculate the overhead cost to be assigned to
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parkas, shirts, pants, and shoes. $180,000 of completed products were transferred to finished goods
C. Calculate the total manufacturing cost of parkas, Products costing $160,000 were sold
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shirts, pants, and shoes.
Required
D. Based on your knowledge of costing systems
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A. Calculate the ending balance of direct materials
described in the chapter, which other method(s)
inventory.
might Haberman consider to measure and track
B. Calculate the ending balance of work in process
the cost of its products? Why would the company
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inventory.
choose to continue using job costing as it cur-
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rently does?
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inventory.
D. At the end of the year, the Gordon Hammock
Module.Prob04.12 Comprehensive Job Company had incurred actual overhead costs of
Costing LO2, 4, 5 $65,000. Did the company over- or underapply
Moody Blues Chocolate Factory uses job costing to overhead for the year? Is the cost of goods sold
cost its products. In its first quarter of operations, too high or too low?
the company incurred the following material and
labor costs in manufacturing a batch of its chocolate Module.Prob04.14 Comprehensive Job
candies. The company applies overhead to products
using normal costing and uses machine hours as the
Costing LO2, 3, 4, 5
Geoff’s Golf Clubs produces custom golf clubs, which
cost driver.
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Direct labor costs 60,000 vide details of the company’s activity and balances
during the last half of the year:
Manufacturing overhead data:
July 1 December 1
Overhead application rate per machine hour 9.00
Direct materials inventory $62,250 $63,750
Machine hours used 10,000
Work in process inventory 46,000 45,500
Inventory data:
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employees to work 2,000 hours, and there are usu- ing equivalent units and assigning product costs.
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ally 1,500 machine hours in a given month. Mollie’s Production costs include both raw material and
Magnets has two departments. The assembly de- conversion costs, which are incurred uniformly in
partment gives rise to 1,800 of the labor hours, and
r the production process.
the finishing department requires 1,200 of the ma- Required
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chine hours. The $12,000 in overhead is allocated as A. How many t-shirts were completed during
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follows: $9,000 is traced to the assembly department February?
and $3,000 is traced to the finishing department. B. Of the t-shirts completed, how many were
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During January, the following jobs were completed: started and completed during the month?
Job 101 Job 102
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C. How many equivalent finished units did the com-
Direct materials used $1,100 $1,450 pany complete in February?
Direct labor cost 2,300 1,250 D. What is the cost per equivalent unit?
E. Calculate the cost of the ending work in process
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job if machine hours were used as the cost driver Riley’s paper company manufactures computer
for overhead? paper for laser printers. The following information is
E. If Mollie’s Magnets decided to use department related to production costs incurred in the manufac-
overhead rates, what would the overhead rates turing process during the month of March.
be for each department? The assembly depart- Reams of Production
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ducted. Employees worked a total of 10,000 hours
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on production. The corporate managers are trying LO2, 3, 4
to decide whether they should use a traditional The following cost information is available for
overhead allocation method based on direct labor
r Senkowski Ltd.:
hours or switch to an activity-based costing system.
Volume Overhead
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Required Activity Allocation Base of Activity Cost
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A. Determine the overhead rate using the tradi- Purchasing Purchase orders 30,000 $150,000
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tional overhead allocation method based on Receiving Shipments received 15,000 60,000
direct labor hours.
Machine setups Setups 2,500 200,000
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B. Determine the overhead rate for each of the
activities assuming that activity-based costing is Quality control Inspections 18,000 90,000
used.
Direct materials are $15 per unit for luxury hand-
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Purchase orders 4
Quality control Number of inspections 75,000 Shipments received 3
Setups 2
During the year, 1,000 purchase orders were issued;
300 shipments of material were received; 600 Inspections 12
machine setups occurred; and 750 inspections were
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conducted. Employees worked a total of 10,000 Calculate the overhead to be allocated to the
direct labor hours on assembly of the monitors. The bags under traditional and activity-based costing
corporate managers are trying to decide whether techniques.
they should use a traditional overhead allocation C. Which costing method do you think is better for
method based on direct labor (assembly) hours, or the company? Why?
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A. Calculate the overhead rate for each cost driver. equipment designed to be sold to universities.
B. An order for 50 ceramic dish sets had the follow- The company’s southeastern plant has undergone
ing requirements: production changes that have resulted in decreased
Number of purchase orders
Number of setups
3
20
e r usage of direct labor and increased usage of au-
tomated processes. As a result, management no
longer believes that its overhead allocation method
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Number of product tests 7
is accurate and is considering changing from a
Machine hours 150
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traditional overhead allocation to an activity-based
method. The controller has chosen the following
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How much overhead should be assigned to this activity centers and cost drivers for overhead:
order?
Driver
C. Would you expect the new activity-based system
Overhead Cost Information Cost Driver Activity
to allocate a different amount of overhead?
