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ON THE FIRST DAY OF CLASS? What is accounting? What is an accountant? What is accounting used for? DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 1 - McGraw Second Edition ON THE FIRST DAY OF CLASS? How management accounting is different than financial accounting, tax, or audit ??? Don’t be afraid to take a big step if one is indicated. You can’t cross a chasm in two small jumps. DAVID LLOYD GEORGE (1863—1945), Statesman Revenge is often like biting a dog because the dog bit you. AUSTIN O’MALLEY (1858—1932), Physician and humorist Cost Handy Handbook Page - 2 - McGraw Second Edition ON THE FIRST DAY OF CLASS? About Debits and Credits … Choose always the way that seems best, however rough it may be; custom will soon render it easy and agreeable. PYTHAGORAS (c. 580—c. 500 B.C.), Philosopher and mathematician DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 3 - McGraw Second Edition ON THE FIRST DAY OF CLASS? More Handy INFORMATION: Management accounting information is unique in its ability to influence future decisions: Budgets / forecasts / outlooks Daily, weekly, monthly operations Cost models Project funding Product costs Pricing decisions, CVP, sales, production, inventory, etc. Differences between Financial and Managerial Accounting: FINANCIAL Measures value Summarizes past Audience outside organization – stockholders, banks, etc. Objective and verifiable (so it can be audited) Precision Summarized data for organization GAAP Mandatory MANAGERIAL Adds value Emphasis on future decisions Audience inside organization – managers Relevance and flexibility Timeliness Detail! No GAAP Not mandatory The most beautiful thing in the world is the conjunction of learning and inspiration. WANDA LANDOWSKI (1879—1959), Musician Shun idleness. It is a rust that attaches itself to the most brilliant of metals. VOLTAIRE [François-Marie Arouet] (1694—1778), Humorist “On with the dance, let joy be unconfined” is my motto, whether there’s any dance to dance or any joy to unconfine. MARK TWAIN [Samuel L. Clemens] (1835—1910), Humorist The two powers which in my opinion constitute a wise man are those of bearing and forbearing. EPICLETUS (c. 55—135), Philosopher Cost Handy Handbook Page - 4 - McGraw Second Edition On The First Day of Class? Do This At Home: 1. Find the Institute of Management Accountants website. 2. On the website, find the document The Rights and Responsibilities of a Certified Management Accountant (I found it on the page entitled After I Pass the Exams). 3. On this document, find the [four] standards of ethical conduct (this is really the information you are after, and you might find it elsewhere on the site). Place/copy/write that information here. Cost Handy Handbook Page - 5 - McGraw Second Edition ON THE FIRST DAY OF CLASS? Nothing is particularly hard if you divide it into small jobs. HENRY FORD (1863—1947), Founder of the Ford Motor Company REVIEW / SELF-QUIZ Do you know the answers to these questions?? What are the four Financial Statements? How do you increase an Asset account? … a Liability account? … a Revenue account? … an Expense account? What is the Accounting Equation? How is “profit” calculated (most simply)? How does Managerial Accounting differ from Financial Accounting, Tax, and Auditing? Note: We may or may not cover all of this material on this day of class, but we should cover the material before the next exam. So, if we have not covered this material, be sure to ask about it during the exam review. Cost Handy Handbook Page - 6 - McGraw Second Edition TERMS AND FLOWS FOUR TYPES OF COSTS: Variable Costs (in total & per unit) Fixed Costs (in total & per unit) Product Costs Period Costs Cost Handy Handbook Page - 7 - McGraw Second Edition TERMS AND FLOWS Three Categories of Product Costs: The society that separates its scholars from its warriors will have its thinking done by cowards and its fighting by fools. THUCIDIDES (c. 455—c. 400 B.C.), Historian The bravest are surely those who have the clearest vision of what is before them, glory and danger alike, and yet notwithstanding, go out to meet it. THUCIDIDES (c. 455—c. 400 B.C.), Historian Cost Handy Handbook Page - 8 - McGraw Second Edition TERMS AND FLOWS Combinations of Product Costs: Prime Costs Conversion Costs Youth is the best time to be rich and the best time to be poor. EURIPIDES (c. 485—406 B.C.), Playwright DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 9 - McGraw Second Edition TERMS AND FLOWS What is the most simple calculation of PROFIT (aka Income)? Be not solitary, be not idle. ROBERT BURTON (1577—1640), Cleric and scholar If things are not going well with you, begin your effort at correcting the situation by carefully examining the service you are rendering, and especially the spirit in which you are rendering it. ROGER BABSON (1875—1967), Statistician DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 10 - McGraw Second Edition TERMS AND FLOWS [Name of Company] Absorption Costing Income Statement [ ______________________________ ] [Name of Company] Variable Costing Income Statement [ ______________________________ ] [Name of Company] Balance Sheet [ ______________________________ ] Cost Handy Handbook Page - 11 - McGraw Second Edition TERMS AND FLOWS The only way to get ride of a temptation Is to yield to it. OSCAR WILDE (1854—1900) In the End, we will remember not the words of our enemies, but the silence of our friends. MARTIN LUTHER KING JR. (1929—1968) You will soon break the bow if you Keep it always stretched. PHAEDRUS (c. 15 B.C. – 50 A.D.), Fabulist NOTE TO “SELF”! See problem: ____________________________ On page _________ of the Handy Handouts For an example of t-accounts and cost flows. A certain amount of opposition is a great help to a person. Kites rise against, not with the wind. JOHN NEAL (1793—1870), Writer Cost Handy Handbook Page - 12 - McGraw Second Edition Let’s Take Notes ... TERMS AND FLOWS REVIEW / SELF-QUIZ Do you know the answers to these questions?? What are Fixed Costs? … Variable Costs? What are Product Costs? … Period Costs? What are Prime Costs? … Conversion Costs? What is Revenue? Expense? Profit? What is the Absorption Costing Income Statement format? What is the Variable Costing Income Statement format? What is Cost of Goods Manufactured? What is Cost of Goods Sold? What are the t-accounts down the left side? What is true of all of them? What are the t-accounts across the top? What is true of all of them? What are the t-accounts down the right side? What is true of all of them? What kind of account is COGS? I/S? DM? WIP? DL? MOH? What phrase appears at the top of every Income Statement? Why? … every Balance Sheet? Why? Note: We may or may not cover all of this material on this day of class, but we should cover the material before the next exam. So, if we have not covered this material, be sure to ask about it during the exam review. Cost Handy Handbook Page - 13 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 14 - McGraw Second Edition MANGO MOTORS (Variable and Fixed Costs) Mango Motors has incurred the following expenses during the 1996 calendar year. Sales revenue Fixed manufacturing costs Fixed selling and administrative costs Variable manufacturing costs Variable selling and administrative costs $810,000 60,000 50,000 540,000 67,500 Required: Calculate net income using both the absorption costing and the variable costing income statement formats. Cost Handy Handbook Page - 15 - McGraw Second Edition SOMUCH STEREOS (Variable and Fixed Costs) As the chief financial officer of SoMuch Stereos, headquartered in Timbuktoo, Tennessee, you have summarized the financial information for the fiscal year ending February 2000. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Fixed administrative expense Sales revenue $22,000 14,000 9,000 10,000 5,000 16,000 14,000 89,000 Required: The CEO has asked you to provide her with income statements using both the absorption costing format and the variable costing format. Cost Handy Handbook Page - 16 - McGraw Second Edition BOJANGLE DANCE SHOES (Variable and Fixed Costs) A partial list of sales and cost data is presented below for the Bojangle Dance Shoes Co. for the calendar year 2002. Sales (18,000 units) Manufacturing costs: Prime costs Variable MOH Budgeted and actual fixed MOH Operating expenses: Variable selling expense Fixed selling expense Fixed administrative $630,000 $252,000 84,000 100,000 54,000 45,000 90,000 Required: Calculate Bojangle’s cost of goods sold, contribution margin, and net income using both the absorption costing format and the variable costing format. Cost Handy Handbook Page - 17 - McGraw Second Edition MULESKINNER ATHETIC WEAR (Cost Flows) Below are summarized financial data of the Muleskinner Athletic Wear for the calendar year 2004. Sales revenue Raw material (beginning inventory) Raw material (ending inventory) Work in process (beginning inventory) Work in process (ending inventory) Finished goods (beginning inventory) Finished goods (ending inventory) Raw materials purchased $940,000 60,000 70,000 120,000 115,000 150,000 165,000 250,000 Indirect material Indirect labor Depreciation on plant and equipment Factory utilities Other factory costs Selling and administrative expenses Direct labor Raw materials requisitioned $ 10,000 25,000 100,000 35,000 30,000 110,000 405,000 240,000 Required: Calculate cost of goods manufactured, cost of good sold, and net income. Cost Handy Handbook Page - 18 - McGraw Second Edition MULESKINNER ATHETIC WEAR, INC. Calculations … Cost Handy Handbook Page - 19 - McGraw Second Edition CATTLE COMPANY (Cost Flows) Below are summarized financial data of the Cattle Company for two consecutive years. Administrative expenses Beginning finished goods Beginning work in process Beginning direct materials Sales Ending finished goods Ending work in process Ending direct materials Cost of goods manufactured Direct materials requisitioned Direct labor Indirect materials All other manufacturing overhead costs 1997 $135,000 45,000 71,000 96,000 566,000 445,000 190,000 130,000 15,000 104,000 1998 $161,000 82,000 65,000 108,000 812,000 69,000 84,000 102,000 562,000 235,000 170,000 18,000 158,000 Required: a. Use T-accounts to show the flow of costs and revenues. b. Prepare income statements for both years. Cost Handy Handbook Page - 20 - McGraw Second Edition CATTLE COMPANY Calculations (1997) ... Cost Handy Handbook Page - 21 - McGraw Second Edition CATTLE COMPANY Calculations (1998) ... Cost Handy Handbook Page - 22 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 23 - McGraw Second Edition JUDGE ELY JEANS (Cost Flows) The December 31, 1999 ledger account balances are presented below for Judge Ely Jeans. Beginning inventories on January 1, 1999 were $37,600 for finished goods inventory, $49,600 for work in process inventory, and $29,500 for direct materials inventory. Sales Insurance on production inventories Factory supervision Indirect materials Office equipment depreciation Utilities (60 percent factory) Delivery expense for finished products Direct labor Direct materials purchased Office fire insurance Finished goods inventory Indirect labor Administrative and marketing salaries Factory property tax Advertising Production equipment lease cost Work in process inventory Direct materials inventory $715,200 7,200 44,800 4,800 7,200 36,000 4,000 118,400 98,400 2,640 52,000 10,400 123,200 15,200 15,300 35,200 62,400 32,300 Required: Calculate cost of goods manufactured, cost of good sold, and net income. Cost Handy Handbook Page - 24 - McGraw Second Edition JUDGE ELY JEANS Calculations ... Cost Handy Handbook Page - 25 - McGraw Second Edition SLEEP WARM, INC. (Cost Flows) The following data is available for Sleep Warm, Inc. for the month of August: Beginning of August: Direct Materials inventory Work in Process inventory Finished Goods inventory $18,500 $12,000 $10,200 During August: Direct Labor cost Direct Materials purchases Total Overhead cost Sales Revenue Selling & Admin. Exp. $40,500 $80,000 $105,750 $400,000 $100,000 End of August: Direct Materials inventory Work in Process inventory Finished Goods inventory $16,800 $23,500 $9,100 Required: Calculate the cost of goods manufactured, the cost of goods sold, and net income for Sleepwell, Inc. in August. Cost Handy Handbook Page - 26 - McGraw Second Edition SLEEP WARM, INC. Calculations ... Cost Handy Handbook Page - 27 - McGraw Second Edition TRABER COMPANY (Cost Flows) The following data pertain to Traber Company for the year ended December 31, 2004. December 31. 2003 Purchases of direct materials Direct labor Indirect labor Factory Insurance Depreciation—Factory Repairs and maintenance—Factory Marketing expenses General and administrative expenses Direct materials inventory Work-in-process inventory Finished goods inventory $25,000 41,250 28,750 December 31, 2004 $75,000 56,250 31,250 15,000 100,000 18,750 82,500 68,750 43,750 43,750 25,000 Sales in 2004 were $625,000. Required: Prepare a schedule of cost of goods manufactured and a statement of net income (in good form) for the year ended December 31, 2004. Helpful Hint: First prepare the calculations using t-accounts, and then prepare the required schedules using the information from the t-accounts. Please turn in all your work (t-accounts and statements). Cost Handy Handbook Page - 28 - McGraw Second Edition TRABER COMPANY Calculations… Cost Handy Handbook Page - 29 - McGraw Second Edition TRABER COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2004 Direct materials used: Direct materials inventory, 1-1-2004 $ Add: Purchases of direct materials ____________ Total materials available $ Deduct: Direct materials inventory, 12-31-2004 (___________) Direct materials used in production $ Direct labor $ Manufacturing overhead $ ____________ Total manufacturing costs incurred $___________ $ Add: Beginning work in process inventory ____________ $ Deduct: Ending work in process inventory (___________) Cost of Goods Manufactured $ Cost Handy Handbook Page - 30 - . McGraw Second Edition TRABER COMPANY Income Statement For the Year Ended December 31, 2004 Sales $ Cost of Goods Sold Finished Goods Inventory, Beginning Cost of Goods Manufactured Total Goods Available for Sale Finished Goods Inventory, Ending $ ____________ $ ____________ Less: Cost of Goods Sold (___________) Gross Margin $ Less: Selling and administrative expenses: $ ____________ Total Selling & Administrative Expenses (___________) Net Income $ Cost Handy Handbook Page - 31 - . McGraw Second Edition HANNIBAL COMPANY (Cost Flows) The following information is available for Hannibal Company: Raw materials purchased Raw materials inventory, 1-1-1993 Raw materials inventory, 12-31-1993 Direct labor Indirect labor Factory rent Depreciation, factory equipment Factory utilities Sales salaries Sales commissions Administrative costs Sales revenue Work in process inventory, 1-1-1993 Work in process inventory, 12-31-1993 Finished goods inventory, 1-1-1993 Finished goods inventory, 12-31-1993 $160,000 $23,400 $33,400 $100,000 $20,000 $21,000 $30,000 $5,978 $55,000 $38,000 $61,000 $600,000 $6,520 $7,498 $40,000 $57,050 Required: Calculate the cost of goods manufactured, cost of goods sold, and net income for Hannibal Co. Cost Handy Handbook Page - 32 - McGraw Second Edition HANNIBAL COMPANY Calculations ... Cost Handy Handbook Page - 33 - McGraw Second Edition BOB’S BEEF BOY (Cost Flows) Bob, the owner and sole proprietor of Bob’s Beef Boy, sells hamburgers for carry out or drive through only. The restaurant is known for the high quality of the meat used in the burgers, and for the kaiser roll used in place of the normal hamburger bun. Each Hamburger sells for $3.99. Bob employs several part-time employees and a full-time manager. He leases the building and hires a cleaning company to provide services on a weekly basis. The manager, who is paid a monthly salary, carries out all administrative functions such as hiring, scheduling, and counting cash. Bob purchases the ingredients needed to make hamburgers on a weekly basis to ensure its freshness; thus, there were no inventory balances at the beginning or the end of the year. During the year 1997 the following expenses were incurred: Ground meat Lettuce Tomatoes Kaiser rolls Condiments Part-time labor, cooks Part-time labor, servers Wrapping paper and bags $54,000 (No accusations here about “Where’s the beef!?”) 6,750 Manager’s salary $41,000 7,500 Utilities 22,500 9,250 Depreciation, grill 7,000 2,650 Depreciation, signs 3,250 66,400 Advertising 3,500 53,000 Rent 25,000 2,400 Cleaning services 6,800 Bob’s restaurant sold 120,000 hamburgers during 1997. Required: 1. Classify each cost as being a product cost (specify either direct materials, direct labor, or manufacturing overhead) or as being a period cost. 2. Use T-accounts to show the flow of costs and revenues for Bob’s Beef Boy. 3. Prepare an income statement for the year. Cost Handy Handbook Page - 34 - McGraw Second Edition BOB’S BEEF BOY Calculations ... Cost Handy Handbook Page - 35 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 36 - McGraw Second Edition BILLY’S BOAT BONANZA, INC. (Classifying Costs) Billy’s Boat Bonanza, Inc. assembles custom sailboats from components supplied by various manufactures. The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse. Below are listed some of the costs that are incurred at the company. Required: For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, marketing and selling, or an administrative cost by placing an X in the appropriate box. Direct Labor Direct Materials Mfg. Overhead Marketing & Selling Admin. Cost 1. The wages of employees who build the sailboats. 2. The cost of advertising in the local newspapers. 3. The cost of an aluminum mast installed in a sailboat. 4. The wages of the assembly shop’s supervisor. 5. Rent on the boathouse. 6. The wages of the company’s bookkeeper. 7. Sales commissions paid to the company’s salespeople. 8. Depreciation on power tools. Cost Handy Handbook Page - 37 - McGraw Second Edition DUNCAN’S AVIONICS (Classifying Costs) Suppose that you have been given a summer job at Duncan’s Avionics, a company that manufacturers sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its tremendous growth. The bank requires financial statements before approving such a loan. You have been asked to help prepare the financial statements and were given a list of costs. Required: Classify the following costs as either product (inventoriable) costs or period (noninventoriable) costs for purposes of preparing the financial statements for the bank by placing an X in the appropriate box. Product Period 1. The cost of the memory chips used in a radar set. 2. Factory heating costs. 3. Factory equipment maintenance costs. 4. Training costs for new administrative employees. 5. The cost of the solder that is used in assembling the radar sets. 6. The travel costs of the company’s salespersons. 7. Wages and salaries of factory security personnel. 8. The cost of air-conditioning executive offices. 9. Wages and salaries in the department that handles billing customers. 10. Depreciation on the equipment in the fitness room used by factory workers. 11. Telephone expenses incurred by factory management. 12. The costs of shipping completed radar sets to customers. 13. The wages of the workers who assemble the radar sets. 14. The president’s salary. 15. Health insurance premiums for factory personnel. Cost Handy Handbook Page - 38 - McGraw Second Edition GLOBAL, INC. (Classifying Costs) Below are a number of costs that are incurred by Global, Inc., a corporation involved in several industries. Required: In the following table, place an X in the appropriate column for each cost to indicate whether the cost involved would be variable or fixed with respect to the goods and services produced by the organization. Cost Behavior Cost 1. Small glass plates used for lab tests in a hospital. Variable Fixed 2. Straight-line depreciation of a building. 3. Top-management salaries. 4. Electrical costs of running machines. 5. Advertising of products and services. 6. Batteries used in manufacturing trucks. 7. Commissions to salespersons. 8. Insurance on a dentist’s office. 9. Leather used in manufacturing footballs. 10. Rent on a medical center. Cost Handy Handbook Page - 39 - McGraw Second Edition MOORE COMPUTERS (Variable and Fixed Costs) A partial list of sales and cost data is presented below for the Moore Computers for the calendar year 2003. Sales Direct materials (Used) Direct labor Indirect labor (Fixed) Factory insurance (Fixed) Depreciation—Factory Repairs and maintenance—Factory (Variable) Marketing expenses (Variable) General and administrative expenses (Fixed) $500,000 $60,000 $45,000 $25,000 $12,000 $80,000 $15,000 $66,000 $55,000 Required: Calculate Moore Computer’s net income using both the absorption costing format and the variable costing format. Cost Handy Handbook Page - 40 - McGraw Second Edition MOORE COMPUTERS Calculations… Cost Handy Handbook Page - 41 - McGraw Second Edition PACIFIC COAST HOME FURNISHINGS (Cost Flows) Consider the following information for Pacific Coast Home Furnishings for the year ended December 31, 2006: Depreciation expense—Administrative office Depreciation expense—Plant and equipment Direct labor—Wages Direct materials inventory, Dec. 31, 2006 Direct materials inventory, Jan. 1, 2006 Direct materials purchases Finished goods inventory, Dec 31, 2006 Finished goods inventory, Jan. 1, 2006 Heat, light, & power—Plant Indirect labor Property taxes—Plant Sales representatives’ salaries Sales revenue Factory Supervisor’s salary Supplies—Administrative office Supplies—Plant Work-in-Process inventory, Dec. 31, 2006 Work-in-Process inventory, Jan. 1, 2006 $42,900 $114,400 $633,100 $32,500 $23,400 $201,500 $49,400 $19,500 $57,200 $32,500 $44,200 $188,500 $1,950,000 $85,800 $20,800 $37,700 $11,700 $29,900 Required: Prepare a schedule of cost of goods manufactured and a statement of net income (in good form) for the year ended December 31, 2006. Helpful Hint: First prepare the calculations using t-accounts, and then prepare the required schedules using the information from the t-accounts. Please turn in all your work (t-accounts and statements). Cost Handy Handbook Page - 42 - McGraw Second Edition PACIFIC COAST HOME FURNISHINGS Calculations… Cost Handy Handbook Page - 43 - McGraw Second Edition PACIFIC COAST HOME FURNISHINGS Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2006 Direct materials used: Direct materials inventory, 1-1-2006 $ Add: Purchases of direct materials ____________ Total materials available $ Deduct: Direct materials inventory, 12-31-2006 (___________) Direct materials used in production $ Direct labor $ Manufacturing overhead $ ____________ Total factory overhead $___________ Total manufacturing costs incurred $ Add: Beginning work in process inventory ____________ Total manufacturing costs to account for $ Deduct: Ending work in process inventory (___________) Cost of Goods Manufactured $ Cost Handy Handbook Page - 44 - . McGraw Second Edition PACFIC COAST HOME FURNISHINGS Income Statement For the Year Ended December 31, 2006 Sales $ Cost of Goods Sold Finished Goods Inventory, Beginning Cost of Goods Manufactured Total Goods Available for Sale Finished Goods Inventory, Ending $ ____________ $ ____________ Less: Cost of Goods Sold (___________) Gross Margin $ Less: Selling and administrative expenses: $ ____________ Total Selling & Administrative Expenses (___________) Net Income $ Cost Handy Handbook Page - 45 - . McGraw Second Edition This page left blank Cost Handy Handbook Page - 46 - McGraw Second Edition BREAKEVEN (C-V-P) What is the GOAL of any business? How does a business accomplish this GOAL? C-V-P analysis seeks the most profitable combination of … Love itself is love’ chief nourishment. SEXTUS PROPERTIUS (c. 50—16 B.C.), Poet Cost Handy Handbook Page - 47 - McGraw Second Edition BREAKEVEN (C-V-P) How do costs behave … In Total How do costs behave … Per Unit Cost Handy Handbook Page - 48 - McGraw Second Edition BREAKEVEN (C-V-P) The Relevance of the Relevant Range DESIGNATED DOODLE ZONE There will always be a conflict between “good” and “good enough”. HENRY MARTYN LELAND (1843—1932), Engineer Cost Handy Handbook Page - 49 - McGraw Second Edition BREAKEVEN (C-V-P) What kind of Cost is this? Chance favours only those who know how to court her. CHARLES NICHOLLE (1866—1936), Physician and Scientist Cost Handy Handbook Page - 50 - McGraw Second Edition BREAKEVEN (C-V-P) Variable Costing information is necessary for breakeven calculations! Variable Costing Income Statement: VC Ratio = CM Ratio = Do the common thing in an uncommon way. BOOKER T. WASHINGTON (1856—1943), Educator Cost Handy Handbook Page - 51 - McGraw Second Edition BREAKEVEN (C-V-P) C-V-P Intuition: Cost Handy Handbook Page - 52 - McGraw Second Edition BREAKEVEN (C-V-P) Let us think about this a little more! What is the effect on Breakeven of … 1. A change in _________________________ ? 2. A change in _________________________ ? 3. A change in _________________________ ? DESIGNATED DOODLE ZONE Every creative act of ours in relation to other people—an act of love, of help, of peacemaking—not merely has a future, but is eternal. NIKOLAY BERDYAYEV (1874—1948), Philosopher Cost Handy Handbook Page - 53 - McGraw Second Edition BREAKEVEN (C-V-P) Margin of Safety, and more! Margin of Safety = A Handful of Handy Formulas: MS($) = Actual Revenue – Breakeven Revenue MS Ratio = (Actual Revenue – Breakeven Revenue) Actual Revenue ________ is GOOD! Operating Leverage = Contribution Margin / Profit MS Ratio = 1 / Operating Leverage DESIGNATED DOODLE ZONE You have your way. I have my way. As for the right way, the correct way, and the only way, it does not exist. FRIEDRICH NIETZCHE (1844—1900), Philosopher Cost Handy Handbook Page - 54 - McGraw Second Edition BREAKEVEN (C-V-P) The Effect of Taxes … When including desired profit in a “breakeven” calculation, is this desired profit before/after tax?? A Handy of Formula: NIBT = NIAT . (1 – Tax Rate) DESIGNATED DOODLE ZONE When we have done our best, we may await the result without anxiety. JOHN BULLOCK (1834—1913), Financier and naturalist Cost Handy Handbook Page - 55 - McGraw Second Edition BREAKEVEN (C-V-P) Multi-Product Breakeven NOTE TO “SELF”! [Cost Acccounting Students Only] See problem: ____________________________ On page _________ of the Handy Handouts For an example of multi-product breakeven. My mother read me bedtime stories until I was six years old. It was a sneak attack on her part. As soon as I really got to like the stories, she said, “Here’s the book, now you read.” OCTAVIA BUTLER (1947—2006), Novelist When [my mother] was dying, talking to me, she said: “Always try to be kind and nice to people. And if you do that, somebody will always speak up for you.” And I’ve found that to be a fact. They really do. B. B. KING, Musician Cost Handy Handbook Page - 56 - McGraw Second Edition BREAKEVEN (C-V-P) What would you describe as the theme of these quotes? The harder you work, the harder it is to surrender. VINCE LOMBARDI I pray hard, work hard, and leave the rest to God. FLORENCE GRIFFITH JOYNER Work is a good word. When we work hard at something we enjoy and feel good about it, we feel good about ourselves again and again and again. MIKE KRZYZEWSKI Work Hard. There is no short cut. ALFRED P. SLOAN, JR. (1875-1966), Business leader and philanthropist Nothing will work unless you do. JOHN WOODEN The road to happiness lies in two simple principles: find what it is that interests you and that you can do well, and when you find it, put your whole soul into it, every bit of energy and ambition and natural ability you have. JOHN D. ROCKEFELLER, III If the power to do hard work is not talent, it is the best possible substitute for it. JAMES A. GARFIELD Cost Handy Handbook Page - 57 - McGraw Second Edition BREAKEVEN (C-V-P) REVIEW / SELF-QUIZ Do you know the answers to these questions?? Can you draw a graph of Fixed Costs in total? … Fixed Costs per unit? … Variable Costs in total? … Variable Costs per unit? … Mixed Costs in total? What formula can we use to draw a line in XY space? What is the Variable Costing income statement format? How does one calculate the VC Ratio in total? … per unit? How does one calculate the CM Ratio in total? … per unit? Does is CM calculated in total? … per unit? The following formulas are important: (why don’t you fill them in here) BE(units) = BE($) = SPU(x) = TR = MS($) = MS Ratio = NIBT = Cost Handy Handbook Page - 58 - McGraw Second Edition STONE MONUMENT COMPANY (A) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: 1. Determine the breakeven point in units and dollars. 2. What is Stone Monument Co.’s breakeven point as a percentage of normal capacity? Cost Handy Handbook Page - 59 - McGraw Second Edition STONE MONUMENT COMPANY (B) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: 1. How many units must be sold to earn a net income of $1,400,000? 