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Cost Accounting A Managerial Emphasis 14e Charles T. Horngren Solutions Manual Test Bank

Cost Accounting A Managerial Emphasis 14e Charles T. Horngren Solutions Manual Test Bank

Cost Accounting A Managerial Emphasis 14e Charles T. Horngren Solutions Manual Test Bank -- $35

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Sample Chapters:


Chapter1 The Manager and Management Accounting
Questions
1-1 How does management accounting differ from financial accounting?
1-2 “Management accounting should not fit the straitjacket of financial accounting.” Explain and give an example.
1-3 How can a management accountant help formulate strategy?
1-4 Describe the business functions in the value chain.
1-5 Explain the term “supply chain” and its importance to cost management.
1-6 “Management accounting deals only with costs.” Do you agree? Explain.
1-7 How can management accountants help improve quality and achieve timely product deliveries?
1-8 Describe the five-step decision-making process.
1-9 Distinguish planning decisions from control decisions.
1-10 What three guidelines help management accountants provide the most value to managers?
1-11 “Knowledge of technical issues such as computer technology is a necessary but not sufficient condition to becoming a successful management accountant.” Do you agree? Why?
1-12 As a new controller, reply to this comment by a plant manager: “As I see it, our accountants may be needed to keep records for shareholders and Uncle Sam, but I don’t want them sticking their noses in my day-to-day operations. I do the best I know how. No bean counter knows enough about my responsibilities to be of any use to me.”
1-13 Where does the management accounting function fit into an organization’s structure?
1-14 Name the four areas in which standards of ethical conduct exist for management accountants in the United States. What organization sets forth these standards?
1-15 What steps should a management accountant take if established written policies provide insufficient guidance on how to handle an ethical conflict?
Exercises
1-16 Value chain and classification of costs, computer company. Compaq Computer incurs the following costs:
a. Electricity costs for the plant assembling the Presario computer line of products
b. Transportation costs for shipping the Presario line of products to a retail chain
c. Payment to David Kelley Designs for design of the Armada Notebook
d. Salary of computer scientist working on the next generation of minicomputers
e. Cost of Compaq employees’ visit to a major customer to demonstrate Compaq’s ability to interconnect with other computers
f. Purchase of competitors’ products for testing against potential Compaq products
g. Payment to television network for running Compaq advertisements
h. Cost of cables purchased from outside supplier to be used with Compaq printers
Required Classify each of the cost items (ah) into one of the business functions of the value chain shown in Exhibit 1-2 (p. 6).
1-17 Value chain and classification of costs, pharmaceutical company. Merck, a pharmaceutical company, incurs the following costs:
a. Cost of redesigning blister packs to make drug containers more tamperproof
b. Cost of videos sent to doctors to promote sales of a new drug
c. Cost of a toll-free telephone line used for customer inquiries about drug usage, side effects of drugs, and so on
d. Equipment purchased to conduct experiments on drugs yet to be approved by the government
e. Payment to actors for a television infomercial promoting a new hair-growth product for balding men
f. Labor costs of workers in the packaging area of a production facility
g. Bonus paid to a salesperson for exceeding a monthly sales quota
h. Cost of Federal Express courier service to deliver drugs to hospitals
Required Classify each of the cost items (ah) as one of the business functions of the value chain shown in Exhibit 1-2 (p. 6).
1-18 Value chain and classification of costs, fast food restaurant. Burger King, a hamburger fast food restaurant, incurs the following costs:
a. Cost of oil for the deep fryer
b. Wages of the counter help who give customers the food they order
c. Cost of the costume for the King on the Burger King television commercials
d. Cost of children’s toys given away free with kids’ meals
e. Cost of the posters indicating the special “two cheeseburgers for $2.50”
f. Costs of frozen onion rings and French fries
g. Salaries of the food specialists who create new sandwiches for the restaurant chain
h. Cost of “to-go” bags requested by customers who could not finish their meals in the restaurant

Classify each of the cost items (ah) as one of the business functions of the value chain shown in Required Exhibit 1-2 (p. 6).
1-19 Key success factors. Grey Brothers Consulting has issued a report recommending changes for its newest manufacturing client, Energy Motors. Energy Motors currently manufactures a single product, which is sold and distributed nationally. The report contains the following suggestions for enhancing business performance:
a. Add a new product line to increase total revenue and to reduce the company’s overall risk.
b. Increase training hours of assembly line personnel to decrease the currently high volumes of scrap and waste.
c. Reduce lead times (time from customer order of product to customer receipt of product) by 20% in order to increase customer retention.
d. Reduce the time required to set up machines for each new order.
e. Benchmark the company’s gross margin percentages against its major competitors.
Link each of these changes to the key success factors that are important to managers. Required

1-20 Planning and control decisions. Conner Company makes and sells brooms and mops. It takes the following actions, not necessarily in the order given. For each action (ae) state whether it is a planning decision or a control decision.
a. Conner asks its marketing team to consider ways to get back market share from its newest competitor, Swiffer.
b. Conner calculates market share after introducing its newest product.
c. Conner compares costs it actually incurred with costs it expected to incur for the production of the new product.
d. Conner’s design team proposes a new product to compete directly with the Swiffer.
e. Conner estimates the costs it will incur to sell 30,000 units of the new product in the first quarter of next fiscal year.
1-21 Five-step decision-making process, manufacturing. Garnicki Foods makes frozen dinners that it sells through grocery stores. Typical products include turkey dinners, pot roast, fried chicken, and meat loaf. The managers at Garnicki have recently introduced a line of frozen chicken pies. They take the following actions with regard to this decision.
a. Garnicki performs a taste test at the local shopping mall to see if consumers like the taste of its proposed new chicken pie product.
b. Garnicki sales managers estimate they will sell more meat pies in their northern sales territory than in their southern sales territory.
c. Garnicki managers discuss the possibility of introducing a new chicken pie.
d. Garnicki managers compare actual costs of making chicken pies with their budgeted costs.
e. Costs for making chicken pies are budgeted.
f. Garnicki decides to introduce a new chicken pie.
g. To help decide whether to introduce a new chicken pie, the purchasing manager calls a supplier to check the prices of chicken.
Classify each of the actions (ag) as a step in the five-step decision-making process (identify the problem and Required uncertainties, obtain information, make predictions about the future, choose among alternatives, implement the decision, evaluate performance, and learn). The actions are not listed in the order they are performed.
1-22 Five-step decision-making process, service firm. Brite Exteriors is a firm that provides house painting services. Robert Brite, the owner, is trying to find new ways to increase revenues. Mr. Brite performs the following actions, not in the order listed.
a. Mr. Brite calls Home Depot to ask the price of paint sprayers.
b. Mr. Brite discusses with his employees the possibility of using paint sprayers instead of hand painting to increase productivity and thus revenues.
c. The workers who are not familiar with paint sprayers take more time to finish a job than they did when painting by hand.
d. Mr. Brite compares the expected cost of buying sprayers to the expected cost of hiring more workers who paint by hand, and estimates profits from both alternatives.
e. The project scheduling manager confirms that demand for house painting services has increased.
f. Mr. Brite decides to buy the paint sprayers rather than hire additional painters.
Classify each of the actions (a-f) according to its step in the five-step decision-making process (identify the Required problem and uncertainties, obtain information, make predictions about the future, choose among alternatives, implement the decision, evaluate performance, and learn).
1-23 Professional ethics and reporting division performance. Marcia Miller is division controller and Tom Maloney is division manager of the Ramses Shoe Company. Miller has line responsibility to Maloney, but she also has staff responsibility to the company controller. Maloney is under severe pressure to achieve the budgeted division income for the year. He has asked Miller to book $200,000 of revenues on December 31. The customers’ orders are firm, but the shoes are still in the production process. They will be shipped on or around January 4. Maloney says to Miller, “The key event is getting the sales order, not shipping the shoes. You should support me, not obstruct my reaching division goals.”
The following decisions were made from June through October 2011:
a. June 2011: Raised subscription fee to $25.50 per month from July 2011 onward. The budgeted number of subscribers for this monthly fee is shown in the following table.
b. June 2011: Informed existing subscribers that from July onward, monthly fee would be $25.50.
c. July 2011: Offered e-mail service to subscribers and upgraded other online services.
d. October 2011: Dismissed the vice president of marketing after significant slowdown in subscribers and subscription revenues, based on July through September 2011 data in the following table.
e. October 2011: Reduced subscription fee to $22.50 per month from November 2011 onward. Results for JulySeptember 2011 are as follows:
Required
1. Describe Miller’s ethical responsibilities.
2. What should Miller do if Maloney gives her a direct order to book the sales?

Problems
1-24 Planning and control decisions, Internet company. WebNews.com offers its subscribers several services, such as an annotated TV guide and local-area information on weather, restaurants, and movie theaters. Its main revenue sources are fees for banner advertisements and fees from subscribers. Recent data are as follows:
Month/Year Advertising Revenues Actual Number of Subscribers Monthly Fee Per Subscriber
June 2009 $ 415,972 29,745 $15.50
December 2009 867,246 55,223 20.50
June 2010 892,134 59,641 20.50
December 2010 1,517,950 87,674 20.50
June 2011 2,976,538 147,921 20.50
Month/Year
Budgeted Number of
Subscribers
Actual Number of
Subscribers Monthly Fee per Subscriber
July 2011 145,000 129,250 $25.50
August 2011 155,000 142,726 25.50
September 2011 165,000 145,643 25.50
Required
1. Classify each of the decisions (ae) as a planning or a control decision.
2. Give two examples of other planning decisions and two examples of other control decisions that may be made at WebNews.com.
1-25 Strategic decisions and management accounting. A series of independent situations in which a firm is about to make a strategic decision follow.
Decisions:
a. Roger Phones is about to decide whether to launch production and sale of a cell phone with standard features.
b. Computer Magic is trying to decide whether to produce and sell a new home computer software package that includes the ability to interface with a sewing machine and a vacuum cleaner. There is no such software currently on the market.
c. Christina Cosmetics has been asked to provide a “store brand” lip gloss that will be sold at discount retail stores.
d. Marcus Meats is entertaining the idea of developing a special line of gourmet bologna made with sun dried tomatoes, pine nuts, and artichoke hearts.
1. For each decision, state whether the company is following a low price or a differentiated product strategy. Required
2. For each decision, discuss what information the management accountant can provide about the source of competitive advantage for these firms.
1-26 Management accounting guidelines. For each of the following items, identify which of the management accounting guidelines applies: cost-benefit approach, behavioral and technical considerations, or different costs for different purposes.
1. Analyzing whether to keep the billing function within an organization or outsource it
2. Deciding to give bonuses for superior performance to the employees in a Japanese subsidiary and extra vacation time to the employees in a Swedish subsidiary
3. Including costs of all the value-chain functions before deciding to launch a new product, but including only its manufacturing costs in determining its inventory valuation
4. Considering the desirability of hiring one more salesperson
5. Giving each salesperson the compensation option of choosing either a low salary and a high-percentage sales commission or a high salary and a low-percentage sales commission
6. Selecting the costlier computer system after considering two systems
7. Installing a participatory budgeting system in which managers set their own performance targets, instead of top management imposing performance targets on managers
8. Recording research costs as an expense for financial reporting purposes (as required by U.S. GAAP) but capitalizing and expensing them over a longer period for management performanceevaluation purposes
9. Introducing a profit-sharing plan for employees
1-27 Role of controller, role of chief financial officer. George Perez is the controller at Allied Electronics, a manufacturer of devices for the computer industry. He is being considered for a promotion to chief financial officer.
1. In this table, indicate which executive is primarily responsible for each activity. Required
Activity Controller CFO
Managing accounts payable
Communicating with investors
Strategic review of different lines of businesses
Budgeting funds for a plant upgrade
Managing the company’s short-term investments
Negotiating fees with auditors
Assessing profitability of various products
Evaluating the costs and benefits of a new product design
2. Based on this table and your understanding of the two roles, what types of training or experiences will George find most useful for the CFO position?
1-28 Pharmaceutical company, budgeting, ethics. Eric Johnson was recently promoted to Controller of Research and Development (R&D) for PharmaCor, a Fortune 500 pharmaceutical company, which manufactures prescription drugs and nutritional supplements. The company’s total R&D cost for 2012 was expected (budgeted) to be $5 billion. During the company’s mid-year budget review, Eric realized that current R&D expenditures were already at $3.5 billion, nearly 40% above the mid-year target. At this current rate of expenditure, the R&D division was on track to exceed its total year-end budget by $2 billion! In a meeting with CFO, James Clark, later that day, Johnson delivered the bad news. Clark was both
shocked and outraged that the R&D spending had gotten out of control. Clark wasn’t any more understanding when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lyricon, which was expected to go to market next year. The new drug would result in large profits for PharmaCor, if the product could be approved by year-end. Clark had already announced his expectations of third quarter earnings to Wall Street analysts. If the R&D expenditures weren’t reduced by the end of the third quarter, Clark was certain that the targets he had announced publicly would be missed and the company’s stock price would tumble. Clark instructed Johnson to make up the budget short-fall by the end of the third quarter using “whatever  means necessary.”
Johnson was new to the Controller’s position and wanted to make sure that Clark’s orders were followed. Johnson came up with the following ideas for making the third quarter budgeted targets:
a. Stop all research and development efforts on the drug Lyricon until after year-end. This change would delay the drug going to market by at least six months. It is also possible that in the meantime a PharmaCor competitor could make it to market with a similar drug.
b. Sell off rights to the drug, Markapro. The company had not planned on doing this because, under current market conditions, it would get less than fair value. It would, however, result in a onetime gain that could offset the budget short-fall. Of course, all future profits from Markapro would be lost.
c. Capitalize some of the company’s R&D expenditures reducing R&D expense on the income statement. This transaction would not be in accordance with GAAP, but Johnson thought it was justifiable, since the Lyricon drug was going to market early next year. Johnson would argue that capitalizing R & D costs this year and expensing them next year would better match revenues and expenses.
Required
1. Referring to the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7 on page 16, which of the preceding items (ac) are acceptable to use? Which are unacceptable?
2. What would you recommend Johnson do?