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D. Discuss why using an activity-based system could Purchase orders $200,000 Number of orders 25,000
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provide better information to decision makers Setup costs 300,000 Number of setups 15,000
regarding the setting of sales prices. What other Testing costs 420,000 Number of tests 16,000
advantages might David Mayes, Inc., realize from Machine maintenance 800,000 Machine hours 50,000
the new costing system?
Required
A. Calculate the overhead rate for each cost driver.
Module.Prob05.05 Decision Focus: Traditional B. An order for 1,000 video projectors had the fol-
vs. ABC LO2, 3, 4 lowing requirements:
Gramercy, Inc., manufactures sailboats and has two
Number of purchase orders 3
major categories of overhead: materials handling
and quality inspection. The costs expected for these Number of setups 5
categories for the coming year are as follows: Number of product tests 20
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Materials handling (based on 500 material moves) $100,000 Machine hours 1,500
Quality inspection (based on 200 inspections) $300,000
How much total overhead should be assigned to
The plant currently applies overhead based on direct this order?
C. What could management do to reduce the
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in time and save approximately $50,000 annually on
Required
inventory carrying costs. In addition, there will be 70
Compute the bids for deluxe and regular pillows on
percent fewer purchase orders for inventory issued,
r a total order basis.
but twice as many setups for production runs. The
company will also be able to receive a 2 percent
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Module.Prob05.09 Traditional vs. ABC LO3, 4
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discount on raw materials purchases because of the
long-term nature of the orders. Grandma’s Rocking Chair Company produces
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1,000 units each of the Kennedy Rocker and the
Required Bentwood Rocker. Currently, the company uses
A. If raw materials purchases are $1,000,000 per
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a traditional cost system, but is considering an
year (that is, cost before the above changes are activity-based cost system. The company is commit-
implemented), what quantitative impact will the ted to producing only the highest-quality chairs.
change to JIT have on the overall costs for the Consequently, the management group wants to
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company?
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B. What qualitative factors will be impacted by the
know what the cost of inspection would be for both
products given the following data:
change to JIT?
Number of inspections per unit:
C. Does it appear that the move to JIT will be positive
or negative for the company? Why or why not? Kennedy 3
Bentwood 1
Module.Prob05.08 ABC LO3 Inspection cost (in total) $50,000
The following cost information is available for the Direct labor hours:
Stuart and Hahn Corporation: Kennedy 3,000
Direct material $14 per unit for deluxe pillows Bentwood 2,000
$10 per unit for regular pillows
Required
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Direct labor $20 per hour (including benefits) A. Under traditional costing, how much of the
inspection cost would be allocated to Kennedy
Overhead Rockers and Bentwood Rockers, respectively?
Activity Allocation Base Cost B. Using activity-based costing, how much of the
Purchasing Number of purchase orders $150,000 inspection cost would be allocated to Kennedy
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Receiving Number of shipments received 50,000 Rockers and Bentwood Rockers, respectively?
Machine setups Number of setups 250,000 C. Discuss what caused the difference. Would this
difference affect management decisions? How?
Quality control Number of inspections 125,000
Which method is more accurate? Why?
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be sold for the company to break even. after her son, who worked for a bicycle delivery
B. Calculate the number of bottles of Daily Wash, service, was hurt in a riding accident. The market’s
Mud Mask, and Face Cleanser that must be sold response has been overwhelmingly favorable to the
to break even.
even point?
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C. How might Clean Skin Company reduce its break-
company’s new suspension system. Riders report
feeling that they experience fewer “unpredictable”
bumps than with traditional suspension systems.
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Gigi made an initial investment of $100,000 and
Module.Prob06.02 Decision Focus:
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has set a target of earning a 30 percent return on
Break-Even and Target Profit LO1, 2, 3 her investment. Gigi expects her company to sell
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approximately 10,000 suspension systems in the
ZIA Motors is a small automobile manufacturer.
coming year. Based on this level of activity, variable
Chris Rickard, the company’s president, is currently
manufacturing costs will be $5 for each suspension
evaluating the company’s performance and is con-
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Humphrey’s maintenance workers will be
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fixed costs total $2 per case based on production
of 250,000 cases. The fixed costs remain unchanged terminated.
within a relevant range of 50,000 to 300,000 cases. Required
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After sales of 180,000 cases were projected for the
year, a special order was received for an additional
30,000 cases.
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Based on the information given, what should
Humphrey Sports do with respect to outsourcing its
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maintenance work?
Required
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Calculate Great Falls Brewery’s minimum acceptable Module.Ex07.06 Outsourcing Decision LO2
selling price for the special order of 30,000 cases. State Hospital is considering outsourcing its main-
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tenance work. The total labor cost for the mainte-
Module.Ex07.03 Special Order: Effect on nance department is $200,000, and the hospital has
Income LO1 an offer from Jenny Maintenance to provide the
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Module.Ex07.04 Basic Make or Buy Decision Finlay Grace Sullivan & Company has two sales
LO2 offices: one located in Portland, Maine, and one
in Portsmouth, New Hampshire. Management is
Ice Cold Corporation makes dorm-size refrigerators.
considering dropping the Portland office. The com-
The company’s records show the following unit costs
pany’s records report the following information:
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tive costs for this order and that regular sales will
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A. What is the contribution margin per limited not be affected, what is the impact of this deci-
resource for each type of football? sion on company profits?