2. What dollar value of sales must be earned to earn a net income of $1,400,000? Cost Handy Handbook Page - 60 - McGraw Second Edition STONE MONUMENT COMPANY (C) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: 1. How many units must be sold to earn a net income of 25 percent of sales? 2. What dollar value of sales must be earned to earn a net income of 25 percent of sales? Cost Handy Handbook Page - 61 - McGraw Second Edition STONE MONUMENT COMPANY (D) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: 1. How many units must be sold to earn a net income of $400 per unit? 2. What dollar value of sales must be earned to earn a net income of $400 per unit? Cost Handy Handbook Page - 62 - McGraw Second Edition STONE MONUMENT COMPANY (E) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: At what price per unit must the headstones be sold in order for the Stone Monument Company to earn a net income of $21,000,000? Cost Handy Handbook Page - 63 - McGraw Second Edition STONE MONUMENT COMPANY (F) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: 1. If Stone Monument Company has a “Normal” year, what is the company’s margin of safety? 2. If Stone Monument Company has a “Normal” year, what is the company’s margin of safety ratio? Cost Handy Handbook Page - 64 - McGraw Second Edition STONE MONUMENT COMPANY (G) (Breakeven) Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of Stone Monument Company. Variable manufacturing costs Selling & general variable costs Total variable costs The company’s annual fixed costs are: Manufacturing overhead Selling & general administrative Total $800 per headstone 200 per headstone $1,000 per headstone $4,500,000 1,500,000 $6,000,000 The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing facility is 20,000 headstones per year. Required: Net income taxes for Stone Monument Company have been averaging 30 percent and are not expected to change. 1. How many units must Stone Monument Co. sell to earn an after-tax profit of $1,400,000? 2. What dollar value of sales must Stone Monument Co. earn to earn an after-tax profit of $1,400,000? Cost Handy Handbook Page - 65 - McGraw Second Edition EAST MEETS WEST COMPANY (A) (Breakeven) East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set selling price at $10 per unit. Required: 1. Determine the breakeven point in units and dollars. 2. If East Meets West Company wants to earn a $15,000 profit on the sale of its compasses, find the number of units and sales revenue required to achieve this goal. Cost Handy Handbook Page - 66 - McGraw Second Edition EAST MEETS WEST COMPANY (B) (Breakeven) East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set selling price at $10 per unit. Management has decided that the number calculated in (A) is not realistic. That is, demand for the compasses is not strong enough and competition is too strong to allow East Meets West Company to sell 8,750 units. Instead, management wants to determine how many units would be required to achieve a profit of 15 percent of sales revenue. Notice above that variable cost is 60 percent of selling price and that management wants profit to be 15 percent of sales revenue. Required: Calculate the number of units and the sales revenue necessary to reach management’s goal. Cost Handy Handbook Page - 67 - McGraw Second Edition EAST MEETS WEST COMPANY (C) (Breakeven) East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set selling price at $10 per unit. East Meets West Company is faced with $.80 per unit increase in labor cost and wants to compensate for this by decreasing its fixed cost. It decides to give up some rented space and move all of its operations into its own plant, reducing fixed cost by $2,000. At the same time management believes that increasing the selling price of each unit by $.40 will not adversely affect demand for its product, and that a target profit of $9,000 can be maintained. Required: If all these changes are incorporated in the analysis, what is the number of units that must be produced and sold? Cost Handy Handbook Page - 68 - McGraw Second Edition EAST MEETS WEST COMPANY (D) (Breakeven) East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set selling price at $10 per unit. Income taxes are a percentage of net income. East Meets West is subject to a 30 percent tax rate and management seeks an after-tax profit of $8,400. Required: 1. Determine the breakeven point in units and dollars. 2. Determine the unit sales and revenue necessary to earn an after-tax income of $8,400. Cost Handy Handbook Page - 69 - McGraw Second Edition EAST MEETS WEST COMPANY (E) (Breakeven) East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set selling price at $10 per unit. The company’s managers want to determine the level of operations required to earn a profit of $12,000 before taxes. They also want to know if it would be more profitable to change the method of operations by automating part of the compass assembly and eliminating some of the direct labor currently required. The company faces two alternatives: maintain its current production operations or use the more automated production process. Selling price of the compass is $10 and East Meets West Company’s management has no plans to change the price. By changing the production process, the company would incur fixed costs of $27,500 per year and variable costs of $5 per compass. Required: Determine which of the two production alternatives is preferable by examining the margin of safety ratio for both alternatives. Cost Handy Handbook Page - 70 - McGraw Second Edition SADLY CORPORATION (Breakeven) The following data are expected for Sadly Corporation’s in 2003: Sales price (SP) per unit Fixed costs (FC) Contribution margin (CM) $10 $300,000 50% of sales Required: 1. Determine the breakeven point in units. 2. Determine the breakeven point in dollars. Cost Handy Handbook Page - 71 - McGraw Second Edition THE HAT SOURCE (Breakeven) The Hat Source operates a chain of women’s hat stores around the country. The stores carry many styles of hats that are sold at the same price. Sales personnel in the shops are paid a substantial commission on each hat sold (in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts. The following cost and revenue data relate to Store 47 in Kansas City and are typical of one of the company’s many outlets: Per Hat $ 30.00 Sales price Variable expenses: Invoice cost Sales commission Total variable expenses $ 13.50 4.50 $ 18.00 Annual Fixed expenses: Advertising Rent Salaries Total fixed expenses $ 30,000 20,000 100,000 $150,000 Required: 1. Calculate the annual break-even point in dollar sales and unit sales for Store 47. 2. Suppose the manager of Store 47 wants to make $30,000 of net income. How does this the change the breakeven calculation? Cost Handy Handbook Page - 72 - McGraw Second Edition JOLLY ROGER CANDIES (Breakeven) The following information is available for Jolly Roger Candies and the Ocean Blue Candy production process. Price of item Variable costs Contribution margin Total fixed costs Per Unit $4 3 $1 $400 Required: 1. How many units must be sold in order to make a profit before taxes of $300? 2. What would the profit before taxes be if the sale volume increased 20% above the breakeven point? 3. If the variable costs (VC) increase to $3.50 per unit, how many units must be sold to make a profit after taxes of $300 (assume a 40% tax rate). Cost Handy Handbook Page - 73 - McGraw Second Edition HOWARD'S LIMITED (Breakeven) The management of Howard's Ltd. is involved in the preliminary analysis of a potential new product. The product will sell for $35 per unit and requires variable costs of $20 per unit. Fixed costs are anticipated to be $30,000 per month. Required: Answer each of the following independent questions: 1. What is the breakeven point in units? In dollars? 2. What annual dollar sales volume would be needed to earn $510,000 before taxes? 3. What is the margin of safety ratio for question 2? 4. How many units must be sold each month to earn an annual after tax profit of $864,000? The tax rate is 40%. Cost Handy Handbook Page - 74 - McGraw Second Edition CLEAR TOYS (Breakeven) Clear Toys is preparing next year's budget for one of their stores. The store has a contribution margin ratio of 60% and its fixed costs are $18,000. Required: (Treat each part separately) 1. If sales increase by $12,000 above the breakeven point, how much will income increase? 2. If the advertising budget is increased by $6,000, it is estimated that sales will increase by $9,000. Should the additional advertising be purchased? 3. If salaries are increased by $3,000, how much must sales be increased to cover the increased cost? 4. It is estimated that sales will increase from 12,000 to 18,000 units if the unit sales price is reduced from $10 to $8 and advertising is increased by $2,000. Is it profitable to do so? Cost Handy Handbook Page - 75 - McGraw Second Edition CASSIDY COMPANY (Breakeven) Cassidy Company makes a deluxe product CASS for special orders. The following are the actual results of operations in 1996. Sales revenue Direct materials used Direct labor costs Variable overhead cost Contribution margin Gross margin Total fixed costs Fixed overhead Variable selling and administrative costs $ 500,000 210,000 140,000 30,000 100,000 70,000 110,000 ? ? Required: 1. Determine the total variable costs of production. 2. Determine the full manufacturing costs for 1996. 3. What is the total variable selling and administrative costs? 4. What is the fixed overhead costs for 1996? 5. Determine the breakeven sales dollars for 1996. 6. What is the operating leverage for 1996? Cost Handy Handbook Page - 76 - McGraw Second Edition CASSIDY COMPANY Calculations ... Cost Handy Handbook Page - 77 - McGraw Second Edition DEERING BANJO COMPANY (Multiple-Product Breakeven) Deering Banjo Company manufactures two basic models of banjos: the Boston and the Deluxe. The Deluxe is Deering's professional model of banjo and uses higher quality materials and is more carefully crafted. More information on these products is provided below. Boston Deluxe Selling Price $1,200 $5,000 Variable Costs $700 $2000 Fixed costs of $3,000,000 are incurred annually. The expected mix of the banjos is 60% Boston and 40% Deluxe. Required: 1. Calculate breakeven in units for the Deering Banjo Company. 2. Calculate breakeven revenue for the Deering Banjo Company. Cost Handy Handbook Page - 78 - McGraw Second Edition ALCATRAZ ARTIFACTS (Multiple-Product Breakeven) Alcatraz inmates produce three artifacts, the “Al”, the “Cat”, and the “Raz”. More information is provided below. Sales in units Selling price per unit Variable cost per unit Total fixed cost “Al” 2,000 $20 $16 Artifacts “Cat” 3,000 $50 $36 “Raz” 5,000 $40 $28 Total 10,000 $77,000 Required: 1. Calculate the breakeven point in units and dollars. 2. What is the breakeven point if the sales mix of artifacts “Al” and “Cat” is 40% each, leaving “Raz” with 20% of total sales? Cost Handy Handbook Page - 79 - McGraw Second Edition PHONY PHONES COMPANY (Multiple-Product Breakeven) Phony Phones Company sells landline telephones. Phony Phones has three products, Corded, 2.4 GHz, and 5.8 GHz. Relevant information for these products are as follows: Last period’s sales Percent of sales Price Unit variable cost Contribution margin Corded $750,000 50% $30 24 $ 6 2.4 GHz $600,000 40% $32 24 $ 8 Total fixed cost 5.8 GHz $150,000 10% $40 36 $ 4 Total $1,500,000 100% $165,000 Required: 1. Calculate the breakeven point in units and dollars. 2. What sales level will the store need to reach a target after-tax profit of $59,400? Assume a tax rate of 40%. Cost Handy Handbook Page - 80 - McGraw Second Edition PHONY PHONES COMPANY Calculations ... Cost Handy Handbook Page - 81 - McGraw Second Edition [Based on a homework problem that Dr. Fessler completed as a cost accounting student (CMA, adapted)] ABTEX ELECTRONICS (Multiple-Product Breakeven) Abtex Electronics manufactures two products -- tape recorders and electronic calculators -- and sells them nationally to wholesalers and retailers. Abtex management is very pleased with the company’s performance for the current fiscal year. Projected sales through December 31, 1997, indicate that 70,000 tape recorders and 140,000 electronic calculators will be sold this year. The projected earnings statement, which appears below, shows that Abtex will exceed its earnings goal of 9% on sales after taxes. ABTEX ELECTRONICS Projected Earnings Statement for the Year Ended December 31, 1997 TAPE ELECTRONIC RECORDERS CALCULATORS Total Total Amount Per Amount Per (000s) Unit (000s) Unit Sales $1,050 $15.00 $3,150 $22.50 Production Costs: Materials $ 280 $ 4.00 $ 630 $ 4.50 Direct labor 140 2.00 420 3.00 Variable overhead 140 2.00 280 2.00 Fixed overhead 70 1.00 210 1.50 Total prod. costs $ 630 $ 9.00 $1,540 $11.00 Gross margin $ 420 $ 6.00 $1,610 $11.50 Fixed selling and admin. NI before income taxes Income taxes (55%) Net income Total (000s) $4,200.0 $ 910.0 560.0 420.0 280.0 $2,170.0 $2,030.0 1,040.0 $ 990.0 544.5 $ 445.5 The tape recorder business has been fairly stable the last few years, and the company does not intend to change the tape recorder price. However, the competition among manufacturers of electronic calculators has been increasing. Abtex’s calculators have been very popular with consumers. In order to sustain this interest in its calculators and to meet the price reductions expected from competitors, management has decided to reduce the wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 1998. At the same time the company plans to spend an additional $57,000 on advertising during fiscal year 1998. As a consequence of these actions, management estimates that 80% of its total revenue will be derived from calculator sales as compared with 75% in 1997. As in prior years, the sales mix is assumed the same at all volume levels. (That is, the sales mix in units will not necessarily be the same as in 1997; however, the sales mix in 1998 will be constant no matter what volume levels occur.) The total fixed overhead costs will not change in 1998, nor will the variable overhead cost rates (applied on a direct-labor-hour base). However, the cost of materials and direct labor is expected to change. The cost of solid state electronic components will be cheaper in 1998. Abtex estimates that material costs will drop 10% for the tape recorders and 20% for the calculators in 1998. However, direct labor costs for both products will increase 10% in the coming year. Variable overhead rates will be unchanged at $2.00 per unit. Required: 1. How many tape recorder and electronic calculator units did Abtex Electronics have to sell in 1997 to break even? 2. How many tape recorder and electronic calculator units will Abtex have to sell in 1998 to break even? Cost Handy Handbook Page - 82 - McGraw Second Edition ABTEX ELECTRONICS Calculations ... Cost Handy Handbook Page - 83 - McGraw Second Edition ABTEX ELECTRONICS Calculations ... Cost Handy Handbook Page - 84 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 85 - McGraw Second Edition BAGS AND MORE (Breakeven) Bags And More is the exclusive distributor for a revolutionary bookbag. The product sells for $60 per unit and has a CM ratio of 40%. The company’s fixed expenses are $360,000 per year. Required: 1. What are the variable expenses per unit? 2. Using the equation method: a. What is the break-even point in units and in sales dollars? b. What sales level in units and in sales dollars is required to earn an annual profit of $90,000? c. Assume that through negotiation with the manufacturer Bags And More is able to reduce its variable expenses by $3 per unit. What is the company’s new break-even point in units and in sales dollars? Cost Handy Handbook Page - 86 - McGraw Second Edition BAGS AND MORE Calculations… Cost Handy Handbook Page - 87 - McGraw Second Edition LANDIS PLAYHOUSES (Breakeven) Susan Landis has a small plant that makes playhouses. She sells them to local customers at $3,000 each. Her costs are as follows: Costs Direct material -------------------------------Direct labor -----------------------------------Variable overhead --------------------------Variable selling ------------------------------Fixed production overhead ----------------Fixed selling and administrative ----------- Per Unit $1,200 $ 400 $ 150 $ 50 Total $200,000 $80,420 Susan is in a 35 percent tax bracket. Required: 1. How many playhouses must she sell to earn $495,014 after taxes? 2. What level of revenue is needed to yield an after-tax income equal to 20 percent of sales? Cost Handy Handbook Page - 88 - McGraw Second Edition LANDIS PLAYHOUSES Calculations… Cost Handy Handbook Page - 89 - McGraw Second Edition GREEN SODA (Breakeven) One of the products produced by Green Soda is Lime Blast. The selling price per half-gallon is $4.50, and variable cost of production is $2.70. Total fixed costs per year are $316,600. The company is currently selling 200,000 half-gallons per year. Required: 1. What is the margin of safety in dollars? 2. What is the degree of operating leverage? 3. If the company can increase sales in units by 30 percent, what percentage increase will it experience in income? Prove your answer using the income statement approach. 4. If the company increases advertising by $41,200 sales in units will increase by 15 percent. What will be the new break-even point in units and in dollars? The new degree of operating leverage? Cost Handy Handbook Page - 90 - McGraw Second Edition GREEN SODA Calculations… Cost Handy Handbook Page - 91 - McGraw Second Edition BAREFOOT BOOKS (Multiple-Product Breakeven) Barefoot Books is a small book store that rents space in a neighborhood shopping mall for $19,200 a year. Its utilities add another $7,680 yearly. The total staff salaries and benefits projected for next year equal $56,000. Barefoot Books also spends $900 on advertising and $2,400 on professional services. Other overhead expenses total $11,500. John Couch, the company’s owner, would like to make a $26,640 profit after taxes next year, when her tax rate will be 40 percent. The store sells hardbound books, paperback books, and magazines. The average variable cost of each category of items and Barefoot’s markup on variable cost is $12.00 and 50 percent, hardbacks; $2.40 and 25 percent, paperbacks; and $2.00 and 60 percent, magazines. In past years, 70 percent of the store’s sales revenue came from hardback books, 20 percent from paperbacks, and the remaining 10 percent from magazines. Required: 1. What is the contribution margin of each sales item? 2. What are the store’s projected fixed costs for next year? 3. What is the breakeven point (in dollars) for Barefoot Books to achieve zero profit? 4. What sales level will the store need to reach the target after-tax profit? Cost Handy Handbook Page - 92 - McGraw Second Edition BAREFOOT BOOKS Calculations… Cost Handy Handbook Page - 93 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 94 - McGraw Second Edition RELEVANT COSTS Relevant Cost Sunk Cost Opportunity Cost Incremental Cost The main idea in golf as in life, I suppose, is to learn to accept what cannot be altered, and to keep on doing one’s reasoned and resolute best whether the prospect be bleak or rosy. BOBBY JONES (1902—1971), Professional golfer Cost Handy Handbook Page - 95 - McGraw Second Edition RELEVANT COSTS Handy Notes: Examples of Decisions made using Relevant Cost thought: 1. Machine replacement 2. Make or buy 3. Keep or drop (a product line) 4. Special orders 5. Scarce resources 6. Sell now or process further IN A NUTSHELL … I believe that every right implies a responsibility; every opportunity, an obligation; every possession, a duty. JOHN D. ROCKEFELLER, JR. (1874—1960), Business executive and philanthropist Cost Handy Handbook Page - 96 - McGraw Second Edition RELEVANT COSTS Some Relevant Quotes (pun intended): Bankers, being human, are reluctant to admit mistakes…. One way to hide a little mistake is to bury it under a bigger one. So Bankers cure a problem loan by lending more money to the source of the problem…. -- Bill Dutcher, “Confessions of a Penn Square Borrower” The Wall Street Journal August 15, 1985, p. 24 To terminate a project in which $1.1 billion has been invested represents an unconscionable mishandling of taxpayers’ dollars. -- Senator Denton, November 4, 1981 Completing Tennessee-Tombigbee [Waterway Project] is not a waste of taxpayer dollars. Terminating the project at this stage of development would, however, represent a serious waste of funds already invested. -- Senator Sasser, November 4, 1981 When it comes down to it, no one with any sense would abort a $2.5 billion construction project. And, by extension, no administration would abort a $200 billion national investment in nuclear energy. So the trick for the industry is to get more new plants under construction without the (anti-nuclear) movement knowing about it. By the time they get around to demonstrating and challenging the license, we’ll have a million tons of steel and concrete in the ground, and no one in their right mind will stop us. -- M. Dowie, “Atomic Psyche-Out” Mother Jones, 6, p. 23 (1981) Cost Handy Handbook Page - 97 - McGraw Second Edition RELEVANT COSTS REVIEW / SELF-QUIZ Do you know the answers to these questions?? What is a Relevant Cost? What is a Sunk Cost? Are sunk costs relevant? What is an Opportunity Cost? Are opportunity costs relevant? What types of decisions can be/are made using relevant cost thought? Vitality shows in not only the ability to persist but the ability to start over. F. SCOTT FITZGERALD (1896—1940), Writer Unshared joy is an unlighted candle. SPANISH PROVERB Cost Handy Handbook Page - 98 - McGraw Second Edition JOE SLOW (Classifying Relevant and Irrelevant Items) Joe Slow is a salesperson for Forrester Fine Foods. He is considering a 250-mile trip to visit a potential customer, Finding Foodstore. Following are factors he is pondering. Hmmm. 1. __________ The cost of traveling the 250 miles to Finding Foodstore. 2. __________ The time he will spend on the road. 3. __________ The time he will spend visiting with Finding Foodstore executives. 4. __________ The amount of time already devoted to Finding Foodstore. 5. __________ The revenue potential from Finding Foodstore. 6. __________ The cost of his last visit to Finding Foodstore. 7. __________ The probability that his visit will result in new sales. 8. __________ The cost of lunch for himself if he visits Finding Foodstore. 9. __________ The cost of lunch he would buy for Finding Foodstore executives. Required: For each item listed, indicate whether it is relevant (R) or irrelevant (I). Cost Handy Handbook Page - 99 - McGraw Second Edition JUDE LAW & ASSOCIATES (Relevant Costs) MACHINE REPLACEMENT Jude Law & Associates, a local law firm, purchased and installed a new computer system two weeks ago at a cost of $35,500. Later Jude’s brother, John, stopped by the law office to say hello. While there, he noticed the new system. He remarked that it is too bad the system was not the latest and quickest because, if it were, the data input time would be cut in half. John suggested that Jude consider updating his system. Jude responded that he cannot because he just purchased the system two weeks ago. Perhaps Jude should reconsider. Both systems have a useful life of 5 years. Old System New System Start up: Cost of system $35,500 $76,000 Operating: Annual depreciation Annual labor cost Annual maintenance cost $ 7,000 36,000 1,000 $15,000 18,000 1,000 Shutdown: Residual value of system Current sale price of old system $ 500 10,000 $ 1,000 Required: Should Jude Law keep the old system or purchase the new one? Cost Handy Handbook Page - 100 - McGraw Second Edition TIGÉR BOATS (Relevant Costs) SPECIAL ORDER Tigér Boats has been in business in Abilene, Texas, since 1995. Tigér Boats sells to boat stores around the world. A representative for Boats Inc., the largest chain of boat retail stores in the U.S., approached the owner of Tigér Boats, Bill Bird, interested in purchasing 1,000 boats for $12,500 each. The largest previous order was for 100 boats, so this large order requires special consideration. The $12,500 offer from Boats Inc. is much less than Tigér Boat’s normal selling price of $16,000 per boat. In fact, the boats cost $13,000 to produce, so the company would lose $500 per boat if it accepts the offer by Boats Inc. Expected sales (5,500 units at $16,000 each) Less: Cost of goods sold (see detail below) Expected gross margin $88,000,000 (71,500,000) $16,500,000 Detailed calculation of cost of goods sold: Number of units Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost of goods sold Per Unit 1 Total 5,500 $ 5,000 5,500 1,000 1,500 $13,000 $27,500,000 30,250,000 5,500,000 8,250,000 $71,500,000 Required: Should Bill Bird accept or reject the offer? Cost Handy Handbook Page - 101 - McGraw Second Edition APPLE APPLIANCES (Relevant Costs) MAKE OR BUY You are the production manager at Apple Appliances, a company that produces convection ovens. A vendor has approached you about supplying the timer assemblies for the convection ovens for $12 each. Apple currently makes its own timers; your research reveals that the company uses 80,000 timers each year and they cost $14 each to produce in-house. Number of timers produced each year Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost of goods sold 80,000 Per Unit $ 5 4 1 4 $14 Total $ 400,000 320,000 80,000 320,000 $1,120,000 Required: Should you accept or reject the offer? Cost Handy Handbook Page - 102 - McGraw Second Edition TINA’S BEST CHOCOLATE (A) (Relevant Costs) SELL NOW OR PROCESS FURTHER Among its many products, Tina Noel’s privately held company imports cocoa beans and processes them into cocoa powder and cocoa butter. A portion of the cocoa powder is used in the production of chocolate candy; the remainder of the cocoa powder is sold to Jerry & Ed’s Ice Cream for use in ice cream production. Tina is considering the possibility of processing the remaining cocoa powder into an instant cocoa mix that she will sell under the Tina’s Best brand. Cocoa butter sales value: $750 for ¾ ton Purchase Cocoa Beans: $500 per ton Joint production costs: $600 per ton Total joint costs: $1,100 per ton Cocoa powder sales value: $500 for ¼ ton Additional processing cost: $800 for ¼ ton Instant cocoa sales value: $2,000 for ¼ ton Required: Should Tina sell the cocoa powder to Jerry & Ed’s or process further and sell as an instant cocoa mix? Cost Handy Handbook Page - 103 - McGraw Second Edition TINA’S BEST CHOCOLATE (B) (Relevant Costs) SCARCE RESOURCES Tina’s production facility in Hillsboro, Kansas, makes two candy products, The Light and The Dark. Plant capacity is limited by its available machine time, only 700 hours are available in the plant each month. The company can sell as many cases of each candy as it produces. Cost per Case: The Light The Dark Machine hours required per case ………………… .02 MH ……… .05 MH Sales price ……………………………………….. Less: Variable costs: Direct material ………………………………… Direct labor Variable overhead …………………………….. Variable S&A Total variable costs Contribution margin per case Less: Fixed costs (allocated at 25% of sales) …….. Net income per case $10.00 ………. $14.00 $ 3.00 ……… $ 3.75 2.00 2.50 3.00 ……… 3.75 1.00 2.00 $ 9.00 $12.00 $ 1.00 $ 2.00 .25 ……… .50 $ 0.75 $ 1.50 Required: Which product should Tina produce and sell? Cost Handy Handbook Page - 104 - McGraw Second Edition FUNK AND WAGNALL (Classifying Relevant and Irrelevant Items) Funk and Wagnall, attorneys at law, have been asked to represent a local client in proceedings to be held in San Francisco, California. Required: Classify each of the following items on the basis of their relationship to this engagement. Items may have multiple classifications. Relevant Costs Opportunity Outlay* 1. The case will require three attorneys to stay four nights in a San Francisco hotel. The predicted hotel bill is $1,200. 2. Funk and Wagnall’s professional staff is paid $800 per day for out-of-town assignments. 3. Last year, depreciation on Funk and Wagnall’s office was $12,000. 4. Round-trip transportation to San Francisco is expected to cost $600 per person for the engagement. 5. The firm has recently accepted an engagement that will require partners to spend two weeks in Dallas. The predicted out-of-pocket costs of this engagement are $8,500. 6. The firm has a maintenance contract on its word processing equipment that will cost $2,200 next year. 7. If the firm accepts the engagement in San Francisco, it will have to decline a conflicting engagement in Orlando that would have provided a net cash inflow of $7,200. 