Assignment 1 Solutions
ACCT 361 MANAGEMENT ACCOUNTING FALL 2015 ASSIGNMENT 1 DUE MONDAY OCTOBER 5 1. Stodgy Industries Ltd. has barely made a profit over the past few years and is looking for ways to improve its results. It has hired a consultant who has suggested that the company introduce a concept called the Balanced Scorecard. This involves looking into all aspects of a company’s activities and seeks to integrate them into a cohesive manner that can focus on corporate goals. The company’s president has called in the vice president of sales and vice president of production to discuss how the company can establish goals and meet those targets. The consultant says that there is a critical person missing from the meeting, which is the company’s controller. Explain why or why not the controller is a critical component of any desire to introduce a Balanced Scorecard in an organization
2. Million Dollar Mills is a textile-manufacturing firm. The company carefully prepares all financial statements in accordance with GAAP, and gives a copy of all financial statements to each department. In addition, the company keeps records on quality control, safety, and environmental pollution by the company. It then prepares "scorecards" for each department indicating their performance. Recently, the financial impact of the second set of information was added, and the information has been used in the evaluation of employees for merit pay and promotions. At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the system. He said that there was no guarantee that the second set of information was fair, since there were no generally accepted principles for this kind of information. He also said that it was kind of like keeping two sets of books—one following all legal requirements, and the other one actually used by the company. Required: a.
Is it ethical to evaluate managers in the way described? Explain briefly.
b.
Name at least two safeguards the company could build into its system to ensure the ethical treatment of employees.
3. Culpepper Computer Ltd. manufactures a laptop and has the following results for its recent year end: Laptop per Unit Sales Data Selling price .................................................. $1,500 Manufacturing Costs: Variable materials ...................................... $500 Variable labour ........................................... 128 Manufacturing overhead ............................ 480 1,108 Gross Margin ................................................ $392 Selling, general, and administrative expenses Variable ...................................................... $50 Fixed ........................................................... 150 200 Profit per unit ................................................ $192 Each laptop requires approximately 240 minutes of highly skilled labour time for assembly and testing. The bottleneck resource in the operation is labour hours. Workers are paid $32 per hour and no additional labour hours are available. Factory overhead, of which 25% is variable, is allocated to laptops using labour hours since all the work in the factory is labour paced. The company sells 10,000 computers a year, which is the capacity dictated by labour hours availability. Recently Zucchini Computers offered to purchase 2,000 computers from Culpepper but with a custom feature. This feature will require 45 minutes of additional labour time and incur an additional $50 in materials for each computer. Selling, general, and administrative costs would not change with this order. Required: a. Compute the minimum price that Culpepper should charge Zucchini for each computer in this order. b. What other factors should Culpepper consider before it agrees to the order?
4. The following information for 2016 for Vinnie`s Cream Pie Fillings is available: Baking capacity Tonnage sold in year Sales Variable costs Contribution margin Fixed costs Manufacturing Selling Administration Income before taxes Income taxes @ 40% Net income
3,000 tonnes of filling 1,800 $900,000 495,000 $405,000 90,000 112,500 45,000 $157,500 63,000 $ 94,500
Required: Consider each of the following scenarios independently: a. Calculate the break-even volume in tonnes for the year. b.
If Vinnie expects to sell 2,100 tonnes of filling next year, calculate the expected after tax income, assuming costs and prices remain the same.
b. Vinnie`s cousin says he can sell pie filling to a new company in a nearby city but will require Vinnie to pay $61,500 to advertise the product. In addition, Vinnie will have to pay his cousin $25 for each tonne sold. Calculate the number of tones that will have to be sold to maintain the current after tax net income. d.
Vinnie wants to ramp up production by investing in a new machine that will cost $58,500. The benefit will be that variable costs will decrease by $25 per tonne. Calculate the new break even if the new machine is purchased.
e.
Assume instead that Vinnie does not purchase the machine or begin selling in the new city. He is worried that per-tonne selling prices will decline by 10% and variable costs will increase by $40 per tonne. Calculate the sales volume in dollars needed if Vinnie is to maintain his after tax income of $94,500.