B. Assuming that demand is not a constraint, how B. Suppose that the preceding order has a onetime
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C. What other factors should be considered, and
Module.Ex07.09 Sell or Process Further how would they impact your decision to accept
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Decision LO6 the special order?
Swine Enterprises produces hams from locally raised D. Disregarding questions A through C, suppose
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pigs. The cost of getting the meat ready for mar- that regular sales would be reduced by 200 units
ket is $1 per pound. Hams weigh an average of 12 if the special order were accepted. What impact
pounds and sell for $1.50 per pound. The company would this have on the company’s decision?
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Required
Marketing and administrative costs: A. In deciding whether to make or buy the part,
Variable $1 per unit what are Tony’s total relevant costs to make the
Fixed $8,000 part?
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Variable costs 10,000 20,000 ment should consider before making this deci-
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Fixed costs 3,000 6,000 sion? What impact could these qualitative factors
Gross margin $ 2,000 $14,000 have on the decision?
Unit sales 10,000
e r20,000
Module.Prob07.14 Decision Focus: Eliminating
Unprofitable Segments LO3
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The Hemp Division has an opportunity to purchase
10,000 feet of identical-quality rope from an outside Big Bucks Casino is currently operating at 80 percent
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supplier at a cost of $1.25 per unit on a continuing capacity. Worried about the casino’s performance, Grey,
basis. Assume that the Hemp Division cannot sell any the general manager, reviewed the company’s operat-
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additional product to outside customers. ing performance. (The revenue and cost data are in
millions.)
Required Segment
A. Should West allow its Hemp Division to purchase
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Card
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not?
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the rope from the outside supplier? Why or why Tables Slots Craps Roulette
Revenues $25 $50 $15 $35
B. Assume that the Hemp Division is now at full ca-
pacity and that sufficient demand exists to sell all Less variable costs 12 20 9 15
production to outsiders at present prices. What Contribution margin $13 $30 $ 6 $20
is the differential cost (benefit) of producing the Less fixed costs 8 15 8 10
rope internally?
Operating profit (loss) $ 5 $15 $ (2) $10
C. Assume that the quality of the rope is found to
be of a lesser, but still satisfactory, quality. What Required
factors should be considered? A. What is the current operating profit for the com-
D. Assume that the quality of the rope is found to pany as a whole?
be of questionable quality but that the price is B. Assuming that all fixed costs are unavoidable,
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$1.00 per unit. What factors should be considered if Grey eliminated the unprofitable segments,
in the decision? what would be the new operating profit for the
company as a whole?
Module.Prob07.13 Decision Focus: Eliminating C. What options does management have to maxi-
Unprofitable Segments LO3 mize profits?
en
Casagrande Company is currently operating at 80 D. What qualitative factors do you think manage-
percent capacity. Worried about the company’s ment should consider before making this deci-
performance, Mike, the general manager, reviewed sion? What impact could these qualitative factors
the company’s operating performance. (The sales have on the decision?
and related cost information provided below are in
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millions of dollars.)
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Direct labor 50 50
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Bottles per foot Variable overhead 50 75
of shelf space 10 9 7 12 Contribution margin $200 $200
Required
A. Rank the salsas based on expected revenue if
e r
each is given 10 feet of shelf space and all bottles
Required machine time
Required
1/4 hour 1/2 hour
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A. If the amount of machine time available to Sun
are expected to be sold.
Devil Golf Balls is limited, which golf ball should
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B. Based on the information given, which salsa
be produced in the larger quantity?
should get the most shelf space? Why?
B. If the total machine time available is 110 hours per
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C. What qualitative factors should be considered in
month and the demand for each model of golf
this decision? How would these factors impact
ball is 108,000 balls per month, how many of each
the decision?
model should be produced to maximize profit?
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of return (ignore income taxes). Round your answer
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expected to be $30,000 each year for four years. At
the end of the tractor’s useful life, the salvage value to two decimals.
of the tractor is expected to be $5,000.
r Module.Ex08.07 IRR: Tax Effects LO2
Required The Golden Golf Club is considering an investment
e
What is the net present value if the cost of capital is in golf carts that requires $21,000 and promises to
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12 percent (ignore income taxes)? return $29,000 in three years’ time. The company
will depreciate the golf carts over the three years
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Module.Ex08.03 Basic NPV with Salvage and will be unable to sell them for any amount at
Value LO1
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the end of that time. The company’s income tax rate
Food Bear Grocery Store purchased a new U-Scan is 40 percent.
machine at a cost of $100,000. Annual operating
Required
cash inflows are expected to be $40,000 each year
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of which project to pursue. Each holds promise for
Buy Decision using NPV Analysis LO1, 4
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the company, but he is confused about what to do
because each project generates the same amount of Bit and Byte sells computer services to its clients. The
cash flow over the four-year period. firm is contemplating the acquisition of a computer
Required
e
Ignoring taxes, compute the net present value of
r but is undecided whether it should be leased or
purchased. Information regarding the computer is
as follows:
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each project at a 15 percent cost of capital. Which Equipment Purchase Information
project should be chosen? Why?