1-29 Professional ethics and end-of-year actions. Janet Taylor is the new division controller of the snack-foods division of Gourmet Foods. Gourmet Foods has reported a minimum 15% growth in annual earnings for each of the past five years. The snack-foods division has reported annual earnings growth of more than 20% each year in this same period. During the current year, the economy went into a recession. The corporate controller estimates a 10% annual earnings growth rate for Gourmet Foods this year. One month before the December 31 fiscal year-end of the current year, Taylor estimates the snack-foods division will report an annual earnings growth of only 8%. Warren Ryan, the snack-foods division president, is not happy, but he notes that “the end-of-year actions” still need to be taken. Taylor makes some inquiries and is able to compile the following list of end-of-year actions that were more or less accepted by the previous division controller:
a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year
b. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year
c. Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year
d. Giving salespeople a double bonus to exceed December sales targets
e. Deferring the current period’s advertising by reducing the number of television spots run in December and running more than planned in January of next year
f. Deferring the current period’s reported advertising costs by having Gourmet Foods’ outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date
g. Persuading carriers to accept merchandise for shipment in December of the current year although they normally would not have done so
Required
1. Why might the snack-foods division president want to take these end-of-year actions?
2. Taylor is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management” in Exhibit 1-7 (p. 16). Classify each of the end-of-year actions
(ag) as acceptable or unacceptable according to that document.
3. What should Taylor do if Ryan suggests that these end-of-year actions are taken in every division of Gourmet Foods and that she will greatly harm the snack-foods division if she does not cooperate and paint the rosiest picture possible of the division’s results?
1-30 Professional ethics and end-of-year actions. Deacon Publishing House is a publishing company that produces consumer magazines. The house and home division, which sells home-improvement and home-decorating magazines, has seen a 20% reduction in operating income over the past nine months, primarily due to the recent economic recession and the depressed consumer housing market. The division’s Controller, Todd Allen, has felt pressure from the CFO to improve his division’s operating results by the end of the year. Allen is considering the following options for improving the division’s performance by year-end:
a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of twenty-five employees.
b. Selling the new printing equipment that was purchased in January and replacing it with discarded equipment from one of the company’s other divisions. The previously discarded equipment no longer meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be delivered in the future) as revenue when cash is received in the current month (just before fiscal year end) instead of showing it as a liability.
d. Reducing the division’s Allowance for Bad Debt Expense. This transaction alone would increase operating income by 5%.
e. Recognizing advertising revenues that relate to January in December.
f. Switching from declining balance to straight line depreciation to reduce depreciation expense in the current year.
1. What are the motivations for Allen to improve the division’s year-end operating earnings?
Required
2. From the point of view of the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7 on page 16, which of the preceding items (af) are acceptable? Which are unacceptable?
3. What should Allen do about the pressure to improve performance?
Collaborative Learning Problem
1-31 Global company, ethical challenges. Bredahl Logistics, a U.S. shipping company, has just begun distributing goods across the Atlantic to Norway. The company began operations in 2010, transporting goods to South America. The company’s earnings are currently trailing behind its competitors and Bredahl’s investors are becoming anxious. Some of the company’s largest investors are even talking of selling their interest in the shipping newcomer. Bredahl’s CEO, Marcus Hamsen, calls an emergency meeting with his executive team. Hamsen needs a plan before his upcoming conference call with uneasy investors. Brehdal’s executive staff make the following suggestions for salvaging the company’s short-term operating results:
a. Stop all transatlantic shipping efforts. The start-up costs for the new operations are hurting current profit margins.
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
c. Pressure current customers to take early delivery of goods before the end of the year so that more revenue can be reported in this year’s financial statements.
d. Sell-off distribution equipment prior to year-end. The sale would result in one-time gains that could offset the company’s lagging profits. The owned equipment could be replaced with leased equipment at a lower cost in the current year.
e. Record executive year-end bonus compensation for the current year in the next year when it is paid after the December fiscal year-end.
f. Recognize sales revenues on orders received, but not shipped as of the end of the year.
g. Establish corporate headquarters in Ireland before the end of the year, lowering the company’s corporate tax rate from 28% to 12.5%.
1.       As the management accountant for Brehdahl, evaluate each of the preceding items (ag) in the con-
Required text of the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7 on page 16. Which of the items are in violation of these ethics standards and which are acceptable?
2. What should the management accountant do with respect to those items that are in violation of the ethical standards for management accountants?

