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BCO322 BUDGETING AND CONTROL Task brief & rubrics Task: Final Timed Assignment (48-hour timed controlled assessment) • • • • This is an individual task

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BCO322 BUDGETING AND CONTROL Task brief & rubrics Task: Final Timed Assignment (48-hour timed controlled assessment) • • • • This is an individual task. Remember that as a student you are bound by the school’s ethics and all the work you submit should be of your own. You are required to answer all the questions in the following four exercises. You may use the accounting textbook and your notes. Each exercise contains computational part and conceptual part. For computational questions, you should show all your workings and the results. For conceptual questions, you should demonstrate thorough understanding of management accounting concepts and principles. The student’s work on conceptual questions will be assessed by deepness of analysis, solid judgments, logic of statements, and understanding of implications of management accounting and business. Submission file format: You should submit all your answers in one pdf file, clearly identifying your answer to each question separately. In your file submission, you should include only your answers. You should not include the questions to avoid high similarity percentage on Turnitin. Formalities: • • • Font: Arial 12,5 pts. Text alignment: Justified. The in-text References and the Bibliography have to be in Harvard’s citation style. Launch: WEEK 13 Friday May 7th, 2021, 23:59hrs via Moodle Submission: WEEK 13 Sunday May 9th, 2021, 23:59hrs via Moodle (Turnitin) Weight: This task is a 40% of your total grade for this subject. This task assesses the following learning outcomes: • • • • • • Outcome 1: Define overhead-related activity cost pools. Outcome 2: Demonstrate how activity bases are used to assign activity cost pools to units produced. Outcome 3: Identify the components of the cost of quality. Outcome 4: Describe the characteristics of quality measures. Outcome 5: Describe the target costing process and list its components. Outcome 6: Compute direct materials, direct labor variances and overhead variances, and explain the meaning of each. EXERCISE 1 Lyrics Corporation makes two styles of cases for compact disks, the standard case and the deluxe case. The company has assigned €210,000 in monthly manufacturing overhead to three cost pools as follows: €90,000 to machining costs, €60,000 to production set-up costs, and €60,000 to inspection costs. Additional monthly data are provided below: Sales revenue Direct materials Direct labor Machine hours Production runs Units produced and sold Standard Case Deluxe Case €480,000 €135,000 €105,000 24,000 7 33,000 €189,000 €45,000 €30,000 6,000 12 3,000 The first and last unit in each production run is inspected for quality control purposes. Inspection costs are allocated to the products based on the number of inspections required. Machining costs are allocated to products using machine hours as an activity base. Set-up costs are allocated to products based on the number of production runs each product line requires. Instructions: (a) Allocate manufacturing overhead from the activity cost pools to each product line. (b) Compute manufacturing cost per unit for each product line. (c) Compute profit per unit for each product line. Which product appears to be more profitable? (10 points per each of a, b, c) EXERCISE 2 Posh Illumine Inc. has developed a new light for lighting swimming pools. After doing market research, it has determined that customers would be willing to pay €140 for this light. Posh Illumine seeks to earn 25% profit on the light. At present, Posh Illumine makes an old-style light for €101.25, which sells for €130. Instructions: (a) What must the target cost be in order to earn the 25% profit that the company demands? (b) If Posh Illumine can adjust its costs to the target cost, the company estimates that it can sell 50,000 lights. What would Posh Illumine profit be at this point? (c) How many of the old-style lights would have to be sold to reach the same profit? (d) What is life-cycle costing and why should it be used in the target costing process? Why is target costing most effectively applied at the research and development and production process design stage of the value chain? Explain. (5 points per each of a, b, c, d) EXERCISE 3 Abigail Corporation incurred the following quality costs for the year ending December 31, 2020: Inspections Training Quality planning Maintenance Rework Warranty Testing of Equipment Scrap Lost sales Downtime Repairs € € € € € € € € € € € 32,000 15,000 7,000 12,500 3,000 7,500 6,300 8,000 22,250 8,700 5,500 Instructions: (1) Compute the following: (a) prevention costs (b) appraisal costs (c) internal failure costs (d) external failure costs (e) each quality cost category as a percentage of total costs (3 points per each of a, b, c, d, e) (2) Why is JIT often described as a “philosophy,” rather than as an inventory management technique? Explain. (5 points) EXERCISE 4 Lazurite Corporation recently implemented a standard cost system. The