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Cash purchase price $275,000
Annual maintenance 25,000
Module.Prob08.10 NPV LO3
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Tate Enterprises is a nonprofit organization that has Salvage value at the end of three years 120,000
a cost of capital of 10 percent. The organization is Equipment Leasing Information
considering the replacement of its computer system. Annual rental fee $75,000 plus 10 percent of billings
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o
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The old system has a net book value of $3,000 and a
remaining useful life of five years, with no expected
(includes maintenance)
Other Information
salvage value at the end of the five years. The com- Estimated billings:
pany estimates the system’s current salvage value to
Year 1 $230,000
be $1,500. A new computer system will cost $10,000
and is expected to have a useful life of five years, Year 2 250,000
with no salvage value. Annual cash operating costs Year 3 240,000
are $4,000 for the old system and $2,000 for the Annual operating expenses 75,000
new system. Equipment setup 20,000
Required Income tax rate 40%
A. What is the present value of the operating cash Depreciation method Straight-line
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outflows for the old system? Minimum desired after-tax rate of return 12%
B. What is the present value of the operating cash
outflows for the new system? Required
C. What is the present value of the salvage value of Prepare a net present value analysis that compares
the old system if it is replaced now? the purchase and leasing options. Which alternative
D. Would you advise the organization to replace the is best for Bit and Byte?
en
Sullivan Company plans to acquire a new asset that each year of the project’s life are presented in the
costs $400,000 and is anticipated to have a salvage schedule below. Stewart assumes that the cash flows
value of $30,000 at the end of four years. Sullivan’s take place at the end of the year. Stewart further as-
policy is to depreciate all assets using straight-line sumes that the investment’s salvage value at the end
depreciation with no half-year convention. The new of each year is equal to its then net book value, but
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Blanchard Company budgets on an annual basis for
successful the company is in forecasting sales each
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its fiscal year. The following beginning and ending
year. She does not understand how the company inventory levels (in units) are planned for the fiscal
does it. year of July 1, 2009, through June 30, 2010:
Required
e r
Help Marcy out by describing some of the factors
Raw materials*
July 1, 2009
40,000
June 30, 2010
50,000
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that her employer may consider in forecasting sales. Work in process 10,000 10,000
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Finished goods 80,000 50,000
Module.Ex09.03 Sales Budget LO2 *Two units of raw material are needed to produce each unit of
Sarah’s Salon performs manicures and pedicures for
ar
finished product.
its clients. Sarah’s also sells bottles of nail polish for
$2.50 each. Sarah’s marketing manager has pre- Required
pared the following first-quarter sales forecast: If Blanchard Company were to manufacture 500,000
Pr
quarter sales forecast. Lulu’s had 10,000 lockets on Finished goods 80,000 45,000
hand at the end of December. The company tries to
Two units of raw material are needed to produce each unit of
keep 10 percent of the next month’s sales on hand
finished product.
at the end of each month.
January 135,000 units Required
en
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Excess (deficiency) of cash (4) ? 30 ?
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Financing:
Borrowings ? 21 —
r — problems
Repayments* — — (?) (8)
Module.Prob09.11 Production and Purchases
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Total $ ? $ ? $ ? $ ?
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Ending cash balance $ ? $ ? $ ? $ ? Budget LO3, 4
*Includes interest. Alvarez Company produces various component parts
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used in the automotive industry. The sales budget
Required
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for the first eight months of 2010 shows the follow-
Fill in the missing amounts in Benson’s cash sum-
ing projections:
mary budget.
Month Units Month Units
Module.Ex09.09 Cash Receipts Budget LO5
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month’s raw material needs on hand at the end of
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Babcock’s most popular cabinet is a small cherrywood
each month.
cabinet typically used in bathrooms. Each completed
Required r unit requires 3.5 hours of direct labor, and the skilled
A. Prepare a production budget for January through labor costs an average of $25 per hour. The company
e
June of 2010. applies overhead at the rate of $3 per direct labor
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B. Prepare a material purchases budget for the hour.
same period, assuming that each gallon of the
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Required
special resin costs $10.
A. Prepare a direct labor budget for January
ar
through June.
Module.Prob09.13 Direct Labor and Overhead B. Prepare a manufacturing overhead budget for
Budgets LO4 the same period.
