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Management Accounting Question 1 (12 points) The Jarvis Company Manufactures and markets two products

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Management Accounting

Question 1 (12 points)

The Jarvis Company Manufactures and markets two products. The following information pertains to the financial year 2014:

	Product A	Product B
Production rate	10 units per machine hour	5 units per machine hour
Number of units produced	400,000	75,000
Number of units sold	375,000	60,000
Variable manufacturing costs per unit	$3	$5
Variable selling costs per unit	$1	$2
Sales price per unit	$5	$11

 

Total fixed manufacturing overhead costs were $440,000. Fixed selling and administration costs were $140,000, with $20,000 of this amount being traceable to product A and $30,000 traceable to product B. The remainder of the fixed SGA cost is common to the two products. Jarvis uses machine hours as the basis to allocate overhead to products. Assume that the firm began 2014 with no inventories of any kind, that expected and actual production levels are the same for 2014, and that expected overhead equals actual overhead.

Required

1. (2 points)  Compute the overhead rate per machine hour. Determine the inventoriable cost per unit of product A and of product B (as would be determined under GAAP in the preparation of gross margin based income statement)

 

2. (4 points) Prepare a gross-margin based income statement (income statement as would be prepared under GAAP) to compute the income before taxes for 2014. What is the value of the inventory of finished goods under this approach?

3. (4 points) Prepare a contribution-margin based income statement for 2014.  What is the value of the inventory of finished goods under this approach?

 

 

 

 

 

 

 

 

4. (2 points) Compare the income that you have computed in parts 2 and 3 above. If the incomes are the same (different), explain why the incomes are the same (different?

 

 

 

 

 

 

Question 2.  Part A (6 points)

Jack makes electric golf carts, sold for $4,000 each. Relevant cost data are as follows:

 

Direct materials (per unit)           $1,600                Fixed manufacturing overhead (total)                        $200,000

Direct labor (per unit)                        500                Fixed selling expenses (total)                                               80,420

Variable manufacturing overhead  250

Variable selling costs (per unit)          25

 

Jack pays income taxes at the rate of 35 percent.

 

1.  (3 points) Compute the number of carts that need to be sold to earn $500,000 after tax.

 

 

 

 

2. (3 points) Determine the revenue at which after tax profit equals 20% of sales.

 

             

 

 

 

Question 2  Part B (9 points)

Howe’s wholesalers sells baseball bats and gloves. Historical data show that it sells six bats for every two gloves. Relevant cost and price data are as follows:

 

Contribution margin per bat      $4.00    Selling price per bat       $10.00 

Contribution margin per glove   $5.00    Selling price per glove    $15.00

 

Fixed costs connected with these products amount to $170,000 per year. Ignore taxes.

 

1. (3 points) Determine the number of bats that must be sold to earn $127,500 from these two products.  

 

 

 

 

 

2. (3 points) Suppose Howe realizes $800,000 in revenue.  However, it only sold five bats for every two gloves. What is the income earned?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. (3 points) This part is independent of the above two parts. In class, we defined operating leverage in two different ways. Using any one of these definitions, explain intuitively why a manager should care about operating leverage. When would a manager prefer a technology or a cost structure that reflects high vs low operating leverage.

 

 

Question 3:  (17 points)

Lincoln Steel Company produces automobile bumpers, sold for $90 per bumper. Cost data are as follows: Materials cost is $42.00, labor cost is $14.00 and allocated overhead is $26.25 per unit.

 

Each bumper includes one unit of mounting hardware. The mounting hardware has materials cost of $12 and labor cost of $1.60 (these numbers are included in the values provided earlier for the bumper as a whole). Each unit of the mounting hardware takes 0.20 machine hours (12 minutes) and all other work takes 1.55 machine hours (=1 hour 33 minutes) for a total of 1.75 machine hours (1 hour 45 minutes).