Chapter 2 An Introduction to Cost Terms and Purposes
Questions
2-1 Define cost object and give three examples.
2-2 Define direct costs and indirect costs.
2-3 Why do managers consider direct costs to be more accurate than indirect costs?
2-4 Name three factors that will affect the classification of a cost as direct or indirect.
2-5 Define variable cost and fixed cost. Give an example of each.
2-6 What is a cost driver? Give one example.
2-7 What is the relevant range? What role does the relevant-range concept play in explaining how costs behave?
2-8 Explain why unit costs must often be interpreted with caution.
2-9 Describe how manufacturing-, merchandising-, and service-sector companies differ from each other.
2-10 What are three different types of inventory that manufacturing companies hold?
2-11 Distinguish between inventoriable costs and period costs.
2-12 Define the following: direct material costs, direct manufacturing-labor costs, manufacturing overhead costs, prime costs, and conversion costs.
2-13 Describe the overtime-premium and idle-time categories of indirect labor.
2-14 Define product cost. Describe three different purposes for computing product costs.
2-15 What are three common features of cost accounting and cost management? Exercises
2-16 Computing and interpreting manufacturing unit costs. Minnesota Office Products (MOP) produces three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its own dedicated production line at the plant. It currently uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total manufacturing overhead costs of the plant in July 2011 are $150 million ($15 million of which are fixed). This total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line. Summary data (in millions) for July 2011 are as follows: 2. If the cost object were the mixing department rather than units of production of each kind of bread, which preceding costs would now be direct instead of indirect costs?
2-18 Classification of costs, service sector. Consumer Focus is a marketing research firm that organizes focus groups for consumer-product companies. Each focus group has eight individuals who are paid $50 per session to provide comments on new products. These focus groups meet in hotels and are led by a trained, independent, marketing specialist hired by Consumer Focus. Each specialist is paid a fixed retainer to conduct a minimum number of sessions and a per session fee of $2,000. A Consumer Focus staff member attends each session to ensure that all the logistical aspects run smoothly. Supreme Deluxe Regular Direct material costs $ 89 $ 57 $ 60 Direct manufacturing labor costs $ 16 $ 26 $ 8 Manufacturing overhead costs $ 48 $ 78 $ 24 Units produced 125 150 140
Required 1. Compute the manufacturing cost per unit for each product produced in July 2011. 2. Suppose that in August 2011, production was 150 million units of Supreme, 190 million units of Deluxe, and 220 million units of Regular. Why might the July 2011 information on manufacturing cost per unit be misleading when predicting total manufacturing costs in August 2011?
2-17 Direct, indirect, fixed, and variable costs. Best Breads manufactures two types of bread, which are sold as wholesale products to various specialty retail bakeries. Each loaf of bread requires a threestep process. The first step is mixing. The mixing department combines all of the necessary ingredients to create the dough and processes it through high speed mixers. The dough is then left to rise before baking. The second step is baking, which is an entirely automated process. The baking department molds the dough into its final shape and bakes each loaf of bread in a high temperature oven. The final step is finishing, which is an entirely manual process. The finishing department coats each loaf of bread with a special glaze, allows the bread to cool, and then carefully packages each loaf in a specialty carton for sale in retail bakeries.
Required 1. Costs involved in the process are listed next. For each cost, indicate whether it is a direct variable, direct fixed, indirect variable, or indirect fixed cost, assuming units of production of each kind of bread is the cost object. Costs: Yeast Mixing department manager Flour Materials handlers in each department Packaging materials Custodian in factory Depreciation on ovens Night guard in factory Depreciation on mixing machines Machinist (running the mixing machine) Rent on factory building Machine maintenance personnel in each department Fire insurance on factory building Maintenance supplies for factory Factory utilities Cleaning supplies for factory Finishing department hourly laborers ASSIGNMENT MATERIAL _ 53 Cost Item D or I V or F A. Payment to individuals in each focus group to provide comments on new products B. Annual subscription of Consumer Focus to Consumer Reports magazine C. Phone calls made by Consumer Focus staff member to confirm individuals will attend a focus group session (Records of individual calls are not kept.) D. Retainer paid to focus group leader to conduct 20 focus groups per year on new medical products E. Meals provided to participants in each focus group F. Lease payment by Consumer Focus for corporate office G. Cost of tapes used to record comments made by individuals in a focus group session (These tapes are sent to the company whose products are being tested.) H. Gasoline costs of Consumer Focus staff for company-owned vehicles (Staff members submit monthly bills with no mileage breakdowns.)
2-19 Classification of costs, merchandising sector. Home Entertainment Center (HEC) operates a large store in San Francisco. The store has both a video section and a music (compact disks and tapes) section. HEC reports revenues for the video section separately from the music section. Classify each cost item (AH) as follows:
Required a. Direct or indirect (D or I) costs with respect to the total number of videos sold. b. Variable or fixed (V or F) costs with respect to how the total costs of the video section change as the total number of videos sold changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of videos sold.) You will have two answers (D or I; V or F) for each of the following items: Cost Item D or I V or F A. Annual retainer paid to a video distributor B. Electricity costs of the HEC store (single bill covers entire store) C. Costs of videos purchased for sale to customers D. Subscription to Video Trends magazine E. Leasing of computer software used for financial budgeting at the HEC store F. Cost of popcorn provided free to all customers of the HEC store G. Earthquake insurance policy for the HEC store H. Freight-in costs of videos purchased by HEC
2-20 Classification of costs, manufacturing sector. The Fremont, California, plant of New United Motor Manufacturing, Inc. (NUMMI), a joint venture of General Motors and Toyota, assembles two types of cars (Corollas and Geo Prisms). Separate assembly lines are used for each type of car. Classify each cost item (AH) as follows:
Required a. Direct or indirect (D or I) costs with respect to the total number of cars of each type assembled (Corolla or Geo Prism). b. Variable or fixed (V or F) costs with respect to how the total costs of the plant change as the total number of cars of each type assembled changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of cars of each type assembled.) Classify each cost item (AH) as follows:
Required a. Direct or indirect (D or I) costs with respect to each individual focus group. b. Variable or fixed (V or F) costs with respect to how the total costs of Consumer Focus change as the number of focus groups conducted changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the number of groups conducted.) You will have two answers (D or I; V or F) for each of the following items: You will have two answers (D or I; V or F) for each of the following items:
Required 1. Draw a graph of the total monthly costs of the three plans for different levels of monthly long-distance calling. 2. Which plan should Ashton choose if she expects to make 100 minutes of long-distance calls? 240 minutes? 540 minutes?
2-22 Variable costs and fixed costs. Consolidated Minerals (CM) owns the rights to extract minerals from beach sands on Fraser Island. CM has costs in three areas: a. Payment to a mining subcontractor who charges $80 per ton of beach sand mined and returned to the beach (after being processed on the mainland to extract three minerals: ilmenite, rutile, and zircon). b. Payment of a government mining and environmental tax of $50 per ton of beach sand mined. c. Payment to a barge operator. This operator charges $150,000 per month to transport each batch of beach sandup to 100 tons per batch per dayto the mainland and then return to Fraser Island (that is, 0 to 100 tons per day = $150,000 per month; 101 to 200 tons per day = $300,000 per month, and so on). Each barge operates 25 days per month. The $150,000 monthly charge must be paid even if fewer than 100 tons are transported on any day and even if CM requires fewer than 25 days of barge transportation in that month. CM is currently mining 180 tons of beach sands per day for 25 days per month.
Required 1. What is the variable cost per ton of beach sand mined? What is the fixed cost to CM per month? 2. Plot a graph of the variable costs and another graph of the fixed costs of CM. Your graphs should be similar to Exhibit
2-3, Panel A (p. 31), and Exhibit
2-4 (p. 34). Is the concept of relevant range applicable to your graphs? Explain. 3. What is the unit cost per ton of beach sand mined (a) if 180 tons are mined each day and (b) if 220 tons are mined each day? Explain the difference in the unit-cost figures.
2-23 Variable costs, fixed costs, relevant range. Sweetum Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 4,100 per month. The machine costs $9,000 and is depreciated using straight line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse, and other fixed manufacturing overhead costs total $1,200 per month. Sweetum currently makes and sells 3,800 jaw-breakers per month. Sweetum buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 30 cents per jawbreaker. Next year Sweetum expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.
Required 1. What is Sweetums current annual relevant range of output? 2. What is Sweetums current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost? 3. What will Sweetums relevant range of output be next year? How if at all, will total annual fixed and variable manufacturing costs change next year? Assume that if it needs to Sweetum could buy an identical machine at the same cost as the one it already has. Cost Item D or I V or F A. Cost of tires used on Geo Prisms B. Salary of public relations manager for NUMMI plant C. Annual awards dinner for Corolla suppliers D. Salary of engineer who monitors design changes on Geo Prism E. Freight costs of Corolla engines shipped from Toyota City, Japan, to Fremont, California F. Electricity costs for NUMMI plant (single bill covers entire plant) G. Wages paid to temporary assembly-line workers hired in periods of high production (paid on hourly basis) H. Annual fire-insurance policy cost for NUMMI plant
2-21 Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small restaurant. She is on a tight budget and must choose between the following long-distance phone plans: Plan A: Pay 10 cents per minute of long-distance calling. Plan B: Pay a fixed monthly fee of $15 for up to 240 long-distance minutes, and 8 cents per minute thereafter (if she uses fewer than 240 minutes in any month, she still pays $15 for the month). Plan C: Pay a fixed monthly fee of $22 for up to 510 long-distance minutes and 5 cents per minute thereafter (if she uses fewer than 510 minutes, she still pays $22 for the month). ASSIGNMENT MATERIAL _ 55
2-24 Cost drivers and value chain. Helner Cell Phones (HCP) is developing a new touch screen smartphone to compete in the cellular phone industry. The phones will be sold at wholesale prices to cell phone companies, which will in turn sell them in retail stores to the final customer. HCP has undertaken the following activities in its value chain to bring its product to market: Identify customer needs (What do smartphone users want?) Perform market research on competing brands Design a prototype of the HCP smartphone Market the new design to cell phone companies Manufacture the HCP smartphone Process orders from cell phone companies Package the HCP smartphones Deliver the HCP smartphones to the cell phone companies Provide online assistance to cell phone users for use of the HCP smartphone Make design changes to the smartphone based on customer feedback During the process of product development, production, marketing, distribution, and customer service, HCP has kept track of the following cost drivers: Number of smartphones shipped by HCP Number of design changes Number of deliveries made to cell phone companies Engineering hours spent on initial product design Hours spent researching competing market brands Customer-service hours Number of smartphone orders processed Number of cell phone companies purchasing the HCP smartphone Machine hours
Required to run the production equipment Number of surveys returned and processed from competing smartphone users 1. Identify each value chain activity listed at the beginning of the exercise with one of the following value-
Required chain categories: a. Design of products and processes b. Production c. Marketing d. Distribution e. Customer Service 2. Use the list of preceding cost drivers to find one or more reasonable cost drivers for each of the activities in HCPs value chain.
2-25 Cost drivers and functions. The list of representative cost drivers in the right column of this table are randomized with respect to the list of functions in the left column. That is, they do not match. Function Representative Cost Driver 1. Accounting 2. Human resources 3. Data processing 4. Research and development 5. Purchasing 6. Distribution 7. Billing A. Number of invoices sent B. Number of purchase orders C. Number of research scientists D. Hours of computer processing unit (CPU) E. Number of employees F. Number of transactions processed G. Number of deliveries made 1. Match each function with its representative cost driver.
Required 2. Give a second example of a cost driver for each function.
2-26 Total costs and unit costs. A student association has hired a band and a caterer for a graduation party. The band will charge a fixed fee of $1,000 for an evening of music, and the caterer will charge a fixed fee of $600 for the party setup and an additional $9 per person who attends. Snacks and soft drinks will be provided by the caterer for the duration of the party. Students attending the party will pay $5 each at the door. 1. Draw a graph depicting the fixed cost, the variable cost, and the total cost to the student association
Required for different attendance levels. 2. Suppose 100 people attend the party. What is the total cost to the student association? What is the cost per person? 3. Suppose 500 people attend the party. What is the total cost to the student association and the cost per attendee? 4. Draw a graph depicting the cost per attendee for different attendance levels. As president of the student association, you want to request a grant to cover some of the party costs. Will you use the per attendee cost numbers to make your case? Why or why not?
2-27 Total and unit cost, decision making. Gayles Glassworks makes glass flanges for scientific use. Materials cost $1 per flange, and the glass blowers are paid a wage rate of $28 per hour. A glass blower blows 10 flanges per hour. Fixed manufacturing costs for flanges are $28,000 per period. Period (nonmanufacturing) costs associated with flanges are $10,000 per period, and are fixed. Marketing, distribution, and customer-service costs $ 37,000 Merchandise inventory, January 1, 2011 27,000 Utilities 17,000 General and administrative costs 43,000 Merchandise inventory, December 31, 2011 34,000 Purchases 155,000 Miscellaneous costs 4,000 Transportation-in 7,000 Purchase returns and allowances 4,000 Purchase discounts 6,000 Revenues 280,000 Marketing and advertising costs $ 24,000 Merchandise inventory, January 1, 2011 45,000 Shipping of merchandise to customers 2,000
Required 1. Distinguish between manufacturing-, merchandising-, and service-sector companies. 2. Distinguish between inventoriable costs and period costs. 3. Classify each of the cost items (ah) as an inventoriable cost or a period cost. Explain your answers. Problems
2-29 Computing cost of goods purchased and cost of goods sold. The following data are for Marvin Department Store. The account balances (in thousands) are for 2011.
Required 1. Compute (a) the cost of goods purchased and (b) the cost of goods sold. 2. Prepare the income statement for 2011.
2-30 Cost of goods purchased, cost of goods sold, and income statement. The following data are for Montgomery Retail Outlet Stores. The account balances (in thousands) are for 2011.
Required 1. Graph the fixed, variable, and total manufacturing cost for flanges, using units (number of flanges) on the x-axis. 2. Assume Gayles Glassworks manufactures and sells 5,000 flanges this period. Its competitor, Floras Flasks, sells flanges for $10 each. Can Gayle sell below Floras price and still make a profit on the flanges? 3. How would your answer to requirement 2 differ if Gayles Glassworks made and sold 10,000 flanges this period? Why? What does this indicate about the use of unit cost in decision making?
2-28 Inventoriable costs versus period costs. Each of the following cost items pertains to one of these companies: General Electric (a manufacturing-sector company), Safeway (a merchandising-sector company), and Google (a service-sector company): a. Perrier mineral water purchased by Safeway for sale to its customers b. Electricity used to provide lighting for assembly-line workers at a General Electric refrigeratorassembly plant c. Depreciation on Googles computer equipment used to update directories of Web sites d. Electricity used to provide lighting for Safeways store aisles e. Depreciation on General Electrics computer equipment used for quality testing of refrigerator components during the assembly process f. Salaries of Safeways marketing personnel planning local-newspaper advertising campaigns g. Perrier mineral water purchased by Google for consumption by its software engineers h. Salaries of Googles marketing personnel selling banner advertising ASSIGNMENT MATERIAL _ 57 Direct materials inventory 10/1/2011 $ 105 Direct materials purchased 365 Direct materials used 385 Total manufacturing overhead costs 450 Variable manufacturing overhead costs 265 Total manufacturing costs incurred during October 2011 1,610 Work-in-process inventory 10/1/2011 230 Cost of goods manufactured 1,660 Finished goods inventory 10/1/2011 130 Cost of goods sold 1,770 1 2 3 4 5 6 7 8 9 10 11 12 13 A B C Canseco Company Beginning of End of 2011 2011 Direct materials inventory $22,000 $26,000 Work-in-process inventory 21,000 20,000 Finished goods inventory 18,000 23,000 Purchases of direct materials 75,000 Direct manufacturing labor 25,000 Indirect manufacturing labor 15,000 Plant insurance 9,000 Depreciationplant, building, and equipment 11,000 Repairs and maintenanceplant 4,000 Marketing, distribution, and customer-service costs 93,000 General and administrative costs 29,000 Calculate the following costs:
Required 1. Direct materials inventory 10/31/2011 2. Fixed manufacturing overhead costs for October 2011 3. Direct manufacturing labor costs for October 2011 4. Work-in-process inventory 10/31/2011 5. Cost of finished goods available for sale in October 2011 6. Finished goods inventory 10/31/2011
2-32 Cost of finished goods manufactured, income statement, manufacturing company. Consider the following account balances (in thousands) for the Canseco Company: 1. Prepare a schedule for the cost of goods manufactured for 2011.
Required 2. Revenues for 2011 were $300 million. Prepare the income statement for 2011. 1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.
Required 2. Prepare the income statement for 2011.
2-31 Flow of Inventoriable Costs. Renkas Heaters selected data for October 2011 are presented here (in millions): Building depreciation $ 4,200 Purchases 260,000 General and administrative costs 32,000 Merchandise inventory, December 31, 2011 52,000 Merchandise freight-in 10,000 Purchase returns and allowances 11,000 Purchase discounts 9,000 Revenues 320,000
2-33 Cost of goods manufactured, income statement, manufacturing company. Consider the following account balances (in thousands) for the Piedmont Corporation: Beginning of End of Piedmont Corporation 2011 2011 Direct materials inventory 65,000 34,000 Work-in-process inventory 83,000 72,000 Finished goods inventory 123,000 102,000 Purchases of direct materials 128,000 Direct manufacturing labor 106,000 Indirect manufacturing labor 48,000 Indirect materials 14,000 Plant insurance 2,000 Depreciationplant, building, and equipment 21,000 Plant utilities 12,000 Repairs and maintenanceplant 8,000 Equipment leasing costs 32,000 Marketing, distribution, and customer-service costs 62,000 General and administrative costs 34,000 For Specific Date For Year 2011 Direct materials inventory, Jan. 1, 2011 $15 Purchases of direct materials $325 Work-in-process inventory, Jan. 1, 2011 10 Direct manufacturing labor 100 Finished goods inventory, Jan. 1, 2011 70 Depreciationplant and equipment 80 Direct materials inventory, Dec. 31, 2011 20 Plant supervisory salaries 5 Work-in-process inventory, Dec. 31, 2011 5 Miscellaneous plant overhead 35 Finished goods inventory, Dec. 31, 2011 55 Revenues 950 Marketing, distribution, and customer-service costs 240 Plant supplies used 10 Plant utilities 30 Indirect manufacturing labor 60
Required 1. Prepare a schedule for the cost of goods manufactured for 2011. 2. Revenues for 2011 were $600 million. Prepare the income statement for 2011.
2-34 Income statement and schedule of cost of goods manufactured. The Howell Corporation has the following account balances (in millions):
Required Prepare an income statement and a supporting schedule of cost of goods manufactured for the year ended December 31, 2011. (For additional questions regarding these facts, see the next problem.)
2-35 Interpretation of statements (continuation of
2-34).
Required 1. How would the answer to Problem
2-34 be modified if you were asked for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured? Be specific. 2. Would the sales managers salary (included in marketing, distribution, and customer-service costs) be accounted for any differently if the Howell Corporation were a merchandising-sector company instead of a manufacturing-sector company? Using the flow of manufacturing costs outlined in Exhibit
2-9 (p. 42), describe how the wages of an assembler in the plant would be accounted for in this manufacturing company. 3. Plant supervisory salaries are usually regarded as manufacturing overhead costs. When might some of these costs be regarded as direct manufacturing costs? Give an example. 4. Suppose that both the direct materials used and the plant and equipment depreciation are related to the manufacture of 1 million units of product. What is the unit cost for the direct materials assigned to those units? What is the unit cost for plant and equipment depreciation? Assume that yearly plant and equipment depreciation is computed on a straight-line basis. 5. Assume that the implied cost-behavior patterns in requirement 4 persist. That is, direct material costs behave as a variable cost, and plant and equipment depreciation behaves as a fixed cost. Repeat the ASSIGNMENT MATERIAL _ 59 computations in requirement 4, assuming that the costs are being predicted for the manufacture of 1.2 million units of product. How would the total costs be affected? 6. As a management accountant, explain concisely to the president why the unit costs differed in requirements 4 and 5.
2-36 Income statement and schedule of cost of goods manufactured. The following items (in millions) pertain to Calendar Corporation: For Specific Date For Year 2011 Work-in-process inventory, Jan. 1, 2011 $18 Plant utilities $ 9 Direct materials inventory, Dec. 31, 2011 8 Indirect manufacturing labor 27 Finished goods inventory, Dec. 31, 2011 11 Depreciationplant and equipment 6 Accounts payable, Dec. 31, 2011 24 Revenues 355 Accounts receivable, Jan. 1, 2011 52 Miscellaneous manufacturing overhead 15 Work-in-process inventory, Dec. 31, 2011 3 Marketing, distribution, and customer-service costs 94 Finished goods inventory, Jan 1, 2011 47 Direct materials purchased 84 Accounts receivable, Dec. 31, 2011 38 Direct manufacturing labor 42 Accounts payable, Jan. 1, 2011 49 Plant supplies used 4 Direct materials inventory, Jan. 1, 2011 32 Property taxes on plant 2 Calendars manufacturing costing system uses a three-part classification of direct materials, direct manufacturing labor, and manufacturing overhead costs. Hours worked including machine downtime Machine downtime Week 1 44 3.5 Week 2 43 6.4 Week 3 48 5.8 Week 4 46 2 Prepare an income statement and a supporting schedule of cost of goods manufactured. (For additional
Required questions regarding these facts, see the next problem.)
2-37 Terminology, interpretation of statements (continuation of
2-36). 1. Calculate total prime costs and total conversion costs. 2. Calculate total inventoriable costs and period costs. 3. Design costs and R&D costs are not considered product costs for financial statement purposes. When might some of these costs be regarded as product costs? Give an example. 4. Suppose that both the direct materials used and the depreciation on plant and equipment are related to the manufacture of 2 million units of product. Determine the unit cost for the direct materials assigned to those units and the unit cost for depreciation on plant and equipment. Assume that yearly depreciation is computed on a straight-line basis. 5. Assume that the implied cost-behavior patterns in requirement 4 persist. That is, direct material costs behave as a variable cost and depreciation on plant and equipment behaves as a fixed cost. Repeat the computations in requirement 4, assuming that the costs are being predicted for the manufacture of 3 million units of product. Determine the effect on total costs. 6. Assume that depreciation on the equipment (but not the plant) is computed based on the number of units produced because the equipment deteriorates with units produced. The depreciation rate on equipment is $1 per unit. Calculate the depreciation on equipment assuming (a) 2 million units of product are produced and (b) 3 million units of product are produced.
2-38 Labor cost, overtime, and idle time. Jim Anderson works in the production department of Midwest Steelworks as a machine operator. Jim, a long-time employee of Midwest, is paid on an hourly basis at a rate of $20 per hour. Jim works five 8-hour shifts per week MondayFriday (40 hours). Any time Jim works over and above these 40 hours is considered overtime for which he is paid at a rate of time and a half ($30 per hour). If the overtime falls on weekends, Jim is paid at a rate of double time ($40 per hour). Jim is also paid an additional $20 per hour for any holidays worked, even if it is part of his regular 40 hours. Jim is paid his regular wages even if the machines are down (not operating) due to regular machine maintenance, slow order periods, or unexpected mechanical problems. These hours are considered idle time. During December Jim worked the following hours: Variable manufacturing costs are variable with respect to units produced. Variable marketing, distribution, and customer-service costs are variable with respect to units sold. Inventory data are as follows: Direct materials purchased $ 240,000 Work-in-process inventory, 3/1/2011 $ 70,000 Direct materials inventory, 3/1/2011 $ 25,000 Finished goods inventory, 3/1/2011 $ 320,000 Conversion Costs $ 660,000 Total manufacturing costs added during the period $ 840,000 Cost of goods manufactured 4 times direct materials used Gross margin as a percentage of revenues 20% Revenues $1,037,500 Direct materials used $147,600 V Direct manufacturing labor costs 38,400 V Plant energy costs 2,000 V Indirect manufacturing labor costs 14,000 V Indirect manufacturing labor costs 19,000 F Other indirect manufacturing costs 11,000 V Other indirect manufacturing costs 14,000 F Marketing, distribution, and customer-service costs 128,000 V Marketing, distribution, and customer-service costs 48,000 F Administrative costs 56,000 F Beginning: January 1, 2011 Ending: December 31, 2011 Direct materials 0 lb 2,400 lbs Work in process 0 units 0 units Finished goods 0 units ? units
Required 1. Calculate (a) direct manufacturing labor, (b) idle time, (c) overtime and holiday premium, and (d) total earnings for Jim in December. 2. Is idle time and overtime premium a direct or indirect cost of the products that Jim worked on in December? Explain.
2-39 Missing records, computing inventory costs. Ron Williams recently took over as the controller of Johnson Brothers Manufacturing. Last month, the previous controller left the company with little notice and left the accounting records in disarray. Ron needs the ending inventory balances to report first quarter numbers. For the previous month (March 2011) Ron was able to piece together the following information:
Required Calculate the cost of: 1. Finished goods inventory, 3/31/2011 2. Work-in-process inventory, 3/31/2011 3. Direct materials inventory, 3/31/2011
2-40 Comprehensive problem on unit costs, product costs. Denver Office Equipment manufactures and sells metal shelving. It began operations on January 1, 2011. Costs incurred for 2011 are as follows (V stands for variable; F stands for fixed): Production in 2011 was 123,000 units. Two pounds of direct materials are used to make one unit of finished product. Revenues in 2011 were $594,000. The selling price per unit and the purchase price per pound of direct materials were stable throughout the year. The companys ending inventory of finished goods is carried at the average unit manufacturing cost for 2011. Finished-goods inventory at December 31, 2011, was $26,000. Included in the total hours worked are two company holidays (Christmas Eve and Christmas Day) during Week 4. All overtime worked by Jim was MondayFriday, except for the hours worked in Week 3. All of the Week 3 overtime hours were worked on a Saturday. ASSIGNMENT MATERIAL _ 61 Case 1 Case 2 (in thousands) Accounts receivable, 12/31 $ 6,000 $ 2,100 Cost of goods sold A 20,000 Accounts payable, 1/1 3,000 1,700 Accounts payable, 12/31 1,800 1,500 Finished goods inventory, 12/31 B 5,300 Gross margin 11,300 C Work-in-process inventory, 1/1 0 800 Work-in-process inventory, 12/31 0 3,000 Finished goods inventory, 1/1 4,000 4,000 Direct materials used 8,000 12,000 Direct manufacturing labor 3,000 5,000 Manufacturing overhead costs 7,000 D Purchases of direct materials 9,000 7,000 Revenues 32,000 31,800 Accounts receivable, 1/1 2,000 1,400 1. Show numerically how operating income would improve by $325,000 just by classifying the preceding
Required costs as product costs instead of period expenses? 2. Is Hewitt correct in his justification that these costs are definitely related to our product. 3. By how much will Hewitt profit personally if the controller makes the adjustments in requirement 1. 4. What should the plant controller do? Collaborative Learning Problem
2-42 Finding unknown amounts. An auditor for the Internal Revenue Service is trying to reconstruct some partially destroyed records of two taxpayers. For each of the cases in the accompanying list, find the unknowns designated by the letters A through D. 1. Calculate direct materials inventory, total cost, December 31, 2011.
Required 2. Calculate finished-goods inventory, total units, December 31, 2011. 3. Calculate selling price in 2011. 4. Calculate operating income for 2011.
2-41 Cost Classification; Ethics. Scott Hewitt, the new Plant Manager of Old World Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Hewitt receives a year-end bonus of 10% of the plants operating income before tax. The year-end income statement provided by the plants controller was disappointing to say the least. After reviewing the numbers, Hewitt demanded that his controller go back and work the numbers again. Hewitt insisted that if he didnt see a better operating income number the next time around he would be forced to look for a new controller. Old World Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3,250,000 are classified as period expenses. Hewitt had suggested that warehousing costs be included as product costs because they are definitely related to our product. The company produced 200,000 units during the period and sold 180,000 units. As the controller reworked the numbers he discovered that if he included warehousing costs as product costs, he could improve