8. The firm’s variable overhead is $40 per client-hour. 9. The firm pays $150 per year for Mr. Funk’s subscription to a law journal. Irrelevant Costs Outlay* Sunk 10. Last year the firm paid $7,500 to increase the insulation in its building. * An outlay cost is a cost that requires a cash disbursement sooner or later. Cost Handy Handbook Page - 105 - McGraw Second Edition FRODO COMPANY (Relevant Costs) MACHINE REPLACEMENT Frodo Company is trying to determine whether or not to replace an old machine with a brand new machine with lower annual operating costs. Book value/cost Salvage value in 5 yrs. Annual operating cost Current resale value Remaining life Old Machine New Machine $30,000 $40,000 $0 $0 $15,000 $4,000 $2,000 N/A 5 yrs. 5 yrs. Required: Should Frodo Company keep the old machine or purchase the new one? Cost Handy Handbook Page - 106 - McGraw Second Edition TOLEDO TORPEDO COMPANY (Relevant Costs) MACHINE REPLACEMENT Toledo Torpedo Company is considering replacement of an existing machine used for finishing products. Annual revenue of $100,000 will not change regardless of the decision. Summary data on the existing machine and the new machine are as follows: Existing Machine 1. Initial cost of $120,000 (purchase made eight years ago) 2. Current book value of $40,000 ($120,000 minus accumulated depreciation of $80,000 using the straight-line method 3. Current disposal value of $4,000 4. Estimated remaining useful life of four years with zero terminal disposal value 5. Variable operating costs per year of $80,000 New Machine 1. Current purchase price of $60,000 2. Estimated useful life of four years with zero terminal disposal value 3. Variable operating costs per year of $56,000 Required: Should Toledo Torpedo Company keep the old machine or purchase the new one? Cost Handy Handbook Page - 107 - McGraw Second Edition HASSLE COMPANY (Relevant Costs) MAKE OR BUY Hassle Company produces ceramic teapots with wooden handles, and its production facility in Patchogue, NY has idle capacity (i.e., no opportunity cost). The 1998 budget specifies that 20,000 wooden handles will be required so the company can produce the same number of teapots. Costs to manufacture the handles are as follows: Direct Material $ .60 Direct Labor $ .40 Variable Mfg. Overhead $ .10 Fixed Mfg. Overhead $ .20 Total $1.30 Superb Handle Co. specializes in the production of wooden handles for ceramic teapots. Superb has offered to supply handles for $1.25 each. Required: Should Hassle Company MAKE the handles for use in teapot production, or BUY them from Superb Handle Co.? Cost Handy Handbook Page - 108 - McGraw Second Edition CALIFORNIA TEXTBOOKS (A) (Relevant Costs) MAKE OR BUY California Textbooks produces high-quality textbooks, and incurs the following costs for making the book covers. Direct materials Direct labor Variable overhead applied Fixed overhead applied Total costs COST OF MAKING COVERS Total Costs for Costs 10,000 units Per Unit $ 10,000 $ 1 80,000 8 40,000 4 50,000 5 $180,000 $18 Textbook-Covers-R-Us has offered to produce the textbook covers for a price of $16 each. If the textbook covers are purchased, $20,000 of fixed costs will be saved. Required: Should California Textbooks make or buy the textbook covers? Cost Handy Handbook Page - 109 - McGraw Second Edition CALIFORNIA TEXTBOOKS (B) (Relevant Costs) MAKE OR BUY California Textbooks produces high-quality textbooks, and incurs the following costs for making the book covers. Direct materials Direct labor Variable overhead applied Fixed overhead applied Total costs COST OF MAKING COVERS Total Costs for Costs 10,000 units per Unit $ 10,000 $ 1 80,000 8 40,000 4 50,000 5 $180,000 $18 Textbook-Covers-R-Us has offered to produce the textbook covers for a price of $16 each. If the textbook covers are purchased, $20,000 of fixed costs will be saved. Additionally, if the textbook covers are purchased, the released production facilities can be used to manufacture other products with a contribution margin of $19,000 or can be rented out for $5,000. California Textbooks now has four options: (1) Make, (2) Buy and leave facilities idle, (3) Buy and use facilities for other products, or (4) Buy and rent. Required: Which option is best for California Textbooks? Cost Handy Handbook Page - 110 - McGraw Second Edition ADAMS’ COMPANY (Relevant Costs) SCARCE RESOURCES Adams’ Company specializes in manufacturing titanium into bicycle frames and golf clubs, their only two product lines. A recent strike in Russia has stopped all production of this rare metal, but Adams’ foresaw this event occurring and has stockpiled 80,000 lbs. of titanium in inventory. No more titanium can be purchased for the foreseeable future and the managers at Adams’ Company must decide whether to use their titanium inventory to produce bicycle frames or to produce golf clubs. Bicycle Frames ------ $40/unit contribution margin, each frame requires 8 lbs. of titanium to produce Set of Golf Clubs ---- $32/unit contribution margin, each set of clubs requires 4 lbs. of titanium to produce Fortunately for Adams’ Company, everything they make can be sold regardless of which product they produce. Required: How many of each product should Adams’ Company make to maximize Income? Cost Handy Handbook Page - 111 - McGraw Second Edition SAM ENTERPRISES (Relevant Costs) SCARCE RESOURCES Sam Enterprises manufactures two products, Cans and Can-ettes. More information regarding these two products can be found below. Selling price per unit Variable expenses per unit Contribution margin per unit Contribution-margin ratio Cans $10 7 $ 3 30% Can-ettes $15 9 $ 6 40% Additionally, as the owner of Sam Enterprises, you know that you only have 1,000 hours of production capacity available. You can produce three Cans per hour but only one Can-ette per hour. Required: Which product should you choose to produce, Cans or Can-ettes? Show all supporting calculations. Cost Handy Handbook Page - 112 - McGraw Second Edition MOEHRLE MANUFACTURING (Relevant Costs) SPECIAL ORDER Moehrle Manufacturing makes computer monitors which sell for $150 each. Steve, the CEO of Moehrle Manufacturing, has received a special order to produce monitors with a special logo. The special logo would increase the production cost of each monitor by $5.00 over and above the normal costs to manufacture these computer monitors, as detailed below. Moehrle Manufacturing has excess capacity and so can fill this order without disturbing production for other customers. Costs to manufacture: Direct materials Direct labor Variable mfg. overhead Fixed mfg. overhead Total $45 $30 $30 $22 $127 Required: What is the minimum selling price Steve should accept for this order? Cost Handy Handbook Page - 113 - McGraw Second Edition TILLAMOOK CHEESE CO. (Relevant Costs) SELL NOW OR PROCESS FURTHER Tillamook Cheese Co. (TCC) produces not only cheese but also ice cream and butter in its facility in Tillamook, Oregon. Raw milk is the primary direct material used to produce all three products. Currently 40% of the TCC’s production is cheese, 50% is ice cream, and 10% is butter. You were recently hired as an accountant and were asked to determine if it would be more profitable instead to sell any of the raw milk as milk rather than use it to produce cheese, ice cream, or butter. Which products should be processed further?? Product: Sales value at split off (i.e., raw milk) Sales value if processed further Cost of further processing Cheese $400,000 $450,000 $ 17,000 Ice Cream $500,000 $679,000 $103,000 Butter $100,000 $110,000 $ 14,000 Joint costs (milk truck) $150,000 Joint costs are allocated by the sales value at split off Required: What product or products should Tillamook Cheese Co. continue to produce? Cost Handy Handbook Page - 114 - McGraw Second Edition TILLAMOOK CHEESE CO. Calculations ... Note: Tillamook Cheese Co. is the name of a real company, but all of the data in this problem are purely fictional. Cost Handy Handbook Page - 115 - McGraw Second Edition ANDRETTI COMPANY (Relevant Costs) Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labor Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses Total cost per unit $10.00 4.50 2.30 5.00 1.20 3.50 $26.50 ($300,000) ($210,000) Required: A number of questions relating to the production and sale of Daks are given below. Each question is independent. 1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year. The company could increase sales by 25 percent above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed expenses be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would b $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. You have been asked by the president to compute the per unit break-even price on this order. 3. The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be "seconds". Due to the irregularities, it will be impossible to sell these units at the regular price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price? 4. Due to a strike in its supplier's plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to continue to operate at 30 percent of normal levels for the two-month period. As an alternative, Andretti could close it plant down entirely for the two months. If the plant were closed, fixed overhead costs would continue at 60 percent of their normal level during the two-month period; the fixed selling costs would be reduced by 20 percent while the plant was closed. What would be the dollar advantage or disadvantage of closing the plant for the two month period? 5. An outside manufacturer has offered to produce Daks for Andretti Company and to ship them directly to Andretti's customers If Andretti Company accepts this offer, the facilities that is uses to produce Daks would be idle; however, fixed overhead costs would be reduced by 75 percent from their present level. Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be only two-thirds of their present amount. Compute the unit cost figure that is relevant for the comparison against whatever quoted price is received from the outside manufacturer. Cost Handy Handbook Page - 116 - McGraw Second Edition ANDRETTI COMPANY Calculations ... Cost Handy Handbook Page - 117 - McGraw Second Edition ANDRETTI COMPANY Calculations ... Cost Handy Handbook Page - 118 - McGraw Second Edition FABULOUS FURNITURE (Identifying Relevant Costs) A number of costs are listed below that may be relevant in decisions faced by the management of Fabulous Furniture, a furniture manufacturer: Case 1 Relevant Not Relevant Case 2 Relevant Not Relevant a. Sales revenue b. Direct materials c. Direct labor d. Variable manufacturing overhead e. Book value-Model A3000 machine f. Disposal value-Model A3000 machine g. Depreciation-Model A3000 machine h. Market value-Model B3800 machine (cost) i. Fixed manufacturing overhead (general) j. Variable selling expense k. Fixed selling expense l. General administrative overhead Required: Place an X in the appropriate column to indicate whether each item is relevant in the following situations. Requirement 1 relates to Case 1 above, and requirement 2 relates to Case 2. Consider the two cases independently. Case 1: The company chronically runs at capacity and the old Model A3000 machine is the company’s constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company’s present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead. Case 2: The old Model A3000 machine is not the company’s constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste. Cost Handy Handbook Page - 119 - McGraw Second Edition BOHR, INC. (Relevant Costs: Make or Buy) Bohr Inc. manufacturers machine parts for aircraft engines. CEO Billy Bohr is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $124,000. If Bohr does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: Costs per Unit $28 18 6 4 Direct materials Direct labor Variable manufacturing overhead Fixed overhead In addition to these costs, Bohr would also incur a retooling and design cost of $8,000 to produce part OP89. Required: Should Bohr, Inc. accept the offer from the subcontractor? Why or why not? Cost Handy Handbook Page - 120 - McGraw Second Edition PAULEY’S PARTS COMPANY (Relevant Costs: Disposal of Assets) Pauley’s Parts Company has an inventory of 2,000 different parts for a line of cars that has been discontinued. The net book value of inventory in the accounting records is $50,000. The parts can be either remachined at a total additional cost of $25,000 and then sold for $30,000 or sold as is for $2,500. Required: What should Pauley’s Parts Company do with these 2,000 car parts? Cost Handy Handbook Page - 121 - McGraw Second Edition GILLIGAN’S BOAT RENTALS (Relevant Costs: Asset Replacement) An uninsured boat costing $90,000 was wrecked the first day it was used. It can be either sold as is for $9,000 cash and replaced with a similar boat costing $92,000 or rebuilt for $75,000 and be brand new as far as operating characteristics and looks are concerned. Required: Should Gilligan’s Boat Rentals replace or fix the old boat? Cost Handy Handbook Page - 122 - McGraw Second Edition EARL CORPORATION (Relevant Costs: Sell Now or Process Further) Earl Corporation manufacturers products A, B, and C from a joint process. Joint costs are allocated on the basis of relative sales value at the end of the joint process. Additional information for Earl Corporation follows: Units produced ………………………….... Joint costs ……………………………….... Sales value after joint processing …...…… Additional costs for further processing …... Sales value if processed further ………...... A 12,000 $144,000 $240,000 $ 28,000 $280,000 B 8,000 $60,000 $100,000 $20,000 $120,000 C 4,000 $36,000 $60,000 $12,000 $80,000 Total 24,000 $240,000 $400,000 $ 60,000 $480,000 Required: Should product A, B, or C be processed further and then sold? Cost Handy Handbook Page - 123 - McGraw Second Edition STEWART COMPANY (Relevant Costs: Make or Buy) Stewart Company needs 20,000 units of a part to use in producing one of its products. If Stewart buys the part from Woodrow Company for $85 instead of making it, Stewart could not use the released facilities in another manufacturing activity. Fifty percent of the fixed overhead will continue regardless of CEO David Stewart’s decision. The cost data are as follows: Costs per Unit $35 11 19 20 $85 Direct materials Direct labor Variable overhead Fixed overhead Required: Determine which alternative is more attractive to Stewart and by what amount. Cost Handy Handbook Page - 124 - McGraw Second Edition GAMERS, INC. (Relevant Costs: Scarce Resources) Gamers Inc. produces two basic types of video games, Bash and Gash. Pertinent data for Gamers Inc. follows: Sales price Costs Direct materials Direct labor Variable factory overhead* Fixed factory overhead* Marketing costs (all variable) Total costs Operating income BASH $200 GASH $140 56 30 50 20 28 $184 $16 26 50 25 10 20 $131 $9 *Based on labor hours. The video craze is at its height so that either BASH or GASH alone can be sold to keep the plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games. BASH and GASH are processed through the same production departments. Required: Which product should be produced? Briefly explain your answer. Cost Handy Handbook Page - 125 - McGraw Second Edition FOSTER’S BAR-B-QUE (Relevant Costs: Special Orders) Foster’s Bar-B-Que is a popular lunch-time spot. Foster is conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable cost for each meal is about $2, and he figures his fixed costs, on a daily basis, at about $1,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat about 700 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Foster to lower the price to $3.50 per meal for each of the 50 bus tour members. Required: Should Foster accept the $3.50 price? Why or why not? What I the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal? Cost Handy Handbook Page - 126 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 127 - McGraw Second Edition JOHNSON COUNTY SENIOR SERVICES (Relevant Costs: Dropping or Retaining a Segment) Johnson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Johnson County area. Three services are provided for seniors—home nursing, meals on wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform tests ordered by their physicians. The meals on wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow: Revenues………………………… Less variable expenses………….. Contribution margin…………….. Less fixed expenses: Depreciation…………………… Liability insurance…………….. Program administrators’ salaries General administrative overhead* Total fixed expenses……………… Net operating income (loss)……… Total $900,000 490,000 410,000 Home Nursing $260,000 120,000 140,000 Meals on Wheels $400,000 210,000 190,000 Housekeeping $240,000 160,000 80,000 68,000 42,000 115,000 180,000 405,000 $ 5,000 8,000 20,000 40,000 52,000 120,000 $ 20,000 40,000 7,000 38,000 80,000 165,000 $ 25,000 20,000 15,000 37,000 48,000 120,000 $(40,000) *Allocated on the basis of program revenues The head administrator of Johnson County Senior Services, Marsha Davis, is concerned about the organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year’s results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Davis asked for more information about the financial advisability or perhaps discontinuing the housekeeping program. The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. Depreciation charges assume zero salvage value. None of the general administrative overhead would be avoided if the housekeeping program was dropped, but the liability insurance and the salary of the program administrator would be avoided. Required: 1. Should the housekeeping program be discontinued? Explain. Show computations to support your answer. 2. Recast the about data in a format that would be more useful to management assessing the long-run financial viability of the various services. Cost Handy Handbook Page - 128 - McGraw Second Edition JOHNSON COUNTY SENIOR SERVICES Calculations… Cost Handy Handbook Page - 129 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 130 - McGraw Second Edition JOB-ORDER COSTING The Cost/Managerial Accounting Problem: DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 131 - McGraw Second Edition JOB-ORDER COSTING Why are manufacturing costs accumulated in inventory? Why is the absorption costing income statement format GAAP?? Be willing to make decisions. That’s the most important quality in a good leader. Don’t fall victim to what I call the “ready-aim-aim-aim-aim syndrome.” You must be willing to fire. T. BOONE PICKENS, Financier I owe all of my success in life to having been always a quarter of an hour beforehand. HORATIO NELSON (1758—1805), Vice Admiral of the Royal Navy Cost Handy Handbook Page - 132 - McGraw Second Edition JOB-ORDER COSTING Two Income Statement Formats: Absorption Costing Income Statement Variable Costing Income Statement DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 133 - McGraw Second Edition JOB-ORDER COSTING How Can Unit Costs Be Calculated? Cost Handy Handbook Page - 134 - McGraw Second Edition EGG YOLK YUMMIES (Applying Overhead) Egg Yolk Yummies manufactures hard yellow candies. The company’s production process is largely automated, and the company incurs monthly expenses of $25,000 for depreciation and factory leases. In addition, on January 1st, 1999, Egg Yolk paid $48,000 for fire insurance covering the entire production facility for the months January 1st through December 31st, 1999. Also, Egg Yolk paid $36,000 on December 15 th to maintain and refurbish the production machines and facilities. Required: When calculating monthly net income, how much manufacturing overhead expense should Egg Yolk Yummies use for each of the months of 1999, January through December? Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total $384,000 Cost Handy Handbook Page - 135 - McGraw Second Edition Job-Order Costing & APPLYING OVERHEAD PDOR = Applied MOH = DESIGNATED DOODLE ZONE As I think back and look forward, I see how nothing is unambiguous; nothing is without risk. Salvation does not come through simplicities. A. BARTLETT GIAMATTI (1938—1989), Educator and baseball executive Cost Handy Handbook Page - 136 - McGraw Second Edition Job-Order Costing & APPLYING OVERHEAD Question: Why Allocate? Handy Notes: Answer: To match revenues and expenses! For example: factory insurance may be paid annually, but managers want monthly information for decision making Helpful for bidding on new jobs. Examples of allocation bases: DLH -- 31% DL$ -- 31% MH -- 12% DM$ -- 4% Units -- 5% Other -- 17% (e.g., EDS used total expenses) It’s easier to hide your light under a bushel than to keep your shady side dark. HELEN ROWLAND (c. 1875—1950), Journalist and humorist Cost Handy Handbook Page - 137 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 138 - McGraw Second Edition THE BAIZE COMPANY (Applying Overhead) The Baize Company allocates manufacturing overhead to production based on direct labor hours. The following information is available for The Baize Company: Estimated manufacturing overhead Actual manufacturing overhead Estimated direct labor hours Actual direct labor hours $403,200 $378,000 21,000 20,000 Required: 1. Compute the manufacturing overhead rate for The Baize Company. 2. Compute the amount of applied manufacturing overhead. 3. Compute the amount of underapplied or overapplied overhead for the year. Cost Handy Handbook Page - 139 - McGraw Second Edition ROBIN HOOD, INC. (Applying Overhead) Robin Hood, Inc., allocates manufacturing overhead to production based on machine hours. The following information is available: Estimated manufacturing overhead Actual manufacturing overhead Estimated machine hours Estimated direct labor hours Actual machine hours Actual direct labor hours $2,000,000 $2,400,000 125,000 210,000 140,000 200,000 Required: 1. Compute the manufacturing overhead rate for Robin Hood, Inc. 2. Compute the amount of applied manufacturing overhead. 3. Compute the amount of underapplied or overapplied overhead for the year. Cost Handy Handbook Page - 140 - McGraw Second Edition HALO PRODUCTS COMPANY (Applying Overhead) The Halo Products Company uses direct labor hours as the basis for applying overhead to products. Estimated manufacturing overhead costs for 1997 are $200,000, and estimated direct labor hours for the year are 32,000 hours. During 1997, 36,400 actual direct labor hours were worked and the Manufacturing Overhead Control account had a year end balance of $256,200. Required: 1. Compute the manufacturing overhead rate for 1997. 2. Compute the amount of applied manufacturing overhead for 1997. 3. Compute the amount of underapplied or overapplied overhead for the year. 4. Compute the actual overhead cost per direct labor hour. Cost Handy Handbook Page - 141 - McGraw Second Edition NARCISSUS NEEDLES (Applying Overhead) Narcissus Needles allocates overhead on the basis of direct labor hours (DLH). The management of Narcissus has estimated the following costs for the 1997 fiscal year, all related to factory and production processes: Factory Utilities Depreciation on factory equipment Supervisors' salaries Janitorial supplies Factory Insurance $10,000 15,000 30,000 6,000 9,000 Management has also estimated that 3,500 direct labor hours will be worked during the year. Required: 1. What is the predetermined overhead rate (PDOR) that Narcissus should use to apply overhead? 2. If 3,600 direct labor hours were actually worked during the fiscal year, what would be applied overhead? 3. If 3,600 direct labor hours were worked and actual costs incurred were as follows, how much overhead was overapplied or underapplied? Factory Utilities $10,500 Depreciation on factory equipment 15,000 Supervisors' salaries 30,000 Janitorial supplies 5,200 Factory Insurance 8,500 Cost Handy Handbook Page - 142 - McGraw Second Edition McKAY MILLS (Applying Overhead) Suppose McKay Mills at the beginning of the year expected to incur $1,335,000 of overhead expenses in 1995. McKay has a policy of allocating overhead on the basis of direct labor hours using a plant-wide rate. McKay has three departments -- Yarn, Fabric and Clothing -- which expect to incur 500, 410 and 735 hours (respectively) of direct labor hours in 1995. Required: What predetermined overhead rate (PDOR) should McKay Mills use? McKay Mills departments actually incurred direct labor hours as follows: Yarn (455), Fabric (420) and Clothing (750). Required: How much overhead should be applied to each department when $1,372,000 of overhead costs were actually incurred? Cost Handy Handbook Page - 143 - McGraw Second Edition BUFFALO BROILERS (Applying Overhead) Buffalo Broilers is the manufacturer of a countertop oven-broiler and estimates overhead costs of $500,000 for 1992. Three possible overhead application bases are being considered by management; they are direct labor hours, direct labor cost, and machine hours. Estimated 1992 activity levels for each of the potential application bases are given below: Direct labor hours Direct labor cost Machine hours 100,000 hours $800,000 80,000 hours The broiler requires two direct labor hours, $18.00 of direct labor cost, and 1.2 hours of machine time. The balance in the manufacturing overhead account was $576,000 on December 31, 1992. During 1992, 120,000 direct labor hours were worked at a cost of $930,000, and 90,000 machine hours were used. There were 60,000 oven-broilers manufactured in 1992. Required: 1. Compute the 1992 manufacturing overhead rate using each of the three potential application bases. 2. Compute the underapplied or overapplied overhead that would have occurred in 1992 using each of the application bases. 3. Assume direct labor hours was used as the application base. Compute the unit cost of overhead using actual overhead cost and actual activity for the year. Cost Handy Handbook Page - 144 - McGraw Second Edition BUFFALO BROILERS Calculations ... Cost Handy Handbook Page - 145 - McGraw Second Edition HOWDY COMPANY (Applying Overhead) Morris Company manufactures products to customer specifications and employs a job-order costing system. Predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined overhead rate in department A is based on machine hours, and the rate in department B is based on direct labor cost. At the beginning of 1995, the company's management made the following estimates: Department A 12,000 70,000 $510,000 $130,000 $602,000 Direct labor-hours Machine-hours Direct materials cost Direct labor cost Manufacturing overhead cost B 60,000 8,000 $650,000 $420,000 $735,000 Job 205 was initiated into production on August 1 and completed on August 10. The company's cost records show the following information on the job: Department A 30 110 $470 $290 Direct labor-hours Machine-hours Direct materials cost Direct labor cost B 85 20 $332 $680 Required: 1. Compute the predetermined overhead rate that should be used during the year in department A. Compute the rate that should be used in department B. 2. Compute the total overhead cost applied to job 205. 3. What would be the total cost of job 205? If the job contains 50 units, what would be the cost per unit? 4. At the end of 1995, the records of Morris Company revealed the following actual cost and operating data for all jobs worked on during the year. What was the amount of under- or overapplied overhead in each department at the end of 1995? Department A B Direct labor-hours 10,000 62,000 Machine-hours 65,000 9,000 Direct materials cost $430,000 $680,000 Direct labor cost $108,000 $436,000 Manufacturing overhead cost $570,000 $750,000 Cost Handy Handbook Page - 146 - McGraw Second Edition HOWDY COMPANY Calculations ... Cost Handy Handbook Page - 147 - McGraw Second Edition HOWDY COMPANY Calculations ... Cost Handy Handbook Page - 148 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 149 - McGraw Second Edition AXIOM PRODUCTS (Applying Overhead) Axiom Products is a manufacturing company that operates a job-order costing system. Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the company would incur $170,000 in manufacturing overhead costs for the year and work 85,000 machine-hours. Required: 1. Compute Axiom’s predetermined overhead rate. 2. Assume that during the year the company actually worked 80,000 machine hours and incurred the costs indicated in the Manufacturing Overhead and Work in Process t-accounts below. Compute the amount of overhead cost that would be applied to Work in Process for the year, and make the entry in the t-accounts. 