company's cost accountant has provided the following data to perform a variance analysis for May: Standard Cost Information Direct Material Standard Price Standard Quantity Allowed Per Unit Direct Labor Standard Rate Standard Hours Allowed Per Unit Fixed Overhead Budgeted Normal Level of Production Variable Overhead Application Rate Fixed Overhead Application Rate (€24,000 ÷ 12,000 units) Total Overhead Application Rate Actual Cost Information Cost of Material Purchased & Used Kgs of Material Purchased & Used Cost of Direct Labor Hours of Direct Labor Cost of Variable Overhead Cost of Fixed Overhead Actual Volume of Production €12 per kg 4 kgs per unit €7 per hour 0.5 hours per unit €24,000 per month 12,000 units per month €1.80 per unit €2.00 per unit €3.80 per unit €429,000 39,000 kgs €23,100 4,200 hours €17,750 €24,200 10,400 units Instructions: (1) Compute the following variances. Indicate whether each variance is favorable (F) or unfavorable (U). (a) Materials price variance (b) Materials quantity variance (c) Labor rate variance (d) Labor efficiency variance (e) Overhead spending variance (f) Overhead volume variance (4 points per each of a, b, c, d, e, f) (2) Consider the following statement: "No manager should be held responsible for a volume variance". Explain why a volume variance should not be investigated and viewed as the responsibility of some manager in an organization. (6 points) Points are stated at the end of each question. Rubrics 9-10 8-8.9 7-7.9 6-6.9 3-5.9 1-2.9 0 Descriptor The student demonstrates an excellent understanding of the concepts. The student demonstrates a good understanding of the concepts. The student demonstrates a fair understanding of the concepts. The student demonstrates some, but insufficient understanding of the concepts. The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student. The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts. The student leaves the question blank or cheats. BCO322 BUDGETING AND CONTROL Week 13: FINAL MOCK TEST SOLUTIONS QUESTION 1 Baxter Corporation makes plastic and wooden picture frames. The company has assigned €107,000 in monthly manufacturing overhead costs to two cost pools as follows: €67,000 to power costs, and €40,000 to production set-up costs. Additional monthly data are provided below: Plastic Wooden Frames Frames Sales revenue Direct materials Direct labor Machine hours Production runs Units produced and sold €254,000 €101,000 €53,360 107,420 65 59,000 €179,000 €38,360 €92,720 7,580 35 29,000 Power costs are allocated to products using machine hours as an activity base. Set-up costs are allocated to products based on the number of production runs each product line requires. Instructions: (a) Allocate manufacturing overhead from the activity cost pools to each product line. (b) Compare the total per-unit cost of manufacturing plastic frames and wooden frames. (c) On a per-unit basis, which product line appears to be most profitable? Answer: (a) Power cost pool allocation Machine hours, plastic frames Machine hours, wooden frames Total machine hours 107,420 7,580 115,000 €62,310 €4,690 Power costs, plastic frames (€67,000 × 93%) Power costs, wooden frames (€67,000 × 7%) Set-up cost pool allocation Production runs, plastic frames Production runs, wooden frames Total machine hours Set-up costs, plastic frames (€40,000 × 65%) Set-up costs, wooden frames (€40,000 × 35%) 93% 7% 100% 65 35 100 65% 35% 100% €26,000 €14,000 (b) Direct materials Direct labor Manufacturing overhead Total manufacturing costs Units produced and sold Manufacturing cost per unit Plastic €101,000 53,360 88,310 €242,670 59,000 €4.11 Wooden €38,360 92,720 18,690 €149,770 29,000 €5.16 Total revenue Units produced and sold Selling price per unit Manufacturing cost per unit Profitability per unit Plastic €254,000 59,000 €4.31 €4.11 €0.20 Wooden €179,000 29,000 €6.17 5.16 €1.01 (c) QUESTION 2 Summer Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay €90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be €65. Instructions: 1) If Summer Products requires a 25% return on sales to undertake production, what is the target cost for the new widget? Answer: €90 – (€90 × 0.25) = €67.50 2) Summer has learned that a competitor plans to introduce a similar widget at a price of €80. In response, Summer may reduce its selling price to €80. If Summer requires a 25% return on sales, what is the target cost for the new widget? Answer: €80 – (€80 × 0.25) = €60.00 3) At a price of €80, Summer's market research indicates that it can sell 60,000 units per year. Assuming Summer can reach its new target cost, how will Summer's profit at the €80 price compare to what it would have earned in the absence of the competitor's product? Answer: (60,000 × [€80 − €60]) – (50,000 × [€90 − €67.50]) = €75,000 higher QUESTION 3 Marcy Corporation is considering the implementation of a JIT inventory system. The company recently analyzed its cycle time to determine the average number of days spent in each activity of its production process. A summary of the analysis is shown below: Instructions: (a) Marcy's value-added production activities include: ________ (b) Marcy's total cycle time