Ash Company manufactures telephone handsets
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under various brand names. The company has built Module.Prob09.15 Cash Receipts Budget
o
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a strong reputation based on quality telephones and LO5
has been profitable for a number of years. Harriman
Barrera’s Outdoor Outfitters sells many items that
Lassiter, the company’s president, has decided to
sporting enthusiasts find useful. The company sells
make a significant push for labor and overhead cost
shoes, pants, shirts, jackets, fly-fishing equipment,
controls in the coming months because of increased
hiking equipment, hunting equipment, and vari-
overseas competition. Harriman has asked the mar-
ous other products. The following sales projections
keting and accounting departments to provide data
were prepared by the company’s sales manager and
related to labor costs and manufacturing overhead.
include all items for each of the first seven months
Production budgets for the period ending June 30
of 2010:
are as follows:
Sales Sales
Month Units Month Units
Month Volume Month Volume
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A. Prepare a direct labor budget for January collected in the next month. The balance of accounts
through June. Direct labor averages $15 per hour. receivable on December 31, 2009, was $141,600. Of
B. Prepare a manufacturing overhead budget for the accounts receivable balance, $33,600 represents
the same period. uncollected November sales.
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April 500 1,600 100 1,650
Module.Prob09.18 Sales and Cash Collections
May 1,800 1,850 145 2,125 Budgets LO2, 5
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The average sales price of each of the various items is
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as follows: books, $70; school supplies, $20; software,
Mountain Mash produces ice cream for wholesale
distribution to grocers, restaurants, and indepen-
dent ice cream shops. March, April, May, June, and
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$90; and miscellaneous, $15. Because the store sells
July are busy months for the company as its custom-
primarily to students and faculty, there are no credit
ers gear up for the spring and summer rush. Moun-
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sales.
tain Mash has projected the following level of sales
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Required (in gallons) for March through June:
Prepare a cash receipts budget by item category for Month Units Month Units
each month. March 70,000 June 90,000
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Budget LO5 The company has a set wholesale selling price of $3.50
Barley Restaurant Supply sells various equipment per gallon. Mountain Mash’s customers purchase ice
and supplies to restaurants in the local and sur- cream on credit, with the agreement that they must
rounding communities. The company’s controller, pay invoices within 30 days. Nonetheless, not all cus-
Barry Barley, has requested your help in preparing a tomers pay within that time frame. Mountain Mash’s
cash budget for the month of June. Barry accumu- credit manager has developed the following table to
lated the following information for you: show the typical cash collection pattern:
a. The cash balance on June 1 was estimated to be
70 percent of sales are collected in the month of sale
$10,000.
b. Actual sales for April and May and budgeted 25 percent of sales are collected in the month following the
ga
ond month.
company estimates, how much will customers
c. Inventory purchases are expected to be $35,000
owe Mountain Mash as of the end of July?
in June. The company pays for inventory pur-
chases in the following month’s purchases. The
balance of May’s purchases is $22,000.
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Prepare a flexible budget for Gordon based on the Budgeted fixed overhead 11,000
production and sale of 125 wool caps. Variable overhead rate per direct labor hour 5.00
r Standard hours allowed for actual production 13,100
Module.Ex10.02 Direct Materials Price and Actual labor hours used 13,000
Usage Variances LO5
e
Required
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The Woods Enterprises prepared the following stan-
dard costs for the production of one stuffed bear: A. What is the variable overhead spending variance?
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B. What is the variable overhead efficiency
Direct materials 1.5 pounds of stuffing @ $2 per lb
variance?
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Direct labor 2 hours of assembly @ $15 per hr
and 1,950 labor hours at $15.25 per hour. Simon Enterprises applies variable overhead at a
o
Required
Le rate of $1.50 per direct labor hour and fixed over-
head at a rate of $1.75 per direct labor hour. The
A. Calculate the direct material price variance. company budgets two direct labor hours for each of
B. Calculate the direct material usage variance. the 5,900 units that are scheduled for production.
Last year, Simon incurred actual variable overhead
Module.Ex10.03 Direct Labor Rate and totaling $18,750 and actual fixed overhead total-
Efficiency Variances LO6 ing $21,500 for the production of 6,000 units. In
Refer to the information in Module.Ex10.02 above. addition, 11,800 direct labor hours were actually
incurred.
Required
A. Calculate the direct labor rate variance. Required
B. Calculate the direct labor efficiency variance. A. Calculate the variable overhead efficiency
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variance.
Module.Ex10.04 Materials and Labor B. Calculate the variable overhead spending
Variances LO5, 6 variance.
Last year, Vera Corporation budgeted for production
and sales of 20,000 cloth handbags. Vera produced Module.Ex10.07 Fixed Overhead Volume and
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and sold 19,250 handbags. Each handbag has a stan- Spending Variances LO8
dard requiring four feet of material at a budgeted Refer to the information in Module.Ex10.06 above.
cost of $2.50 per foot and 45 minutes of sewing Required
time at a cost of $0.28 per minute. The handbags A. Calculate the fixed overhead volume variance.
sell for $45.00. Actual costs for the production
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Chapter 10: Variance Analysis—A Tool for Cost Control and Performance Evaluation M10-1
ACCT_Managerial_Ch10_Module.indd 1 1/21/10 12:28 PM
problems • Each part has a standard requiring 20 minutes of
assembly time at a cost of $0.25 per minute.