3. Compute the amount of under- or overapplied overhead for the year, and show the balance in your Manufacturing Overhead t-account. Prepare a journal entry to close out the balance in this account to Cost of Goods Sold. 4. Explain why the manufacturing overhead was underapplied or overapplied for the year. Manufacturing Overhead (Utilities) (Insurance) (Maintenance) (Indirect materials) (Indirect labor) (Depreciation) $14,000 9,000 33,000 7,000 65,000 40,000 ____________ Work in Process (Direct materials) (Direct labor) (Overhead) $530,000 85,000 _________ Balance Cost Handy Handbook Page - 150 - McGraw Second Edition AXIOM PRODUCTS Calculations… Cost Handy Handbook Page - 151 - McGraw Second Edition HOLMAN COMPANY (Applying Overhead) Holman Company is a furniture manufacturing firm in a suburb of Billings, Montana. It uses a job-order costing system. It applies factory overhead costs on the basis of direct labor-hours. At the beginning of 2004, management estimated that the company would incur $284,000 of factory overhead costs for the year and work 71,000 direct labor-hours. During the year, the company actually worked 75,000 direct labor-hours and incurred these factory overhead costs: a. b. c. d. e. f. g. h. Paid $75,400 cash for utilities, power, and other miscellaneous items for the manufacturing plants. Recognized $58,000 depreciation on manufacturing property, plant, and equipment for the year. Paid $25,000 cash for the insurance premium on manufacturing property and plant. Incurred advertising costs, $10,000. Incurred indirect labor costs, $54,600. Incurred indirect material costs, $53,000. Paid the $55,000 salary of the factory superintendent. Accrued sales and administrative salaries, $85,000. Required: 1. Compute the firm’s predetermined overhead rate. 2. Compute the amount of factory overhead that should be applied to the Work-in-Process Inventory account for the year. 3. Compute the amount of overapplied or underapplied overhead to be closed into the Cost of Goods Sold account at the end of the year. Cost Handy Handbook Page - 152 - McGraw Second Edition HOLMAN COMPANY Calculations… Cost Handy Handbook Page - 153 - McGraw Second Edition EVERYTHING INCORPORATED (Process Costing and Job-Order Costing) Everything Incorporated has many industries in which it is involved. The following is a list of some its diversified businesses: Business Job-Order Costing Process Costing Custom yacht builder. Golf course designer. Potato chip manufacturer. Business consultant. Plywood manufacturer. Soft-drink bottler. Film studio. Bridge construction company. Manufacturer of fine custom jewelry. Made-to-order garment factory. Factory making one personal computer model. Fertilizer factory. Required: In each of the previous businesses, place an X in the appropriate column to indicate whether job-order costing or process costing is more appropriate. Cost Handy Handbook Page - 154 - McGraw Second Edition [EVEN MORE] JOB-ORDER COSTING ** NOTE TO “SELF”! ** See this problem ____________________________ On page _________ of the Handy Handouts For an example of cost flows with applied MOH. Cost Handy Handbook Page - 155 - McGraw Second Edition Knowledge is food for the soul. PLATO (c. 427—347 B.C.), Philosopher Saddle your dreams afore you ride ‘em. MARY WEBB (1881—1927), Novelist Cost Handy Handbook Page - 156 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 157 - McGraw Second Edition ARC LIGHT & SOUND (Job-Order Costing) Arc Light & Sound uses a job-order costing system. The company’s inventory balances on April 1, the start of the fiscal year, were as follows: Raw materials Work in process Finished goods $32,000 $20,000 $48,000 During the year, the following transactions were completed: 1. 2. Raw materials were purchased on account, $170,000. Raw materials were issued from the storeroom for use in production, $180,000 (80% direct and 20% indirect). 3. Employee salaries and wages were accrued as follows: direct labor, $200,000; indirect labor, $82,000; and selling and administrative salaries, $90,000. 4. Utility costs were incurred in the factory, $65,000. 5. Advertising costs were incurred, $100,000. 6. Prepaid insurance expired during the year, $20,000 (90% related to factory operations, and 10% related to selling and administrative activities). 7. Depreciation was recorded, $180,000 (85% related to factory assets, and 15% related to selling and administrative assets). 8. Manufacturing overhead was applied to jobs at the rate of 175% of direct labor cost. 9. Goods that cost $700,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse. 10. Sales for the year totaled $1,000,000 and were all on account. The total cost to manufacture these goods according to their job cost sheets was $720,000. Required: 1. Using t-accounts, compute Cost of Goods Manufactured, Cost of Goods Sold, and Net Income. 2. Prepare an Income Statement for the year, in good form. Cost Handy Handbook Page - 158 - McGraw Second Edition ARC LIGHT & SOUND Calculations ... Cost Handy Handbook Page - 159 - McGraw Second Edition MARIE MANUFACTURING COMPANY (Job-Order Costing) The following data pertain to the Marie Manufacturing Company for the year ended December 31, 2004. The company used 51,000 direct labor hours during 2004. Beginning direct material inventory Ending direct material inventory Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory Direct material purchased Indirect material used in production Factory supplied used Depreciation on the factory Depreciation on the sales office Depreciation on the administrative office Sales salaries Sales revenue Assembly-line labor cost Factory security guard cost Factory supervision Depreciation on production equipment Depreciation on sales office equipment $ 42,000 48,000 84,000 93,000 124,000 133,000 850,000 4,000 6,200 60,000 4,000 3,000 120,000 3,335,000 820,000 12,000 82,600 560,000 22,200 Additional Information: The overhead is applied using a budgeted rate that is set every December by forecasting the following year's production (in units) and relating it to forecast direct labor hours. The budget for 2004 called for 50,000 direct labor hours and $750,000 of factory overhead. Required: 1. Materials requisitioned during 2004 2. Overhead applied during 2004 3. Overapplied or underapplied overhead during 2004 4. Cost of Goods Manufactured during 2004 5. (Adjusted) Cost of Goods Sold during 2004 6. Net income for January Cost Handy Handbook Page - 160 - McGraw Second Edition MARIE MANUFACTURING COMPANY Calculations ... Cost Handy Handbook Page - 161 - McGraw Second Edition ROLEY POLEY COMPANY (Job-Order Costing) Below are data for Roley Poley Company as of year-end, December 31, 2002. Sales salaries ……… Advertising ……… Direct materials inventory ……… Direct materials used ……… Work in process ……… Indirect labor ……… Depreciation, factory ……… Property taxes (70 percent production plant) Fire insurance (80 percent production plant) Sales commissions ……… Administrative salaries ……… Finished goods ……… Direct labor ……… Indirect material ……… Direct materials purchased ……… Utilities (80 percent factory) ……… Rent, office equipment ……… Depreciation, office ……… Depreciation, factory equipment ……… Sales ……… Miscellaneous office expense ……… Sales returns and allowances ……… $ 85,000 44,000 126,100 325,000 73,900 22,700 31,000 18,000 9,800 28,500 167,200 77,300 293,480 11,600 319,700 45,000 8,700 17,400 44,000 1,281,700 4,300 36,100 All accounts have normal balances. Beginning work in process was $49,000 and beginning finished goods was $87,300. Roley Poley pays income taxes at a rate of 40% of pretax income. Roley Poley’s 2002 budget called for production of 800 unicycles. On average it takes 26 hours of direct labor per unicycle at a wage rate of $11 per hour. The manufacturing overhead rate is $6.00 per direct labor hour. During 2002, 920 unicycles were produced. Actual direct labor hours averaged 3 per unit more than expected. Required: 1. Calculate the beginning balance of direct materials inventory 2. Calculate the total prime cost for 2002. 3. Calculate the underapplied or overapplied overhead for the year. 4. Calculate the cost of goods manufactured. 5. Calculate the average unit cost of unicycles completed during 2002. 6. Calculate the cost of goods sold, and net income before and after taxes. Cost Handy Handbook Page - 162 - McGraw Second Edition ROLEY POLEY COMPANY Calculations ... Cost Handy Handbook Page - 163 - McGraw Second Edition PLENTIFUL PRINTING, INC. (Job-Order Costing) You are asked to bring the following incomplete accounts of one of Plentiful Printing's printing plants up to date through January 31, 1992. Also consider the data that appears below. Materials (12/31/91 Balance) Factory Department Overhead (total January charges) Finished Goods (12/31/91 Balance) $15,000 $57,000 $20,000 Additional Information: 1. 2. 3. 4. 5. 6. 7. 8. 9. The overhead is applied using a budgeted rate that is set every December by forecasting the following year's overhead and relating it to forecast direct labor costs. The budget for 1992 called for $400,000 of direct labor and $600,000 of factory overhead. The only job unfinished on January 31, 1992, was No. 419, on which total production costs were $13,000 (direct labor cost of $2,000 --125 direct labor hours--, direct materials cost of $8,000, and manufacturing overhead costs of $3,000). Total materials placed into production during January were $90,000. Cost of goods manufactured during January was $180,000. Materials inventory as of January 31 was $20,000. Finished goods inventory as of January 31 was $15,000. All factory workers earn the same rate of pay. Direct labor hours for January totaled 2,500. Sales during January of $285,000 were made. Selling costs of $57,000 and administrative costs of $12,000 were incurred during January. Required: 1. Materials purchased during January 2. Cost of Goods Sold during January 3. Direct labor costs incurred during January 4. Overhead applied during January 5. Balance, Work in Process, December 31, 1991 6. Balance, Work in Process, January 31, 1992 7. Overapplied or underapplied overhead for January 8. Net income for January Cost Handy Handbook Page - 164 - McGraw Second Edition PLENTIFUL PRINTING, INC. Calculations ... Cost Handy Handbook Page - 165 - McGraw Second Edition POLARIS COMPANY (Job-Order Costing) The Polaris Company uses a (normal costing) job-order system. The following data relate to October 2005, the first month of the company’s fiscal year. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Raw materials purchased, $210,000. Raw materials issued to production, $190,000 ($178,000 direct materials and $12,000 indirect materials). Direct labor cost incurred, $90,000. Indirect labor cost incurred, $110,000. Depreciation recorded on factory equipment, $40,000. Other manufacturing overhead incurred during October, $70,000. The company applies manufacturing overhead cost to production on a basis of $8 per machinehour. There were 30,000 machine hours recorded for October. Production orders costing $520,000 were completed during October and transferred to finished goods. Production orders that had cost $480,000 to complete were shipped to customers during the month. These goods were invoiced at 25 percent above cost. Selling costs of $54,000 and administrative costs of $42,000 were incurred. Raw materials had a beginning balance of $14,000. Work in process had a beginning balance of $42,000. Finished goods had a beginning balance of $37,000. Required: 1. Prepare all T-accounts and calculate both the net income and cash flow of Polaris Company for the month of October 2005. 2. Compute the ending balance of each account. Cost Handy Handbook Page - 166 - McGraw Second Edition POLARIS COMPANY Calculations ... Cost Handy Handbook Page - 167 - McGraw Second Edition THE SWIZZLE MANUFACTURING COMPANY (Job-Order Costing) The Swizzle Manufacturing Company is a manufacturer of custom-made equipment and relies heavily on direct labor in the completion of its jobs. The company uses a job-order costing system and applies manufacturing overhead cost to jobs on the basis of direct labor hours. At the beginning of 1994, the following estimates were made as a basis for computing a predetermined overhead rate for the year: Manufacturing overhead cost .......... $360,000 Direct labor hours .......................... 20,000 hours The following transactions took place during the year (all purchases and services were acquired on account): 1. 2. 3. Raw materials were purchased for use in production, $200,000 Raw materials were requisitioned for use in production (all direct materials), $185,000 Utility bills were incurred, $70,000 (90% related to factory operations, and the remainder related to selling and administrative activities) 4. Salary and wage costs were incurred: Direct labor (21,400 hours) ...................... $230,000 Indirect labor .......................................... 90,000 Selling and administrative salaries ............ 110,000 5. Maintenance costs were incurred in the factory, $54,000 6. Advertising costs were incurred, $136,000 7. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment) 8. Rental cost incurred on buildings, $120,000 (85% related to factory operations, and the remainder related to selling and administrative facilities) 9. Manufacturing overhead cost was applied to jobs, $ __?___ 10. Sales for the year (all on account) totaled $1,200,000. These goods cost $780,000 to manufacture. The balances in the inventory accounts at the beginning of the year were: Raw Material $10,000 Work in Process 15,000 Finished Goods 30,000 Work in Process at December 31, 1994, totaled $22,000 Required: Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and a statement of net income (in good form) for the year ended December 31, 1994. Helpful Hint: First prepare the calculations using t-accounts, then prepare the required schedules using the information from the t-accounts. Please turn in all your work (t-accounts and statements). Cost Handy Handbook Page - 168 - McGraw Second Edition THE SWIZZLE MANUFACTURING COMPANY Calculations ... Cost Handy Handbook Page - 169 - McGraw Second Edition THE SWIZZLE MANUFACTURING COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31, 1994 Direct materials: Direct materials inventory, 1-1-1994 $ Add: Purchases of direct materials ____________ Total materials available $ Deduct: Direct materials inventory, 12-31-1994 (___________) Direct materials used in production $ Direct labor $ Manufacturing overhead $ ____________ Actual overhead costs $ Add / (Deduct): Over (Under) applied overhead Manufacturing overhead applied to Work In Process Total manufacturing costs incurred ____________ $___________ $ Add: Beginning work in process inventory ____________ Total manufacturing costs to account for $ Deduct: Ending work in process inventory (___________) Cost of Goods Manufactured $ Cost Handy Handbook Page - 170 - . McGraw Second Edition THE SWIZZLE MANUFACTURING COMPANY Schedule of Cost of Goods Sold For the Year Ended December 31, 1994 Finished goods inventory, 1-1-1994 $ Add: Cost of goods manufactured ___________ Goods available for sale $ Less: Finished goods inventory, 12-31-1994 (___________) Cost of goods sold $ Add / (Deduct): Under (Over) applied overhead ____________ Adjusted cost of goods sold $ . THE SWIZZLE MANUFACTURING COMPANY Income Statement For the Year Ended December 31, 1994 Sales $ Less: Cost of goods sold (___________) Gross margin $ Less: Selling and administrative expenses: $ ____________ Net Income Cost Handy Handbook (___________) $ Page - 171 - . McGraw Second Edition MARSHALL PROPS UNLIMITED (Job-Order Costing) Marshall Props Unlimited designs and fabricates movie props. The company’s balance sheet as of January 1, 2006: Marshall Props Unlimited Balance Sheet January 1, 2006 Assets Current Assets: Cash................................................................. $15,000 Accounts Recievable ....................................... 40,000 Inventories: Raw materials ................................................. $25,000 Work in process.............................................. 30,000 Finished goods (props awaiting shipment) ..... 45,000 100,000 Prepaid insurance ............................................ 5,000 Total current assets ............................................ 160,000 Buildings and equipment ................................... 500,000 Less accumulated depreciation .......................... 210,000 290,000 Total assets ........................................................ $450,000 Liabilities and Stockholders Equity Accounts payable .............................................. $75,000 Capital stock ...................................................... $250,000 Retained earnings .............................................. 125,000 375,000 Total liabilities and stockholders’ equity........... $450,000 Since each prop is a unique design and may require anything from a few hours to a month or more to complete, Marshall Props uses a job-order costing system. Overhead in the fabrication shop is charged to props on the basis of direct-labor cost. The company estimated that it would incur $80,000 in manufacturing overhead and $100,000 in direct labor cost during the year. The following transactions were recorded during the year: a. b. c. Raw materials, such as wood, paints, and metal sheeting, were purchased on account, $80,000. Raw materials were issued to production, $90,000; $5,000 of this amount was for indirect materials. Payroll costs incurred and paid; direct labor, $120,000; indirect labor, $30,000; and selling and administrative salaries, $75,000. d. Fabrication shop utilities costs incurred, $12,000. e. Deprecation recorded for the year, $30,000 ($5,000 on selling and administrative assets; $25,000 on fabrication shop assets). f. Prepaid insurance expired, $4,800 ($4,000 related to fabrication shop operations, and $800 related to selling and administrative activities). g. Shipping expenses incurred, $40,000 h. Other manufacturing overhead costs incurred, $17,000. i. Manufacturing overhead was applied to production. Overhead is applied on a basis of direct labor cost. j. Movie props that cost $310,000 to produce according to their job cost sheets were completed. k. Sales for the year totaled $450,000 and were all on account. The total cost to produce these movies props was $300,000 according to their job cost sheets. l. Collections on account from customers, $445,000. m. Payments on account to suppliers, $150,000. Required: 1. Use t-accounts to calculate COGM, COGS, and Net Income. 2. Was manufacturing overhead underapplied or overapplied for the year? By how much? 3. Prepare a Schedule of COGM, a Schedule of COGS, and Income Statement for the year. Cost Handy Handbook Page - 172 - McGraw Second Edition MARSHALL PROPS UNLIMITED Calculations… Cost Handy Handbook Page - 173 - McGraw Second Edition MARSHALL PROPS UNLIMITED Marshall Props Unlimited Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2006 Direct materials: Direct materials inventory, 1-1-2006 $ Add: Purchases of direct materials ____________ Total materials available $ Deduct: Direct materials inventory, 12-31-2006 (___________) Direct materials used in production Less: Indirect materials ____________ Direct labor $ $ Manufacturing overhead $ ____________ Actual overhead costs $ Add / (Deduct): Over (Under) applied overhead Manufacturing overhead applied to Work In Process Total manufacturing costs incurred ____________ $___________ $ Add: Beginning work in process inventory ____________ Total manufacturing costs to account for $ Deduct: Ending work in process inventory (___________) Cost of Goods Manufactured $ Cost Handy Handbook Page - 174 - . McGraw Second Edition MARSHALL PROPS UNLIMITED Marshall Props Unlimited Schedule of Cost of Goods Sold For the Year Ended December 31, 2006 Finished goods inventory, 1-1-2006 $ Add: Cost of goods manufactured ___________ Goods available for sale $ Less: Finished goods inventory, 12-31-2006 (___________) Cost of goods sold $ Add / (Deduct): Under (Over) applied overhead ____________ Adjusted cost of goods sold $ . Marshall Props Unlimited Income Statement For the Year Ended December 31, 2006 Sales $ Less: Cost of goods sold (___________) Gross margin $ Less: Selling and administrative expenses: $ ____________ Net Income Cost Handy Handbook (___________) $ Page - 175 - . McGraw Second Edition OATMAN COMPANY (Job-Order Costing) Oatman Company is a manufacturing firm that uses a job-order cost system. On January 1, 2010, the company’s inventory balances were as follows: Direct materials ....................... $16,000 Work in process ....................... 10,000 Finished goods ......................... 30,000 The company applies overhead cost to jobs on the basis of machine-hours. For 2010, the company estimated that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following transactions were recorded during 2010: a. b. c. Direct materials purchased on account, $200,000. Direct materials requisitioned for use in production, $190,000. The following costs were incurred for employee services: Direct labor .............................. $160,000 Indirect labor ........................... 27,000 Sales commissions ................... 36,000 Administrative salaries ............ 80,000 d. e. f. g. h. i. j. Heat, power, and water costs incurred in the factory, $42,000. Prepaid insurance expired during the year, $10,000 (90% relates to factory operations, and 10% relates to selling and administrative activities). Advertising costs incurred, $50,000. Depreciation recorded for the year, $60,000 (85% relates to factory operations, and 15% relates to selling and administrative activities). Manufacturing overhead cost was applied to production. The company recorded 40,000 machine-hours for the year. Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse. Sales for the year totaled $700,000 and were all on account. The total cost to manufacture these goods according to their job cost sheets was $475,000. Required 1. Use t-accounts to calculate COGM, COGS, and net income. 2. Write journal entries for every applicable number in the t-accounts. (Remember that every arrow is a journal entry.) 3. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the journal entries and t-accounts you have prepared.) Cost Handy Handbook Page - 176 - McGraw Second Edition OATMAN COMPANY Calculations… [T-Accounts] Cost Handy Handbook Page - 177 - McGraw Second Edition OATMAN COMPANY Calculations… [Journal Entries] Cost Handy Handbook Page - 178 - McGraw Second Edition OATMAN COMPANY Oatman Company Income Statement For the Year Ended December 31, 2010 Sales $ Less: Cost of goods sold (___________) Gross margin $ Less: Selling and administrative expenses: $ ____________ Net Income Cost Handy Handbook (___________) $ Page - 179 - . McGraw Second Edition This page left blank Cost Handy Handbook Page - 180 - McGraw Second Edition ACTIVITY-BASED COSTING How can unit costs be calculated? (Some review, some new) Cost Handy Handbook Page - 181 - McGraw Second Edition ACTIVITY-BASED COSTING How might PERRY MASON define ABC? Sometimes you win, sometimes you lose, and sometimes you get rained out. SATCHEL PAIGE (c. 1905—1982), Baseball player Pessimism is depreciated will-to-live. ALBERT SCHWEITZER (1875—1965), Philosopher and physician DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 182 - McGraw Second Edition ACTIVITY-BASED COSTING Two ways ABC differs from Job-Order Costing: It is what you are inside that matters. You, yourself, are your only real capital. VLADIMIR ZWORYKIN (1889—1982), Physicist It often takes more courage to change one’s opinion than to stick to it. GEORG CHRISTOPH LICHTENBERG (1742—1799), Physicist and philosopher Cost Handy Handbook Page - 183 - McGraw Second Edition ACTIVITY-BASED COSTING HANDY NOTES: ABC Steps: Pools of MOH Total Activity and Cost in pools Calculate “Cost per” in pools “Apply” to products/lines It is easy to learn something about everything, but difficult to learn everything about something. NATHANIEL EMMONS (1745—1840), Clergyman ** NOTE TO “SELF”! ** See problem: ____________________________ On page _________ of the Handy Handouts For an example of ABC. Cost Handy Handbook Page - 184 - McGraw Second Edition ACTIVITY-BASED COSTING REVIEW / SELF-QUIZ (Job-Order Costing and ABC) Do you know the answers to these questions?? Job-order costing is used for what type(s) of products? How is cost-per-unit calculated in job-order costing? Both ABC and job-order costing are trying to answer the same question: what is it? How does one calculate PDOR? How does one calculate Applied MOH? Where does Applied MOH go in the t-accounts? Where does Over- or Under-Applied MOH go in the t-accounts? Where do period costs go in the t-accounts? How might Perry Mason define ABC? How is ABC different than job-order costing? What steps are performed when calculating activity-based costs? Cost Handy Handbook Page - 185 - McGraw Second Edition ACTIVITY-BASED COSTING HANDY Information: Robin Cooper (literally one of the inventors of Activity-Based Costing) suggests four levels for classifying manufacturing activities: 1. A unit-level activity is performed on each individual unit of products or services of the firm. Examples of unit-level activities include using direct materials, using direct labor-hours, inserting a component, and inspecting every unit. A unit-level activity is volume-based. The required activity varies in proportion with the quantity of the cost object. The resource consumption driver and the activity consumption driver are most likely to be the same for unit level activities. 2. A batch-level activity is performed for each batch or group of units or products or services. A firm incurs a batch-level activity for each batch or group of units of products or services scheduled to be processed together, rather than for each individual unit of the cost object. A batch has more than one unit of a product or service or more than one product or service. Examples of batch-level activities are setting up machines, placing purchase orders, scheduling production, conducting inspections by batch, handling materials, and expediting production. 3. A product-sustaining activity supports the production of a specific product or service. Examples of product-sustaining activities include designing products, administering parts required for products, and engaging in engineering changes to modify products. 4. A facility-sustaining activity supports the operation in general. These activities are not caused by products or customer service needs and cannot be traced to individual units, batches, or products. Examples of facility sustaining activities include providing security and safety, performing maintenance of general purpose machines, managing the plant, incurring factory property taxes and insurance and closing of the books each month. Some firms refer to these activities as business or infrastructure sustaining activities. Examples of Activities and Activity Levels for a Manufacturer of Electric Motors Activity Direct materials Direct labor-hours Machine-hours Number of production orders Number of special components Activity Level Unit Unit Unit Batch Batch Robin Cooper, “Cost Classification in Unit-Based Manufacturing Cost Systems,” Journal of Cost Management, Fall 1990, pp. 5-14. Cost Handy Handbook Page - 186 - McGraw Second Edition ACTIVITY-BASED COSTING ARE YOU EVERYTHING YOU COULD BE? People the world over came to the museum to walk across Marble Floor and gaze adoringly at Marble Statue. Soon Marble Floor began to resent being treated like a doormat and said as much to Marble Statue. “It’s not fair!” Floor complained. “We started at the same place, but you’re revered while I’m ignored.” “My friend,” Statue replied. “You have a short memory. We originated in the same cave, but don’t you remember what happened after that?” “No,” Floor pouted. “Let me remind you. When the designer cut us from the cave, you resisted his tools and efforts to shape you.” “Of course I did!” Floor shouted. “It hurt! I didn’t need to be shaped.” “When you fought being shaped, he worked on me,” Statue said. “I was willing to endure the hardship because it takes work to reach toward your potential.” “I never thought of it that way,” Floor said. “You gave up halfway,” said Statue. “So don’t blame the people who step on you now.” -- Adapted from The Motivational Manager, Lawrence Ragan Communications Cost Handy Handbook Page - 187 - McGraw Second Edition MIZZOU COMPANY (Activity-Based Costing) Mizzou Company manufactures two products, the Miz and the Zou. The company estimated it would incur $130,890 in manufacturing overhead costs during the current period. Overhead currently is assigned to products on the basis of direct labor hours. Data concerning the current period’s operations appear below: Estimated volume Direct labor hours per unit Direct material cost per unit Direct labor cost per unit Miz 400 units 0.70 hour $10.70 $11.20 Zou 1,200 units 1.20 hours $16.70 $19.20 Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following three activity pools: Activity Cost Pool Machine Setups Purchase Orders General Factory Activity Cost Pool Number of setups Number of purchase orders Number of direct labor hours Activity Measure Number of setups Number of purchase orders Direct labor hours Expected Activity Miz Zou 100 130 810 1,270 280 1,440 Overhead Cost $13,570 $91,520 $25,800 Total 230 2,080 1,720 Required: 1. Compute the predetermined overhead rate using the traditional method. Using this rate and the other data from the problem, calculate the unit product cost of both products. 2. Determine the activity rate (i.e,. predetermined overhead rate) for each of the cost pools. 