is ________ days. (c) Marcy's manufacturing efficiency ratio is ________%. (d) Which activities might be reduced or eliminated should Marcy implement a JIT system? Answer: (a) Cutting, Assembling, Painting, and Packaging (3 + 4 + 2 + 1 = 10 days) (b) 25 days (c) 40% [10 days ÷ 25 days (1 + 2 + 5 + 3 + 4 + 3 + 4 + 2 + 1 = 25 days)]. (d) Receiving materials, Inspecting materials, Storing materials, Moving materials into production, and Setting-up production equipment. QUESTION 4 The accountants for Monoglot Inc., have developed the following information regarding the standard cost and the actual cost of a product manufactured in March. Standard Cost Direct materials: Standard: 12 ounces at €0.20 per ounce Actual: 13 ounces at €0.22 per ounce Direct labor: Standard: 0.60 hours at €12.00 per hour Actual: 0.50 hours at €13.00 per hour Manufacturing overhead: Standard: €6,000 fixed cost and €4,000 variable cost for 10,000 units normal monthly volume Actual: €6,000 fixed cost and €2,540 variable cost for 7,000 units actually produced in March Total unit cost Actual Cost € 2.40 € 2.86 7.20 6.50 1.00 €10.60 1.22 €10.58 Instructions: a. Compute the materials price variance and the materials quantity variance, indicating whether each is favorable or unfavorable. b. Compute the labor rate variance and the labor efficiency variance, indicating whether each is favorable or unfavorable. c. Compute the overhead spending variance and the overhead volume variance, indicating whether each is favorable or unfavorable. Answer: a. Materials price variance = Actual Quantity × (Standard Price - Actual Price) Materials price variance = (7,000 units × 13 ounces) × (€0.20/oz. - €0.22/oz.) Materials price variance = € (1 820) Unfavorable Materials quantity variance = Standard Price × (Standard Quantity - Actual Quantity) Materials quantity variance = €0.20/oz. × (84,000 ounces - 91,000 ounces) Materials quantity variance = € (1 400) Unfavorable b. Labor rate variance = Actual Hours × (Standard Hourly Rate - Actual Hourly Rate) Labor rate variance = (7,000 units × 0.50 hr.) × (€12.00/hr. - €13.00/hr.) Labor rate variance = € (3 500) Unfavorable Labor efficiency variance = Standard Hourly Rate × (Standard Hours - Actual Hours) Labor efficiency variance = €12.00/hr. × [(7,000 units × 0.6 hr.) - (7,000 units × 0.50 hr.)] Labor efficiency variance = €12.00/hr. × 700 hrs. = €8 400 Favorable c. Overhead spending variance: Overhead per flexible budget—7,000 units: Fixed €6 000 Variable (7,000 units × €0.40 per unit) 2 800 Total overhead per flexible budget €8 800 Less: Actual overhead in March (€6,000 + €2,540) 8 540 Overhead spending variance € 260 Favorable Overhead volume variance: Overhead applied at standard cost (7,000 units × €1) €7 000 Less: Overhead per flexible budget (above) 8 800 Overhead volume variance € (1 800) Unfavorable BCO322 BUDGETING AND CONTROL Week 12: Standard Cost Systems & Variance Analysis (chapter 24) SOLUTIONS PROBLEM 24.2A Computing and Journalizing Cost Variances AgriChem Industries manufactures fertilizer concentrate and uses cost standards. The fertilizer is produced in 500-pound batches; the normal level of production is 250 batches of fertilizer per month. The standard costs per batch are as follows. Standard Costs per Batch Direct materials: Various chemicals (500 pounds per batch at $0.60/pound) $300 Direct labor: Preparation and blending (25 hours per batch at $7.00/hour) 175 Manufacturing overhead: Fixed ($50,000 per month ÷ 250 batches) $200 Variable (per batch) 25 225 Total standard cost per batch of fertilizer $700 During January, the company temporarily reduced the level of production to 200 batches of fertilizer. Actual costs incurred in January were as follows. Direct materials (102,500 pounds at $0.57/pound) Direct labor (4,750 hours at $6.80/hour) Manufacturing overhead Total actual costs (200 batches) Standard cost of 200 batches (200 batches × $700 per batch) Net unfavorable cost variance $ 58,425 32,300 54,525 $145,250 140,000 $ 5,250 Instructions You have been engaged to explain in detail the elements of the $5,250 net unfavorable cost variance and to record the manufacturing costs for January in the company’s standard cost accounting system. a. As a first step, compute the materials price and quantity variances, the labor rate and efficiency variances, and the overhead spending and volume variances for the month. Materials Price Variance= Actual Quantity Used×(Standard Price−Actual Price) Materials Price Variance= 102,500 pounds x ($0.60/pound −$0.57/pound) Materials Price Variance= $3,075 Favorable Materials Quantity Variance= Standard Price×(Standard Quantity−Actual Quantity) Materials Quantity Variance= $0.60/pound x (500 pounds per batch x 200 batches - 102,500 pounds) Materials Quantity Variance= ($1,500) Unfavorable Labor Rate Variance = Actual Labor Hours×(Standard Rate−Actual Rate) Labor Rate Variance = 4,750 hours x ($7.00/hour - $6.80/hour) Labor Rate Variance = $950 Favorable Labor Efficiency Variance=Standard Rate×(Standard Hours−Actual Hours) Labor Efficiency Variance= $7.00/hour x (25 hours per batch x 200 batches - 4,750 hours) Labor Efficiency Variance=$1,750 Favorable Standard