• Average wholesale price for each part is $8.
Module.Prob10.08 Flexible Budget Variance • Actual costs for the production of 11,000 parts
LO2 were $17,094 for 11,100 pounds of material.
Fort Worth Company is a printer and binder of • Actual labor costs were $58,080 for 242,000 min-
specialized booklets and pamphlets. Last year, the utes of labor time.
company’s sales manager estimated sales to be Required
10,000 combined booklets and pamphlets. The sales A. What was the budgeted contribution margin per
manager also estimated that the items would retail part?
for approximately $10 each. Various production B. What was the actual contribution margin per
costs including direct and indirect material, direct part?
and indirect labor, and variable overhead were C. What was Turner’s flexible budget variance?
estimated to total $50,000, while fixed costs were D. What was Turner’s direct material price variance?
estimated to be $20,000. E. What was Turner’s direct material usage
During the year, Fort Worth’s unit sales equaled v ariance?
its production of 12,000 units. Because of chang- F. What was Turner’s labor rate variance?
ing market conditions, specifically competition, the G. What was Turner’s labor efficiency variance?
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average selling price fell to just $9.50 per unit. There
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were increased variable costs as well that resulted Module.Prob10.10 Material and Labor
in average per unit variable costs of $6. At the end
of the year, the company’s controller accumulated
Variances: Solve for Missing Data LO5, 6
fixed costs and found them to be $21,000.
Required
e r Sparky Electric produces a special type of grounded
outlet. The outlets are used in areas where water
is likely to be present, such as kitchens, bathrooms,
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Prepare a report to show the difference between the outdoor work areas, porches, poolsides, workshops,
actual contribution margin and the budgeted contri- and so forth. Sparky Electric has a policy to maintain
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bution margin per the static budget. Then, compare as little inventory of Materials A and B as possible.
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the actual contribution margin and the budgeted For the quarter included in this analysis, there was
contribution margin per the flexible budget. no beginning or ending inventory of either mate-
rial. Selected standard cost information is provided
Module.Prob10.09 Comprehensive Variance below:
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Analysis LO3, 5, 6
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Turner Corporation produces overdrive transmission Material A
Cost Standards
2 pounds at $6.00 per pound $12.00
parts for several small specialty automobile compa- Material B 3 gallons at $3.00 per gallon 9.00
nies. Prior to founding the company, Benson Turner,
Labor 4 hours at $3.20 per hour 12.80
the company’s president, had an illustrious stock-car-
racing career. After several serious injuries, Benson’s Total standard $33.80
unit cost
family convinced him that it was time to retire from
the sport and pursue a calmer and safer line of work.
The performance report for the third quarter of the year appears
The company has been operating for just over
as follows (F indicates a favorable variance; U indicates an unfa-
five years and is beginning to show signs of sig-
vorable variance):
nificant growth. Benson is a planner and he wants
to get a handle on his manufacturing operations Comparison of Actual and Standard
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M10-2 Chapter 10: Variance Analysis—A Tool for Cost Control and Performance Evaluation
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Small Tykes World Company mass-produces chairs budgeted at $900,000 for the year, and the fixed
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for children. The chairs can be purchased in a variety overhead rate was estimated to be $3 per unit.
of colors, but only one basic design. The chairs Both fixed and variable overhead are assigned to
are wildly popular, especially with young, highly
r the product on the basis of direct labor hours. The
educated parents. The design is the key to the actual data for the year ended November 30, 2009,
e
company’s success and there seems to be no end to are as follows:
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the demand for Small Tykes’ products. The following Production in units 198,000
data were extracted from the company’s standard Labor hours 440,000
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cost sheet:
Variable overhead $352,000
Plastic 10 pounds at $4.50 per pound
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Fixed overhead $575,000
Molding 3 feet at $3.00 per foot
Direct labor 4 hours at $6.00 per hour Required
A. What are the total standard hours allowed for
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month.
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Chapter 10: Variance Analysis—A Tool for Cost Control and Performance Evaluation M10-3
ACCT_Managerial_Ch10_Module.indd 3 1/21/10 12:28 PM
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advertising campaign during broadcast coverage of a division. In the Hillsborough Avenue location,
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major sporting event. Management has determined the division has sales of $600,000, net operating
that based on the expense of the advertising cam- income of $15,000, and average operating assets of
paign, $28,000, only one division can be featured.
r $1,200,000.
In-house marketing studies suggest that the campaign Required
e
could increase sales of the cheeseburgers division by What is the asset turnover for the specialty drinks
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$100,000 or increase sales of the chiliburgers division division?
by $75,000.
op
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Which product should be featured in the campaign?
Why? Show computations to support your recom- Comfortable Carpets manufactures and installs vari-
mendation. ous types of carpets for their customers. Comfort-
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sions as follows: 30 percent to professional wear and B. What is the ROI for Olive Patch?
70 percent to formal wear.