3. Use the activity rates you calculated in (2.) above to: a. Compute the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system. b. Then, determine the amount of manufacturing overhead cost per unit of each product. c. Finally, compute the unit product cost of each product. Cost Handy Handbook Page - 188 - McGraw Second Edition MIZZOU COMPANY Calculations ... Cost Handy Handbook Page - 189 - McGraw Second Edition AUDIO BASICS CORPORATION (Activity-Based Costing) Audio Basics Corporation manufactures two types of video cassettes: standard and high-grade. The standard cassettes are primarily for home use. The high-grade version is used for television commercials. Management believes the accounting system may not be accurately allocating costs to products, particularly since sales of the high-grade video tapes have been increasing. Management asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on the direct labor costs in the products. For your investigation, you have data from last year. Last year's manufacturing overhead was $880,000 based on production of 320,000 standard cassettes and 100,000 high-grade cassettes. Direct labor and direct materials costs were as follows: Direct labor Direct materials Standard $348,000 $250,000 High-Grade $132,000 $228,000 Total $480,000 $478,000 Management determined that overhead costs are caused by three cost drivers. The cost drivers and their costs for last year were as follows: Cost Pool Production Run Setup Quality Testing Packing Activities Total overhead Costs Assigned $400,000 $360,000 $120,000 $880,000 Cost Driver Number of production runs Quality tests performed Shipping orders processed Activity Level Standard High-Grade 40 10 180 120 100 50 Total 50 300 150 Required: 1. (a) (b) 2. (a) (b) How much of the overhead will be assigned to each product if the above three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product? How much of the overhead will be assigned to each product if direct labor cost had been used to allocate overhead? What would the total cost per unit produced be for each product? Cost Handy Handbook Page - 190 - McGraw Second Edition AUDIO BASICS CORPORATION Calculations ... Cost Handy Handbook Page - 191 - McGraw Second Edition J.B. GOODE COMPANY (Activity-Based Costing) J.B. Goode Company produces two models of guitars. One is a standard acoustic guitar model that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made acoustic-electric guitar with pearl inlays and a body constructed from special woods. The custom guitar sells for $1,000. Both guitars require 10 hours of direct labor to produce, but the custom guitar is manufactured by more experienced workers who are paid at a higher rate. Most of J.B. Goode’s sales come from the standard guitar, but sales of the custom model have been growing. Here is the company’s sales, production, and cost information for last year. Sales and production volume in units Unit costs: Direct materials Direct labor Manufacturing overhead Total unit costs Manufacturing Overhead Cost Building rent Maintenance Purchasing Inspection Indirect materials Supervision Supplies Total Overhead Amount $40,000 15,000 22,000 12,000 15,000 28,000 3,000 $135,000 Standard Guitar 900 Custom Guitar 100 $ 150 180 135 $465 $ 375 240 135 $750 Cost Driver Square footage Direct labor hours Number of purchase orders Number of inspections Number of units Number of inspections Number of units Standard Guitar 3,000 9,000 1,500 400 900 400 900 Custom Guitar 1,000 1,000 500 600 100 600 100 The company allocates overhead costs using the traditional method with an activity base of direct labor hours. Normal production in the facility utilizes 10,000 direct labor hours. Chuck B., president of J.B. Goode, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling prices of the guitar may not be covering its true cost. Required: 1. Using the traditional method, how much overhead is allocated to the standard guitars, and how much to the custom guitars? Discuss why this might not be an accurate way to assign overhead costs to products. 2. J.B. Goode’s controller developed the cost driver and activity data presented above. Use activitybased costing to assign the total cost of overhead to each model of guitar. 3. Calculate the cost of one custom guitar using activity-based costing. Why is the cost different from the cost calculated using the traditional allocation method? At the current selling price, is the company covering its true cost of production? Explain your answers. Cost Handy Handbook Page - 192 - McGraw Second Edition J.B. GOODE COMPANY Calculations ... Cost Handy Handbook Page - 193 - McGraw Second Edition THE CUTTERS, INC. (A) (Activity-Based Costing) Chase Gardner is an expatriate product manager for The Cutters, Inc., a manufacturer of hunting blades and knives. Its production facilities are located in Argentina. In recent years profits have begun to decline and Chase is trying to improve the situation by focusing the company’s sales efforts on the most profitable products. Chase’s reports generally indicate that complex, low volume products (such as The Hunter) are much more profitable than simple, high volume products (such as The Carver). The Cutters currently uses a job-order costing and allocates manufacturing overhead to product lines using direct labor hours. 780,000,000 Pesos (Argentine) of manufacturing overhead costs were incurred during 2003, and 10,000 direct labor hours occurred producing all of the company’s many product lines. Additional information about The Hunter and The Carver product lines is provided below. Sales Cost: Direct material cost Direct labor cost The Hunter 19,500,000 Pesos The Carver 53,000,000 Pesos 4,500,000 Pesos 1,200,000 Pesos 10,000,000 Pesos 6,000,000 Pesos Units produced Total direct labor hours worked 15,000 80 100,000 400 Required: Using job-order costing, apply overhead to The Hunter and The Carver and calculate the gross profit of these two product lines. Cost Handy Handbook Page - 194 - McGraw Second Edition THE CUTTERS, INC. (A) Calculations ... Cost Handy Handbook Page - 195 - McGraw Second Edition THE CUTTERS, INC. (B) (Activity-Based Costing) Sales and direct costs remain as described in The Cutters, Inc. (A). However, rather than allocating indirect manufacturing costs to product lines using a single rate, Chase is considering the use of more sophisticated costing methods. With activity-based costing in mind, he has collected the following information. COST DRIVER Number of parts Number of production runs Number of machine hours Number of components tested Direct labor hours OVERHEAD COST POOL POOL 1 Materials purchasing and handling cost POOL 2 Production engineering and design Production machine setup POOL 3 Production machine depreciation Production machine maintenance POOL 4 Quality testing POOL 5 Plant security Plant supervision Building maintenance Factory supplies Factory insurance Total Manufacturing Overhead OVERHEAD COST 75,000,000 Pesos 60,000,000 Pesos 40,000,000 Pesos 300,000,000 Pesos 50,000,000 Pesos 100,000,000 Pesos 25,000,000 Pesos 70,000,000 Pesos 10,000,000 Pesos 20,000,000 Pesos 30,000,000 Pesos 780,000,000 Pesos The Cutters, Inc., experienced the following levels of activity: Number of parts 750,000 Number of production runs 25 Number of machine hours 2,000 Number of components tested 25,000 Number of direct labor hours 10,000 Additional information regarding the The Hunter and The Carver can be found below. The Hunter The Carver Number of units produced 15,000 100,000 Number of parts per unit 3 1 Number of production runs 1 1 Number of machine hours 16 48 Number of components tested 1,000 100 Number of direct labor hours 80 400 Required: Using activity-based costing, apply overhead to The Hunter and The Carver and calculate the gross profit of these two product lines. Cost Handy Handbook Page - 196 - McGraw Second Edition THE CUTTERS, INC. (B) Calculations ... Cost Handy Handbook Page - 197 - McGraw Second Edition THE CUTTERS, INC. (B) Calculations (continued) ... Cost Handy Handbook Page - 198 - McGraw Second Edition GREASY HANDS (Activity-Based Costing) Greasy Hands, a small hamburger eatery, has identified the following resources used in its operations: a. b. c. d. e. f. g. h. i. j. Bread Hourly help Store rent Ground beef Catsup Advertising for two-pound burger special Salary for the store managers Utilities $1-off-coupon for the second order Bags Required: 1. Classify these costs as unit-level, batch-level, product-sustaining, or facility-sustaining costs. 2. Suggest a proper cost driver for each of the above items. Cost Handy Handbook Page - 199 - McGraw Second Edition HBM INDUSTRIES (Activity-Based Costing) HBM Industries manufactures industrial tools after creating a mold for each newly designed tool. The president of HBM Industries personally inspects every unit during the trial run of a new mold and 10 percent of the units manufactured in the first three batches. Some of the activities of the firm follow: a. b. c. d. e. f. g. h. i. j. Designing molds Creating molds Inspecting products Modifying molds Setting up production Requesting and moving materials Machining Insuring equipment Paying suppliers Heating the factory Required: 1. Classify each of the activities as a unit-level, batch-level, product-sustaining, or facility-sustaining activity. 2. Identify a proper cost driver for each activity. Cost Handy Handbook Page - 200 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 201 - McGraw Second Edition CHEETAH COMPANY (Activity-Based Costing) Cheetah Company has identified the following overhead cost pools and cost drivers: Cost Pools Machine setup Materials handling Electric power Activity Costs $360,000 100,000 40,000 Cost Driver Setup hours Pounds of materials Kilowatt-hours Driver Consumption 3,000 25,000 40,000 The following cost information pertains to the production of its products The Quick and The Dead. Number of units produced Direct materials cost ($) Direct labor cost ($) Number of setup hours Pounds of materials used Kilowatt-hours The Quick 4,000 $40,000 $24,000 200 1,000 2,000 The Dead 20,000 $50,000 $40,000 240 3,000 4,000 Required: Use the activity-based costing approach to calculate the unit cost for each product. Cost Handy Handbook Page - 202 - McGraw Second Edition CHEETAH COMPANY Calculations… Cost Handy Handbook Page - 203 - McGraw Second Edition KNOB NOSTER HOSPITAL (Activity-Based Costing) Knob Noster Hospital uses a hospital wide overhead rate based on nurse-hours. The critical care unit (CCU), which has 30 beds, applies overhead using patient-days. Its budgeted cost and operating data for the year follow: Budget Information Hospital total overhead Hospital total nurse-hours $69,120,000 1,152,000 Budget Cost Driver Information for CCU for the Month of June Cost Pool Beds Equipment Nursing care Budget Cost $810,000 422,500 457,500 $1,690,000 Cost Driver Number of bed-days Number of patient-days Number of nurse-hours Budget Cost Driver Activity 900 845 6,000 In June, Knob Noster Hospital’s critical care unit had the following operating data: Nurse-hours Patient-days 5,900 870 Required: 1. Calculate the CCU’s overhead costs for the month of June using a. The hospital-wide rate. b. The CCU department-wide rate. c. The ABC cost drivers for the CCU department. 2. Explain the differences and determine which overhead assignment method is more appropriate. Cost Handy Handbook Page - 204 - McGraw Second Edition KNOB NOSTER HOSPITAL Calculations… Cost Handy Handbook Page - 205 - McGraw Second Edition KNOB NOSTER HOSPITAL Calculations… Cost Handy Handbook Page - 206 - McGraw Second Edition PROCESS COSTING We are still answering what question? Process costing is used for what types of products? When a company uses process costing, costs are accumulated by … _________________ DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 207 - McGraw Second Edition PROCESS COSTING How can unit costs be calculated? (Some review material, some new) DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 208 - McGraw Second Edition PROCESS COSTING Parallel and Sequential Processing When you get to the end of your rope, tie a knot and hang on. FRANKLIN D. ROOSEVELT (1882—1945), 32nd U.S. President Cost Handy Handbook Page - 209 - McGraw Second Edition PROCESS COSTING What is an EQUIVALENT UNIT? (“EU,” for short) DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 210 - McGraw Second Edition PROCESS COSTING HANDY NOTES: Process Costing Steps: Summarize total physical units and cost Compute EU and Cost per EU Account for cost of units completed and cost of ending inventory The greatest results in life are usually attained by simple means and the exercise of ordinary qualities. These may for the most part be summed up in these two—common sense and perseverance. OWEN FELTHAM (c. 1602—1668), Writer A professional is someone who can do his best work when he doesn’t feel like it. ALISTAIR COOKE (1908—2004), Journalist Truth is often eclipsed but never extinguished. LIVY (59 B.C. —17 A.D.), Historian ** NOTE TO “SELF”! ** See problem: ____________________________ On page _________ of the Handy Handouts For an example of process costing, including EU calculations. Cost Handy Handbook Page - 211 - McGraw Second Edition PROCESS COSTING REVIEW / SELF-QUIZ Do you know the answers to these questions?? Job-order costing, ABC and process costing are trying to answer the same question: what is it? On what types of products would you generally use Process Costing? What is sequential processing? What is parallel processing? What is an EU? How do you calculate EU using the weighted-average method? How do you calculate EU using the FIFO method? In what t-account do you calculate EU? What steps are performed when calculating process costs? Good has two meanings: It means that which is good absolutely and that which is good for somebody. ARISTOTLE (384—322 B.C), Philosopher Cost Handy Handbook Page - 212 - McGraw Second Edition B. G. WIP COMPANY (Process Costing) B. G. Wip Company manufactures and sells buggy whips as novelty items. A continuous flow production operation is necessary to satisfy demand. The company is relatively new and the accountant hired last month worked only for a job order manufacturing company before this position. The accountant is familiar with what costs to accumulate as product costs, but is having difficulty determining the amount of output for the month so that unit costs can be computed. Below are some notes the accountant has gathered to help determine the output for the last process center in the manufacturing process. 2,000 units were in beginning inventory. 9,000 units were transferred in from the preceding process center during the month. 7,700 units were completed and transferred to finished goods inventory during the month. Both the beginning and ending work in process inventory had all material added. Conversion was 60 percent complete on the beginning work in process inventory but only 1/3 complete on the ending inventory. Required: Prepare a schedule for the new accountant showing the amount of production for the period in the department. Use both the weighted average and FIFO methods. Cost Handy Handbook Page - 213 - McGraw Second Edition ABIQUA ACRES (Process Costing) The following information is available for the Pasteurization Department of the Abiqua Acres dairy farm for the year 1996: Units Costs Work in process, January 1 (100% complete as to direct materials, 40% complete for conversion costs) 5,000 Direct materials $20,000 Conversion costs 16,000 Total work in process, January 1 $36,000 Started in production during the year 60,000 Costs added: Direct materials Conversion costs Total costs added during 1996 $250,000 450,000 $700,000 Work in process, December 31 (100% complete as to direct materials, 50% complete as to conversion costs) Units transferred out during the year 57,000 Materials are added at the beginning of the process. Round unit costs to 4 decimal places. Required: 1. What would be the equivalent units of production for materials using the weighted average method? 2. What would be the equivalent units of production for conversion costs using the weighted average method? 3. What would be the cost per equivalent unit of production for materials using the weighted average method? 4. What would be the cost per equivalent unit of production for conversion costs using the weighted average method? 5. What would be the cost of goods transferred out using the weighted average method? 6. What would be the cost of ending work in process using the weighted average method? Repeat steps 1 through 6 using the FIFO Method. Cost Handy Handbook Page - 214 - McGraw Second Edition ABIQUA ACRES Weighted Average Method … Calculations ... Cost Handy Handbook Page - 215 - McGraw Second Edition ABIQUA ACRES FIFO Method … Calculations ... Cost Handy Handbook Page - 216 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 217 - McGraw Second Edition THE JOHN COMPANY (Process Costing) October 2005 manufacturing cost data are presented below for the Machining process center of The John Company. Beginning work in process consists of 5,000 gallons, all materials, 60 percent of conversion. Beginning work in process costs include $5,050 materials and $3,270 conversion. Gallons started in October are 40,000. Material costs in October are $44,000. Conversion costs in October are $48,600. Ending work in process consists of 10,000 gallons, all materials and 40 percent of conversion. Required: 1. Calculate the value of goods transferred-out and ending inventory using the weighted average method. 2. Calculate the value of goods transferred-out and ending inventory using the FIFO method. Cost Handy Handbook Page - 218 - McGraw Second Edition THE JOHN COMPANY Weighted Average Method … Calculations ... Cost Handy Handbook Page - 219 - McGraw Second Edition THE JOHN COMPANY FIFO Method … Calculations … Cost Handy Handbook Page - 220 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 221 - McGraw Second Edition STEINMUELLER STEINS, INC. (Process Costing) The following information is available for the Molding Department of Steinmueller Steins for the month of July: Units Work in process, July 1 (70% complete for conversion costs) Direct materials Direct labor Manufacturing overhead Total work in process, July 1 Costs 5,000 $ 6,000 3,000 4,000 $13,000 Started in production during July 20,000 Costs added: Direct materials Direct labor Manufacturing overhead Total costs added during July $18,000 8,000 10,000 $36,000 Work in process, July 31 (80% complete for conversion costs) 2,000 Materials are added at the beginning of the process. Round unit costs to 2 decimal places. Required: 1. What would be the equivalent units of production for materials using the Weighted Average Method? 2. What would be the equivalent units of production for conversion costs using the Weighted Average Method? 3. What would be the cost per equivalent unit of production for materials using the Weighted Average Method? 4. What would be the cost per equivalent unit of production for conversion costs using the Weighted Average Method? 5. What would be the cost of goods transferred out using the Weighted Average Method? 6. What would be the cost of ending work in process using the Weighted Average Method? Repeat steps 1 through 6 using the FIFO Method. Cost Handy Handbook Page - 222 - McGraw Second Edition STEINMUELLER STEINS, INC. Weighted Average Method … Calculations ... Cost Handy Handbook Page - 223 - McGraw Second Edition STEINMUELLER STEINS, INC. FIFO Method … Calculations ... Cost Handy Handbook Page - 224 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 225 - McGraw Second Edition CANDLELIGHT CANDLES CO. (Process Costing) The following is data for the August 2001 operations of the production department of Candlelight Candles. Beginning inventory: Units in process Percent complete with respect to materials Percent complete with respect to conversion 25,000 100% 40% Costs in the beginning inventory: Materials Conversion Total $42,650 17,152 $59,802 Units started into production during August Units completed and transferred out 510,000 523,000 Costs added to production during November Materials Conversion Total $433,500 339,690 $773,190 Work in process inventory, ending: Units in process Percent complete with respect to materials Percent complete with respect to conversion 12,000 100% 80% Required: Calculate the value of goods transferred-out and ending inventory using both the weighted average and FIFO methods. Cost Handy Handbook Page - 226 - McGraw Second Edition CANDLELIGHT CANDLES CO. Weighted Average Method … Calculations ... Cost Handy Handbook Page - 227 - McGraw Second Edition CANDLELIGHT CANDLES CO. FIFO Method … Calculations ... Cost Handy Handbook Page - 228 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 229 - McGraw Second Edition CUTTING EDGE SKIS (Process Costing) The following is data for the November, 1997, operations of the shaping and milling department of Cutting Edge Skis. Work in process inventory, beginning: Units in process Percent complete with respect to materials Percent complete with respect to conversion Costs in the beginning inventory: Materials Conversion Total 200 50% 30% $3,000 1,000 $4,000 Units started into production during November Units completed and transferred out 5,000 4,800 Costs added to production during November Materials Conversion Total $74,000 70,000 $144,000 Work in process inventory, ending: Units in process Percent complete with respect to materials Percent complete with respect to conversion 400 40% 25% Required: 1. Calculate the value of goods transferred-out and ending inventory using the weighted average method. 2. Calculate the value of goods transferred-out and ending inventory using the FIFO method. Cost Handy Handbook Page - 230 - McGraw Second Edition CUTTING EDGE SKIS Weighted Average Method … Calculations ... Cost Handy Handbook Page - 231 - McGraw Second Edition CUTTING EDGE SKIS FIFO Method … Calculations ... Cost Handy Handbook Page - 232 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 233 - McGraw Second Edition BROTHER’S BAKERIES (A) (Process Costing) Brother’s Bakeries makes loafs of bread for various distributors. Two departments are involved—Mixing and Baking. Data relating to the loaves of bread mixed in the Mixing Department during June are given below: Loaves Percent of Bread Completed Work in process, June 1 ............................ 30,000 55% Started into processing during June........... 480,000 -Work in process, June 31 .......................... 20,000 90% All materials are added at the beginning of processing in the Mixing Department. Required: Calculate the loaves of bread transferred-out of the Mixing Department and in ending inventory using the weighted average method. Cost Handy Handbook Page - 234 - McGraw Second Edition BROTHER’S BAKERIES (A) Calculations… Cost Handy Handbook Page - 235 - McGraw Second Edition BROTHER’S BAKERIES (B) (Process Costing) Brother’s Bakeries makes loafs of bread for various distributors. Two departments are involved—Mixing and Baking. Data relating to the loaves of bread mixed in the Mixing Department during June are given below: Loaves Percent of Bread Completed Work in process, June 1 ............................ 30,000 55% Started into processing during June........... 480,000 -Work in process, June 31 .......................... 20,000 90% All materials are added at the beginning of processing in the Mixing Department. Required: Calculate the loaves of bread transferred-out of the Mixing Department and in ending inventory using the FIFO method. Cost Handy Handbook Page - 236 - McGraw Second Edition BROTHER’S BAKERIES (B) Calculations… Cost Handy Handbook Page - 237 - McGraw Second Edition PIPES COMPANY (Process Costing) The Pipes Company manufactures a high-quality metal pipe in two departments, Welding and Finishing. Materials are introduced at various points during work in the Welding Department. After the welding is completed, the materials are transferred into the Finishing Department. Selected data relating to the Welding Department during Many are given below: Production data: Pounds in process, May 1: materials 100% complete, conversion 90% complete ........................................................ 70,000 Pounds started into production during May ................................................. 350,000 Pounds completed and transferred to Finishing ........................................... ? Pounds in process, May 31: materials 75% complete, conversion 25% complete ........................................................................ 40,000 Cost data: Work in process inventory, May 1: Materials cost ........................................................................................ $ 86,000 Conversion cost .................................................................................... 36,000 Cost added during May: Materials cost ........................................................................................ 447,000 Conversion cost .................................................................................... 198,000 The company uses the weighted-average method. Required: Calculate the value of goods transferred-out and ending inventory using the weighted average method. Cost Handy Handbook Page - 238 - McGraw Second Edition PIPES COMPANY Calculations… Cost Handy Handbook Page - 239 - McGraw Second Edition EDWARDS, INC. (Process Costing) Edwards Inc. manufactures a single product and uses process costing. The company’s product goes through two processing departments, Hammering and Drilling. The following activity was recorded in the Hammering Department during July: Production data: Units in process, July 1: materials 60% complete, conversion 30% complete ........................................................................ Units started into production ........................................................................ Units completed and transferred to Drilling ................................................. Units in process, July 31: materials 80% complete, conversion 40% complete ........................................................ 60,000 510,000 ? 70,000 Cost data Work in process inventory, July 1: Materials cost ........................................................................................ $ 27,000 Conversion cost .................................................................................... 13,000 $ 40,000 Cost added during July: Materials cost ........................................................................................ 468,000 Conversion cost .................................................................................... 