overhead costs allowed at 200 baches of production: Fixed overhead costs Variable overhead ($25 per batch × 200 units) $50,000 5,000 $55,000 Actual overhead costs incurred in January: $54,525 Overhead spending variance (Favorable) $475 Overhead applied to work in process (200 batches × $225) $45,000 Standard overhead allowed (at 200 batches): Fixed Variable ($25 per batch x 200 units) Total overhead allowed at standard Overhead volume variance (Unfavorable) $50,000 5,000 55,000 $(10,000) b. Prepare journal entries to record the flow of manufacturing costs through the standard cost system and the related cost variances. Make separate entries to record the costs of direct materials used, direct labor, and manufacturing overhead. Work in Process Inventory is to be debited only with standard costs. Work in Process Inventory (at standard cost) $300 x 200 batches Materials Quantity Variance (unfavorable) 60,000 1,500 Materials Price Variance (favorable) Direct Materials Inventory (at actual cost) 3,075 $ 58,425 To record the cost of direct materials charged to production. Work in Process Inventory (at standard cost) $175 x 200 batches 35,000 Labor Rate Variance (favorable) 950 Labor Efficiency Variance (favorable) 1,750 Direct Labor (at actual cost) 32,300 To record the cost of direct labor charged to production. Work in Process Inventory (at standard cost) $225 x 200 batches 45,000 Overhead Spending Variance (favorable) Overhead Volume Variance (unfavorable) Manufacturing Overhead (at actual cost) To apply overhead to production. 475 10,000 54,525 PROBLEM 24.2B Computing and Journalizing Cost Variances Dyelot Industries manufactures dyes and uses cost standards. The dye is produced in 1,000-pound batches; the normal level of production is 500 batches of dye per month. The standard costs per batch are as follows. Standard Costs per Batch Direct materials: Various chemicals (1,000 pounds per batch at $0.80/pound) Direct labor: Preparation and blending (20 hours per batch at $8.00/hour) Manufacturing overhead: Fixed ($150,000 per month ÷ 500 batches) $300 Variable (per batch) 20 Total standard cost per batch of fertilizer $ 800 160 320 $1,280 During January, the company temporarily reduced the level of production to 400 batches of dye. Actual costs incurred in January were as follows. Direct materials (410,000 pounds at $0.75) Direct labor (7,950 hours at $7.80/hour) Manufacturing overhead Total actual costs (400 batches) Standard cost of 400 batches (400 batches × $1,280 per batch) Net unfavorable cost variance $ 307,500 62,010 150,490 $520,000 512,000 $ 8,000 Instructions You have been engaged to explain in detail the elements of the $8,000 net unfavorable cost variance and to record the manufacturing costs for January in the company’s standard cost accounting system. a. As a first step, compute the materials price and quantity variances, the labor rate and efficiency variances, and the overhead spending and volume variances for the month. Computation of materials price variance (MPV): MPV = = = = Actual Quantity Used × (Standard Price - Actual Price) 410,000 lbs. × ($0.80/lb. - $0.75/lb.) 410,000 lbs. × $0.05/lb. $20,500 Favorable Computation of materials quantity variance (MQV): MQV = = = = Standard Price × (Standard Quantity - Actual Quantity) $0.80/lb. × [(1,000 lbs. × 400 batches) - 410,000 lbs.] $0.80/lb. × -10,000 lbs. -$8,000 (or $8,000 Unfavorable) Computation of labor rate variance (LRV): LRV = = = = Actual Hours × (Standard Hourly Rate - Actual Hourly Rate) 7,950 hrs. × ($8.00/hr. - $7.80/hr.) 7,950 hrs. × $0.20/hr. $1,590 Favorable Computation of labor efficiency variance (LEV): LEV = = = = Standard Hourly Rate × (Standard Hours - Actual Hours) $8.00/hr. × [(20 hrs. × 400 batches) - 7,950 hrs.] $8.00/hr. × 50 hrs. $400 Favorable Computation of overhead spending variance: Overhead budgeted for 400 batches: Fixed $150,000 Variable (400 batches × $20 per batch) 8,000 Total budgeted overhead Less: Actual overhead for the month Overhead spending variance (favorable) $158,000 150,490 $7,510 Computation of volume variance: Overhead applied at standard cost ($320 × 400 batches) Less: Budgeted overhead (above) Volume variance (unfavorable) $128,000 158,000 $(30,000) b. Prepare journal entries to record the flow of manufacturing costs through the standard cost system and the related cost variances. Make separate entries to record the costs of direct materials used, direct labor, and manufacturing overhead. Work in Process Inventory is to be debited only with standard costs. b. General Journal Jan. 31 Work in Process Inventory (at standard) Materials Quantity Variance Materials Price Variance 320,000 8,000 20,500 Materials Inventory (actual) 307,500 To record direct materials used in January. Standard cost (400 batches × $800) = $320,000 Actual cost = $307,500 31 31 Work in Process Inventory (at standard) Labor Rate Variance Labor Efficiency Variance Direct Labor (actual) To record direct labor cost applicable to January production: Standard cost (400 batches × $160) = $64,000 Actual cost = $62,010 Work in Process Inventory (at standard) Volume Variance Overhead Spending Variance Manufacturing Overhead (actual) To apply overhead to work in process, using standard unit cost: Standard cost (400 batches × $320) = $128,000 Actual cost = $150,490 64,000 1,590 400 62,010 128,000 30,000 7,510 150,490 BCO322 BUDGETING AND CONTROL Week 11: Activity-Based Management (chapter 19) EXERCISE 19.3 Value-Added versus Non-Value-Added Activities Dainty Diners, Inc., produces various types of bird feeders. The following is a detailed description of the steps involved in the production of wooden bird feeders. 