INTRODUCTORY MGT ACCOUNTING
Problem 1 -
Cozi Company makes a very comfortable scarf in two models, Basic and Premium. The Basic scarfs are made of wool. The Premium scarfs are made of both wool and silk. Cozi uses a FIFO cost flow assumption for both direct materials and finished goods inventory. The company uses activity-based costing and classifies all overhead costs for the month of May as shown in the following table:
|
Cost Type
|
Denominator Activity
|
Rate
|
|
Manufacturing:
|
|
|
|
Setup
|
Setup-hours
|
$8 per setup-hour
|
|
Production
|
Direct manufacturing labor-hours (DMLH)
|
$1.50 per DMLH
|
|
Inspection
|
Number of units of scarfs
|
$1.00 per unit
|
|
Non-manufacturing:
|
|
|
|
Marketing & administration Shipping
|
Sales revenues
|
6%
|
|
Shipping
|
Number of shipments
|
$15 per shipment
|
Cozi Company, based on past experience, is preparing its budget for May 2014. Related sales, inventory and other information are as follows:
Expected sales quantity of Basic - 1,000 units
Expected sales quantity of Premium - 2,000 units
Unit selling price of Basic - $60
Unit selling price of Basic - $100
Cost of direct material, wool - $3.5 per ounce
Cost of direct material, silk - $5.0 per ounce
Direct materials required for a unit of Basic - 1 ounce of wool, and 0 ounce of silk
Direct materials required for a unit of Premium - 2 ounce of wool, and 1 ounce of silk
Cost of direct manufacturing labor - $10 per direct manufacturing labor hour
Direct labor required for a unit of Basic - 1 hour
Direct labor required for a unit of Premium - 2 hours
Setup hours per batch for Basic - 2 hours
Setup hours per batch for Premium - 3 hours
Beginning inventory of direct materials, wool - 500 ounces
Beginning inventory of direct materials, silk - 270 ounces
Cost of beginning inventory of direct materials, wool - $1,750
Cost of beginning inventory of direct materials, silk - $1,350
Target ending inventory of direct materials, wool - 320 ounces
Target ending inventory of direct materials, silk - 100 ounces
Beginning inventory of finished goods, Basic - 100 units
Beginning inventory of finished goods, Premium - 300 units
Cost of beginning inventory of finished goods, Basic - $4,600
Cost of beginning inventory of finished goods, Premium - $21,900
Target ending inventory of finished goods, Basic - 200 units
Target ending inventory of finished goods, Premium - 400 units
- All scarfs are produced in batches of 25 units.
- All scarfs are shipped in batches of 100 units.
- All sales are on account; 70% are collected in the month of the sale, 29% are collected in the following month, and 1% are never collected and written off as bad debts.
- All purchases of direct materials are on account; 60% are paid in the month of purchase and 40% are paid in the following month.
- All other costs are paid in the month incurred.
- A cash dividend of $10,000 is declared and paid in June.
- Monthly interest payments of 0.75% (9% per year) on a $80,000 long-term note payable is made.
- The income tax expense of $3,100 outstanding as of April is paid in May. There is no income tax expense for May.
- 35% of manufacturing overhead costs, and 15% of nonmanufacturing overhead costs are depreciation.
Cozi has its balance sheet for April 30, 2014 as follows:
|
Cozi Company Balance Sheet as of April 30, 2014
|
|
Assets
|
|
|
|
Cash
|
|
$10,000
|
|
Accounts receivable (net of allowance for bad debts)
|
|
102,6000
|
|
Inventories
|
|
|
|
Direct materials
|
|
1,850
|
|
Finished goods
|
|
26,500
|
|
Fixed assets
|
$300,000
|
|
|
Less Accumulated depreciation
|
47,000
|
253,000
|
|
Total assets
|
|
$393,950
|
|
Liabilities and Equity
|
|
|
|
Accounts payable
|
|
$9,000
|
|
Income taxes payable
|
|
3,100
|
|
Interest payable
|
|
600
|
|
Long-term note payable
|
|
80,000
|
|
Common stock
|
|
100,500
|
|
Retained earnings
|
|
200,750
|
|
Total liabilities and equity
|
|
$393,950
|
Required:
1. Calculate the budgeted direct materials to be purchased (in dollars) for the month of May 2014.
2. Calculate the budgeted costs of ending inventories of direct materials and of finished goods at the end of May 2014.
3. Calculate the budgeted costs of goods sold for the month of May 2014.
4. Calculate the budgeted cash collection for the month of May, 2014.
Problem 2 -
The following data for the telephone company pertain to the actual production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost in a windstorm.
Direct Materials (All materials purchased were used.)
- Standard cost per roll: a pounds at $4.00 per pound.
- Total actual cost: b pounds costing $9,600.
- Standard cost allowed for units produced was $9,000.
- Materials price variance: c .
- Materials efficiency variance was $80 unfavorable.
Direct Manufacturing Labor:
- Standard cost is 3 hours per roll at $8.00 per hour.