357,000 825,000 Total cost ......................................................................................................... $865,000 Materials are added at several stages during the hammering process. The company uses the FIFO method. Required: Calculate the value of goods transferred-out and ending inventory using the FIFO method. Cost Handy Handbook Page - 240 - McGraw Second Edition EDWARDS, INC. Calculations… Cost Handy Handbook Page - 241 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 242 - McGraw Second Edition BUDGETING THE FIRM What we hope ever to do with ease, we must first learn to do with diligence. SAMUEL JOHNSON (1709—1784), Lexicographer and writer Failure is the condiment that gives success its flavor. TRUMAN CAPOTE (1924—1984), Writer Cost Handy Handbook Page - 243 - McGraw Second Edition BUDGETING What is a “BUDGET”? Budgets are used for TWO major purposes: DESIGNATED DOODLE ZONE The art of living is always to make a good thing out of a bad thing. E. F. SCHUMACHER (1911—1977), Economist Cost Handy Handbook Page - 244 - McGraw Second Edition BUDGETING Additional Handy Information: The Roles of Budgeting [also, The Benefits of Budgeting]: Planning = linking objectives and resources Motivation = degree of participation, level of goals (goal theory) Evaluation = fair and productive Coordination = among Marketing, Operations, Finance, Distribution, Purchasing, etc. Communication = “ – “ Education = learning about business by all levels of managers and staff Ritual = need to do more than just go through the motions every year to reap the benefits of planning The Environments of Budgeting: Economic Variables = assumptions, indicators, and forecasts are implicit at the onset of budgeting Organizational Factors = corporate culture, company tradition and taboos, leadership styles Behavioral Patterns = link between management philosophy, leadership style, and budget formulation; budget slack and budgeting behavior; “people make budgets work, not vice versa” Managerial Decisions About the Budget Process: What? = management’s decisions about the form or structure of the budget; line-item, program, or other budget models How? = specific process of assigning resources during budget deliberations; incremental, zero-base, and hybrid forms of budgeting; tradeoff: time vs. accuracy Who? = personnel who will be directly involved in formulating the budget; authoritative vs. participative budgeting One does what one is; one becomes what one does. ROBERT [Edler von] MUSIL (1880—1942), Novelist and essayist Cost Handy Handbook Page - 245 - McGraw Second Edition BUDGETING Budgets are generally prepared in this order: The Master Budget = DESIGNATED DOODLE ZONE It is not in everyone’s power to secure wealth, office or honors; but everyone may be good, generous, and wise. LUC de CAPIERS (1715—1747), Moralist and essayist Cost Handy Handbook Page - 246 - McGraw Second Edition BUDGETING Punctuality is the politeness of kings. LOUIS XVIII (1755—1824), King of France Cost Handy Handbook Page - 247 - McGraw Second Edition BUDGETING REVIEW / SELF-QUIZ Do you know the answers to these questions?? What is a budget? Budgets are used for what two major purposes in organizations? In what order are the budgets prepared? What do the words “pro-forma” mean? What is the master budget? [N]o legacy is so rich as honesty. WILLIAM SHAKESPEARE, All’s Well That Ends Well Character is long-standing habit. PLUTARCH (c. 46—120 A.D.), Biographer Grant me the courage not to give up even though I think it is hopeless. CHESTER W. NIMITZ (1885—1966), U.S. Navy Admiral Cost Handy Handbook Page - 248 - McGraw Second Edition BEE-SAFE COMPANY (Budgeting) BeeSafe Company manufactures burglar-resistant commercial door locks. Recently, the company began selling locks on the Web, and the company expects sales to increase dramatically compared with the prior year. For the past year, 2004, unit sales were as follows: First quarter Second quarter Third quarter Fourth quarter 21,000 26,000 25,000 30,000 Because the company started selling locks on the web, it expects sales in each quarter of 2005 will be 30 percent higher than they were in 2004. The selling price for each lock is $40. Required: What will be sales, in units and in dollars, in 2005? Cost Handy Handbook Page - 249 - McGraw Second Edition BEE-GO COMPANY (Budgeting) Bee-Go produces a sports drink that is sold in southern Florida. The company expects sales to be 15,600 bottles in January, 16,500 bottles in February, 16,000 bottles in March, and 18,500 bottles in April. There are 1,600 bottles on hand at the start of January. Bee-Go desires to maintain monthly ending inventory equal to 10 percent of next month’s expected sales. Required: How many units (bottles) will Bee-Go need to produce in the months of January, February, and March? Cost Handy Handbook Page - 250 - McGraw Second Edition BEE-KILL CHEMICAL (A) (Budgeting) Bee-Kill Chemical company has estimated that production for the next five quarters will be: Production Information Quarter 1, 2006 46,000 units Quarter 2, 2006 42,000 units Quarter 3, 2006 50,000 units Quarter 4, 2006 39,000 units Quarter 1, 2007 48,000 units Finished units of production require 4 pounds of raw material per unit. The raw material cost is $4 per pound. There are 45,000 pounds of raw material on hand at the beginning of Quarter 1, 2006. Bee-Kill desires to have 30 percent of the next quarter’s material requirements on hand at the end of each quarter. Required: 1. How many pounds of raw material will need to be purchased for Quarters 1 through 4 of 2006? 2. How much will Bee-Kill spend on raw materials during 2006? Cost Handy Handbook Page - 251 - McGraw Second Edition BEE-KILL CHEMICAL (B) (Budgeting) Bee-Kill Chemical company has estimated that production for the next five quarters will be: Production Information Quarter 1, 2006 46,000 units Quarter 2, 2006 42,000 units Quarter 3, 2006 50,000 units Quarter 4, 2006 39,000 units Quarter 1, 2007 48,000 units It takes 2.5 hours of direct labor to produce each unit of finished product. Direct labor costs are $20 per hour. Each employee can work 450 hours per quarter. Required: 1. How many hours of direct labor will be required for Quarters 1 through 4 of 2006? 2. How much will Bee-Kill spend on direct labor during 2006? Cost Handy Handbook Page - 252 - McGraw Second Edition BEE-KILL CHEMICAL (C) (Budgeting) Bee-Kill Chemical company has estimated that production for the next five quarters will be: Production Information Quarter 1, 2006 46,000 units Quarter 2, 2006 42,000 units Quarter 3, 2006 50,000 units Quarter 4, 2006 39,000 units Quarter 1, 2007 48,000 units Bee-Kill has manufacturing overhead costs as follows: Variable Costs Indirect material $2.25 per unit Indirect labor 1.50 per unit Utilities 1.00 per unit Fixed Costs per Quarter Supervisor salaries $80,000 Factory depreciation 30,000 Other 4,100 Required: 1. How much will Bee-Kill spend on variable manufacturing overhead costs each quarter of 2006? 2. How much will Bee-Kill spend in total on manufacturing overhead during 2006? Cost Handy Handbook Page - 253 - McGraw Second Edition BEE-CEE’S GUITAR EMPORIUM (A) (Budgeting) Bee-Cee’s Guitar Emporium budgeted Credit sales in the first quarter of 2006 to be as follows: January February March $60,000 80,000 90,000 Credit sales in December 2005 are expected to be $100,000. The Emporium expects to collect 80 percent of a month’s sales in the month of sale and 20 percent in the following month. Required: Estimate cash receipts for each month of the first quarter of 2006. Cost Handy Handbook Page - 254 - McGraw Second Edition BEE-CEE’S GUITAR EMPORIUM (B) (Budgeting) Bee-Cee’s Guitar Emporium expects to make instrument purchases in the first quarter of 2006 as follows: January February March $42,000 56,000 63,000 Purchases in December of 2005 are expected to be $70,000. The Emporium expects that 10 percent of a month’s purchases will be paid in the month of purchase and 90 percent will be paid the following month. Required: Estimate cash disbursements related to purchases for each month of the first quarter of 2006. Cost Handy Handbook Page - 255 - McGraw Second Edition MISSOURI RETAILERS (A) (Budgeting) Missouri Retailers expects Credit sales in the next quarter as follows: February March April May June $ 85,000 95,000 75,000 85,000 108,000 Prior experience has shown that 50 percent of a month’s sales are collected in the month of sale, 30 percent in the month following sale, and the remaining 20 percent in the second month following sale. Required: Estimate budgeted cash receipts for April, May and June. Cost Handy Handbook Page - 256 - McGraw Second Edition MISSOURI RETAILERS (B) (Budgeting) Missouri Retailers expects to make inventory purchases in the next quarter as follows: March April May June $50,000 55,000 65,000 88,000 Prior experience has shown that 30 percent of a month’s purchases are paid in the month of purchase and 70 percent in the month following purchase. Required: Estimate cash disbursements related to purchases for April, May and June. Cost Handy Handbook Page - 257 - McGraw Second Edition WHITTLE COMPANY (Budgeting) Whittle Company plans to sell 4,600 units in October and 5,000 units in November of 1997. The beginning inventory of finished goods on October 1 is expected to be 650 units. Whittle has a policy of wanting to have 10% of next month's sales as ending inventory. Required: How much production should Whittle’s schedule for the month of October? Cost Handy Handbook Page - 258 - McGraw Second Edition PARADISE COMPANY (Budgeting) Paradise Company forcasted the following information about its inventories for the fiscal year ending June 30, 1995. 7/1/94 6/30/95 Raw Material Work In Process Finished Goods 40,000 lbs. 10,000 lbs. 80,000 lbs. 50,000 lbs. 10,000 lbs. 50,000 lbs. During the manufacturing process, 2 lbs. of raw material is used to produce one finished unit of product. Required: If 500,000 units are expected to be manufactured during the fiscal year, how much raw material should Paradise Company plan on purchasing? Cost Handy Handbook Page - 259 - McGraw Second Edition WHISKERS PRODUCTS, INC. (Budgeting) Whiskers Products expects the following sales to occur during 1996: February March April May June Sales Volume 110,000 120,000 100,000 120,000 110,000 Sales Revenue $55,000 $60,000 $50,000 $60,000 $55,000 Whiskers Products makes all sales on account. Fifty percent of the sales is collected in the month of the sale, thirty percent is collected in the following month, and the remaining twenty percent is collected two months after the sale. Required: Calculate the second quarter cash budget for Whisker Products, Inc. Cost Handy Handbook Page - 260 - McGraw Second Edition KAITLYN KORPORATION (Budgeting) The cash balance of Kaitlyn Korp. at the beginning of the month is $15,000, the balance required in the cash account at the end of the month is $12,000, cash disbursements are $125,000, and cash collections from customers for the month are $90,000. Required: How much money should Kaitlyn Korp. borrow? Cost Handy Handbook Page - 261 - McGraw Second Edition ARCHER COMPANY (Budgeting) Archer Company has budgeted sales of 30,000 units in April, 40,000 units in May, and 60,000 units in June. The company has 6,000 units on hand on April 1. Required: If the company requires an ending inventory equal to 20 percent of the following month's sales, what should be Archer Company's production in May? Refer to the data for Archer Company above. Each unit requires 3 pounds of material X. Some 24,000 pounds of material X were on hand April 1, and the company requires materials on hand at the end of each month equal to 25 percent of the following month's production needs. Required: For April, the company should purchase how many pounds of material X? Cost Handy Handbook Page - 262 - McGraw Second Edition WARD COMPANY (Budgeting) Actual sales in Ward Company were: June, $30,000; July, $50,000; and August, $70,000. Sales in September are expected to be $60,000. Required Part 1: If all sales are made on account and 30 percent of a month's sales are collected in the month of sale, 50 percent in the first month after sale, and 15 percent in the second month after sale, then what are cash receipts for September budgeted to be? Required Part 2: If twenty percent of sales are cash sales, then the remaining 80 percent of sales are on account. If 30 percent of a month's account sales are collected in the month of sale, 50 percent in the first month after sale, and 15 percent in the second month after sale, then what are cash receipts for September budgeted to be? Cost Handy Handbook Page - 263 - McGraw Second Edition YOUNG PRODUCTS (Budgeting) Young Products produces coat racks. The projected sales for the first quarter of the coming year and the beginning and ending inventory data are as follows: Sales (units) Unit price Beginning inventory (units) Targeted ending inventory (units) 100,000 $15 8,000 12,000 The coat racks are molded and then painted. Each rack requires four pounds of metal, which costs $2.50 per pound. The beginning inventory of raw materials is 4,000 pounds. Young Products wants to have 6,000 pounds of metal in inventory at the end of the quarter. Each rack produced required thirty minutes of direct labor time, which is billed at $9.00 per hour. Required: For the first quarter prepare a … 1. Sales budget 2. Production budget 3. Direct materials purchases budget 4. Direct labor budget Cost Handy Handbook Page - 264 - McGraw Second Edition YOUNG PRODUCTS Calculations ... Cost Handy Handbook Page - 265 - McGraw Second Edition YOUNG PRODUCTS Calculations ... Cost Handy Handbook Page - 266 - McGraw Second Edition CYCLONE COMPANY (Production Budget) Cyclone Company has the following sales budget for the next year: Quarter 1 Quarter 2 Quarter 3 Quarter 4 10,000 units 8,000 units 12,000 units 14,000 units Company policy is to have a finished goods inventory at the end of each quarter equal to 20 percent of the next quarter’s sales. Required: Calculate the budgeted production for the second quarter of the next year. Cost Handy Handbook Page - 267 - McGraw Second Edition PENNER CORPORATION (Production and Materials Purchase Budgets) Penner Corporation’s budget calls for the following sales next year: Quarter 1 Quarter 2 Quarter 3 Quarter 4 45,000 units 38,000 units 34,000 units 48,000 units Each unit of the product requires 3 pounds of direct material. The company’s policy is to begin each quarter with an inventory of the product equal to 10 percent of that quarter’s sales requirements and an inventory of direct materials equal to 20 percent of that quarter’s direct materials requirements for productions. Required: Determine the production and materials purchase budgets for the second quarter. Cost Handy Handbook Page - 268 - McGraw Second Edition PENNER CORPORATION Calculations ... Cost Handy Handbook Page - 269 - McGraw Second Edition KIT INCORPORATED (Cash Budget) Kit Incorporated has the following budget data for 2006: Cash balance, beginning Collections from customers Expenses: Direct materials purchases Operating expenses Payroll Income taxes Machinery purchases $ 10,000 150,000 25,000 50,000 75,000 6,000 30,000 Operating expenses include $20,000 depreciation for buildings and equipment. The company requires a minimum cash balance of $20,000. Required: Compute the amount the firm needs to finance or excess cash available for Kit Incorporated to invest. Cost Handy Handbook Page - 270 - McGraw Second Edition KIT INCORPORATED Calculations… Cost Handy Handbook Page - 271 - McGraw Second Edition CMSU WHO (Accounts Receivable Collections Budget) CMSU Who’s credit sales have the following historical pattern: 70 percent collected in the month of sale 15 percent collected in the first month after sale 10 percent collected in the second month after sale 4 percent collected in the third month after sale 1 percent uncollectible These sales on open account (credit sales have been budgeted for the last six months in 2007. July August September October November December $ 60,000 70,000 80,000 90,000 100,000 85,000 Required: 1. Determine the estimated total cash collections from accounts receivable during October 2007. 2. Compute the estimated total cash collections during the fourth quarter from credit sales of the fourth quarter. Cost Handy Handbook Page - 272 - McGraw Second Edition CMSU WHO Calculations… Cost Handy Handbook Page - 273 - McGraw Second Edition Sincerity and truth are the basis of every virtue. CONFUCIUS (551—479 B.C.), Philosophoer Logic is a machine of the mind, and if it is used honestly it ought to bring out an honest conclusion. G. K. CHESTERTON (1874—1936), Journalist and essayist Cost Handy Handbook Page - 274 - McGraw Second Edition STANDARD COSTS and FLEXIBLE BUDGETING DAY #1 What I hope you always remember (BOOK BUYING EXAMPLE): What two reasons can be used to explain literally any variance? #1. #2. DESIGNATED DOODLE ZONE It is not the mountain we conquer but ourselves. EDMUND HILLARY (1919—present), Explorer and the first man conquer Mt. Everest Cost Handy Handbook Page - 275 - McGraw Second Edition STANDARD COSTS and FLEXIBLE BUDGETING Static Budget = Flexible Budget = Budget = Standard = We will learn how to calculate four variances: DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 276 - McGraw Second Edition FOOLS GOLD JEWELRY (Standard Costs and Flexible Budgeting) Fools Gold Jewelry produced 1,300 rings during March. The standard cost of each ounce of gold used in a ring is $295 per ounce. The standard quantity of material for each ring is a half ounce of gold per ring. The cost of gold purchased and used in March was $198,900 at $300 per ounce. Required: Calculate the direct materials price variance and the direct materials quantity variance. Cost Handy Handbook Page - 277 - McGraw Second Edition GEE-WHIZ SHOES (Standard Costs and Flexible Budgeting) The standard labor cost in the production of a pair of Gee-Whiz Shoes is .5 hours at $18 per hour. During the month of June, 20,000 pairs were produced. Actual labor costs were $172,900 for 9,500 hours. Required: 1. Calculate the actual labor rate paid during June. 2. Calculate the direct labor rate variance and the direct labor efficiency variance for the month of June. Cost Handy Handbook Page - 278 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 279 - McGraw Second Edition COWBOY BOOTS CO. (Standard Costs and Flexible Budgeting) Cowboy Boots Company uses a standard cost system. The standard material and labor costs for producing each pair of boots are as follows Materials (1.5 yards × $9.00) Direct labor (.5 hours × $15) $13.50 $ 7.50 During May, the company produced 7,000 pairs of boots. 10,000 yards of material were purchased for $80,000. 11,000 yards of material were used in production. Also during May, 3,800 direct labor hours were worked at a cost of $58,900. Required: Calculate the material price and quantity variances and labor rate and efficiency variances. Cost Handy Handbook Page - 280 - McGraw Second Edition COWBOY BOOTS CO. Calculations ... Cost Handy Handbook Page - 281 - McGraw Second Edition BIG DOG FOODS (Standard Costs and Flexible Budgeting) Big Dog Foods operates a small plant in Tigard, Oregon, manufacturing dog food using human-quality ingredients. Big Dog produces dog food in batches of 1,000 pounds. The product sells for $4.00 per pound. Standard costs for 2006 are: Standard direct labor cost = $15 per hour Standard direct labor hours per batch = 8 hours Standard cost of Ground Brown Rice = $0.20 per pound Standard pounds of Ground Brown Rice per batch = 800 pounds Standard cost of Chicken Meal = $0.40 per pound Standard pounds of Chicken Meal per batch = 200 pounds At the start of 2006, the company estimated monthly production and sales of 40 batches. During the month of June, 2006 (typically a somewhat slow month) 30 batches were produced (not an unusual level of production for this month). The following costs were incurred: Direct labor costs were $4,800 for 300 hours. 24,500 pounds of Ground Brown Rice costing $4,655 were purchased and used. 5,900 pounds of Chicken Meal costing $2,419 were purchased and used. Required: Calculate all variances for material and labor. Cost Handy Handbook Page - 282 - McGraw Second Edition BIG DOG FOODS Calculations ... Cost Handy Handbook Page - 283 - McGraw Second Edition P.W. PRODUCTS (Standard Costs and Flexible Budgeting) P.W. Products has developed the following standards for one of its products: Direct materials Direct labor 25 pounds at $4 per pound 8 hours at $10 per hour The following activity was recorded for the production of 12,000 units during the month of August: Materials purchased Materials used Direct labor Required: 1. 2. 3. 4. 350,000 pounds at $4.12 per pound 304,000 pounds 95,400 hours at $10.55 an hour Compute the materials price variance. Compute the materials usage variance. Compute the labor rate variance. Compute the labor efficiency variance. Cost Handy Handbook Page - 284 - McGraw Second Edition P.W. PRODUCTS Calculations ... Cost Handy Handbook Page - 285 - McGraw Second Edition POSTMODERN PRODUCTS (Standard Costs and Flexible Budgeting) Postmodern Products manufactures a single product, for which the following standards have been developed: Direct materials Direct labor Standard Quantity or Hours 5 feet ? hours Standard Price or Rate $3 per foot ? per hour Standard Cost $15 ? During October, the company purchased 15,200 feet of direct materials at a cost of $47,880, all of which was used in the production of 3,000 units. A total of 5,400 hours was spent on production during the month. The actual cost of direct labor was $61,560. The following labor variances have been computed: Total labor variance Labor rate variance $1,185 Unfavorable $ 540 Favorable Required: 1. For direct materials, compute (a) the actual cost paid for materials per foot, (b) the materials price variance, and (c) the materials usage variance. 2. For direct labor, compute (a) the standard labor rate per hour, (b) the standard hours allowed for the output of 3,000 units, and (c) the standard hours allowed per unit of product. Cost Handy Handbook Page - 286 - McGraw Second Edition POSTMODERN PRODUCTS Calculations ... Cost Handy Handbook Page - 287 - McGraw Second Edition LANDS’ END MEN’S SUITS (Standard Costs and Flexible Budgeting) The following information is available: Std. DM cost per yard = $6.00 DM qty. std. = (Std. Qty.) = Actual price per yard Actual quantity used per suit Yards purchased Units produced 2.8 yards of material .6 yards of waste .1 yards of rejects 3.5 yards per suit how the standard was established $5.00 4 yards 10,000 2,700 Required: Calculate all variances. Cost Handy Handbook Page - 288 - McGraw Second Edition PIRATES, INC. (Standard Costs and Flexible Budgeting) Pirates, Inc. uses a standard cost system. Pirates has established the following standards for the cost of one unit of product. Direct labor Std. Qty. 1.25 hours Std. Price or Rate $12.00 per hour During June, Pirates incurred total factory direct labor wages for June of $327,600. Pirates manufactured 22,000 units of product during June, using 28,000 direct labor hours. Required: 1. What is the direct labor rate variance for June? 2. What is the direct labor efficiency variance for June? 3. What was the actual direct labor rate for June? Cost Handy Handbook Page - 289 - McGraw Second Edition SMITH COMPANY (Standard Costs and Flexible Budgeting) Let’s do this example: DM DL Standards: 10 lbs. at @ 3.5 hrs at @ $8.25 / lb. $9.65 / hour Actuals: Units produced 3,200 DM purchased 36,000 @ $8.35 / lb. DM used 31,800 lbs. DL 11,520 hours DL cost $112,896 Required: 1. Compute material price and usage variances 2. Compute labor rate and efficiency variances Cost Handy Handbook Page - 290 - McGraw Second Edition SMITH COMPANY Calculations ... Cost Handy Handbook Page - 291 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 292 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 293 - McGraw Second Edition SHOCKEY COMPANY (Direct MaterialsVariances) Shockey Company used 3,375 pounds of steel in June to manufacture 900 units. The company paid $30 per pound during the month to purchase the steel. On June 1, the firm had 500 pounds of steel on hand. At the end of June, the firm only had 250 pounds of steel in its warehouse. The company spent 4,200 direct labor hours in June and the average wage during the month is $42 per hour. Additional important information: Steel allowed per unit…………………………………….. Standard cost per pound of steel…………………………. Standard direct labor wage……………………………….. Standard direct-labor hours per unit of product………….. 4 lbs. per unit $25 per lb. $40 per direct labor hour 5 Required: 1. Compute for June, Shockey Company’s purchase price and usage variances for steel. 2. Compute for June, Shockey Company’s direct labor rate and efficiency variances. Cost Handy Handbook Page - 294 - McGraw Second Edition SHOCKEY COMPANY Calculations… Cost Handy Handbook Page - 295 - McGraw Second Edition WABASH CANNONBALL (Direct Materials Variances) Wabash Cannonball has the following data from its operations for the month just completed: Direct materials purchased ....................................... Direct materials used ............................................... Total direct materials purchased costs ..................... Standard price of direct materials ............................ Direct materials usage variance-unfavorable ........... 30,000 pounds 28,000 pounds $90,000 $3.25 per pound $6,500 Required: 1. Compute the price per pound paid to purchase direct materials. 2. Compute the direct materials price variance. 3. Compute the total standard quantity of direct materials for the operation. Cost Handy Handbook Page - 296 - McGraw Second Edition WABASH CANNONBALL Calculations… Cost Handy Handbook Page - 297 - McGraw Second Edition KSU COMPANY (Direct Labor Variances) KSU Company’s direct labor costs for the month of January follow: Total direct labor-hours worked ................................................ Total standard direct labor-hours for units manufactured .......... Average hourly wage rate paid for direct labor ......................... Direct labor efficiency variance ................................................. 40,000 42,000 $25 $48,000 favorable Required: 1. What is KSU’s standard hourly rate? 2. What is KSU’s direct labor rate variance? Cost Handy Handbook Page - 298 - McGraw Second Edition KSU COMPANY Calculations… Cost Handy Handbook Page - 299 - McGraw Second Edition CREAMED CORNHUSKER, INC. (Direct Labor Variances) Creamed Cornhusker’s direct labor costs for the month of February follow: Direct labor hourly rate paid ...................................................... Total standard direct labor hours for production ....................... Direct labor hours worked ......................................................... Direct labor rate variance ........................................................... $30.00 12,000 11,000 $33,000 favorable Required: 1. Compute Cornhusker’s standard direct wage per hour in February. 2. Compute Cornhusker’s direct labor efficiency variance. Cost Handy Handbook Page - 300 - McGraw Second Edition CREAMED CORNHUSKER, INC. Calculations… Cost Handy Handbook Page - 301 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 302 - McGraw Second Edition STANDARD COSTS and FLEXIBLE BUDGETING DAY #2 Normal Cost System: Extended Normal Cost System: Small opportunities are often the beginning of great enterprises. DEMOSTHENES (384—322), Orator and statesman Cost Handy Handbook Page - 303 - McGraw Second Edition STANDARD COSTS and FLEXIBLE BUDGETING If you wouldn’t write it and sign it, don’t say it. EARL WILSON (1907—1987), Columnist Living well and beautifully and justly are all one thing. SOCRATES (c. 470—399 B.C.), Philosopher REVIEW / SELF-QUIZ Do you know the answers to these questions?? What is the difference between a budget and a standard? What is a static budget? What is a flexible budget? What four variances should you be able to calculate? When utilizing standard costs, what is another name for the PDOR? When utilizing standard costs, how is the “activity” calculated? Know Thy Calculations! Cost Handy Handbook Page - 304 - McGraw Second Edition TRUE-BLUE CORPORATION (Standard Costs and Flexible Budgeting) True-Blue Corporation has the following information available for December, 2003: VOH Std. Rate Actual VOH Actual DLH Std. Hours Allowed $3.85 per DLH $1,600 400 hours 420 hours Required: Calculate all variances. Cost Handy Handbook Page - 305 - McGraw Second Edition STRANGE FIRE, P.C. (Standard Costs and Flexible Budgeting) Strange Fire, P.C., has the following information available for the first quarter of 2004: Actual VOH Standard OH Applied Actual “hours” incurred Variable OH Rate $54,000 $56,000 2,900 hours $20 per hour Required: What is the Standard Quantity? Cost Handy Handbook Page - 306 - McGraw Second Edition THE COSTUME COMPANY (Standard Costs and Flexible Budgeting) The Costume Company incurred the following during the fiscal year ending January 31, 2002: Budgeted FOH Expected Production Std. FOH Rate Actual Production Actual FOH Actual Hours $800,000 25,000 units $8 per DLH 25,250 units $802,000 102,000 Required: Calculate all variances. Cost Handy Handbook Page - 307 - McGraw Second Edition TALLYHO COMPANY (Standard Costs and Flexible Budgeting) Normal activity for Tallyho Company is 100,000 units. Tallyho Company Operating Data for 2005 Production in units Sales in units, at $80 each Ending inventory in units Actual production costs: Variable Fixed Selling and administrative expenses: Variable at $5 per unit Fixed Standards and budgets: Budgeted fixed production costs Standard variable production costs 110,000 90,000 20,000 $2,255,000 $3,200,000 $450,000 $1,400,000 $3,000,000 $20 per unit Required: Calculate all fixed manufacturing overhead variances. Cost Handy Handbook Page - 308 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 309 - McGraw Second Edition FROSTEE FREEZE COMPANY (Standard Costs and Flexible Budgeting) Each Super-Tastee required 2.5 machine hours (standard) per unit at a variable overhead cost of $2.20 per machine hour (standard). Actual production was 3,000 Super-Tastees, actual machine hours used was 7,300, and actual variable factory overhead was $16,850. The standard fixed overhead cost per Super-Tastee was $0.90 per machine hour. Normal (budgeted) production was 3,100 Super-Tastees, and actual fixed overhead was $7,890. Required: Calculate all variable and fixed manufacturing overhead variances. Cost Handy Handbook Page - 310 - McGraw Second Edition FROSTEE FREEZE COMPANY Calculations … Cost Handy Handbook Page - 311 - McGraw Second Edition BENTON COMPANY (Standard Costs and Flexible Budgeting) Benton Co. provides the following information from their cost system. Benton records standard overhead based on direct labor hours. Actual units completed Actual labor cost (@ $6.90) Budgeted total overhead Actual variable overhead Actual fixed overhead 310 $20,769 $45,900 $25,150 $23,800 Standard specification per unit of finished product: Direct labor (9 hrs./unit) Variable overhead Fixed overhead $63.00 $72.00 $81.00 Required: Calculate the standard hours, manufacturing overhead rate, and the variances. Cost Handy Handbook Page - 312 - McGraw Second Edition BENTON COMPANY Calculations ... Cost Handy Handbook Page - 313 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 314 - McGraw Second Edition BEACHSIDE INDUSTRIES (A) (Variable Overhead Variances) Beachside Industries manufactures metal detectors. The cost of each metal detector includes direct materials, direct labor, and factory overhead. The firm traces all direct costs to products, but assigns overhead based on direct labor hours. The following measures have been provided for the month of July: Budgeted variable factory overhead Budgeted direct labor hours Budgeted metal detectors to manufacture $21,000 3,500 7,000 Actual variable factory overhead Actual direct labor hours Actual metal detectors manufactured $21,840 3,780 6,720 Required: 1. Compute the spending variance and the efficiency variance for variable factory overhead. 