1. Raw materials, such as wood, nails, and clear plastic are purchased. Value-added. 2. The raw materials are unloaded from the delivery truck into a raw materials storage area. Non-value-added. Although the materials must be unloaded, it would be more efficient if they were delivered straight to the Cutting Department as they were needed. 3. The purchase order is checked for accuracy by an employee doing a visual count of the items. Non-value-added. The cost and/or time required to verify purchase orders could be minimized by employing a bar coding system rather than visually counting items. 4. The materials are inspected for defects such as rotting, excessive knots, and scratches. Non-value-added. The need for an inspection could be eliminated by having the supplier guarantee the quality of the items delivered. 5. The Cutting Department orders raw materials by sending a requisition form to the raw materials storage area. Non-valueadded. The process of obtaining raw materials could be sped up by using an electronic ordering system connected directly to the supplier. 6. When a requisition is received, raw materials are moved from the storage area to the Cutting Department. Non-value-added. This step could be eliminated if raw materials could be delivered by the supplier directly to the Cutting Department. 7. The wood and plastic are cut into properly sized pieces. Valueadded. 8. The cut pieces are stacked and moved to a work in process warehouse. Non-value-added. This step could be eliminated if cut materials were produced and delivered to the Assembly Department as needed. 9. The Assembly Department orders cut pieces when they are needed by sending a requisition form to the work in process warehouse. Non-value-added. The process of obtaining cut materials could be improved by electronically signaling the Cutting Department to produce and send over more materials. 10. When a requisition is received, cut pieces are moved from the work in process warehouse to the Assembly Department. Nonvalue-added. This additional movement could be eliminated if raw materials were delivered directly from the Cutting Department. 11. The cut pieces are assembled into a bird feeder. Value-added. Instructions a. For each of these steps, indicate whether it is a valueadded or non-value-added activity. b. For each of the non-value-added activities, determine whether it can be eliminated; if it cannot be eliminated, suggest ways in which the costs could be minimized or productive efficiency increased. EXERCISE 19.4 Activity-Based Management Blake Furniture, Inc., maintains an Accounts Receivable Department that currently employs eight people. Blake is interested in doing an activity analysis because an outside firm has offered to take over a portion of the activities currently handled by the Accounts Receivable Department. The four main activities handled by the department are (1) billing and recording payments, (2) customer service activities, (3) financial reporting and analysis, and (4) collecting delinquent accounts. The salaries paid to the department’s employees are as follows. Manager, 1 @ $65,000 per year $ 65,000 Clerks, 5 @ $30,000 per year 150,000 Account specialists, 2 @ $38,000 per year 76,000 Total $291,000 It is estimated that the manager of the Accounts Receivable Department spends an equal amount of her time supervising the four main activities. The clerks spend approximately half of their time on billing and recording payments. Their remaining time is divided equally between reporting activities and customer service. The two account specialists spend half of their time on delinquent account activities, and the rest of their time is split equally between financial analysis activities and customer service activities that the clerks are not qualified to perform. Paypro, Inc., has proposed that it can perform all the activities related to collecting delinquent accounts for a fee of $50,000 per year. The manager of Paypro argues that Blake can save $26,000 because the $76,000 in salaries paid to the specialists who currently handle all delinquent accounts can be eliminated. If the contract is accepted, it is estimated that the manager of the Accounts Receivable Department would need to devote a quarter of her time to dealing with Paypro employees. Instructions a. Using the information given, prepare an Activity Cost Analyses to calculate the labor cost for personnel devoted to each of the four main activities of the Accounts Receivable Department. b. Should Blake accept Paypro’s offer to take over its delinquent account activities? a. BLAKE FURNITURE, INC. Accounts Receivable Department Labor Category Manager Billing and Recording Payments ¼ time $ 16 250 