 Chapter 3 Cost-Volume-Profit Analysis
Questions
3-1 Define cost-volume-profit analysis.
3-2 Describe the assumptions underlying CVP analysis.
3-3 Distinguish between operating income and net income.
3-4 Define contribution margin, contribution margin per unit, and contribution margin percentage.
3-5 Describe three methods that can be used to express CVP relationships.
3-6 Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analysis?
3-7 CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis. Do you agree? Explain.
3-8 How does an increase in the income tax rate affect the breakeven point?
3-9 Describe sensitivity analysis. How has the advent of the electronic spreadsheet affected the use of sensitivity analysis?
3-10 Give an example of how a manager can decrease variable costs while increasing fixed costs.
3-11 Give an example of how a manager can increase variable costs while decreasing fixed costs.
3-12 What is operating leverage? How is knowing the degree of operating leverage helpful to managers?
3-13 There is no such thing as a fixed cost. All costs can be unfixed’ given sufficient time. Do you agree? What is the implication of your answer for CVP analysis?
3-14 How can a company with multiple products compute its breakeven point?
3-15 In CVP analysis, gross margin is a less-useful concept than contribution margin. Do you agree? Explain briefly. Exercises
3-16 CVP computations. Fill in the blanks for each of the following independent cases.
Required
3-17 CVP computations. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2011. Variable cost per unit is $60 and total fixed costs are $1,640,000. Case Revenues Variable Costs Fixed Costs Total Costs Operating Income Contribution Margin Percentage a. $500 $ 800 $1,200 b. $2,000 $300 $ 200 c. $1,000 $700 $1,000 d. $1,500 $300 40% 1. Calculate (a) contribution margin and (b) operating income. 2. Garrett’s current manufacturing process is labor intensive. Kate Schoenen, Garrett’s production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $5,330,000. The variable costs are expected to decrease to $54 per unit. Garrett expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenen’s proposal affect your answers to (a) and (b) in requirement 1? 3. Should Garrett accept Schoenen’s proposal? Explain.

3-18 CVP analysis, changing revenues and costs. Sunny Spot Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Canadian Air. Sunny Spot’s fixed costs are $23,500 per month. Canadian Air charges passengers $1,500 per round-trip ticket. Calculate the number of tickets Sunny Spot must sell each month to (a) break even and (b) make a target
Required operating income of $17,000 per month in each of the following independent cases. 1. Sunny Spot’s variable costs are $43 per ticket. Canadian Air pays Sunny Spot 6% commission on ticket price. 2. Sunny Spot’s variable costs are $40 per ticket. Canadian Air pays Sunny Spot 6% commission on ticket price. 3. Sunny Spot’s variable costs are $40 per ticket. Canadian Air pays $60 fixed commission per ticket to Sunny Spot. Comment on the results. 4. Sunny Spot’s variable costs are $40 per ticket. It receives $60 commission per ticket from Canadian Air. It charges its customers a delivery fee of $5 per ticket. Comment on the results.  

3-19 CVP exercises. The Super Donut owns and operates six doughnut outlets in and round Kansas City. You are given the following corporate budget data for next year: Revenues $10,000,000 Fixed costs $ 1,800,000 Variable costs $ 8,000,000 Variable costs change with respect to the number of doughnuts sold.
Required Compute the budgeted operating income for each of the following deviations from the original budget data. (Consider each case independently.) 1. A 10% increase in contribution margin, holding revenues constant 2. A 10% decrease in contribution margin, holding revenues constant 3. A 5% increase in fixed costs 4. A 5% decrease in fixed costs 5. An 8% increase in units sold 6. An 8% decrease in units sold 7. A 10% increase in fixed costs and a 10% increase in units sold 8. A 5% increase in fixed costs and a 5% decrease in variable costs

3-20 CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.
Required Consider each case separately: 1a. What is the current annual operating income? b. What is the present breakeven point in revenues? Compute the new operating income for each of the following changes: 2. A $0.04 per unit increase in variable costs 3. A 10% increase in fixed costs and a 10% increase in units sold 4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold Compute the new breakeven point in units for each of the following changes: 5. A 10% increase in fixed costs 6. A 10% increase in selling price and a $20,000 increase in fixed costs

3-21 CVP analysis, income taxes. Brooke Motors is a small car dealership. On average, it sells a car for $27,000, which it purchases from the manufacturer for $23,000. Each month, Brooke Motors pays $48,200 in rent and utilities and $68,000 for salespeople’s salaries. In addition to their salaries, salespeople are paid a commission of $600 for each car they sell. Brooke Motors also spends $13,000 each month for local advertisements. Its tax rate is 40%.
Required 1. How many cars must Brooke Motors sell each month to break even? 2. Brooke Motors has a target monthly net income of $51,000. What is its target monthly operating income? How many cars must be sold each month to reach the target monthly net income of $51,000?

3-22 CVP analysis, income taxes. The Express Banquet has two restaurants that are open 24-hours a day. Fixed costs for the two restaurants together total $459,000 per year. Service varies from a cup of coffee to full meals. The average sales check per customer is $8.50. The average cost of food and other variable costs for each customer is $3.40. The income tax rate is 30%. Target net income is $107,100.
Required 1. Compute the revenues needed to earn the target net income. 2. How many customers are needed to break even? To earn net income of $107,100? 3. Compute net income if the number of customers is 170,000.

3-23 CVP analysis, sensitivity analysis. Hoot Washington is the newly elected leader of the Republican Party. Media Publishers is negotiating to publish Hoot’s Manifesto, a new book that promises to be an instant best-seller. The fixed costs of producing and marketing the book will be $500,000. The variable costs of producing and marketing will be $4.00 per copy sold. These costs are before any payments to Hoot. Hoot negotiates an up-front payment of $3 million, plus a 15% royalty rate on the net sales price of each book. The net sales price is the listed bookstore price of $30, minus the margin paid to the bookstore to sell the book. The normal bookstore margin of 30% of the listed bookstore price is expected to apply.
Required 1. Prepare a PV graph for Media Publishers. 2. How many copies must Media Publishers sell to (a) break even and (b) earn a target operating income of $2 million? 3. Examine the sensitivity of the breakeven point to the following changes: a. Decreasing the normal bookstore margin to 20% of the listed bookstore price of $30 b. Increasing the listed bookstore price to $40 while keeping the bookstore margin at 30% c. Comment on the results   89

3-24 CVP analysis, margin of safety. Suppose Doral Corp.’s breakeven point is revenues of $1,100,000. Fixed costs are $660,000. 1. Compute the contribution margin percentage.
Required 2. Compute the selling price if variable costs are $16 per unit. 3. Suppose 95,000 units are sold. Compute the margin of safety in units and dollars.

3-25 Operating leverage. Color Rugs is holding a two-week carpet sale at Jerry’s Club, a local warehouse store. Color Rugs plans to sell carpets for $500 each. The company will purchase the carpets from a local distributor for $350 each, with the privilege of returning any unsold units for a full refund. Jerry’s Club has offered Color Rugs two payment alternatives for the use of space. _ Option 1: A fixed payment of $5,000 for the sale period _ Option 2: 10% of total revenues earned during the sale period Assume Color Rugs will incur no other costs. 1. Calculate the breakeven point in units for (a) option 1 and (b) option 2.
Required 2. At what level of revenues will Color Rugs earn the same operating income under either option? a. For what range of unit sales will Color Rugs prefer option 1? b. For what range of unit sales will Color Rugs prefer option 2? 3. Calculate the degree of operating leverage at sales of 100 units for the two rental options. 4. Briefly explain and interpret your answer to requirement 3.

3-26 CVP analysis, international cost structure differences. Global Textiles, Inc., is considering three possible countries for the sole manufacturing site of its newest area rug: Singapore, Brazil, and the United States. All area rugs are to be sold to retail outlets in the United States for $250 per unit. These retail outlets add their own markup when selling to final customers. Fixed costs and variable cost per unit (area rug) differ in the three countries. 1. Compute the breakeven point for Global Textiles, Inc., in each country in (a) units sold and (b) revenues.
Required 2. If Global Textiles, Inc., plans to produce and sell 75,000 rugs in 2011, what is the budgeted operating income for each of the three manufacturing locations? Comment on the results.