- Actual cost per hour was $8.25.
- Total actual cost: d .
- Labor price variance: e .
- Labor efficiency variance was $400 unfavorable.
Required: Compute the missing elements in the report represented by the lettered items.
Problem 3 -
Simon Manufacturing has the following standard cost sheet for one of its products:
|
|
Total
|
|
Direct materials
|
5 pounds at $2 per pound
|
$10
|
|
Direct labor
|
2 hours at $25 per hour
|
50
|
|
Variable factory overhead
|
2 hours at $5 per hour
|
10
|
|
Fixed factory overhead
|
2 hours at $20 per hour
|
40
|
|
Cost per unit
|
|
$110
|
The company uses a standard costing and allocates factory overhead based on direct labor hours and determines the factory overhead rate based on budgeted sales of the product which is 400 units.
Simon has the following actual operating results for the year just completed:
|
Units manufactured
|
360
|
|
|
Direct materials purchased and used
|
1,800 pounds
|
$19,800
|
|
Direct labor incurred
|
750 hours
|
$20,250
|
|
Variable factory overhead incurred
|
|
$4,800
|
|
Fixed factory overhead incurred
|
|
$15,800
|
Required: Compute the following variances:
a. Variable overhead spending variance
b. Variable overhead efficiency variance
c. Underallocated or overallocated variable overhead
d. Fixed overhead spending variance
e. Production-volume variance
f. Underallocated or overallocated fixed overhead
Problem 4 -
During 2013, ABC Company that manufactures and sells electric tabletop grills, produced 275,000 units of products. It sold the product at $60 per unit. The beginning inventory balance of 2013 was 5,000 units. Total fixed costs and unit variable costs of 2013 are the same as those of 2012. At the beginning of 2013, the managers expected to sell 220,000 units, which is the same as the budgeted and actual sales for 2012. The manager then used this quantity as the allocation base for allocating fixed overhead costs during 2013. For simplicity, assume there were no price, efficiency, or spending variances. Any production-volume variance was written off to cost of goods sold. Absorption costing income statement for 2013 is as following, assuming variable selling and administrative cost is $2.5 per unit:
|
Revenue
|
|
$15,000,000
|
|
Cost of goods sold:
|
|
|
|
Cost of goods sold before adjustment:
|
11,875,000
|
|
|
Adjustment for production-volume variance
|
(550,000)
|
|
|
Cost of goods sold
|
|
11,325,000
|
|
Gross margin
|
|
3,675,000
|
|
Selling and administrative
|
|
2,000,000
|
|
Operating income
|
|
$1 675 000
|
Required:
1. Prepare income statement using variable costing for 2013.
2. Briefly explain the difference between variable income and absorption income.
Problem 5 -
Reliant Home Care Services provides assistance to seniors who live in their own homes. It operates three program segments-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. The meals-on-wheels program delivers a hot meal once a day to enrolled seniors. The housekeeping program provides weekly house-cleaning and maintenance services. A segmented income statement for 2013 follows:
|
Home
Nursing
|
Meals on
Wheels
|
House-
keeping
|
Total
|
|
Fee revenue
|
$260,000
|
$420,000
|
$240,000
|
$920,000
|
|
Variable expenses
|
120,000
|
205,000
|
160,000
|
485,000
|
|
Contribution margin
|
140,000
|
215,000
|
80,000
|
435,000
|
|
Fixed expenses:
|
|
|
|
|
|
Amortization or rent *
|
12,000
|
40,000
|
8,000
|
60,000
|
|
Liability insurance
|
20,000
|
7,000
|
15,000
|
42,000
|
|
Program administrators' salaries
|
40,000
|
38,000
|
37,000
|
115,000
|
|
General administrative expenses **
|
51,000
|
82,000
|
47,000
|
180,000
|
|
Total fixed expenses
|
123,000
|
167,000
|
107,000
|
397,000
|
|
Operating income
|
$17,000
|
$48,000
|
$ (27,000)
|
$38.000
|
* For Home Nursing, the $12,000 is rent paid for a vehicle. For Meals on Wheels, the $40,000 is amortization of vehicles and equipment. For Housekeeping, the $8,000 is amortization of a vehicle.
** General administrative expenses are allocated to segments based on program fee revenue.
The results for the prior three years were very similar-a loss on housekeeping. This year is not expected to be any different. The chief administrator is concerned about the organization's sus-tainability and is considering discontinuing the housekeeping program.
Housekeeping's amortization expense is for a small van that is used to transport the housekeepers and their equipment from job to job. If this program is discontinued, then the van would be transferred to the home-nursing program. With the use of this van, the home-nursing program would no longer need to rent the van that it currently uses. General-administrative expenses would not change if the housekeeping program is dropped, but the segment's liability insurance and salary of the program administrator would be avoided.
Required: Should the housekeeping program be discontinued? Why? If it is discontinued, what would be the change in Reliant's operating income? Show your calculations.