Activity Category Financial Reporting Customer & Service Analysis ¼ time ¼ time $ ½ time Clerks Account Specialists Total Activity Resources b. $ 75 000 16 250 $ ¼ time $ 0 37 500 16 250 Delinquent Accounts ¼ time $ ¼ time $ ¼ time 37 500 16 250 Total Labor Resources $ 65 000 0 $ ¼ time 0 $ 150 000 ½ time $ 0 $ 19 000 $ 19 000 $ 38 000 $ 76 000 $ 91 250 $ 72 750 $ 72 750 $ 54 250 $ 291 000 In addition to handling delinquent account activities, the account specialists perform customer service activities and analysis activities that are not covered by the contract from Paypro. Thus, the $76,000 in salary savings is an overestimate. If the contract were accepted, Blake would still need one full-time specialist to perform these additional activities at a salary of $38,000 and the change would not save any of the manager’s time. Thus, if the contract were accepted, Blake would pay Paypro $50,000 while only saving $38,000 in salary costs, for a net increase in costs of $12,000. Based on the activity analysis, the contract from Paypro should not be accepted. EXERCISE 19.5 Target Costing On Point, Inc., is interested in producing and selling a deluxe electric pencil sharpener. Market research indicates that customers are willing to pay $30 for such a sharpener and that 20,000 units could be sold each year at this price. The cost to produce the sharpener is currently estimated to be $14. Instructions a. If On Point requires a 25 percent return on sales to undertake production of a product, what is the target cost for the new pencil sharpener? b. If a competitor sells basically the same sharpener for $28, what would On Point’s target cost be to maintain a 25 percent return on sales? c. At a price of $28, On Point estimates that it can sell 22,000 sharpeners per year. Assuming target costs are reached, would On Point earn more or less profit per year at the $28 selling price compared to the original estimated selling price of $30? a. Target Cost = Target Price - Target Profit Target Price = $30.00 Target Profit = 25% × $30 = $7.50 Target Cost = $30.00 - $7.50 = $22.50 b. Since the competitor is selling essentially the same product for $28.00, On Point should set its target price at that level to remain competitive. Target Cost = Target Price - Target Profit Target Price = $28.00 Target Profit = 25% × $28 = $7.00 Target Cost = $28.00 - $7.00 = $21.00 c. The original estimated selling price of $30 would yield a profit of $7.50 per unit once the target cost had been achieved. Total yearly profits would be: 20,000 units × $7.50 = $150,000 At a selling price of $28, the profit per unit once the target cost had been reached would be $7.00. Given the expected increase in sales volume, the total yearly profits under this price would be: 22,000 units × $7.00 = $154,000 Thus, total yearly profits would be $4,000 higher under the $28 selling price. EXERCISE 19.6 Just-in-Time Manufacturing Carts Corporation is trying to determine how long it takes for one product to pass through the production process. The following information was gathered regarding how many days the product spent in various production activities. Activity Inspection Storage Assembly Handling Painting Packaging Number of Days 4 3 5 2 3 1 Instructions a. b. c. d. a. Which of these activities are value-added? What is Carts’ total cycle time? Determine Carts’ manufacturing efficiency ratio. If Carts implements a total quality management program and a just-in-time inventory system, which of these activities could be eliminated? What would be the change in Carts’ manufacturing efficiency ratio? The only value-added activities are assembly and painting. b. Total cycle is 18 days (4+ 3 + 5 + 2 + 3 + 1) c. Manufacturing Efficiency Ratio = Value-Added Time Total Cycle Time (5 days in assembly + 3 days in painting) = 18 days = 8/18 = 44,44% d. JIT and TQM implementation would allow for the elimination of inspection and storage time, which would reduce cycle time to 11 days (18 - 4 - 3). Cart’s new manufacturing efficiency ratio would be: (5 days in assembly Manufacturing Efficiency Ratio = Value-Added Time Total Cycle Time + 3 days in painting) = 11 days = 8/11 = 72,73% EXERCISE 19.7 Cost of Quality Charles Berkle is the manager of Nogain Manufacturing and is interested in doing a cost of quality analysis. The following cost and revenue data are available for the most recent year ended December 31. Sales revenue $500,000 Cost of goods sold 272,000 Warranty expense 34,000 Inspection costs 15,000 Scrap and rework 10,600 Product returns due to defects 6,000 Depreciation expense 32,000 Machine maintenance expense 11,000 Wage expense 135,000 Machine breakdown costs 5,400 Estimated lost sales due to poor quality 10,000 Instructions a. Classify each of these costs into the four quality cost categories and prepare a cost of quality report for Nogain. b. What percentage of sales revenue is being spent on prevention and appraisal activities? c. What percentage of sales revenue is being spent on internal and external failure costs? NOGAIN MANUFACTURING Quality Cost Report For the Current Year Ended December 31 a. Prevention costs: Machine maintenance …………………………………………………………….. Appraisal