3-27 Sales mix, new and upgrade customers. Data 1-2-3 is a top-selling electronic spreadsheet product. Data is about to release version 5.0. It divides its customers into two groups: new customers and upgrade customers (those who previously purchased Data 1-2-3, 4.0 or earlier versions). Although the same physical product is provided to each customer group, sizable differences exist in selling prices and variable marketing costs: Variable Variable Sales Price Annual Manufacturing Marketing & to Retail Fixed Cost per Distribution Cost Country Outlets Costs Area Rug per Area Rug Singapore $250.00 $ 9,000,000 $75.00 $25.00 Brazil 250.00 8,400,000 60.00 15.00 United States 250.00 12,400,000 82.50 12.50 New Customers Upgrade Customers Selling price $275 $100 Variable costs Manufacturing $35 $35 Marketing ƒ65 ƒ100 ƒ15 ƒƒ50 Contribution margin $175 $ƒ50 The fixed costs of Data 1-2-3, 5.0 are $15,000,000. The planned sales mix in units is 60% new customers and 40% upgrade customers. 1. What is the Data 1-2-3, 5.0 breakeven point in units, assuming that the planned 60%:40% sales mix
Required is attained? 2. If the sales mix is attained, what is the operating income when 220,000 total units are sold? 3. Show how the breakeven point in units changes with the following customer mixes: a. New 40% and Upgrade 60% b. New 80% and Upgrade 20% c. Comment on the results  Mr. Lurvey, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $30,000 variable costs, which vary with sales volume, and $15,000 (fixed) costs.

3-28 Sales mix, three products. Bobbie’s Bagel Shop sells only coffee and bagels. Bobbie estimates that every time she sells one bagel, she sells four cups of coffee. The budgeted cost information for Bobbie’s products for 2011 follows: Coffee Bagels Selling Price $2.50 $3.75 Product ingredients $0.25 $0.50 Hourly sales staff (cost per unit) $0.50 $1.00 Packaging $0.50 $0.25 Fixed Costs Rent on store and equipment $5,000 Marketing and advertising cost $2,000
Required 1. How many cups of coffee and how many bagels must Bobbie sell in order to break even assuming the sales mix of four cups of coffee to one bagel, given previously? 2. If the sales mix is four cups of coffee to one bagel, how many units of each product does Bobbie need to sell to earn operating income before tax of $28,000? 3. Assume that Bobbie decides to add the sale of muffins to her product mix. The selling price for muffins is $3.00 and the related variable costs are $0.75. Assuming a sales mix of three cups of coffee to two bagels to one muffin, how many units of each product does Bobbie need to sell in order to break even? Comment on the results.

3-29 CVP, Not for profit. Monroe Classical Music Society is a not-for-profit organization that brings guest artists to the community’s greater metropolitan area. The Music Society just bought a small concert hall in the center of town to house its performances. The mortgage payments on the concert hall are expected to be $2,000 per month. The organization pays its guest performers $1,000 per concert and anticipates corresponding ticket sales to be $2,500 per event. The Music Society also incurs costs of approximately $500 per concert for marketing and advertising. The organization pays its artistic director $50,000 per year and expects to receive $40,000 in donations in addition to its ticket sales.
Required 1. If the Monroe Classical Music Society just breaks even, how many concerts does it hold? 2. In addition to the organization’s artistic director, the Music Society would like to hire a marketing director for $40,000 per year. What is the breakeven point? The Music Society anticipates that the addition of a marketing director would allow the organization to increase the number of concerts to 60 per year. What is the Music Society’s operating income/(loss) if it hires the new marketing director? 3. The Music Society expects to receive a grant that would provide the organization with an additional $20,000 toward the payment of the marketing director’s salary. What is the breakeven point if the Music Society hires the marketing director and receives the grant?

3-30 Contribution margin, decision making. Lurvey Men’s Clothing’s revenues and cost data for 2011 are as follows: Revenues $600,000 Cost of goods sold ƒ300,000 Gross margin 300,000 Operating costs: Salaries fixed $170,000 Sales commissions (10% of sales) 60,000 Depreciation of equipment and fixtures 20,000 Store rent ($4,500 per month) 54,000 Other operating costs ƒƒ45,000 ƒ349,000 Operating income (loss) $ƒ(49,000)
Required 1. Compute the contribution margin of Lurvey Men’s Clothing. 2. Compute the contribution margin percentage. 3. Mr. Lurvey estimates that he can increase revenues by 15% by incurring additional advertising costs of $13,000. Calculate the impact of the additional advertising costs on operating income.

3-31 Contribution margin, gross margin, and margin of safety. Mirabella Cosmetics manufactures and sells a face cream to small ethnic stores in the greater New York area. It presents the monthly operating income statement shown here to George Lopez, a potential investor in the business. Help Mr. Lopez understand Mirabella’s cost structure.   91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 A B C D Units sold 10,000 Revenues $100,000 Cost of goods sold Variable manufacturing costs $55,000 Fixed manufacturing costs 20,000 Total 75,000 Gross margin 25,000 Operating costs Variable marketing costs $ 5,000 Fixed marketing & administration costs 10,000 Total operating costs 15,000 Operating income $ 10,000 Mirabella Cosmetics Operating Income Statement, June 2011 1. Recast the income statement to emphasize contribution margin.
Required 2. Calculate the contribution margin percentage and breakeven point in units and revenues for June 2011. 3. What is the margin of safety (in units) for June 2011? 4. If sales in June were only 8,000 units and Mirabella’s tax rate is 30%, calculate its net income.

3-32 Uncertainty and expected costs. Foodmart Corp, an international retail giant, is considering implementing a new business to business (B2B) information system for processing purchase orders. The current system costs Foodmart $2,500,000 per month and $50 per order. Foodmart has two options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost of $10,000,000 per month and a variable cost of $40 per order. The fully automated B2B system has a fixed cost of $20,000,000 per month and $25 per order. Based on data from the last two years, Foodmart has determined the following distribution on monthly orders: Monthly Number of Orders Probability 350,000 0.15 450,000 0.20 550,000 0.35 650,000 0.20 750,000 0.10 1. Prepare a table showing the cost of each plan for each quantity of monthly orders.
Required 2. What is the expected cost of each plan? 3. In addition to the information systems costs, what other factors should Foodmart consider before deciding to implement a new B2B system? Problems

3-33 CVP analysis, service firm. Lifetime Escapes generates average revenue of $5,000 per person on its five-day package tours to wildlife parks in Kenya. The variable costs per person are as follows: Airfare $1,400 Hotel accommodations 1,100 Meals 300 Ground transportation 100 Park tickets and other costs ƒƒƒ800 Total $3,700  Annual fixed costs total $520,000.
Required 1. Calculate the number of package tours that must be sold to break even. 2. Calculate the revenue needed to earn a target operating income of $91,000. 3. If fixed costs increase by $32,000, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement 1?

3-34 CVP, target operating income, service firm. Snow Leopard Daycare provides daycare for children Mondays through Fridays. Its monthly variable costs per child are as follows: Lunch and snacks $150 Educational supplies 60 Other supplies (paper products, toiletries, etc.) ƒƒ20 Total $230 Rent $2,150 Utilities 200 Insurance 250 Salaries 2,350 Miscellaneous ƒƒƒ650 Total $5,600 Monthly fixed costs consist of the following: Snow Leopard charges each parent $580 per child.
Required 1. Calculate the breakeven point. 2. Snow Leopard’s target operating income is $10,500 per month. Compute the number of children who must be enrolled to achieve the target operating income. 3. Snow Leopard lost its lease and had to move to another building. Monthly rent for the new building is $3,150. At the suggestion of parents, Snow Leopard plans to take children on field trips. Monthly costs of the field trips are $1,300. By how much should Snow Leopard increase fees per child to meet the target operating income of $10,500 per month, assuming the same number of children as in requirement 2?

3-35 CVP analysis, margin of safety. (CMA, adapted) Technology Solutions sells a ready-to-use software product for small businesses. The current selling price is $300. Projected operating income for 2011 is $490,000 based on a sales volume of 10,000 units. Variable costs of producing the software are $120 per unit sold plus an additional cost of $5 per unit for shipping and handling. Technology Solutions annual fixed costs are $1,260,000. Variable cost (per bowl) Direct materials $ 3.25 Direct manufacturing labor 8.00 Variable overhead (manufacturing, marketing, distribution, and customer service) ƒƒƒƒ2.50 Total variable cost per bowl $ƒƒ13.75 Fixed costs Manufacturing $ 25,000 Marketing, distribution, and customer service ƒ110,000 Total fixed costs $135,000 Selling price 25.00 Expected sales, 20,000 units $500,000 Income tax rate 40%
Required 1. Calculate Technology Solutions breakeven point and margin of safety in units. 2. Calculate the company’s operating income for 2011 if there is a 10% increase in unit sales. 3. For 2012, management expects that the per unit production cost of the software will increase by 30%, but the shipping and handling costs per unit will decrease by 20%. Calculate the sales revenue Technology Solutions must generate for 2012 to maintain the current year’s operating income if the selling price remains unchanged, assuming all other data as in the original problem.

3-36 CVP analysis, income taxes. (CMA, adapted) R. A. Ro and Company, a manufacturer of quality handmade walnut bowls, has had a steady growth in sales for the past five years. However, increased competition has led Mr. Ro, the president, to believe that an aggressive marketing campaign will be necessary next year to maintain the company’s present growth. To prepare for next year’s marketing campaign, the company’s controller has prepared and presented Mr. Ro with the following data for the current year, 2011:   93 1. What is the projected net income for 2011?
Required 2. What is the breakeven point in units for 2011? 3. Mr. Ro has set the revenue target for 2012 at a level of $550,000 (or 22,000 bowls). He believes an additional marketing cost of $11,250 for advertising in 2012, with all other costs remaining constant, will be necessary to attain the revenue target. What is the net income for 2012 if the additional $11,250 is spent and the revenue target is met? 4. What is the breakeven point in revenues for 2012 if the additional $11,250 is spent for advertising? 5. If the additional $11,250 is spent, what are the
Required 2012 revenues for 2012 net income to equal 2011 net income? 6. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2012 net income of $60,000 is desired?

3-37 CVP, sensitivity analysis. The Brown Shoe Company produces its famous shoe, the Divine Loafer that sells for $60 per pair. Operating income for 2011 is as follows: Sales revenue ($60 per pair) $300,000 Variable cost ($25 per pair) ƒ125,000 Contribution margin 175,000 Fixed cost ƒ100,000 Operating income $ƒ75,000 Brown Shoe Company would like to increase its profitability over the next year by at least 25%. To do so, the company is considering the following options: 1. Replace a portion of its variable labor with an automated machining process. This would result in a
Required 20% decrease in variable cost per unit, but a 15% increase in fixed costs. Sales would remain the same. 2. Spend $30,000 on a new advertising campaign, which would increase sales by 20%. 3. Increase both selling price by $10 per unit and variable costs by $7 per unit by using a higher quality leather material in the production of its shoes. The higher priced shoe would cause demand to drop by approximately 10%. 4. Add a second manufacturing facility which would double Brown’s fixed costs, but would increase sales by 60%. Evaluate each of the alternatives considered by Brown Shoes. Do any of the options meet or exceed Brown’s targeted increase in income of 25%? What should Brown do?

3-38 CVP analysis, shoe stores. The WalkRite Shoe Company operates a chain of shoe stores that sell 10 different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a fixed salary and a sales commission. WalkRite is considering opening another store that is expected to have the revenue and cost relationships shown here: 1 2 3 4 5 6 A B C D E Selling price $30.00 Rent $ 60,000 Cost of shoes $19.50 Salaries 200,000 Sales commission 1.50 Advertising 80,000 Variable cost per unit $21.00 Other fixed costs 20,000 Total fixed costs $360,000 Unit Variable Data (per pair of shoes) Annual Fixed Costs Consider each question independently:
Required 1. What is the annual breakeven point in (a) units sold and (b) revenues? 2. If 35,000 units are sold, what will be the store’s operating income (loss)? 3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be the annual breakeven point in (a) units sold and (b) revenues? 4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues? 5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of $0.30 per unit in excess of the breakeven point, what would be the store’s operating income if 50,000 units were sold?  
Required 1. Calculate the number of units sold at which the owner of WalkRite would be indifferent between the original salary-plus-commissions plan for salespeople and the higher fixed-salaries-only plan. 2. As owner, which sales compensation plan would you choose if forecasted annual sales of the new store were at least 55,000 units? What do you think of the motivational aspect of your chosen compensation plan? 3. Suppose the target operating income is $168,000. How many units must be sold to reach the target operating income under (a) the original salary-plus-commissions plan and (b) the higher-fixed-salaries-only plan? 4. You open the new store on January 1, 2011, with the original salary-plus-commission compensation plan in place. Because you expect the cost of the shoes to rise due to inflation, you place a firm bulk order for 50,000 shoes and lock in the $19.50 price per unit. But, toward the end of the year, only 48,000 shoes are sold, and you authorize a markdown of the remaining inventory to $18 per unit. Finally, all units are sold. Salespeople, as usual, get paid a commission of 5% of revenues. What is the annual operating income for the store?

3-40 Alternate cost structures, uncertainty, and sensitivity analysis. Stylewise Printing Company currently leases its only copy machine for $1,000 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement Stylewise would pay a commission for its printing at a rate of $10 for every 500 pages printed. The company currently charges $0.15 per page to its customers. The paper used in printing costs the company $.03 per page and other variable costs, including hourly labor amount to $.04 per page.
Required 1. What is the company’s breakeven point under the current leasing agreement? What is it under the new commission based agreement? 2. For what range of sales levels will Stylewise prefer (a) the fixed lease agreement (b) the commission agreement? 3. Do this question only if you have covered the chapter appendix in your class. Stylewise estimates that the company is equally likely to sell 20,000; 40,000; 60,000; 80,000; or 100,000 pages of print. Using information from the original problem, prepare a table that shows the expected profit at each sales level under the fixed leasing agreement and under the commission based agreement. What is the expected value of each agreement? Which agreement should Stylewise choose?