 

Lincoln allocates overhead based on labor cost and estimates that 2/3 of the allocated amount represents fixed manufacturing costs. Defining capacity in terms of machine hours, it estimates that it can make up to 155,000 bumpers per year (as per the current process for making bumpers).

 

Indiana automobiles has offered to supply as many units of mounting hardware as needed for $16 per unit.

 

1. (6 points) Suppose that Lincoln is operating at a volume of 120,000 bumpers per year.  What is the profit impact of accepting the offer from Indiana Automobiles?

 

 

 

 

2. (8 points) Suppose that Lincoln is operating at a volume of 155,000 units per year because it can sell all the bumpers it makes. Thus, if it accepts the offer from Lincoln, it can use the freed up capacity to make additional bumpers. What is the profit impact of accepting the offer from Indiana?

 

 

 

3. (3 points) This part is independent of the above two parts. Consider an existing capacity resource such as a machine whose capacity is measured in hours it can be realistically operated in a year. In some months, the machine is idle for a few hours because of lack of demand. At other times, demand is high and available machine capacity is not enough. In such instances, let us say additional machine hours are “purchased” from a nearby machine shop to meet the demand. Suppose the company receives a special job that requires some machine time. Briefly answer the following questions.

1. In “costing” this special job, how much would you charge for machine time if the machine is idling? Why?
2. In “costing” this special job, how much would you charge for machine time if the machine is being fully utilized? Why?
3. Most companies allocate fixed costs to products and jobs using some allocation basis such as machine hours (as you have seen in the class). Would you use this method to “cost” the special job? Why or why not?

 

 

 

Question 4 (14 points)

Outdoor Adventures is a contract provider that produces engine parts for small vehicles. Outdoor Adventures produces two parts, Part A and Part B. The competition is fierce among the contract providers of these products. Currently in the marketplace, Part A is experiencing extraordinary competition. On the other hand, Outdoor Adventures seems to have a corner on the market for product B. Because of this, Outdoor Adventures is considering dropping Part A to focus solely on Part B.

Jackie Chen, the controller, is very concerned there might be some problem with the current cost system. Jackie Chen has expressed his concern to the CFO, Lois Lane. Lois has instructed Jackie to conduct a thorough cost study. Jackie collects the following information regarding the products: Prices, materials and labor costs per unit, and typical volumes of activity measures.

	Part A	Part B
Production Units	100,000	21,000
Selling Price per unit	$58.00	$46.00
Materials and direct labor cost per unit	$17.06	$12.52
Number of production runs	20	40
Number of purchasing and receiving orders processed	80	200
Number of machine hours	25,500	12,000
Number of direct labor hours	50,000	5,000
Number of engineering hours	10,000	10,000
Number of material moves	100	80

Outdoor Adventures has monthly overhead (just manufacturing) of $1,410,000, divided into the following activity cost pools:

Setup costs	$60,000
Machine costs	350,000
Purchasing and Receiving costs	420,000
Engineering Costs	400,000
Materials handling cost.	180,000
Total	$1,410,000

 

 

 

1. (2 points) Calculate the per unit costs of products A and B after allocating costs using direct labor hours as the only allocation basis. That is, compute a single rate for the entire plant. Round rates to two decimal points.

 

 

2. (3 points) Calculate the per unit costs of A and B after allocating the costs of machines and setup using machine hours as the basis and all remaining overhead using direct labor hours as the only allocation basis. That is, compute two burden rates, as would be done with a departmental accounting system. Round rates to two decimal points.

Rate per machine hour = $410.000 / 37,500 = 10.93 / MH
 

 

 

3. (5 Points) Calculate the manufacturing overhead costs for each part using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Use the most appropriate activity driver for assigning activity costs to the two products. Round rates to two decimal points.

 

 

4. (2 points) Comment on why many firms choose not to implement an activity-based costing system.

 

 

5. (2 points) Noting the ABC costing by itself does not change profit, address the steps that must be taken for this initiative to have a profit impact.