costs: Inspections ………………………………………………………………………… Internal failure costs: Scrap and rework ………………………………………………… $ 10 600 Machine breakdown 5 400 …………………………………………………… External failure costs: Warranties ………………………………………………………… $ 34 000 Defect returns 6 000 …………………………………………………………. Lost sales 10 000 ……………………………………………………………. Total quality costs …………………………………………………………………. b. Prevention and Appraisal Costs as a Percentage of Sales c. Internal and External Failure Costs as a Percentage of Sales $ 11 000 $ 15 000 $ 16 000 $ 50 000 $ 92 000 = ($11,000 + $15,000) $500 000 = $26 000 $500 000 = 5,2% = ($16,000 + $50,000) $500 000 = $66 000 $500 000 = 13,2% BCO322 BUDGETING AND CONTROL Week 10: Activity-Based Costing (chapter 17) BRIEF EXERCISE 17.9 Selecting Activity Bases Listed are the eight activity cost pools used by Charvez Corporation. 1. 2. 3. 4. 5. 6. 7. 8. Production set-up costs Heating costs Machinery power costs Purchasing department costs Maintenance costs Design and engineering costs Materials warehouse costs Product inspection costs Suggest an appropriate activity base for allocating each of the activity cost pools to products. (Consider each cost pool independently.) Suggested activity bases for allocating the company’s activity-cost pools are listed below: Production set-up costs: The number of set-ups required (or, perhaps, number of production runs). Heating costs: The square feet of production space occupied by each product line. Machinery power costs: The total machine hours required to manufacture each product. Purchasing department costs: The number of purchase orders related to each product line. Maintenance costs: The number of work orders related to each product line. Design and engineering costs: The number of design or engineering change orders generated. Materials warehouse costs: The percent of total square feet in the materials warehouse occupied by each product line (number of component parts per product line). Product inspection costs: The number of inspections related to each product line (rate of defects). BRIEF EXERCISE 17.10 Allocations in an ABC System Danato, Inc., applies manufacturing overhead to production using an activity-based costing system. The company's utilities cost pool has accumulated $180,000, its maintenance cost pool has accumulated $240,000, and its set-up cost pool has accumulated $60,000. The company has two product lines, Deluxe and Basic. The utilities cost pool is allocated to these product lines on the basis of machine-hours. The maintenance pool is allocated on the basis of work orders. The setup pool is allocated on the basis of production runs. a. Allocate the utilities cost pool to each product line assuming the Deluxe model used 6,400 machine-hours and the Basic model used 1,600 machine-hours. STEP 1. Machine Hours Percent Deluxe 6,400 80% Basic 1,600 20% Total 8,000 100% STEP 2. Utility Cost Deluxe Basic $180,000 x 80% = $144,000 $180,000 x 20% = $36,000 $180,000 b. Allocate the maintenance pool to each product line assuming the Deluxe model required 50 work orders and the Basic model required 150 work orders. STEP 1. Deluxe Basic Total Work Orders Percent 50 150 200 25% 75% 100% STEP 2. Maintenance cost Deluxe Basic $240,000 x 25% = $60,000 $240,000 x 75% = $180,000 $240,000 c. Allocate the set-up pool to each product line assuming the Deluxe model required 30 production runs and the Basic model required 70 production runs. STEP 1. Production runs Percent Deluxe Basic 30 70 30% 70% Total 100 100% STEP 2. Set-up cost Deluxe Basic $60,000 x 30% = $18,000 $60,000 x 70% = $42,000 $60,000 EXERCISE 17.14 Allocating Activity Cost Pool Costume Kings has two product lines: machine-made costumes and hand-made costumes. The company assigns $80,000 in manufacturing overhead costs to two cost pools: power costs and inspection costs. Of this amount, the power cost pool has been assigned $32,000 and the inspection cost pool has been assigned $48,000. Additional information about each product line is shown as follows. Machine-Made Hand-Made Sales revenue $240,000 $160,000 Direct labor and materials costs $ 120,000 $ 96,000 Units produced and sold 48,000 16,000 Machine-hours 96,000 4,000 Square feet of production space 1,200 800 Material orders received 150 100 Quality control inspection hours 2,000 500 a. Allocate the manufacturing overhead from the activity cost pools to each product line. Use what you believe are the most significant cost drivers from the information provided. Power cost pool: STEP 1. Machine-made Hand-made Total Machine Hours Percent 96,000 4,000 100,000 96% 4% 100% STEP 2. Machine-made Hand-made $32,000 x 96% = $30,720 $32,000 x 4% = $1,280 $32,000 Inspection cost pool: STEP 1. Machine-made Hand-made Total Inspection Hours Percent 2,000 500 2,500 80% 20% 100% STEP 2. Machine-made Hand-made $48,000 x 80% = $38,400 $48,000 x 20% = $9,600 $48,000 b. Compute the cost per unit of machine-made costumes and hand-made costumes. Machine-Made Direct labor and materials costs $ 120,000 Hand-Made $ 96,000 Manufacturing overhead: Power costs $30,720 $1,280 Inspection costs $38,400 $9,600 TOTAL MANUFACTURING COSTS $189,120 $106,880 Units produced and sold 48,000 16,000 COST