2. Comment on the factory’s operation in July with regard to variable factory overhead. Cost Handy Handbook Page - 315 - McGraw Second Edition BEACHSIDE INDUSTRIES (B) (Fixed Overhead Variances) Beachside Industries manufactures metal detectors. The cost of each metal detector includes direct materials, direct labor, and factory overhead. The firm traces all direct costs to products, but assigns overhead based on direct labor hours. The following information is available for the month of July: Budgeted fixed factory overhead Budgeted direct labor hours Budgeted metal detectors to manufacture $126,000 3,500 7,000 Actual fixed factory overhead Actual direct labor hours Actual metal detectors manufactured $128,800 3,780 6,720 Required: 1. Compute the spending variance and the volume variance for fixed factory overhead. 2. Comment on the factory’s operation in July with regard to fixed factory overhead. Cost Handy Handbook Page - 316 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 317 - McGraw Second Edition BIG LEAGUE, INC. (Comprehensive Variance Problem) Big League Inc. manufactures baseballs and other equipment, measuring production volume in direct laborhours and uses a flexible budget system to plan and control department overhead. Standard costs of manufacturing a dozen baseballs are as follows: Direct materials Leather String Cork Direct labor Variable overhead Fixed overhead Total 2 sheets x $ 2 6 spools x $ 1 1 sheet x $2 2 hours x $ 6 2 hours x $ 3 2 hours x $ 2 $ 4 6 2 12 6 4 $34 The overhead rate is 3,000 direct labor hours per month, though practical capacity is 3,500 hours per month. Variable overhead costs are expected to vary with the numbers of direct labor-hours actually used. During March, the plant produced 1,500 dozen baseballs. In addition, the following costs were incurred in March: Direct Material Leather String Cork Direct Labor Regular time Overtime Factory Overhead Variable Fixed Purchased 4,000 sheets at $2.00/sheet and used 3,050 sheets Purchased 12,000 spools at $1.10/spool and used 9,100 spools Purchased 2,000 sheets at $1.95/sheet and used 1,650 sheets 2,800 hours at $6.00 and 400 hours at $6.25 All of the 400 hours at $6.25 were subject to overtime premium amounting to $1,250 which is included in variable overhead $ 10,000 $ 6,500 Required: 1. What is the most appropriate time to record any variance of actual materials prices from standard? 2. What is the total direct materials price variance? 3. What is the total direct materials usage variance? 4. What is the direct labor rate (price) variance? 5. What is the direct labor efficiency variance? 6. What is the variable overhead spending variance? 7. What is the variable overhead efficiency variance? 8. What is the budget (spending) variance for fixed overhead? 9. What is the factory overhead production volume variance? Cost Handy Handbook Page - 318 - McGraw Second Edition BIG LEAGUE INC. Calculations ... Cost Handy Handbook Page - 319 - McGraw Second Edition BIG LEAGUE INC. Calculations (continued) ... Cost Handy Handbook Page - 320 - McGraw Second Edition STANDARD COSTS and FLEXIBLE BUDGETING DAY #3 Why do unfavorable variances occur?? Who is to blame? DM : DM : DL : DL : I think we consider too much the good luck of the early bird, and not enough the bad luck of the early worm. FRANKLIN D. ROOSEVELT (1882—1945), U.S. President Cost Handy Handbook Page - 321 - McGraw Second Edition STANDARD COSTS and FLEXIBLE BUDGETING Why do unfavorable variances occur?? Who is to blame? VOH : VOH : FOH : FOH : You cannot be a leader and ask other people to follow you, unless you know how to follow, too. SAM RAYBURN (1882—1961), Legislator Cost Handy Handbook Page - 322 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 323 - McGraw Second Edition BEALE STREET BLUES, INC. (Standard Costs and Flexible Budgeting) At the beginning of 1987, Beale Street Blues, Inc., adopted the following standards: Total Direct materials Direct labor Factory overhead: Variable Fixed Standard cost per unit Input 3 lbs. @ $2.50 per lb. 5 hrs. @ $7.50 per hr. $ 7.50 $37.50 $3.00 per direct labor hour $4.00 per direct labor hour $15.00 $20.00 $80.00 Normal volume per month is 40,000 standard labor hours. Beale’s January 1987 budget was based on normal volume. During January Beale produced 7,800 units, with records indicating the following: Direct materials purchased Direct materials used Direct labor Total factory overhead Variable overhead 25,000 lbs. @ $2.60 23,100 lbs. 40,100 hrs. @ $7.30 $300,000 $130,000 Required: For the month of January 1987, compute the following variances, indicating whether each is favorable or unfavorable: 1. Direct materials price variance, based on purchases. 2. Direct materials usage variance. 3. Direct labor rate variance. 4. Direct labor efficiency variance. 5. Variable factory overhead efficiency variance. 6. Fixed factory overhead spending variance. 7. Factory overhead volume variance. Cost Handy Handbook Page - 324 - McGraw Second Edition BEALE STREET BLUES, INC. Calculations ... Cost Handy Handbook Page - 325 - McGraw Second Edition BEALE STREET BLUES, INC. Calculations ... Cost Handy Handbook Page - 326 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 327 - McGraw Second Edition BALLYCANALLY CORPORATION (Standard Costs and Flexible Budgeting) The following information is available for Ballycanally's operations for the latest calendar year. Treat each variance calculation independently. Materials Variances AX-89: Material Price Sheets Requisitioned Sheets Purchased Units Produced Standard $1.75 13,000 6,500 Actual $1.80 13,250 14,000 6,300 Labor Variances Deluxe Model: Labor Hours Labor Costs Units Produced Standard Hours Per Unit Standard $36,000 Actual 4,100 $37,105 2,000 2 Variable Overhead Variances Supplies Expense: Cost Per Labor Hour Labor Hours Standard Allowable Hours Standard $1.20 Actual $1.22 27,750 28,000 Fixed Overhead Variances Standard Units Allowed Volume Variance Standard Fixed Cost Rate Total Fixed Cost Variance 60,000 $6,000 F $2.50 per unit $5,500 U Required: 1. Materials variances: Calculate the standard allowable sheets per unit and all variances. 2. Labor variances: Calculate the actual labor rate per hour and all variances. 3. Variable overhead variances: Calculate the actual supplies expense and all variances. 4. Fixed overhead variances: Calculate actual and budgeted fixed overhead and all variances. Cost Handy Handbook Page - 328 - McGraw Second Edition BALLYCANALLY CORPORATION Calculations ... Cost Handy Handbook Page - 329 - McGraw Second Edition BALLYCANALLY CORPORATION Calculations ... Cost Handy Handbook Page - 330 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 331 - McGraw Second Edition BRÖTCHEN BAKERY (Standard Costs and Flexible Budgeting) Brötchen Bakery sells brötchen (rolls) by the case to specialty shops in the U.S. During April, Brötchen Bakery produced 1,450 cases of rolls and incurred the following actual costs. Actual Costs Variable overhead ………………………………………….. $ 11,000 Fixed overhead …………………………………………….. 26,000 Actual labor cost (8,000 direct-labor hours) ……………….. 151,200 Actual material cost (30,000 pounds purchased and used) … 66,000 Standard cost and annual budget information are as follows: Standard Costs per Case Direct labor (5 hours at $18) …………………………………. Direct material (20 pounds at $2) ……………………………. Variable overhead (5 hours at $1.50) ………………………… Fixed overhead (5 hours at $3) ………………………………. Total Annual Budget Information Variable overhead …………………………………………. Fixed overhead ……………………………………………. Planned activity for year ………………………………….. $ 90.00 40.00 7.50 15.00 $152.50 $150,000 $300,000 100,000 direct-labor hours Required: Prepare as complete an analysis of cost variances as is possible from the available data. Cost Handy Handbook Page - 332 - McGraw Second Edition BRÖTCHEN BAKERY Calculations ... Cost Handy Handbook Page - 333 - McGraw Second Edition BRÖTCHEN BAKERY Calculations ... Cost Handy Handbook Page - 334 - McGraw Second Edition COXWAIN COMPANY (Standard Costs and Flexible Budgeting) Information on Coxwain Company's direct materials costs for the month of January 2003 was as follows: Actual quantity purchased Actual unit purchase price Materials purchase price variance — unfavorable (based on purchases) Standard quantity allowed for actual production Actual quantity used 18,000 $ 3.60 $ 3,600 16,000 15,000 Required: What was the direct material usage variance for January 2003? Cost Handy Handbook Page - 335 - McGraw Second Edition KENNEL STREET COMPANY (Standard Costs and Flexible Budgeting) Information on Kennel Street Company's direct material costs is as follows: Standard unit price Actual quantity purchased Standard quantity allowed for actual production Materials purchase price variance — favorable $3.60 1,600 1,450 $ 240 Required: What was the actual purchase price per unit, rounded to the nearest penny? Cost Handy Handbook Page - 336 - McGraw Second Edition REBEL COMPANY (Standard Costs and Flexible Budgeting) Information on Rebel Co.'s direct material costs for May 2005 is as follows: Actual quantity of direct materials purchased and used Actual cost of direct materials Unfavorable direct materials usage variances Standard quantity of direct materials allowed for May production 30,000 lbs. $ 84,000 $ 3,000 29,000 lbs. Required: For the month of May, what was Rex's direct materials price variance? Cost Handy Handbook Page - 337 - McGraw Second Edition BARBERSHOP COMPANY (Standard Costs and Flexible Budgeting) Information on Barbershop Company's direct labor costs for the month of January 2001 is as follows: Actual direct-labor hours Standard direct-labor hours Total direct-labor payroll Direct-labor efficiency variance — favorable 34,500 35,000 $ 241,500 $ 3,200 Required: What is Barbershop's direct labor rate variance? Cost Handy Handbook Page - 338 - McGraw Second Edition TUBBER COMPANY (Standard Costs and Flexible Budgeting) Tubber Co. uses a standard cost system. The following information pertains to direct labor for Product T for the month of October: Actual rate paid Standard rate Standard hours allowed for actual production Labor efficiency variance $ 8.40 per hour $ 8.00 per hour 2,000 hours $ 1,600 unfavorable Required: What were the actual hours worked? Cost Handy Handbook Page - 339 - McGraw Second Edition THOR’S HAMMER, INC. (Standard Costs and Flexible Budgeting) For the month of April, Thor’s Hammer's records disclosed the following data relating to direct labor: Actual costs Rate variance Efficiency variance Standard cost $10,000 1,000 favorable 1,500 unfavorable $ 9,500 For the month of April, actual direct labor hours amounted to 2,000. Required: In April, what was Thor’s Hammer’s standard direct labor rate per hour? Cost Handy Handbook Page - 340 - McGraw Second Edition DUNCE COMPANY (Standard Costs and Flexible Budgeting) The following processing standards have been set for Dunce Co.'s clerical workers: Number of hours per 1,000 paper processed Number of papers processed per year Wage rate per 1,000 papers Standard variable cost of processing 1,500,000 papers Fixed costs per year 150 1,500,000 $600 $900,000 $150,000 The following information pertains to the 1,200,000 papers that were processed during 2006: Total cost Labor cost Labor hours $915,000 $760,000 190,000 Required: 1. Assuming standard performance, what should be Dunce's expected total cost to process the 1,200,000 papers be for 2006? 2. What would be Dunce's labor rate variance for 2006? Cost Handy Handbook Page - 341 - McGraw Second Edition HERRY COMPANY (Standard Costs and Flexible Budgeting) The following information relates to one department of Herry Company for the fourth quarter 2004: Actual total overhead (fixed plus variable) Budget formula Total overhead application rate Spending variance Volume variance $178,500 $110,000 plus $0.50/hr. $1.50/hr. $8,000 unfavorable $5,000 favorable The total overhead variance is divided into three variances — spending, efficiency, and volume. Required: 1. What were the actual hours worked in this department during the quarter? 2. What were the standard hours allowed for good output in this department during the quarter? Cost Handy Handbook Page - 342 - McGraw Second Edition HERDING CATS, INC. (Standard Costs and Flexible Budgeting) Herding Cats reported the following data for 2002: Actual hours Denominator hours Standard hours allowed for output 40,000 50,000 42,000 The predetermined overhead rate was $9.00 per hour, of which $3.00 was variable and $6.00 was fixed. Required: Given these data, what was the company's volume variance for the year? Cost Handy Handbook Page - 343 - McGraw Second Edition BOSNA CORPORATION (Standard Costs and Flexible Budgeting) The following information is available for the variable overhead expense of Bosna Corporation: Estimated 1995 sales Bad debt Budgeted bad debt $2,000,000 0.5% of sales ?? Actual 1995 sales Actual bad debt $2,450,000 $12,500 Required: Calculated budgeted bad debt expense and the bad debt variance. Cost Handy Handbook Page - 344 - McGraw Second Edition STIEGL CORPORATION (Standard Costs and Flexible Budgeting) The following information is available for the variable overhead expense of Stiegl Corporation: Budgeted indirect labor per direct labor hour Budgeted indirect labor for 1995 Total (actual) indirect labor hours for 1995 Total (actual) indirect labor cost for 1995 $2 / DLH $24,000 15,000 $27,500 Required: Calculate the variable overhead spending variance for indirect labor. Cost Handy Handbook Page - 345 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 346 - McGraw Second Edition JOINT COSTS Prosperity is no just scale; adversity is the only balance to weigh friends. PLUTARCH (c. 46—c. 120 A.D.), Biographer and moralist Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots. EDWARD GEORGE BULWER-LYTTON (1803—1873), Writer Cost Handy Handbook Page - 347 - McGraw Second Edition JOINT COSTS A Helping Hand Companies may engage in a single process to simultaneously generate various different outputs such as the refining of crude oil may produce gasoline, motor oil, heating oil, and kerosene. A single process in which one product cannot be manufactured without producing others is known as a joint process. The costs incurred for materials, labor, and overhead during a joint process are referred to as the joint cost of the production process. The point at which joint process outputs are first identifiable as individual products is called the split-off point. Once the split-off point is reached, the joint cost has already been incurred and is a sunk cost that cannot be changed regardless of what future course of action is taken. There are several methods companies use to distribute joint costs to products. Under the physical units method, joint costs are distributed to products on the basis of some physical measure such as pounds, tons, gallons, board feet, atomic weight, or heat units. For example, suppose that Canyon Lumber Company processes logs into four types of lumber totaling 6,000,000 board feet. Total joint cost is $372,000. First we find the proportion of the total units for each grade, and then assign each grade its proportion of joint cost. Types Douglas Fir Western Red Cedar Forrest Oak Tiger Maple Board Feet 900,000 2,400,000 1,200,000 1,500,000 Totals 6,000,000 % of Units 0.15 0.40 0.20 0.25 Joint Cost Allocation $ 55,800 148,800 74,400 93,000 $ 372,000 The sales-value-at-split-off method allocates joint cost based on each product’s share of market or sales value at the split-off point. Using the same example of lumber mill cost given in the preceding discussion of the physical units method, the joint cost of $372,000 is distributed to the various grades on the basis of their sales value at split-off. Quantity Produced Types (Board Feet) Douglas Fir 900,000 Western Red Cedar 2,400,000 Forrest Oak 1,200,000 Tiger Maple 1,500,000 Totals Price at Split-Off (per Board Foot) $ 0.300 0.200 0.121 0.070 6,000,000 Sales Value at Split-Off $ 270,000 280,000 145,200 105,000 $1,000,200 % of Total Sales Value 0.2699 0.4799 0.1452 0.1050 Allocated Joint Cost $ 100,403 178,523 54,014 39,060 1.0000 $ 372,000 The net realizable value method assigns cost based on the joint products’ proportional net realizable values. Net realizable value (NRV) is equal to product sales revenue at split-off minus any incremental costs, which are incurred between the split-off point and the point of sale. Once the net realizable value for each product is determined, calculate the joint cost allocation using the sales value at split-off method. Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots. EDWARD GEORGE BULWER-LYTTON (1803—1873), Writer Cost Handy Handbook Page - 348 - McGraw Second Edition ABILENE MEAT PACKERS (Joint Costs) In-Class Assignment Group Members ______________________________________ ______________________________________ ______________________________________ ______________________________________ Abilene Meat Packers experienced the operating statistics in the following table for its joint meat cutting process during March 2006. The costs of the joint process were direct material, $19,000; direct labor, $11,100; and overhead, $4,300. The main products are ribs, brisket, and steak. The products do not require any additional processing or disposal costs, although management may consider additional processing. Products Ribs Brisket Steak Weight in Pounds 4,300 6,700 5,400 Sales Value at Split-Off $66,000 $43,000 $11,200 a. Calculate the per pound and total value of each joint product based on (1) relative sales value and (2) pounds. b. Discuss the advantages and disadvantages of each allocation base for (1) financial statement purposes and (2) decisions about the desirability of processing the joint products beyond the split-off point. Cost Handy Handbook Page - 349 - McGraw Second Edition ABILENE MEAT PACKERS Calculations ... Cost Handy Handbook Page - 350 - McGraw Second Edition SPARTAN, INC. (Joint Cost) Spartan Inc. produces joint products Alpha, Beta, and Chi from a process. This information concerns a batch produced in May at a joint cost of $120,000: Product Alpha Beta Chi Units Produced and Sold 2,000 4,000 8,000 After Split-Off: Total Additional Costs Total Sales Value $20,000 $180,000 20,000 100,000 5,000 20,000 Required: How much of the joint cost should be allocated to each joint product using the net realizable value method? Cost Handy Handbook Page - 351 - McGraw Second Edition CAROLINA CORP. (Joint Costs) Carolina Corp. manufactures tar from coal and from petroleum from a joint process. It allocates joint costs on the basis of sales value at split-off. Processing 750 gallons of coal tar and 1,500 gallons of petroleum tar to the split-off point costs $6,840. The sales value at split-off is $15 per gallon for coal tar and $21 for petroleum tar. Petroleum tar requires an additional process beyond split-off at a cost of $3.75 per gallon before it can be sold. Required: What is Carolina’s cost to produce 1,500 gallons of petroleum tar? Cost Handy Handbook Page - 352 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 353 - McGraw Second Edition SOAP ‘N SUDS, INC. (Joint Costs) Soap ‘N Suds Inc. manufactures two lines of liquid hand soap, Mango Delight and Kiwi Surprise, from a joint process. The joint costs incurred are $210,000 for a standard production run that generates 90,000 gallons of Mango Delight and 60,000 gallons of Kiwi Surprise. Mango Delight sells for $2.25 per gallon, when Kiwi Surprise sells for $3.50 per gallon. Required: 1. Assuming that both products are sold at the split-off point, how much of the joint cost of each production run is allocated to Mango Delight on a net realizable value basis? 2. If no additional costs are incurred after the split-off point, how much of the joint cost of each production run is allocated to Kiwi Surprise on the physical measure method basis? 3. If additional processing costs beyond the split-off point are $1.30 per gallon for Mango Delight and $0.80 per gallon for Kiwi Surprise, how much of the joint cost of each production run is allocated to Kiwi Surprise on a net realizable value basis? 4. If additional processing cost beyond the split-off point are $1.30 per gallon for Mango Delight and $0.80 per gallon for Kiwi Surprise, how much of the joint cost of each production run is allocated to Mango Delight on a physical measure method basis? Cost Handy Handbook Page - 354 - McGraw Second Edition SOAP ‘N SUDS, INC. Calculations ... Cost Handy Handbook Page - 355 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 356 - McGraw Second Edition ABSORPTION COSTING AND VARIABLE COSTING Absorption Costing Income Statement Variable Costing Income Statement DESIGNATED DOODLE ZONE Cost Handy Handbook Page - 357 - McGraw Second Edition ABSORPTION COSTING AND VARIABLE COSTING Some HANDY Information: Absorption Costing I/S Variable Costing I/S GAAP Not GAAP FOH considered an asset*; results in future cost avoidance because incurring cost now will make future costs unnecessary, therefore has future service potential and is an asset FOH not considered an asset*; viewed as relating to capacity to produce, not production itself *Asset = something that has future service potential HANDY NOTES: Advantages of Variable Costing Income Statement Format: 1. Dovetails with C-V-P 2. More useful information for pricing decisions 3. Changes in inventory don’t affect NI 4. Managers find it easier to understand 5. Impact of fixed costs on NI emphasized 6. More difficult to “game” Cost Handy Handbook Page - 358 - McGraw Second Edition ABSORPTION COSTING AND VARIABLE COSTING When will Net Income be the same for both approaches? When will Net Income be different?? DESIGNATED DOODLE ZONE To be good is noble; but to show others how to be good is nobler and no trouble. MARK TWAIN “Following the Equator” Dover Cost Handy Handbook Page - 359 - McGraw Second Edition ABSORPTION COSTING AND VARIABLE COSTING A conceptual discussion about “gaming” … DESIGNATED DOODLE ZONE To have ideas is to gather flowers; to think, is to weave them into garlands. ANNE-SOPHIE SWETCHINE (1782—1857), Writer Cost Handy Handbook Page - 360 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 361 - McGraw Second Edition BOWLING COMPANY (Absorption Costing and Variable Costing Income Statements) Bowling Company produces a single product. The cost characteristics of the product and of the manufacturing plant for 2005 are given below: Beginning inventory in units Units produced Units sold Ending inventory in units -06,000 5,000 1,000 Selling price per unit Selling and administrative expenses: Variable per unit Fixed per year Cost of a unit of product: Direct materials Direct labor Variable overhead Fixed overhead ($30,000 ÷ 6,000 units) Total cost per unit $20 $ 3 $10,000 Absorption $ 2 4 1 5 $12 Variable $2 4 1 -$7 Required: Calculate net income under absorption costing and variable costing for 2005. Cost Handy Handbook Page - 362 - McGraw Second Edition BOWLY COMPANY Calculations ... Cost Handy Handbook Page - 363 - McGraw Second Edition HOLLANDAISE COMPANY (Absorption Costing and Variable Costing Income Statements) Hollandiase Company produces a single product. Number of units produced annually Variable costs per unit: Direct material, direct labor, and variable manufacturing overhead Selling and administrative expense Fixed costs per year: Manufacturing overhead Selling and administrative expense 5,000 $5 $1 $15,000 $21,000 Selling price per unit Units Produced Units Sold $15.00 Year 1 5,000 5,000 Year 2 5,000 4,000 Year 3 5,000 6,000 Required: 1. Calculate the production cost of a single unit of product under the absorption and variable costing methods. 2. Calculate net income for years 1, 2 and 3 with under the absorption and variable costing methods. 3. Reconcile any differences between net income calculated using both methods. Cost Handy Handbook Page - 364 - McGraw Second Edition HOLLAND COMPANY Calculations ... Cost Handy Handbook Page - 365 - McGraw Second Edition FAST COMPANY (Absorption Costing and Variable Costing Income Statements) Presented below is the operating data of Fast Company in the years 2002, 2003 and 2004. Variable costs per unit: Direct materials Direct labor Variable overhead (estimated and actual) Variable selling and administrative $4.00 1.50 0.50 0.25 Estimated fixed overhead was $150,000 each year. Actual fixed overhead was also $150,000. Normal production volume was 150,000 units per year. The sales price each year was $10 per unit. Fixed selling and administrative expenses were $50,000 per year. Other operating data were as follows: Beginning inventory Production Sales Ending inventory 2002 ----150,000 150,000 ----- 2003 ----150,000 100,000 50,000 2004 50,000 150,000 200,000 ----- Required: Prepare variable-costing and absorption-costing income statements for 2002, 2003 and 2004. Cost Handy Handbook Page - 366 - McGraw Second Edition FAST COMPANY Calculations ... Cost Handy Handbook Page - 367 - McGraw Second Edition SOUTH STREET FURNITURE CO. (Absorption Costing and Variable Costing Income Statements) The South Street Furniture Company makes cabinets for televisions and VCR units. Normal capacity for the company is 80,000 units per year. During year-ended December 31, 2004, 78,000 units were manufactured. Prime cost Variable overhead Variable selling and administrative cost Fixed overhead cost Fixed selling and administrative cost $25 per unit $ 3 per unit $ 3 per unit $480,000 $340,000 During the year, 72,000 units were sold for $50 each. Beginning inventory was 8,000 units with variable manufacturing costs of $26 and applied fixed overhead of $5 per unit. The FIFO inventory method is used. Required: 1. Prepare a variable costing income statement for the South Street Furniture Company 2. Prepare an absorption costing income statement for the South Street Furniture Company. 3. Prepare a schedule to reconcile the difference in net income between the two costing methods. Cost Handy Handbook Page - 368 - McGraw Second Edition SOUTH STREET FURNITURE CO. Calculations ... Cost Handy Handbook Page - 369 - McGraw Second Edition STETSON COMPANY (Absorption Costing and Variable Costing Income Statements) Stetson Company began business on January 1, 2001. It is now the end of 2002. The company uses absorption costing. The president is trying to decide whether to adopt variable costing for measuring management performance. She has asked you to prepare comparative income statements for 2001 and 2002 under absorption and variable costing. The following simplified data are available: Beginning inventory Production Sales Ending inventory 2001 ----6,000 2,000 4,000 2002 4,000 900 3,000 1,900 Variable manufacturing costs per unit …………….. $2.00 Fixed manufacturing costs ………………………… $10,000 Denominator volume in units ……………………… 10,000 Fixed manufacturing costs per unit ……………….. $1.00 Fixed selling and administrative costs ……………. $1,400 Variable selling and administrative costs per unit sold $0.50 Selling price per unit ……………………………… $8.50 There were no inventories of work in process or raw materials. Production was far below expected volume in 2002 because of persistent shortages of raw materials. Required: 1. Prepare the requested comparative income statements. 2. Explain the difference in operating income between absorption costing and variable costing in each of the two years. 3. Sales rose in 2002. Did operating income rise? Explain. Cost Handy Handbook Page - 370 - McGraw Second Edition STETSON COMPANY Calculations ... Cost Handy Handbook Page - 371 - McGraw Second Edition STETSON COMPANY Calculations (continued) ... Cost Handy Handbook Page - 372 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 373 - McGraw Second Edition BELLY RUB PRODUCTIONS (Absorption Costing and Variable Costing Income Statements) Below are the Production, sales and cost data for Belly Rub Productions’ only product. Normal capacity is producing 10,000 units annually. Belly Rub Productions Calendar Years 2001 through 2004 Sales in units Production in units Direct materials per unit Direct labor per unit Variable MOH per unit Fixed MOH Variable S&A per unit Fixed S&A Sales price per unit Beg. Inventory in units 2001 8,000 10,000 $6 $3 $2 $50,000 $3 $30,000 $25 0 2002 9,000 12,000 $6 $4 $2 $60,000 $3 $35,000 $27 2,000 2003 13,000 10,000 $7 $4 $3 $70,000 $4 $40,000 $30 5,000 2004 10,000 8,000 $8 $5 $4 $80,000 $5 $50,000 $35 2,000 Required: 1. Calculate the production cost of a single unit of product under the absorption and variable costing methods. 