3-41 CVP, alternative cost structures. PC Planet has just opened its doors. The new retail store sells refurbished computers at a significant discount from market prices. The computers cost PC Planet $100 to purchase and require 10 hours of labor at $15 per hour. Additional variable costs, including wages for sales personnel, are $50 per computer. The newly refurbished computers are resold to customers for $500. Rent on the retail store costs the company $4,000 per month. Selling price $ 3,000 Variable cost per engine $ 500 Annual fixed costs $3,000,000 Net income $1,500,000 Income tax rate 25%
Required 1. How many computers does PC Planet have to sell each month to break even? 2. If PC Planet wants to earn $5,000 per month after all expenses, how many computers does the company need to sell? 3. PC Planet can purchase already refurbished computers for $200. This would mean that all labor
Required to refurbish the computers could be eliminated. What would PC Planet’s new breakeven point be if it decided to purchase the computers already refurbished? 4. Instead of paying the monthly rental fee for the retail space, PC Planet has the option of paying its landlord a 20% commission on sales. Assuming the original facts in the problem, at what sales level would PC Planet be indifferent between paying a fixed amount of monthly rent and paying a 20% commission on sales?

3-42 CVP analysis, income taxes, sensitivity. (CMA, adapted) Agro Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2012 budget, Agro Engine Company estimates the following:

3-39 CVP analysis, shoe stores (continuation of

3-38). Refer to requirement 3 of Problem

3-38. In this problem, assume the role of the owner of WalkRite. The first quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 300 units had been sold at the current price of $3,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2012 annual net income   95 projection would not be met unless management took action. A management committee was formed and presented the following mutually exclusive alternatives to the president: a. Reduce the selling price by 20%. The sales organization forecasts that at this significantly reduced price, 2,000 units can be sold during the remainder of the year. Total fixed costs and variable cost per unit will stay as budgeted. b. Lower variable cost per unit by $50 through the use of less-expensive direct materials. The selling price will also be reduced by $250, and sales of 1,800 units are expected for the remainder of the year. c. Reduce fixed costs by 20% and lower the selling price by 10%. Variable cost per unit will be unchanged. Sales of 1,700 units are expected for the remainder of the year. 1. If no changes are made to the selling price or cost structure, determine the number of units that Agro
Required Engine Company must sell (a) to break even and (b) to achieve its net income objective. 2. Determine which alternative Agro Engine should select to achieve its net income objective. Show your calculations.

3-43 Choosing between compensation plans, operating leverage. (CMA, adapted) Marston Corporation manufactures pharmaceutical products that are sold through a network of external sales agents. The agents are paid a commission of 18% of revenues. Marston is considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of revenues and total salaries of $2,080,000. The income statement for the year ending December 31, 2011, under the two scenarios is shown here. 1 2 3 4 5 6 7 8 9 10 11 12 13 A B C D E Revenues $26,000,000 $26,000,000 Cost of goods sold Variable $11,700,000 $11,700,000 Fixed 2,870,000 14,570,000 2,870,000 14,570,000 Gross margin 11,430,000 11,430,000 Marketing costs Commissions $ 4,680,000 $ 2,600,000 Fixed costs 3,420,000 8,100,000 5,500,000 8,100,000 Operating income $ 3,330,000 $ 3,330,000 Marston Corporation Using Sales Agents Using Own Sales Force For theYear Ended December 31, 2011 Income Statement 1. Calculate Marston’s 2011 contribution margin percentage, breakeven revenues, and degree of operat-
Required ing leverage under the two scenarios. 2. Describe the advantages and disadvantages of each type of sales alternative. 3. In 2012, Marston uses its own salespeople, who demand a 15% commission. If all other cost behavior patterns are unchanged, how much revenue must the salespeople generate in order to earn the same operating income as in 2011?

3-44 Sales mix, three products. The Ronowski Company has three product lines of beltsA, B, and C with contribution margins of $3, $2, and $1, respectively. The president foresees sales of 200,000 units in the coming period, consisting of 20,000 units of A, 100,000 units of B, and 80,000 units of C. The company’s fixed costs for the period are $255,000. 1. What is the company’s breakeven point in units, assuming that the given sales mix is maintained?
Required 2. If the sales mix is maintained, what is the total contribution margin when 200,000 units are sold? What is the operating income? 3. What would operating income be if 20,000 units of A, 80,000 units of B, and 100,000 units of C were sold? What is the new breakeven point in units if these relationships persist in the next period?  
Required 1. What is the breakeven point in unit sales and dollars for each type of filter at the current sales mix? 2. Pure Water is considering buying new production equipment. The new equipment will increase fixed cost by $181,400 per year and will decrease the variable cost of the faucet and the pitcher units by $5 and $9 respectively. Assuming the same sales mix, how many of each type of filter does Pure Water need to sell to break even? 3. Assuming the same sales mix, at what total sales level would Pure Water be indifferent between using the old equipment and buying the new production equipment? If total sales are expected to be 30,000 units, should Pure Water buy the new production equipment?

3-46 Sales mix, two products. The Stackpole Company retails two products: a standard and a deluxe version of a luggage carrier. The budgeted income statement for next period is as follows:
Required 1. Compute the breakeven point in units, assuming that the planned sales mix is attained. 2. Compute the breakeven point in units (a) if only standard carriers are sold and (b) if only deluxe carriers are sold. 3. Suppose 250,000 units are sold but only 50,000 of them are deluxe. Compute the operating income. Compute the breakeven point in units. Compare your answer with the answer to requirement 1. What is the major lesson of this problem?

3-47 Gross margin and contribution margin. The Museum of America is preparing for its annual appreciation dinner for contributing members. Last year, 525 members attended the dinner. Tickets for the dinner were $24 per attendee. The profit report for last year’s dinner follows.

3-45 Multiproduct CVP and decision making. Pure Water Products produces two types of water filters. One attaches to the faucet and cleans all water that passes through the faucet. The other is a pitcher-cum-filter that only purifies water meant for drinking. The unit that attaches to the faucet is sold for $80 and has variable costs of $20. The pitcher-cum-filter sells for $90 and has variable costs of $25. Pure Water sells two faucet models for every three pitchers sold. Fixed costs equal $945,000. Standard Carrier Deluxe Carrier Total Units sold ƒƒƒ187,500 ƒƒƒƒ62,500 ƒƒƒ250,000 Revenues at $28 and $50 per unit $5,250,000 $3,125,000 $8,375,000 Variable costs at $18 and $30 per unit ƒƒ3,375,000 ƒ1,875,000 ƒ5,250,000 Contribution margins at $10 and $20 per unit $1,875,000 $1,250,000 3,125,000 Fixed costs ƒ2,250,000 Operating income $ƒƒ875,000 Ticket sales $12,600 Cost of dinner ƒ15,300 Gross margin (2,700) Invitations and paperwork ƒƒ2,500 Profit (loss) $(5,200) Revenues $5,000,000 Variable costs 3,000,000 Fixed costs ƒ2,160,000 Operating income $ƒƒ(160,000) This year the dinner committee does not want to lose money on the dinner. To help achieve its goal, the committee analyzed last year’s costs. Of the $15,300 cost of the dinner, $9,000 were fixed costs and $6,300 were variable costs. Of the $2,500 cost of invitations and paperwork, $1,975 were fixed and $525 were variable.
Required 1. Prepare last year’s profit report using the contribution margin format. 2. The committee is considering expanding this year’s dinner invitation list to include volunteer members (in addition to contributing members). If the committee expands the dinner invitation list, it expects attendance to double. Calculate the effect this will have on the profitability of the dinner assuming fixed costs will be the same as last year.

3-48 Ethics, CVP analysis. Allen Corporation produces a molded plastic casing, LX201, for desktop computers. Summary data from its 2011 income statement are as follows: 1. Calculate Allen Corporation’s breakeven revenues for 2011.
Required 2. Calculate Allen Corporation’s breakeven revenues if variable costs are 52% of revenues. 3. Calculate Allen Corporation’s operating income for 2011 if variable costs had been 52% of revenues. 4. Given Max Lemond’s comments, what should Lester Bush do?

Collaborative Learning Problem

3-49 Deciding where to produce. (CMA, adapted) The Domestic Engines Co. produces the same power generators in two Illinois plants, a new plant in Peoria and an older plant in Moline. The following data are available for the two plants: All fixed costs per unit are calculated based on a normal capacity usage consisting of 240 working days. When the number of working days exceeds 240, overtime charges raise the variable manufacturing costs of additional units by $3.00 per unit in Peoria and $8.00 per unit in Moline. Domestic Engines Co. is expected to produce and sell 192,000 power generators during the coming year. Wanting to take advantage of the higher operating income per unit at Moline, the company’s production manager has decided to manufacture 96,000 units at each plant, resulting in a plan in which Moline operates at capacity (320 units per day 300 days) and Peoria operates at its normal volume (400 units per day * 240 days). * 1 2 3 4 5 6 7 8 9 10 11 A B C D E Selling price $150.00 $150.00 Variable manufacturing cost per unit $72.00 $88.00 Fixed manufacturing cost per unit 30.00 15.00 Variable marketing and distribution cost per unit 14.00 14.00 Fixed marketing and distribution cost per unit 19.00 14.50 Total cost per unit 135.00 131.50 Operating income per unit $ 15.00 $ 18.50 Production rate per day 400 units 320 units Normal annual capacity usage 240 days 240 days Maximum annual capacity 300 days 300 days Peoria Moline Jane Woodall, Allen’s president, is very concerned about Allen Corporation’s poor profitability. She asks Max Lemond, production manager, and Lester Bush, controller, to see if there are ways to reduce costs. After two weeks, Max returns with a proposal to reduce variable costs to 52% of revenues by reducing the costs Allen currently incurs for safe disposal of wasted plastic. Lester is concerned that this would expose the company to potential environmental liabilities. He tells Max, We would need to estimate some of these potential environmental costs and include them in our analysis. You can’t do that, Max replies. We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company and costing all of us our jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing.
1. Calculate the breakeven point in units for the Peoria plant and for the Moline plant.
Required 2. Calculate the operating income that would result from the production manager’s plan to produce 96,000 units at each plant.
3. Determine how the production of 192,000 units should be allocated between the Peoria and Moline plants to maximize operating income for Domestic Engines. Show your calculations.


Chapter 4 Job Costing
Questions
4-1 
Define cost pool, cost tracing, cost allocation, and cost-allocation base. 
4-2 
How does a job-costing system differ from a process-costing system? 
4-3 
Why might an advertising agency use job costing for an advertising campaign by Pepsi, whereas a bank might use process costing to determine the cost of checking account deposits? 
4-4 
Describe the seven steps in job costing. 
4-5 
Give examples of two cost objects in companies using job costing? 
4-6 
Describe three major source documents used in job-costing systems. 
4-7 
What is the advantage of using computerized source documents to prepare job-cost records? 
4-8 
Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates. 
4-9 
Distinguish between actual costing and normal costing. 
4-10 
Describe two ways in which a house construction company may use job-cost information. 
4-11 
Comment on the following statement: 
In a normal-costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account. 
4-12 
Describe three different debit entries to the Work-in-Process Control T-account under normal costing. 
4-13 
Describe three alternative ways to dispose of under- or overallocated overhead costs. 
4-14 
When might a company use budgeted costs rather than actual costs to compute direct-labor rates? 
4-15 
Describe briefly why Electronic Data Interchange (EDI) is helpful to managers. ASSIGNMENT MATERIAL _ 127 