5. John Plomly has operated Cedar Star Restorations for several years in Kitchener, Ontario, a business that was started by his father in 1981. The company restores residential buildings with wood exteriors, including log cabins built with either Ontario or British Columbia cedar logs. The company operates seasonally through the warm months, keeping his crews busy who are guaranteed a 40-hour work week (regardless of hours worked), Monday to Friday, from May to September (operating for 22 weeks per year). Customers refuse to give up the use of their yards on summer weekends and, therefore, always demand that the work be scheduled for weekdays. While vacationing and visiting at a friend’s cottage during the past weekend, John’s friend mentioned that his cedar log cottage is in desperate need of restoration after several years of neglect. His friend also mentioned that he knows of two other people in the area who also have log homes and who have been unable to find a service provider in the area to do cleaning and restoration work. The buildings are all too large for the owners to take on the project alone. Having returned from his weekend trip, John is wondering whether he should employ his company’s services to his friend and neighbours three hours away in cottage country. He knows his staff is eager to earn as much as possible during the summer months and would appreciate a weekend overtime opportunity to work at a remote location at double their regular rate. In addition, since taking over the business from his father, he has been considering expanding his service into this vacation area, as people are not always at their cottages and jobs can be scheduled on weekends. John’s friend indicated that he was certain that all three jobs would be awarded if John offered to do the work for $2,000 per building during the upcoming long weekend. The following are the annual crew wages and fixed costs of Cedar Star Restorations:
Property taxes Equipment/vehicle depreciation Equipment maintenance Worksite supervisor salary Crew annual wages* Insurance *based on a regular hourly rate of $16/hour
$5,000 12,500 3,200 50,000 98,560 4,000
Based on John’s knowledge of the size and condition of his friend’s cottage and the description of the other two buildings, he is sure each building can be washed and stained in a day with each member of his three-person crew working 10 hours per day over three days of the long weekend. Overtime pay will be required as the employees are working beyond their regular hours and double time is required on the statutory holiday (Monday). Given that John had already planned to be in the area on the weekend that the jobs would be completed, the worksite supervisor would not be needed. John would stay at his friend’s cottage and occasionally visit the job site during the weekend to drive the employees to and from their motel. He also plans to take the three employees up to the site with him in his minivan.
There are various other costs directly associated with each restoration job. John has estimated that each building will require 2.5 litres of their specially mixed cleaning solution at $32 per litre. The three employees will sleep at a nearby motel that is expected to cost $85 per person for each of the three nights of their stay. Power for the pressure washing equipment will be supplied by the owners. Meals for the crew are expected to be $75 per day per person. Required: 1.
Should John agree to complete these three jobs offered by his friend?
2.
If Cedar Star Restorations does expand operations into this new area, should John price other jobs of similar size at $2,000?
SOLUTIONS 1. A Balanced Scorecard seeks to establish a series of goals that an organization can set that will enable it to attain a comprehensive target. This target can have both financial (profit) or nonfinancial (quality) targets that need to be monitored along the way. Both of these two broad components require adequate tracking of data generated through the company’s activities. Generally, vice presidents of sales and production are focused mostly on their own areas and activities; the controller is the one person who has information available on both areas. The controller can work with these two people and help determine the information that they will need to meet their goals. Without effective information, it is unlikely that the company’s implementation of a Balanced Scorecard will offer expected results. 2. a. It is ethical for a company to use all available data in order to evaluate managers, and even to collect data not routinely available. In fact, such a method seems preferable to one in which the company may only use specified financial data in its evaluation of a manager's performance. It does not imply a departure from GAAP, nor that the company does not actually use the information prepared according to GAAP. It supplements the standard reports, it does not replace them. b. The company should make certain that the appropriate information is calculated in the same way each period. All the relevant data should be collected and reported each period. New data should be limited. The qualitative information should be complemented, not replaced, by the regular financial information. 3. a. Variable cost of special order ($500 + 128 + 50 + 50 +120) Additional time required (.75 hours x (128 + 120) / 4) Contribution margin foregone: Hours required for special order 2,000 x 4.75 = 9,500 Regular units lost 9,500 / 4 = 2,375 CM / regular unit $1,500 – 500 – 128 – 120 – 50 = $702 CM foregone (2,375 x $702) / 2,000 Minimum price of each unit of custom order
$848.00 46.50
833.63 $1,728.13
b. On the surface this looks like a good arrangement for Culpepper. But the company needs to look at the strategic aspects of the order. Can it take out 2,000 computers from its regular customer orders and expect to regain them once the special order is complete? Will its cost estimates be accurate, considering that there will be a learning curve from its workers who will have to adapt to making the new products? It appears that labour hours are already maxed out and any difficulties with the new order could set back its own production schedules for its regular products. Alternatively, could this be a breakthrough into a whole new market for Culpepper and if so, would there be other companies that would wish to have custom orders made for them? Culpepper currently appears to be a manufacturer of one or two products and is set up to operate in this fashion; changing to a specialty manufacturer requires it to view its production capabilities in more of a job-order manner. This may mean more pressure on its sales force as well as on its production operations.