2. Calculate net income for 2001, 2002 and 2003 using both the absorption and variable costing methods. 3. Reconcile any differences between net income calculated using both methods. Cost Handy Handbook Page - 374 - McGraw Second Edition BELLY RUB PRODUCTIONS Calculations ... Cost Handy Handbook Page - 375 - McGraw Second Edition BELLY RUB PRODUCTIONS Calculations (continued) ... Cost Handy Handbook Page - 376 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 377 - McGraw Second Edition ROCKY MOUNTAIN BICYCLE CLUB (Absorption Costing and Variable Costing) Rocky Mountain Bicycle Club produces all-terrain mountain bikes which are very popular in the Wyoming area. The bikes are sold at $350. The following production information for 2005 is available below: Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead Fixed selling and administrative 0 5,000 4,000 2,000 $60 70 25 10 $300,000 400,000 Required: 1. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle. Prepare an income statement based on absorption costing. 2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle. Prepare an income statement based on variable costing. Cost Handy Handbook Page - 378 - McGraw Second Edition ROCKY MOUNTAIN BICYCLE CLUB Calculations … Cost Handy Handbook Page - 379 - McGraw Second Edition GEORGETOWN, INC. (Absorption Costing and Variable Costing) Georgetown, Inc. manufactures toothbrushes that sell at wholesale for $2.00 per unit. The company had no beginning inventory in 2005. These data summarize the 2005 and 2006 operations: Sales Production: Production cost – Variable (per unit) – Fixed Marketing – Variable Administrative – Fixed 2005 2,000 units 2,200 units 2006 2,400 units 2,200 units $ 0.70 $ 1,100.00 $ 0.50 $ 300.00 $ 0.70 $ 1,100.00 $ 0.50 $ 300.00 Required: Prepare the following: 1. An income statement for each year based on absorption costing. 2. An income statement for each year based on variable costing. 3. A reconciliation and explanation of the differences in the operating income resulting from using the absorption costing method and variable costing method. Cost Handy Handbook Page - 380 - McGraw Second Edition GEORGETOWN, INC. Calculations … Cost Handy Handbook Page - 381 - McGraw Second Edition GROVER MANUFACTURING (Absorption Costing and Variable Costing) Grover Manufacturing has the following information for the years ended Dec. 31, 2003 and Dec. 31, 2004: Units Beginning inventory (units) Price Units sold Actual production (units) Budgeted production (units) Unit variable costs Manufacturing Selling and administrative Fixed costs Manufacturing Selling and administrative 2003 300 $75 1,100 1,300 1,500 2004 $35 $10 $35 $10 $27,000 $4,000 $27,000 $4,000 $75 2,000 1,500 1,500 Required: 1. Prepare the absorption cost and variable cost income statements for 2003 and 2004. 2. Prepare a reconciliation and explanation for the differences between absorption cost and variable cost income for both years. Cost Handy Handbook Page - 382 - McGraw Second Edition GROVER MANUFACTURING Calculations … Cost Handy Handbook Page - 383 - McGraw Second Edition THE LOST ART OF HENRY JONES A critic, an artist, and a scholar were assembled on a panel for an art history presentation at a university. During the question and answer portion of the lecture, a student asked the panel to name the greatest artist who ever lived. “Michelangelo,” responded the critic. “Monet,” said the artist. “Henry Jones,” replied the scholar. “Henry Jones?” questioned the student. “Who is Henry Jones?” “Many years ago, he was a janitor at this very institution.” “How can you compare a janitor to great artists like Monet and Michelangelo?” “Henry Jones has more talent than either of those men,” said the scholar. “Then why have we never heard of him?” asked the student. “Because he never thought he was good enough, so he never cultivated his talents nor shared them with the world,” the scholar sighed. “Henry Jones is lost to us forever, because he never lived up to his potential.” Adapted from American Scandal!, Pat Williams, Destiny Image Publishers I don’t paint things. I only paint the difference between things. HENRI MATISSE (1869—1954), Artist Anyone can hold the helm when the sea is calm. PUBLILIUS SYRUS (c. 42 B.C.), Writer Cost Handy Handbook Page - 384 - McGraw Second Edition TRANSFER PRICING Education is the best provision for old age. ARISTOTLE (384—322 B.C.), Philosopher Cost Handy Handbook Page - 385 - McGraw Second Edition TRANSFER PRICING A HELPING HAND A transfer price is the price charged when one division of a company provides goods or services to another division of the company. The profits of both the buying (incurring a cost) and selling (realizing revenue and expenses) divisions are impacted by the purchase, but the transfer price nets out for the company as a whole. Many methods can be used to establish a transfer price. Generally, the highest price the buying division would be willing to pay is the market price (if known); the lowest price the selling division would be willing to accept is the relevant (variable) cost of the product. The market price method sets the transfer price as the outside market price of the selling division’s product or service. Cost-Based Transfer Price Methods Variable cost: transfer price is based on the variable cost per unit. Full cost: transfer price equals a product or service’s variable costs plus fixed costs allocated to it. Variable cost + markup: transfer price equals variable cost plus a markup. For example, variable cost plus 25% Full cost + markup: transfer price equals full cost plus a markup. For example, 120% of full cost. A negotiated transfer price results when top management allows the buying and selling division managers to negotiate a transfer price. Whether or not the selling division has idle capacity will influence the price the selling division is willing to accept for the good or service. When the selling division must displace outside business to provide goods or services to another division, the lost profit is an opportunity cost for the selling division. The most beautiful thing in the world is the conjunction of learning and inspiration. -- Wanda Landowski (1879—1959), Musician Shun idleness. It is a rust that attaches itself to the most brilliant of metals. -- Voltaire [François-Marie Arouet] (1694—1778), Humorist “On with the dance, let joy be unconfined” is my motto, whether there’s any dance to dance or any joy to unconfine. -- Mark Twain [Samuel L. Clemens] (1835—1910), Humorist The two powers which in my opinion constitute a wise man are those of bearing and forbearing. -- Epicletus (c. 55—135), Philosopher Cost Handy Handbook Page - 386 - McGraw Second Edition TRANSFER PRICING More on Transfer Pricing Why are transfer prices necessary? Because many companies are decentralized. In decentralized companies, decision-making authority and empowerment is spread throughout the company, not just to a few top managers. Hence, you read in textbooks about responsibility centers such as cost centers, profit centers, and investment centers. In practice, such responsibility centers are sometimes called “divisions”. There are many advantages and disadvantages of a decentralized company. Advantages: 1. Lower-level managers usually have better information than does top management for making operational decisions. 2. Local managers can make decisions more quickly, benefiting customers and others. 3. Decentralized decision-making gives lower-level managers more experience making decisions—which is good training for higher-level positions. 4. Relatedly, top management can concentrate on big decisions rather than worrying about day-to-day operations. 5. Smaller, decentralized units are more flexible to changing business conditions. 6. Decentralized organizations are better able to expose its divisions to competition, which can improve division performance. 7. Decentralized can provide lower-level managers with greater motivation and job satisfaction because of their higher levels of responsibility. Disadvantages: 1. Lower-level managers can make decisions without understanding the true big picture. 2. Lower-level managers are less experienced decision-makers and can make poor decisions. 3. There can be a lack of coordination among lower-level managers. 4. More sophisticated (and expensive) accounting control systems are required in decentralized organizations. 5. More training of lower-level managers must occur. 6. The personal objectives of lower-level managers may different than those of the organization (at least as represented by top management). For instance, a lower-level manager may be concerned about earning a year-end bonus and use methods that are not in the best interest of the company as a whole to earn that bonus. 7. Innovation can be more difficult to introduce and implement in a decentralized company. Centralization exists when top management controls the major functions of an organization. Centralization also has advantages and disadvantages. Advantages: 1. There are greater economies of scale when company resources are coordinated centrally. 2. There is improved control over organizational resources. 3. More complex organization-wide activities can be performed. Disadvantages: 1. As a company grows larger, there is upper limit to how much can be controlled by top management. 2. Relatedly, as company activities grow more complex, they can be centrally unmanageable. 3. Diminishing returns of centralization can occur. Cost Handy Handbook Page - 387 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 388 - McGraw Second Edition TEXAS PRODUCTS, INC. (Transfer Pricing) In-Class Assignment Group Members ______________________________________ ______________________________________ ______________________________________ ______________________________________ Texas Products, Inc. is a decentralized company. Each division has its own sales force and production facilities and is operated as an investment center. Top management uses return on investment (ROI) for performance evaluation of division managers. The Midland Division has just been awarded a contract for a product that uses a component manufactured by the Amarillo Division as well as by outside suppliers. Midland used a cost figure of $3.80 for the component when the bid was prepared for the new product. Amarillo supplied this cost figure in response to Midland’s request for the average variable cost of the component. Midland Division anticipates a total cost of $26.25 for the product (including the $3.80 cost of the Amarillo component) and won the contract with a bid of $36.25. Variable manufacturing cost Variable selling and distribution cost Fixed manufacturing cost Total cost [New Product] $16.80 3.15 6.30 $26.25 (including $3.80) Amarillo has an active sales force that is continually soliciting new customers. Amarillo’s regular selling price for the component Midland needs for the new product is $6.50. Sales of the component are expected to increase. Amarillo management has the following costs associated with the component: Variable manufacturing cost Variable selling and distribution cost Fixed manufacturing cost Total cost [Component] $3.20 0.60 1.20 $5.00 The two divisions have been unable to agree on a transfer price for the component. Corporate management has never established a transfer price because interdivisional transactions have never occurred. The following suggestions have been made for the transfer price: Regular selling price Regular selling price less variable selling and distribution expenses Manufacturing cost plus 15 percent Variable manufacturing cost plus 20 percent Required: 1. Compute each of the suggested transfer prices. 2. Discuss the effect of each of the transfer prices might have on the Amarillo Division management’s attitude toward intra-company business. 3. Is the negotiation of a price between the Midland and Amarillo Divisions a satisfactory method to solve the transfer price problem? 4. Should the corporate management of Texas Products, Inc., become involved in this transfer controversy? Explain. Cost Handy Handbook Page - 389 - McGraw Second Edition TEXAS PRODUCTS, INC. Calculations… Cost Handy Handbook Page - 390 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 391 - McGraw Second Edition ZEPHYR COMPANY (Transfer Pricing) Zephyr Company’s Mechanics Division produces a high powered motor used in smaller electronics. Sales and cost data on the motor follow: Selling price per unit on the outside market Variable cost per unit Fixed costs per unit (based on capacity) Capacity in units $80 $42 $18 30,000 Zephyr has a Computer Division that would like to begin purchasing this motor from the Mechanics Division. The Computer Division is currently purchasing 5,000 motors each year from another company at a cost of $76 per motor. Zephyr Company evaluates its division managers on the basis of divisional profits. Required: 1. Assume that the Mechanics Division is now only selling 25,000 motors each year to outside customers. a. From the standpoint of the Mechanics Division, what is the lowest acceptable transfer price for motors sold to the Computer Division? b. From the standpoint of the Computer Division, what is the highest acceptable transfer price for motors acquired from the Mechanics Division? c. If left free to negotiate without interference, would you expect the division mangers to voluntarily agree to the transfer of 5,000 motors from the Mechanics Division to the Computer Division? Why or why not? d. From the standpoint of the entire company, should a transfer take place? Why or why not? 2. Assume that the Mechanics Division is now selling all of the motors it can product to outside customers. a. From the standpoint of the Computer Division, what is the lowest acceptable transfer price for motors sold to the Computer Division? b. From the standpoint of the Mechanics Division, what is the highest acceptable transfer price for motors acquired from the Mechanics Division? c. If left free to negotiate without interference, would you expect the division mangers to voluntarily agree to the transfer of 5,000 motors from the Mechanics Division to the Computer Division? Why or why not? d. From the standpoint of the entire company, should a transfer take place? Why or why not? Cost Handy Handbook Page - 392 - McGraw Second Edition ZEPHYR COMPANY Calculations… Cost Handy Handbook Page - 393 - McGraw Second Edition RAINBOW, INC. (Transfer Pricing) Rainbow, Inc.’s Yellow Division produces a part that is used by the Green Division. The cost of manufacturing the part follows: Direct materials Direct labor Variable overhead Fixed overhead* Total cost $20 4 6 10 $40 * Based on a practical volume of 100,000 parts Other costs incurred by the Yellow Division are as follows: Fixed selling and administrative Variable selling (per unit) $400,000 2 The part usually sells for between $56 and $60 in the external market. Currently, the Yellow Division is selling it to external customers for $58. The division is capable of producing 100,000 units of the part per year; however, because of a weak economy, only 75,000 parts are expected to be sold during the coming year. The variable selling expenses are avoidable if the part is sold internally. The Green Division has been buying the same part from an external supplier for $56. It expects to use 25,000 units of the part during the coming year. The manger of the Green Division has offered to buy 25,000 units from the Yellow Division for $36 per unit. Required: 1. Determine the minimum transfer price that the Yellow Division would accept. 2. Determine the maximum transfer price that the manager of the Green Division would pay. 3. Assume a transfer price of $36 each. What will be the operating income for the Yellow Division? 4. Should an internal transfer take place? Why or why not? If you were the manager of the Yellow Division, would you sell the 25,000 components for $36 each? Explain. Cost Handy Handbook Page - 394 - McGraw Second Edition RAINBOW, INC. Calculations… Cost Handy Handbook Page - 395 - McGraw Second Edition CARDINAL MANUFACTURING (Transfer Pricing) The Jocketty Division of Cardinal Manufacturing produces a component used by the LaRussa Division in its finished product. Jocketty, which is operating at full capacity, sells the components in an active external market for $80 per unit. The current transfer price for the unit is the market price, or $80. Variable costs on the unit are $50. LaRussa Division is operating at 75 percent capacity. The division has an opportunity to bid on a special order from a large wholesaler. Accountants have prepared the following cost analysis for LaRussa’s manager: Variable costs Manufacturing Shipping Electrical component purchased Transfer price (from Jocketty) Total variable costs Fixed costs (based on 100% capacity) Total costs $30 10 80 $120 30 $150 The manager considers the total cost too high to allow a competitive bid on the special order. To obtain the order, LaRussa must bid no more than $130. Accordingly, the manager has asked Jocketty Division to reduce its transfer price to $60. Jocketty’s manager has refused because the division can sell all its production to external customers at $80 per unit. Required: 1. Will Cardinal Manufacturing’s overall contribution margin per unit increase or decrease if Jocketty sells its component to LaRussa for the special order? 2. Should corporate management force the transfer at a price of $60 per unit? Cost Handy Handbook Page - 396 - McGraw Second Edition CARDINAL MANUFACTURING Calculations… Cost Handy Handbook Page - 397 - McGraw Second Edition This page left blank Cost Handy Handbook Page - 398 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR DESIGNATED DOODLE ZONE One man practicing sportsmanship is far better than 50 preaching it. KNUTE K. ROCKNE (1888—1931), College football coach Cost Handy Handbook Page - 399 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR Really great people always see the best in others; it is the little man who looks for the worst – and finds it. SAMUEL COLERIDGE-TAYLOR (1875—1912), Composer and conductor Cost Handy Handbook Page - 400 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR DESIGNATED DOODLE ZONE Never bend your head. Always hold it high. Look the world straight in the face. HELLEN KELLER (1880—1968), Writer and lecturer Cost Handy Handbook Page - 401 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR Fame is something which must be won; honor is something which must not be lost. ARTHUR SCHOPENHAUER (1788—1860), Philosopher Cost Handy Handbook Page - 402 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR DESIGNATED DOODLE ZONE If you get hung up on everybody else’s hang-ups, then the whole world’s going to be nothing more than one huge gallows. RICHARD BRAUTIGAN (1935—1984), Writer and poet Cost Handy Handbook Page - 403 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR Your honesty influences others to be honest. GEORGE WASHINGTON (1732—1799), 1st U.S. President Cost Handy Handbook Page - 404 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR DESIGNATED DOODLE ZONE The less you do, the better you do it. MARCELLO MASTROIANNI (1924—1996), Actor Cost Handy Handbook Page - 405 - McGraw Second Edition THE COST OF UNETHICAL BEHAVIOR REVIEW / SELF-QUIZ Were you paying attention?? If I asked you to prepare some review questions, what would you ask? Cost Handy Handbook Page - 406 - McGraw Second Edition MISCELLANEOUS Cost Handy Handbook Page - 407 - McGraw Second Edition MISCELLANEOUS Cost Handy Handbook Page - 408 - McGraw Second Edition MISCELLANEOUS Cost Handy Handbook Page - 409 - McGraw Second Edition MISCELLANEOUS Cost Handy Handbook Page - 410 - McGraw Second Edition 1st Edition ©2007 Dr. Nick Fessler Common sense is not so common. VOLTAIRE (1694—1778), Philosopher and writer We cannot all do GREAT THINGS, but we can do SMALL THINGS WITH GREAT LOVE. MOTHER TERESA (1910—1997) OBSERVATIONS FROM THE ANCIENTS … Hope is a waking dream. ARISTOTLE (384—322 B.C.), Philosopher Fate leads the willing, drags the unwilling. CLEANTHES (c. 331—231 B.C.), Philosopher Human behavior flows from three main sources: desire, emotion, and knowledge. PLATO (c. 428—348 B.C.), Philosopher I hold this as a rule of life: Too much of anything is bad. TERENCE (c. 186—159 B.C.), Dramatist ... INDEX ... Problem Let’s Take Notes! Topic ON THE FIRST DAY OF CLASS? Page 1 Let’s Take Notes! MANGO MOTORS SOMUCH STEROES BOJANGLE DANCE SHOES MULESKINNER ATHLETIC WEAR CATTLE COMPANY JUDGE ELY JEANS SLEEP WARM, INC. TRABER COMPANY HANNIBAL COMPANY BOB’S BEEF BOY BILLY’S BOAT BONANZA, INC. DUNCAN’S AVIONICS GLOBAL, INC. MOORE COMPUTERS PACIFIC COAST HOME FURNISHINGS TERMS AND FLOWS (Variable and Fixed Costs) (Variable and Fixed Costs) (Variable and Fixed Costs) (Cost Flows) (Cost Flows) (Cost Flows) (Cost Flows) (Cost Flows) (Cost Flows) (Cost Flows) (Classifying Costs) (Classifying Costs) (Classifying Costs) (Variable and Fixed Costs) (Cost Flows) 7 15 16 17 18 20 24 26 28 32 34 37 38 39 40 42 Let’s Take Notes! STONE MONUMENT COMPANY (A) STONE MONUMENT COMPANY (B) STONE MONUMENT COMPANY (C) STONE MONUMENT COMPANY (D) STONE MONUMENT COMPANY (E) STONE MONUMENT COMPANY (F) STONE MONUMENT COMPANY (G) EAST MEETS WEST COMPANY (A) EAST MEETS WEST COMPANY (B) EAST MEETS WEST COMPANY (C) EAST MEETS WEST COMPANY (D) EAST MEETS WEST COMPANY (E) SADLY CORPORATION THE HAT SOURCE JOLLY ROGER CANDIES HOWARD’S LIMITED CLEAR TOYS CASSIDY COMPANY DEERING BANJO COMPANY ALCATRAZ ARTIFACTS PHONY PHONES COMPANY ABTEX ELECTRONICS BAGS AND MORE LANDIS PLAYHOUSES GREEN SODA BAREFOOT BOOKS BREAKEVEN (C-V-P) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Breakeven) (Multiple-Product Breakeven) (Multiple-Product Breakeven) (Multiple-Product Breakeven) (Multiple-Product Breakeven) (Breakeven) (Breakeven) (Breakeven) (Multiple-Product Breakeven) 47 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 78 79 80 82 86 88 90 92 Cost Handy Handbook -i- McGraw Second Edition ... INDEX ... Problem Let’s Take Notes! JOE SLOW JUDE LAW & ASSOCIATES TIGÉR BOATS APPLE APPLIANCES TINA’S BEST CHOCOLATE (A) TINA’S BEST CHCOLATE (B) FUNK AND WAGNALL FRODO COMPANY TOLEDO TORPEDO COMPANY HASSLE COMPANY CALIFORNIA TEXTBOOKS (A) CALIFORNIA TEXTBOOKS (B) ADAMS’ COMPANY SAM ENTERPRISES MOEHRLE MANUFACTURING TILLAMOOK CHEESE CO. ANDRETTI COMPANY FABULOUS FURNITURE BOHR, INC. PAULEY’S PARTS COMPANY GILLIGAN’S BOAT RENTALS EARL CORPORATION STEWART COMPANY GAMERS, INC. FOSTER’S BAR-B-QUE JOHNSON COUNTY SENIOR SERVICES Cost Handy Handbook Topic Page RELEVANT COSTS (Classifying Relevant and Irrelevant Items) (Relevant Costs) MACHINE REPLACEMENT (Relevant Costs) SPECIAL ORDER (Relevant Costs) MAKE OR BUY (Relevant Costs) SELL NOW OR PROCESS FURTHER (Relevant Costs) SCARCE RESOURCES (Classifying Relevant and Irrelevant Items) (Relevant Costs) MACHINE REPLACEMENT (Relevant Costs) MACHINE REPLACEMENT (Relevant Costs) MAKE OR BUY (Relevant Costs) MAKE OR BUY (Relevant Costs) MAKE OR BUY (Relevant Costs) SCARCE RESOURCES (Relevant Costs) SCARCE RESOURCES (Relevant Costs) SPECIAL ORDER (Relevant Costs) SELL NOW OR PROCESS FURTHER (Relevant Costs) (Identifying Relevant Costs) (Relevant Costs: Make or Buy) (Relevant Costs: Disposal of Assets) (Relevant Costs: Asset Replacement) (Relevant Costs: Sell Now or Process Further) (Relevant Costs: Make or Buy) (Relevant Costs: Scarce Resources) (Relevant Costs: Special Orders) (Relevant Costs: Dropping or Retaining Segment) - ii - 95 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 116 119 120 121 122 123 124 125 126 128 McGraw Second Edition ... INDEX ... Problem Topic Page Let’s Take Notes! EGG YOLK YUMMIES JOB-ORDER COSTING (Applying Overhead) 131 135 Let’s Take Notes! THE BAIZE COMPANY ROBIN HOOD, INC. HALO PRODUCTS COMPANY NARCISSUS NEEDLES McKAY MILLS BUFFALO BROILERS HOWDY COMPANY AXIOM PRODUCTS HOLMAN COMPANY EVERYTHING INCORPORATED JOB-ORDER COSTING & APPLYING OVERHEAD (Applying Overhead) (Applying Overhead) (Applying Overhead) (Applying Overhead) (Applying Overhead) (Applying Overhead) (Applying Overhead) (Applying Overhead) (Applying Overhead) (Process Costing and Job-Order Costing) 136 139 140 141 142 143 144 146 150 152 154 Let’s Take Notes! ARC LIGHT & SOUND MARIE MANUFACTURING CO. ROLEY POLEY COMPANY PLENTIFUL PRINTING, INC. POLARIS COMPANY THE SWIZZLE MANUFACTURING CO. MARSHALL PROPS UNLIMITED OATMAN COMPANY [EVEN MORE] JOB-ORDER COSTING (Job-Order Costing) (Job-Order Costing) (Job-Order Costing) (Job-Order Costing) (Job-Order Costing) (Job-Order Costing) (Job-Order Costing) (Job-Order Costing) 155 158 160 162 164 166 168 172 176 Let’s Take Notes! MIZZOU COMPANY AUDIO BASICS CORPORATION J.B. GOODE COMPANY THE CUTTERS, INC. (A) THE CUTTERS, INC. (B) GREASY HANDS HBM INDUSTRIES CHEETAH COMPANY KNOB NOSTER HOSPITAL ACTIVITY-BASED COSTING (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) (Activity-Based Costing) 181 188 190 192 194 196 199 200 202 204 Cost Handy Handbook - iii - McGraw Second Edition ... INDEX ... Problem Topic Page Let’s Take Notes! B.G. WIP COMPANY ABIQUA ACRES THE JOHN COMPANY STEINMUELLER STEINS, INC. CANDLELIGHT CANDLES CO. CUTTING EDGE SKIS BROTHER’S BAKERY (A) BROTHER’S BAKERY (B) PIPES COMPANY EDWARDS, INC. PROCESS COSTING (Process Costing) (Process Costing) (Process Costing) (Process Costing) (Process Costing) (Process Costing) (Process Costing) (Process Costing) (Process Costing) (Process Costing) 207 213 217 218 222 226 230 234 236 238 240 Let’s Take Notes! BEE-SAFE COMPANY BEE-GO COMPANY BEE-KILL CHEMICAL (A) BEE-KILL CHEMICAL (B) BEE-KILL CHEMICAL (C) BEE-CEE’S GUITAR EMPORIUM (A) BEE-CEE’S GUITAR EMPORIUM (B) MISSOURI RETAILERS (A) MISSOURI RETAILERS (B) WHITTLE COMPANY PARADISE COMPANY WHISKERS PRODUCTS, INC. KAITLYN KORPORATION ARCHER COMPANY WARD COMPANY YOUNG PRODUCTS CYCLONE COMPANY PENNER CORPORATION KIT INCORPORATED CMSU WHO BUDGETING (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Budgeting) (Production Budget) (Production and Materials Purchase Budgets) (Cash Budget) (Accounts Receivable Collections Budget) 243 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 267 268 270 272 Cost Handy Handbook - iv - McGraw Second Edition ... INDEX ... Problem Topic Page Let’s Take Notes! (Day #1) FOOLS GOLD JEWELRY GEE-WHIZ SHOES COWBOY BOOTS CO. BIG DOG FOODS P.W. PRODUCTS POSTMODERN PRODUCTS LANDS END MENS SUITS PIRATES, INC. SMITH COMPANY SHOCKEY COMPANY WABASH CANNONBALL KSU COMPANY CREAMED CORNHUSKER, INC. STANDARD COSTS AND FLEXIBLE BUDGETING (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Direct Materials Variances) (Direct Materials Variances) (Direct Labor Variances) (Direct Labor Variances) 275 277 278 280 282 284 286 288 289 290 294 296 298 300 Let’s Take Notes! (Day #2) TRUE-BLUE CORPORATION STRANGE FIRE, P.C. THE COSTUME COMPANY TALLYHO COMPANY FROSTEE FREEZE COMPANY BENTON COMPANY BEACHSIDE INDUSTRIES (A) BEACHSIDE INDUSTRIES (B) BIG LEAGUE, INC. STANDARD COSTS AND FLEXIBLE BUDGETING (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Variable Overhead Variances) (Fixed Overhead Variances) (Comprehensive Variance Problem) 303 305 306 307 308 310 312 315 316 318 Let’s Take Notes! (Day #3) BEALE STREET BLUES, INC. BALLYCANALLY CORPORATION BRÖTCHEN BAKERY COXWAIN COMPANY KENNEL STREET COMPANY REBEL COMPANY BARBERSHOP COMPANY TUBBER COMPANY THOR’S HAMMER, INC. DUNCE COMPANY HERRY COMPANY HERDING CATS, INC. BOSNA CORPORATION STIEGL CORPORATION STANDARD COSTS AND FLEXIBLE BUDGETING (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) (Standard Costs and Flexible Budgeting) 321 324 328 332 335 336 337 338 339 340 341 342 343 344 345 Cost Handy Handbook -v- McGraw Second Edition ... INDEX ... Problem Topic Page Let’s Take Notes! ABILENE MEAT PACKERS SPARTAN, INC. CAROLINA CORP. SOAP ‘N SUDS, INC. JOINT COSTS (Joint Costs) (Joint Costs) (Joint Costs) (Joint Costs) 347 349 351 352 354 Let’s Take Notes! BOWLING COMPANY HOLLANDAISE COMPANY FAST COMPANY SOUTH STREET FURNITURE CO. STETSON COMPANY BELLY RUB PRODUCTIONS ROCKY MOUNTAIN BICYCLE CLUB GEORGETOWN, INC. GROVER MANUFACTURING ABSORPTION COSTING AND VARIABLE COSTING (Absorption and Variable Costing Income Statements) (Absorption and Variable Costing Income Statements) (Absorption and Variable Costing Income Statements) (Absorption and Variable Costing Income Statements) (Absorption and Variable Costing Income Statements) (Absorption and Variable Costing Income Statements) (Absorption Costing and Variable Costing) (Absorption Costing and Variable Costing) (Absorption Costing and Variable Costing) 357 362 364 366 368 370 374 378 380 382 Let’s Take Notes! TEXAS PRODUCTS, INC. ZEPHYR COMPANY RAINBOW, INC. CARDINAL MANUFACTURING TRANSFER PRICING (Transfer Pricing) (Transfer Pricing) (Transfer Pricing) (Transfer Pricing) 385 389 392 394 396 Let’s Take Notes! THE COST OF UNETHICAL BEHAVIOR 399 Let’s Take Notes! MISCELLANEOUS 407 Cost Handy Handbook - vi - McGraw Second Edition