Required
Prepare new segmented income statements for
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Chapter 11: Decentralization, Performance Evaluation, and the Balanced Scorecard M11-1
ACCT_Managerial_Ch11_Module.indd 1 1/21/10 1:03 PM
Module.Ex11.07 ROI with Margin and perspective and the internal business perspective of
Turnover and Residual Income LO5 the balanced scorecard.
There are two different hotel chains that you have Required
identified as potential investment opportunities. Discuss how quality can be assessed (i.e., measured)
You are looking for a minimum required rate of for the customer perspective and the internal busi-
return of 8 percent. As a starting point, you have ac- ness perspective. Use short and concise statements.
cumulated some basic information to calculate the
return on investment and residual income. Module.Ex11.11 Quality Costs LO7
Hotel Aster Hotel Bella No company can simply wish quality into being;
Sales $10,000,000 $6,000,000 rather, quality comes at a cost. Quality costs are
Net operating income 200,000 300,000 often classified into four general categories: preven-
Average operating assets 2,000,000 3,000,000 tion costs, appraisal costs, internal failure costs, and
external failure costs..
Required
Calculate the ROI and residual income for each Required
hotel. Explain the meaning of your calculations. Briefly describe each of the four general categories
of quality costs and provide several examples of
Module.Ex11.08 Residual Income LO5 costs that may be included in each category.
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Allied Electronics has a particular division that gen-
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erates $3,000,000 in sales and operating income of Module.Ex11.12 Quality Costs LO7
$250,000 on average operating assets of $1,250,000. Timmer Meats is a large meat processor in the
The company’s management team has made it clearr southeastern United States. The company’s most
that division managers are expected to generate recent year’s sales totaled $50 million. Over the last
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sufficient income to guarantee a minimum return of several years, the company has had an unfortunate
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10 percent. number of quality problems, which threatens the
company’s existence. Webb Timmer, the company’s
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Required
president, asked the company’s controller and qual-
What is the division’s residual income?
ity control manager to accumulate data related to
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product quality. These two individuals prepared the
Module.Ex11.09 Net Operating Income and following data for Webb:
Residual Income LO5 Warranty claims $120,000
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Average operating assets $200,000 $150,000 E. Webb is considering spending more on inspec-
Residual income ? ? tions. What is the likely impact on other failure
costs? What do you recommend?
Required
A. Calculate net operating income and residual Module.Ex11.13 Quality Costs LO7
en
income for each division. Plum Republic is an upscale retail clothing store that
B. Compare the two divisions and discuss the useful- sells clothes for professional working women. The
ness of ROI and residual income for the purpose store expects sales of $10 million for the year. Plum’s
of comparing the divisions. customers have lodged recent complaints about
the quality of the clothes and service received while
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M11-2 Chapter 11: Decentralization, Performance Evaluation, and the Balanced Scorecard
ge f ty
about the quality of service received and the qual- plates. In order to manage the two separate busi-
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ity of the food served, and the company was even nesses, the operations of Regis Steel are reported
sued for food poisoning. Bill Crabby, the restaurant’s separately as an investment center.
owner, accumulated the following data related to
r Raddington monitors its divisions on the basis
the restaurant’s product quality and service quality of both unit contribution and return on average in-
e
over the last year: vestment (ROI), with the investment defined as aver-
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Costs of compensating customers for $ 7,000 age operating assets used. Raddington has a policy
unsatisfactory meals of basing all employee bonuses on divisional ROI.
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Employee training for cooks and wait staff 15,000 All investments in operating assets are expected to
earn a minimum return of 11 percent before income
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Food poisoning liability lawsuits 20,000
Cost of remaking entrees 10,000 taxes.
Regis’s cost of goods sold is considered to be
Inspection of incoming ingredients 5,000
entirely variable, whereas the division’s administra-
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Spoilage and waste from discarding 2,500 tive expenses are not dependent on volume. Selling
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poor-quality food
Le expenses are a mixed cost, with 40 percent attrib-
Lost sales 15,000 uted to sales volume. Over the last two years, Regis’s
ROI has ranged from 11.8 percent to 14.7 percent.
Required
During the fiscal year ended November 30, 2009,
A. Compute total prevention costs.
Regis contemplated a capital acquisition with an es-
B. Compute total appraisal costs.
timated ROI of 11.5 percent; however, division man-
C. Compute total internal failure costs.
agement decided against the investment because it
D. Compute total external failure costs.
believed that the investment would decrease Regis’s
overall ROI.
The 2009 income statement for Regis is pre-
sented below. The division’s operating assets were
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Chapter 11: Decentralization, Performance Evaluation, and the Balanced Scorecard M11-3
ACCT_Managerial_Ch11_Module.indd 3 1/21/10 1:03 PM
Required Required
A. Calculate the unit contribution for Regis Steel Prepare a report that shows total prevention, ap-
Division if 1,484,000 units were produced and praisal, internal failure, and external failure costs.
sold during the year ended November 30, 2009. Based on the report, what recommendations would
B. Calculate the return on investment (ROI) for you make to the company? Be sure to consider the
Regis Steel Division for 2009. relation between quality costs and annual sales.