Exercises
4-16 Job costing, process costing. 
In each of the following situations, determine whether job costing or process costing would be more appropriate. 
4-17 Actual costing, normal costing, accounting for manufacturing overhead. 
Destin Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Destin allocates manufacturing overhead costs using direct manufacturing labor costs. Destin provides the following information: a. A CPA firm b. An oil refinery c. A custom furniture manufacturer d. A tire manufacturer e. A textbook publisher f. A pharmaceutical company g. An advertising agency h. An apparel manufacturing plant i. A flour mill j. A paint manufacturer k. A medical care facility l. A landscaping company m. A cola-drink-concentrate producer n. A movie studio o. A law firm p. A commercial aircraft manufacturer q. A management consulting firm r. A breakfast-cereal company s. A catering service t. A paper mill u. An auto repair shop Direct material costs $2,000,000 $1,900,000 Direct manufacturing labor costs 1,500,000 1,450,000 Manufacturing overhead costs 2,700,000 2,755,000 1. Compute the actual and budgeted manufacturing overhead rates for 2011. Required 2. During March, the job-cost record for Job 626 contained the following information: Direct materials used $40,000 Direct manufacturing labor costs $30,000 Compute the cost of Job 626 using (a) actual costing and (b) normal costing. 3. At the end of 2011, compute the under- or overallocated manufacturing overhead under normal costing. Why is there no under- or overallocated overhead under actual costing? 
4-18 Job costing, normal and actual costing. 
Amesbury Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2010, Amesbury budgets 2011 assembly-support costs to be $8,300,000 and 2011 direct labor-hours to be 166,000. At the end of 2011, Amesbury is comparing the costs of several jobs that were started and completed in 2011. Laguna Model Mission Model Construction period Feb
June 2011 MayOct 2011 Direct material costs $106,760 $127,550 Direct labor costs $ 36,950 $ 41,320 Direct labor-hours 960 1,050 Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labor-hours are worked. The 2011 actual assembly-support costs were $6,520,000, and the actual direct labor-hours were 163,000. 1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ? Required 2. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing? 3. Why might Amesbury Construction prefer normal costing over actual costing? 
4-19 Budgeted manufacturing overhead rate, allocated manufacturing overhead. 
Gammaro Company uses normal costing. It allocates manufacturing overhead costs using a budgeted rate per machine-hour. The following data are available for 2011: Budgeted manufacturing overhead costs $4,200,000 Budgeted machine-hours 175,000 Actual manufacturing overhead costs $4,050,000 Actual machine-hours 170,000 128 _ CHAPTER 4 JOB COSTING Compute the total manufacturing overhead costs allocated to Job 494. 3. At the end of 2011, the actual manufacturing overhead costs were $2,100,000 in machining and $3,700,000 in assembly. Assume that 55,000 actual machine-hours were used in machining and that actual direct manufacturing labor costs in assembly were $2,200,000. Compute the over- or underallocated manufacturing overhead for each department. 
4-21 Job costing, consulting firm. 
Turner & Associates, a consulting firm, has the following condensed 
Required 1. 
Calculate the budgeted manufacturing overhead rate. 2. Calculate the manufacturing overhead allocated during 2011. 3. Calculate the amount of under- or overallocated manufacturing overhead. 
4-20 Job costing, accounting for manufacturing overhead, budgeted rates. 
The Lynn Company uses a normal job-costing system at its Minneapolis plant. The plant has a machining department and an assembly department. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the machining department overhead, allocated to jobs based on actual machine-hours, and the assembly department overhead, allocated to jobs based on actual direct manufacturing labor costs). The 2011 budget for the plant is as follows: Machining Department Assembly Department Manufacturing overhead $1,800,000 $3,600,000 Direct manufacturing labor costs $1,400,000 $2,000,000 Direct manufacturing labor-hours 100,000 200,000 Machine-hours 50,000 200,000 Machining Department Assembly Department Direct materials used $45,000 $70,000 Direct manufacturing labor costs $14,000 $15,000 Direct manufacturing labor-hours 1,000 1,500 Machine-hours 2,000 1,000 Revenues $21,250,000 Total costs: Direct costs Professional Labor $ 5,312,500 Indirect costs Client support 
ƒ13,600,000 ƒ18,912,500 Operating income $ƒ2,337,500 Turner has a single direct-cost category (professional labor) and a single indirect-cost pool (client support). Indirect costs are allocated to jobs on the basis of professional labor costs. Calculate the budgeted cost of the Tasty Chicken job. How much will Turner bid for the job if it is to earn its target operating income of 11% of revenues? Professional Labor Category Budgeted Rate per Hour Budgeted Hours Director $198 4 Partner 101 17 Associate 49 42 Assistant 36 153 
Required 1. 
Present an overview diagram of Lynn
s job-costing system. Compute the budgeted manufacturing overhead rate for each department. 2. During February, the job-cost record for Job 494 contained the following: 
Required 1. 
Prepare an overview diagram of the job-costing system. Calculate the 2011 budgeted indirect-cost rate for Turner & Associates. 2. The markup rate for pricing jobs is intended to produce operating income equal to 11% of revenues. Calculate the markup rate as a percentage of professional labor costs. 3. Turner is bidding on a consulting job for Tasty Chicken, a fast-food chain specializing in poultry meats. The budgeted breakdown of professional labor on the job is as follows: ASSIGNMENT MATERIAL _ 129 It takes 0.5 direct manufacturing labor-hour to make each pool. The actual direct material cost is $7.50 per pool. The actual direct manufacturing labor rate is $16 per hour. The budgeted variable manufacturing overhead rate is $12 per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are $10,500 each quarter. Quarter 1 2 3 4 Pools manufactured and sold 700 500 150 150 1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company Required allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter. 2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate. 3. Splash Manufacturing prices its pools at manufacturing cost plus 30%. Why might Sotco Wholesale be seeing large fluctuations in the prices of pools? Which of the methods described in requirements 1 and 2 would you recommend Splash use? Explain. 
4-23 Accounting for manufacturing overhead. 
Consider the following selected cost data for the Pittsburgh Forging Company for 2011. Budgeted manufacturing overhead costs $7,500,000 Budgeted machine-hours 250,000 Actual manufacturing overhead costs $7,300,000 Actual machine-hours 245,000 The company uses normal costing. Its job-costing system has a single manufacturing overhead cost pool. Costs are allocated to jobs using a budgeted machine-hour rate. Any amount of under- or overallocation is written off to Cost of Goods Sold. 1. Compute the budgeted manufacturing overhead rate. Required 2. Prepare the journal entries to record the allocation of manufacturing overhead. 3. Compute the amount of under- or overallocation of manufacturing overhead. Is the amount material? Prepare a journal entry to dispose of this amount. 
4-24 Job costing, journal entries. 
The University of Chicago Press is wholly owned by the university. It performs the bulk of its work for other university departments, which pay as though the press were an outside business enterprise. The press also publishes and maintains a stock of books for general sale. The press uses normal costing to cost each job. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead, allocated on the basis of direct manufacturing labor costs). The following data (in thousands) pertain to 2011: 
4-22 Time period used to compute indirect cost rates. 
Splash Manufacturing produces outdoor wading and slide pools. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company
s production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Sotco Wholesale, due to large fluctuations in price. The owner of Splash has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year: Direct materials and supplies purchased on credit $ 800 Direct materials used 710 Indirect materials issued to various production departments 100 Direct manufacturing labor 1,300 Indirect manufacturing labor incurred by various production departments 900 Depreciation on building and manufacturing equipment 400 Miscellaneous manufacturing overhead* incurred by various production departments (ordinarily would be detailed as repairs, photocopying, utilities, etc.) 550 Manufacturing overhead allocated at 160% of direct manufacturing labor costs ? Cost of goods manufactured 4,120 Revenues 8,000 Cost of goods sold (before adjustment for under- or overallocated manufacturing overhead) 4,020 Inventories, December 31, 2010 (not 2011): * The term manufacturing overhead is not used uniformly. Other terms that are often encountered in printing companies include job overhead and shop overhead. 130 _ CHAPTER 4 JOB COSTING Costs incurred: Purchases of direct materials (net) on credit $124,000 Direct manufacturing labor cost 80,000 Indirect labor 54,500 Depreciation, factory equipment 30,000 Depreciation, office equipment 7,000 Maintenance, factory equipment 20,000 Miscellaneous factory overhead 9,500 Rent, factory building 70,000 Advertising expense 90,000 Sales commissions 30,000 Inventories: January 1, 2011 December 31, 2011 Direct materials $ 9,000 $11,000 Work in process 6,000 21,000 Finished goods 69,000 24,000 Production Co. uses a normal costing system and allocates overhead to work in process at a rate of $2.50 per direct manufacturing labor dollar. Indirect materials are insignificant so there is no inventory account for indirect materials. Materials Control, beginning balance, January 1, 2011 $ 12 Work-in-Process Control, beginning balance, January 1, 2011 2 Finished Goods Control, beginning balance, January 1, 2011 6 Materials and supplies purchased on credit 150 Direct materials used 145 Indirect materials (supplies) issued to various production departments 10 Direct manufacturing labor 90 Indirect manufacturing labor incurred by various production departments 30 Depreciation on plant and manufacturing equipment 19 Miscellaneous manufacturing overhead incurred (ordinarily would be detailed as repairs, utilities, etc., with a corresponding credit to various liability accounts) 9 Manufacturing overhead allocated, 2,100,000 actual machine-hours ? Cost of goods manufactured 294 Revenues 400 Cost of goods sold 292 
Required 1. 
Prepare an overview diagram of the job-costing system at the University of Chicago Press. 2. Prepare journal entries to summarize the 2011 transactions. As your final entry, dispose of the year-end under- or overallocated manufacturing overhead as a write-off to Cost of Goods Sold. Number your entries. Explanations for each entry may be omitted. 3. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead Control, and Manufacturing Overhead Allocated. 
4-25 Journal entries, T-accounts, and source documents. 
Production Company produces gadgets for the coveted small appliance market. The following data reflect activity for the year 2011: 
Required 1. 
Prepare journal entries to record the transactions for 2011 including an entry to close out over- or underallocated overhead to cost of goods sold. For each journal entry indicate the source document that would be used to authorize each entry. Also note which subsidiary ledger, if any, should be referenced as backup for the entry. 2. Post the journal entries to T-accounts for all of the inventories, Cost of Goods Sold, the Manufacturing Overhead Control Account, and the Manufacturing Overhead Allocated Account. 
4-26 Job costing, journal entries. 
Donnell Transport assembles prestige manufactured homes. Its job costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead allocated at a budgeted $30 per machine-hour in 2011). The following data (in millions) pertain to operations for 2011: Materials Control 100 Work-in-Process Control 60 Finished Goods Control 500 ASSIGNMENT MATERIAL _ 131 1 2 3 A Rafael Company, May 2011 Direct materials Direct manufacturing labor Job M2 $ 51,000 208,000 Job M1 $ 78,000 273,000 B C 1. Prepare an overview diagram of Donnell Transport
s job-costing system. Required 2. Prepare journal entries. Number your entries. Explanations for each entry may be omitted. Post to T-accounts. What is the ending balance of Work-in-Process Control? 3. Show the journal entry for disposing of under- or overallocated manufacturing overhead directly as a year-end write-off to Cost of Goods Sold. Post the entry to T-accounts. 
4-27 Job costing, unit cost, ending work in process. 
Rafael Company produces pipes for concertquality organs. Each job is unique. In April 2011, it completed all outstanding orders, and then, in May 2011, it worked on only two jobs, M1 and M2: Direct manufacturing labor is paid at the rate of $26 per hour. Manufacturing overhead costs are allocated at a budgeted rate of $20 per direct manufacturing labor-hour. Only Job M1 was completed in May. 1. Calculate the total cost for Job M1. Required 2. 1,100 pipes were produced for Job M1. Calculate the cost per pipe. 3. Prepare the journal entry transferring Job M1 to finished goods. 4. What is the ending balance in the Work-in-Process Control account? 
4-28 Job costing; actual, normal, and variation from normal costing. 
Chico & Partners, a Quebec-based public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (audit support, which contains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Chico & Partners employs 10 professionals to perform audit services. Budgeted and actual amounts for 2011 are as follows: 1 2 3 4 5 Audit support department costs Professional labor-hours billed to clients 6 7 Actual results for 2011 8 Audit support department costs Professional labor-hours billed to clients B C 9 10 Actual professional labor cost rate $990,000 $774,000 18,000 $735,000 17,500 $ 59 hours per hour 1. Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2011 under Required (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. 2. Chico
s 2011 audit of Pierre & Co. was budgeted to take 150 hours of professional labor time. The actual professional labor time spent on the audit was 160 hours. Compute the cost of the Pierre & Co. audit using (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. Explain any differences in the job cost. 
4-29 Job costing; actual, normal, and variation from normal costing. 
Braden Brothers, Inc., is an architecture firm specializing in high-rise buildings. Its job-costing system has a single direct-cost category (architectural labor) and a single indirect-cost pool, which contains all costs of supporting the office. Support costs are allocated to individual jobs using architect labor-hours. Braden Brothers employs 15 architects. 132 _ CHAPTER 4 JOB COSTING Inventory balances on December 31, 2011, were as follows: Braden Brothers, Inc. Budget for 2010 Architect labor cost $2,880,000 Office support costs $1,728,000 Architect labor-hours billed to clients 32,000 hours Actual results for 2010 Office support costs $1,729,500 Architect labor-hours billed to clients 34,590 hours Actual architect labor cost rate $ 92 per hour Budgeted manufacturing overhead cost $125,000 Budgeted direct manufacturing labor cost $250,000 Actual manufacturing overhead cost $117,000 Actual direct manufacturing labor cost $228,000 Account Ending balance 2011 direct manufacturing labor cost in ending balance Work in process $ 50,700 $ 20,520 Finished goods 245,050 59,280 Cost of goods sold 549,250 148,200 Manufacturing overhead costs $10,660,000 $7,372,000 Direct manufacturing labor costs $ 940,000 $3,800,000 Direct manufacturing labor-hours 36,000 145,000 Machine-hours 205,000 32,000 Budgeted and actual amounts for 2010 are as follows: 
Required 1. 
Compute the direct-cost rate and the indirect-cost rate per architectural labor-hour for 2010 under (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. 2. Braden Brother
s architectural sketches for Champ Tower in Houston was budgeted to take 275 hours of architectural labor time. The actual architectural labor time spent on the job was 250 hours. Compute the cost of the Champ Tower sketches using (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. 
4-30 Proration of overhead. 
The Ride-On-Wave Company (ROW) produces a line of non-motorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2011: 
Required 1. 