PER UNIT $3.94 $6.68 c. On a per-unit basis, which product line appears to be the most profitable? Explain. Machine-Made Hand-Made Sales revenue $240,000 $160,000 Less: MANUFACTURING COSTS $189,120 $106,880 Profit $50,880 $53,120 Units produced and sold 48,000 16,000 PROFIT PER UNIT $1.06 $3.32 EXERCISE 17.15 Using ABC to Determine a Bid Price Spear Custom Furniture uses an activity-based cost accounting system to apply overhead to production. The company maintains four overhead cost pools. The four cost pools, and their budgeted amounts for the upcoming period, are as follows. Maintenance $40,000 Materials handling 20,000 Set-ups 10,000 Quality control 45,000 Four cost drivers are used by Spear to allocate its overhead cost pools to production. The four cost drivers, and their budgeted total levels of activity for the upcoming period, are shown as follows. Machine-hours (to allocate maintenance costs) 600 hours Material moves (to allocate materials handling costs) 400 moves Set-ups (to allocate set-up costs) 100 set-ups Number of inspections (to allocate quality control costs) 300 inspections The company has been asked by Cosmopolitan University to submit a bid for tables to be used in a new computer lab. The plant manager feels that obtaining this job would result in new business in future years. Estimates for the Cosmopolitan University project are as follows. Direct materials Direct labor (500 hours) Number of machine-hours Number of material moves Number of set-ups Number of inspections $14,000 $15,000 60 20 4 2 a. Estimate the total cost of manufacturing the tables for Cosmopolitan University. Direct materials $14,000 Direct labor (500 hours) $15,000 Manufacturing Overhead: Maintenance $40,000 x 60/600 hours = $4,000 Materials handling 20,000 x 20/400 moves = $1,000 Set-ups 10,000 x 4/100 setups = Quality control 45,000 x 2/300 inspections = $300 Total Manufacturing Cost $400 $34,700 b. Determine the company’s bid price if bids are based upon the total estimated manufacturing cost of a particular project, plus 75 percent. Bid Price = $34,700 x 175% = $60,725 PROBLEM 17.6A Applying Overhead Costs Using ABC Page 794-795 Norton Chemical Company produces two products: Amithol and Bitrite. The company uses activity-based costing (ABC) to allocate manufacturing overhead to these products. The costs incurred by Norton’s Purchasing Department average $80,000 per year and constitute a major portion of the company’s total manufacturing overhead. Purchasing Department costs are assigned to two activity cost pools: (1) the order cost pool and (2) the inspection cost pool. Costs are assigned to the pools based on the number of employees engaged in each activity. Of the department’s five full-time employees, one is responsible for ordering raw materials, and four are responsible for inspecting incoming shipments of materials. Costs assigned to the order pool are allocated to products based on the total number of purchase orders generated by each product line. Costs assigned to the inspection pool are allocated to products based on the number of inspections related to each product line. For the upcoming year, Norton estimates the following activity levels. Purchase orders generated Inspections conducted Total Amithol Bitrite 10,000 2,000 8,000 2,400 1,800 600 In a normal year, the company conducts 2,400 inspections to sample the quality of raw materials. The large number of Amithol-related inspections is due to quality problems experienced in the past. The quality of Bitrite materials has been consistently good. Instructions a. Assign the Purchasing Department’s costs to the individual cost pools. 1 employee responsible for ordering 4 employees responsible for inspecting Total 1 4 5 20% 80% 100% order cost pool $80,000 x 20% = $16,000 inspection cost pool $80,000 x 80% = $64,000 Total Purchasing Department costs $80,000 b. Allocate the order cost pool to the individual product lines. STEP 1. Total Amithol Bitrite Purchase orders generated 10,000 2,000 8,000 Percent 20% 80% 100% STEP 2. Amithol $16,000 x 20% = $3,200 Bitrite $16,000 x 80% = $12,800 Order cost pool $16,000 c. Allocate the inspection cost pool to the individual product lines. STEP 1. Total Amithol Bitrite Inspections conducted 2,400 1,800 600 Percent 100% 75% 25% STEP 2. Amithol $64,000 x 75% = $48,000 Bitrite $64,000 x 25% = $16,000 Inspection cost pool $64,000 d. Suggest how Norton might reduce manufacturing costs incurred by the Purchasing Department. Norton might control manufacturing overhead costs incurred by the purchasing department in two ways: (1) The company needs to work more closely with the supplier of materials used to make Amithol in an attempt to improve the quality of materials being received. If this quality control problem can be solved, fewer quality control inspections will be needed, and the $48,000 of related costs can be reduced. (2) If possible, the company needs to consider making larger orders of Bitrite material on a less frequent basis. This might enable the company to cut costs by replacing the full-time order clerk with a part-time order clerk, and to thereby reduce the $16,000 cost currently assigned to the order cost pool.