C. Calculate the residual income using the average
operating assets employed for 2009 for the Regis Module.Prob11.18 Quality Costs, Excel LO7
Steel Division. Tanner Leathers implemented a quality control and
D. Explain why the management of Regis Steel improvement program in 2009. The quality control
Division would have been more likely to accept manager, a daughter of the company’s president,
the contemplated acquisition if residual income developed the following table that shows the
rather than ROI were used as a performance components of quality cost as a percentage of the
measure. company’s sales for the last five years.
E. The Regis Steel Division is a separate investment Internal External
center within Raddington Industries. Identify sev- Year Prevention Detection Failure Failure
eral items that Regis Steel should control if it is to 2009 3% 4% 9% 13%
be evaluated fairly by either the ROI or residual
2010 4 5 8 11
income performance measure.
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2011 5 6 6 8
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Module.Prob11.17 Quality Costs Report LO7 2012 6 5 4 6
Wailai Macadamia Confectioners is a maker of fine 2013 7 2 1 2
candies and chocolates. The company’s founder
believes that production has become less well
e r Required
A. Prepare a graph (i.e., a trend graph) that shows
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controlled in recent months, resulting in a decrease
the trend for each quality cost category. To
in overall quality and a growing tide of customer
complete the graph in Excel, use the chart wizard
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dissatisfaction. Nimi Naoro, quality control manager,
and select “XY (scatter) graph with data points
is also concerned but she believes that the company
connected by lines” as the chart type. You should
ar
is being sufficiently proactive to combat most qual-
have one graph with four separate lines. Show
ity concerns. She asks the controller to accumulate
the percentage of sales on the vertical axis and
any data that might relate to the company’s current
the year on the horizontal axis.
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ingredients
Product quality audits 237,500
Total annual sales 25,000,000
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M11-4 Chapter 11: Decentralization, Performance Evaluation, and the Balanced Scorecard
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sales and total asset turnover.
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Required
C. Comment on the relative profitability of the two A. Compute the rate of return on assets for each
companies. company. Separate the rate of return on assets
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(Company 1 and Company 2) reveal the following Johnson & Johnson, and May Department Stores.
financial information (in millions):
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Which of the companies corresponds to A, B, and
Company 1 Company 2 C, respectively? What clues did you use in reach-
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Revenues $3,043 $8,017 ing your conclusions?
Interest expense 95 184
Net income 852 1,426
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Gross margin $ 7.3 $ 7.3 $ 6.9
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Analysis LO4, 5, 6 Selling and administrative
Using the following financial statements for Eagle expenses (6.6) (6.8) (7.3)
Company, compute the required ratios: r Earnings (loss) before taxes $ 0.7 $ 0.5 $(0.4)
Eagle Company Balance Sheet as of December 31
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Income taxes (0.3) (0.2) 0.2
(in millions)
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Net income $ 0.4 $ 0.3 $ (0.2)
2007 2008 2009
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Assets Required
Cash $ 2.6 $ 1.8 $ 1.6 A. What is the rate of return on total assets for 2009?
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B. What is the current ratio for 2009?
Government securities 0.4 0.2 0.0
C. What is the quick (acid-test) ratio for 2009?
Accounts and notes D. What is the profit margin for 2008?
receivable 8.0 8.5 8.5
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Williams Media, Inc.’s comparative balance sheets in- Required
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cluded accounts receivable of $100,000 on December How should each of these transactions be treated
31, 2008, and $125,000 on December 31, 2009. Sales on the statement of cash flows?
of consulting services reported by Williams Media on
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its 2009 income statement amounted to $2 million. Module.Ex13.06 Financing Activities LO1, 3
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Required Walden Book Buyers buys 5,000 shares of its own
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What is the amount of cash collections that Williams common stock at $25 per share. The company pur-
Media should report in the Operating section of its chases the shares as Treasury stock.
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2009 statement of cash flows, assuming that the Required
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direct method is used? How is this transaction reported on the statement of
cash flows?
Module.Ex13.03 Accrual to Cash: Direct
Method LO2 Module.Ex13.07 Investing Activities: Indirect
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Workman-Smith Company’s comparative balance
sheets included inventory of $120,000 on December 31,
Method LO1, 3
Washburn Delivery Company sold a company car for
2008, and $110,000 on December 31, 2009. Workman- $12,000. Its original cost was $35,000, and the accu-
Smith’s comparative balance sheets also included mulated depreciation at the time of sale was $20,000.
accounts payable of $60,000 on December 31, 2008,
and $55,000 on December 31, 2009. Workman-Smith’s Required
accounts payable balances are composed solely of How does the transaction to record the sale appear
amounts due to suppliers for purchases on inventory. on a statement of cash flows prepared using the
Cost of goods sold, as reported by Workman-Smith on indirect method?
its 2009 income statement, amounted to $850,000.
Required
Module.Ex13.08 Cash Equivalents LO1, 3
Whitney R.V.’s Inc. has invested its excess cash in the
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