Calculate the manufacturing overhead allocation rate. 2. Compute the amount of under- or overallocated manufacturing overhead. 3. Calculate the ending balances in work in process, finished goods, and cost of goods sold if underoverallocated manufacturing overhead is as follows: a. Written off to cost of goods sold b. Prorated based on ending balances (before proration) in each of the three accounts c. Prorated based on the overhead allocated in 2011 in the ending balances (before proration) in each of the three accounts 4. Which method makes the most sense? Justify your answer. Problems
4-31 Job costing, accounting for manufacturing overhead, budgeted rates. 
The Fasano Company uses a job-costing system at its Dover, Delaware, plant. The plant has a machining department and a finishing department. Fasano uses normal costing with two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the machining department with machinehours as the allocation base, and the finishing department with direct manufacturing labor costs as the allocation base). The 2011 budget for the plant is as follows: ASSIGNMENT MATERIAL _ 133 1. Prepare an overview diagram of Fasano
s job-costing system. Required 2. What is the budgeted manufacturing overhead rate in the machining department? In the finishing department? 3. During the month of January, the job-cost record for Job 431 shows the following: Direct materials used $15,500 $ 5,000 Direct manufacturing labor costs $ 400 $1,1,00 Direct manufacturing labor-hours 50 50 Machine-hours 130 20 Manufacturing overhead incurred $11,070,000 $8,236,000 Direct manufacturing labor costs $ 1,000,000 $4,400,000 Machine-hours 210,000 31,000 Compute the total manufacturing overhead cost allocated to Job 431. 4. Assuming that Job 431 consisted of 400 units of product, what is the cost per unit? 5. Amounts at the end of 2011 are as follows: Compute the under- or overallocated manufacturing overhead for each department and for the Dover plant as a whole. 6. Why might Fasano use two different manufacturing overhead cost pools in its job-costing system? 
4-32 Service industry, job costing, law firm. 
Keating & Associates is a law firm specializing in labor relations and employee-related work. It employs 25 professionals (5 partners and 20 associates) who work directly with its clients. The average budgeted total compensation per professional for 2011 is $104,000. Each professional is budgeted to have 1,600 billable hours to clients in 2011. All professionals work for clients to their maximum 1,600 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Keating & Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2011 is $2,200,000. 1. Prepare an overview diagram of Keating
s job-costing system. Required 2. Compute the 2011 budgeted direct-cost rate per hour of professional labor. 3. Compute the 2011 budgeted indirect-cost rate per hour of professional labor. 4. Keating & Associates is considering bidding on two jobs: a. Litigation work for Richardson, Inc., which requires 100 budgeted hours of professional labor b. Labor contract work for Punch, Inc., which requires 150 budgeted hours of professional labor Prepare a cost estimate for each job. 
4-33 Service industry, job costing, two direct- and two indirect-cost categories, law firm (continuation of
4-32). 
Keating has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used the firm
s resources and interviews with personnel about what factors drive the level of indirect costs. Management concluded that a system with two direct-cost categories (professional partner labor and professional associate labor) and two indirect-cost categories (general support and secretarial support) would yield more accurate job costs. Budgeted information for 2011 related to the two direct-cost categories is as follows: Budgeted information for 2011 relating to the two indirect-cost categories is as follows: Professional Partner Labor Professional Associate Labor Number of professionals 5 20 Hours of billable time per professional 1,600 per year 1,600 per year Total compensation (average per professional) $200,000 $80,000 General Support Secretarial Support Total costs $1,800,000 $400,000 Cost-allocation base Professional labor-hours Partner labor-hours 1. Compute the 2011 budgeted direct-cost rates for (a) professional partners and (b) professional associates. Required 2. Compute the 2011 budgeted indirect-cost rates for (a) general support and (b) secretarial support. 134 _ CHAPTER 4 JOB COSTING 4. Comment on the results in requirement 3. Why are the job costs different from those computed in Problem
4-32? 
4-34 Proration of overhead. 
(Z. Iqbal, adapted) The Zaf Radiator Company uses a normal-costing system with a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The following data are for 2011: Machine-hours data and the ending balances (before proration of under- or overallocated overhead) are as follows: Richardson, Inc. Punch, Inc. Professional partners 60 hours 30 hours Professional associates 40 hours 120 hours Budgeted manufacturing overhead costs $4,800,000 Overhead allocation base Machine-hours Budgeted machine-hours 80,000 Manufacturing overhead costs incurred $4,900,000 Actual machine-hours 75,000 Actual Machine-Hours 2011 End-of-Year Balance Cost of Goods Sold 60,000 $8,000,000 Finished Goods Control 11,000 1,250,000 Work-in-Process Control 4,000 750,000 Work in Process Finished Goods Cost of Goods Sold Balance before proration $27,720 $15,523.20 $115,156.80 Molding Department Overhead Allocated $ 4,602 $ 957.00 $ 12,489.00 Painting Department Overhead Allocated $ 2,306 $ 1,897.00 $ 24,982.00 3. Compute the budgeted costs for the Richardson and Punch jobs, given the following information: 
Required 1. 
Compute the budgeted manufacturing overhead rate for 2011. 2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2011. Dispose of this amount using the following: a. Write-off to Cost of Goods Sold b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold c. Proration based on the overhead allocated in 2011 (before proration) in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold 3. Which method do you prefer in requirement 2? Explain. 
4-35 Normal costing, overhead allocation, working backward. 
Gibson Manufacturing uses normal costing for its job-costing system, which has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost category (manufacturing overhead). The following information is obtained for 2011: _ Total manufacturing costs, $8,000,000 _ Manufacturing overhead allocated, $3,600,000 (allocated at a rate of 200% of direct manufacturing labor costs) _ Work-in-process inventory on January 1, 2011, $320,000 _ Cost of finished goods manufactured, $7,920,000 
Required 1. 
Use information in the first two bullet points to calculate (a) direct manufacturing labor costs in 2011 and (b) cost of direct materials used in 2011. 2. Calculate the ending work-in-process inventory on December 31, 2011. 
4-36 Proration of overhead with two indirect cost pools. 
New Rise, Inc., produces porcelain figurines. The production is semi-automated where the figurine is molded almost entirely by operator-less machines and then individually hand-painted. The overhead in the molding department is allocated based on machinehours and the overhead in the painting department is allocated based on direct manufacturing labor-hours. New Rise, Inc., uses a normal-costing system and reported actual overhead for the month of May of $17,248 and $31,485 for the molding and painting departments, respectively. The company reported the following information related to its inventory accounts and cost of goods sold for the month of May: ASSIGNMENT MATERIAL _ 135 1. Calculate the over- or underallocated overhead for each of the Molding and Painting departments Required for May. 2. Calculate the ending balances in work in process, finished goods, and cost of goods sold if the underor overallocated overhead amounts in each department are as follows: a. Written off to cost of goods sold b. Prorated based on the ending balance (before proration) in each of the three accounts c. Prorated based on the overhead allocated in May (before proration) in the ending balances in each of the three accounts 3. Which method would you choose? Explain. 
4-37 General ledger relationships, under- and overallocation. 
(S. Sridhar, adapted) Needham Company uses normal costing in its job-costing system. Partially completed T-accounts and additional information for Needham for 2011 are as follows: Manufacturing Overhead Control Manufacturing Overhead Allocated Cost of Goods Sold 540,000 Direct Materials Control Work-in-Process Control Finished Goods Control 1-1-2011 30,000 380,000 1-1-2011 20,000 1-1-2011 10,000 900,000 400,000 Dir. manuf. 940,000 labor 360,000 Additional information follows: a. Direct manufacturing labor wage rate was $15 per hour. b. Manufacturing overhead was allocated at $20 per direct manufacturing labor-hour. c. During the year, sales revenues were $1,090,000, and marketing and distribution costs were $140,000. 1. What was the amount of direct materials issued to production during 2011? Required 2. What was the amount of manufacturing overhead allocated to jobs during 2011? 3. What was the total cost of jobs completed during 2011? 4. What was the balance of work-in-process inventory on December 31, 2011? 5. What was the cost of goods sold before proration of under- or overallocated overhead? 6. What was the under- or overallocated manufacturing overhead in 2011? 7. Dispose of the under- or overallocated manufacturing overhead using the following: a. Write-off to Cost of Goods Sold b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold 8. Using each of the approaches in requirement 7, calculate Needham
s operating income for 2011. 9. Which approach in requirement 7 do you recommend Needham use? Explain your answer briefly. 
4-38 Overview of general ledger relationships. 
Brady Company uses normal costing in its job-costing system. The company produces custom bikes for toddlers. The beginning balances (December 1) and ending balances (as of December 30) in their inventory accounts are as follows: Beginning Balance 12/1 Ending Balance 12/30 Materials Control $1,200 $ 7,600 Work-in-Process Control 5,800 8,100 Manufacturing Department Overhead Control 
 94,070 Finished Goods Control 3,500 18,500 Additional information follows: a. Direct materials purchased during December were $65,400. b. Cost of goods manufactured for December was $225,000. c. No direct materials were returned to suppliers. d. No units were started or completed on December 31. e. The manufacturing labor costs for the December 31 working day: direct manufacturing labor, $3,850, and indirect manufacturing labor, $950. f. Manufacturing overhead has been allocated at 120% of direct manufacturing labor costs through December 30. 136 _ CHAPTER 4 JOB COSTING There were two jobs in process on December 31, 2010: Job 11 and Job 12. Costs added to each job as of December 31 are as follows: Tamden, Inc., has no finished goods inventories because all printing jobs are transferred to cost of goods sold when completed. Budgeted direct labor costs $150,000 Budgeted overhead costs $180,000 Costs of actual material used $126,500 Actual direct labor costs $148,750 Actual overhead costs $176,000 Direct materials Direct labor Job 11 $3,620 $4,500 Job 12 $6,830 $7,250 Standard cost sheet: 1,000 sq. ft. one-bedroom model Direct materials $ 8,000 Direct manufacturing labor 30 hours 600 Manufacturing overhead* $3 per direct labor dollar ƒƒ1,800 Total cost $10,400 Retail markup on total cost 20% Retail price $12,480 
Required 1. 
Prepare journal entries for the December 31 payroll. 2. Use T-accounts to compute the following: a. The total amount of materials requisitioned into work in process during December b. The total amount of direct manufacturing labor recorded in work in process during December (Hint: You have to solve requirements 2b and 2c simultaneously) c. The total amount of manufacturing overhead recorded in work in process during December d. Ending balance in work in process, December 31 e. Cost of goods sold for December before adjustments for under- or overallocated manufacturing overhead 3. Prepare closing journal entries related to manufacturing overhead. Assume that all under- or overallocated manufacturing overhead is closed directly to Cost of Goods Sold. 
4-39 Allocation and proration of overhead. 
Tamden, Inc., prints custom marketing materials. The business was started January 1, 2010. The company uses a normal-costing system. It has two direct cost pools, materials and labor and one indirect cost pool, overhead. Overhead is charged to printing jobs on the basis of direct labor cost. The following information is available for 2010. *Overhead cost pool includes inspection labor ($15 per hour), setup labor ($12 per hour), and other indirect costs associated with production. 
Required 1. 
Compute the overhead allocation rate. 2. Calculate the balance in ending work in process and cost of goods sold before any adjustments for under- or overallocated overhead. 3. Calculate under- or overallocated overhead. 4. Calculate the ending balances in work in process and cost of goods sold if the under- or overallocated overhead amount is as follows: a. Written off to cost of goods sold b. Prorated using the ending balance (before proration) in cost of goods sold and work-in-process control accounts 5. Which of the methods in requirement 4 would you choose? Explain. 
4-40 Job costing, contracting, ethics. 
Kingston Company manufactures modular homes. The company has two main products that it sells commercially: a 1,000 square foot, one-bedroom model and a 1,500 square foot, two-bedroom model. The company recently began providing emergency housing (huts) to FEMA. The emergency housing is similar to the 1,000 square foot model. FEMA has requested Kingston to create a bid for 150 emergency huts to be sent for flood victims in the south. Your boss has asked that you prepare this bid. In preparing the bid, you find a recent invoice to FEMA for 200 huts provided after hurricane Katrina. You also have a standard cost sheet for the 1,000 square foot model sold commercially. Both are provided as follows: ASSIGNMENT MATERIAL _ 137 INVOICE: DATE: September 15, 2005 BILL TO: FEMA FOR: 200 Emergency Huts SHIP TO: New Orleans, Louisiana Direct materials $1,840,000 Direct manufacturing labor** 138,400 Manufacturing overhead 
ƒƒƒ415,200 Total cost ƒ2,393,600 Government contract markup on total cost 15% Total due $2,752,640 From Beginning SIP Incurred in April Author Materials Labor Materials Labor N. Asher $425 $750 $ 90 $225 T. Bucknell 710 575 150 75 S. Brown 200 550 320 450 S. King   650 400 D. Sherman   150 200 **Direct manufacturing labor includes 28 production hours per unit, 4 inspection hours per unit, and 6 setup hours per unit 1. Calculate the total bid if you base your calculations on the standard cost sheet assuming a cost plus Required 15% government contract. 2. Calculate the total bid if you base your calculations on the September 15, 2005, invoice assuming a cost plus 15% government contract. 3. What are the main discrepancies between the bids you calculated in #1 and #2? 4. What bid should you present to your boss? What principles from the IMA Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management should guide your decision? Collaborative Learning Problem 
4-41 Job costingservice industry. Cam Cody schedules book signings for science fiction authors and creates e-books and books on CD to sell at each signing. Cody uses a normal-costing system with two direct cost pools, labor and materials, and one indirect cost pool, general overhead. General overhead is allocated to each signing based on 80% of labor cost. Actual overhead equaled allocated overhead in March 2010. Actual overhead in April was $1,980. All costs incurred during the planning stage for a signing and during the signing are gathered in a balance sheet account called Signings in Progress (SIP). When a signing is completed, the costs are transferred to an income statement account called Cost of Completed Signings (CCS). Following is cost information for April 2010: The following information relates to April 2010. As of April 1, there were three signings in progress, N. Asher, T. Bucknell, and S. Brown. Signings for S. King and D. Sherman were started during April. The signings for T. Bucknell and S. King were completed during April. 1. Calculate SIP at the end of April. Required 2. Calculate CCS for April. 3. Calculate under/overallocated overhead at the end of April. 4. Calculate the ending balances in SIP and CCS if the under/overallocated overhead amount is as follows: a. Written off to CCS b. Prorated based on the ending balances (before proration) in SIP and CCS c. Prorated based on the overhead allocated in April in the ending balances of SIP and CCS (before proration) 5. Which of the methods in requirement 4 would you choose?