4. a. CM/Unit = $405,000 ÷ 1,800 = $225 B/E point = $247,500 ÷ 225 = 1,100 tonnes b. [(2,100 x 225) – 247,500] x .6 = $135,000 c. B/E in new city: CM/Unit = $225 – 25 = $200 Incremental fixed costs = $61,500 B/E point = 61,500 ÷ 200 = 307.5 tonnes d. CM/unit = $250 FC = 247,500 + 58,500 = $306,000 B/E Point = $306,000 / 250 = 1,224 tonnes e. New Selling Price = 900,000 ÷ 1,800 x .9 = $450 New VC/unit = $275 + 40 = $315 CM/Unit = $135 CM ratio = 30% Before tax income = 94,500 ÷ .6 = 157,500 Sales = (247,500 + 157,500) ÷ .30 = $1,350,000 5. a. Relevant financial data: Number of people in crew Hourly rate of crew Overtime rate Hours required to complete each job Cost per litre of cleaning fluid Litres required per job Cost of motel per person per night Cost of meals per person per day
3 $16 2x 10 $32 2.50 $85 $75
Contribution margin per job/day: Revenue Variable cost: Crew of 3 Cleaning fluid Nightly accommodations (motel) Meals Total variable costs Contribution margin
Per Job/Day $2,000 $960 $80 $255 $225 $1,520 $480
Based on the financial analysis above, these jobs will contribute $480 each to fixed costs. In addition, this will help the company to establish a reputation into an area where John is interested in expanding. This will also provide the company with some limited experience operating in distant job sites. b. If John intends to be competitive and grow his business in this area over the long run, he must also consider fixed costs. Fixed costs: Property taxes Equipment/vehicle depreciation Equipment maintenance Worksite supervisor salary Insurance Days of operation Fixed costs per day
$5,000 12,500 3,200 50,000 4,000 $74,700 154 $485
Based on a 154 days of operations, fixed costs are incurred at a rate of $485 per day. For the company to be successful over the longer run, John must ensure that he is also covering fixed costs. In this situation, he is not doing that. John must make it clear to these three new customers that they are receiving special pricing based on his relationship with his friend. While this opportunity allows the company to establish a reputation in the area, future jobs must be priced higher so the all costs are covered and at least the minimum required return is generated.
2. Million Dollar Mills is a textile-manufacturing firm. The company carefully prepares all financial statements in accordance with GAAP, and gives a copy of all financial statements to each department. In addition, the company keeps records on quality control, safety, and environmental pollution by the company. It then prepares "scorecards" for each department indicating their performance. Recently, the financial impact of the second set of information was added, and the information has been used in the evaluation of employees for merit pay and promotions. At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the system. He said that there was no guarantee that the second set of information was fair, since there were no generally accepted principles for this kind of information. He also said that it was kind of like keeping two sets of books—one following all legal requirements, and the other one actually used by the company. Required: a.
Is it ethical to evaluate managers in the way described? Explain briefly.
b.
Name at least two safeguards the company could build into its system to ensure the ethical treatment of employees.
3. Culpepper Computer Ltd. manufactures a laptop and has the following results for its recent year end: Laptop per Unit Sales Data Selling price .................................................. $1,500 Manufacturing Costs: Variable materials ...................................... $500 Variable labour ........................................... 128 Manufacturing overhead ............................ 480 1,108 Gross Margin ................................................ $392 Selling, general, and administrative expenses Variable ...................................................... $50 Fixed ........................................................... 150 200 Profit per unit ................................................ $192 Each laptop requires approximately 240 minutes of highly skilled labour time for assembly and testing. The bottleneck resource in the operation is labour hours. Workers are paid $32 per hour and no additional labour hours are available. Factory overhead, of which 25% is variable, is allocated to laptops using labour hours since all the work in the factory is labour paced. The company sells 10,000 computers a year, which is the capacity dictated by labour hours availability. Recently Zucchini Computers offered to purchase 2,000 computers from Culpepper but with a custom feature. This feature will require 45 minutes of additional labour time and incur an additional $50 in materials for each computer. Selling, general, and administrative costs would not change with this order. Required: a. Compute the minimum price that Culpepper should charge Zucchini for each computer in this order. b. What other factors should Culpepper consider before it agrees to the order?
4. The following information for 2016 for Vinnie`s Cream Pie Fillings is available: Baking capacity Tonnage sold in year Sales Variable costs Contribution margin Fixed costs Manufacturing Selling Administration Income before taxes Income taxes @ 40% Net income
3,000 tonnes of filling 1,800 $900,000 495,000 $405,000 90,000 112,500 45,000 $157,500 63,000 $ 94,500
Required: Consider each of the following scenarios independently: a. Calculate the break-even volume in tonnes for the year. b.
If Vinnie expects to sell 2,100 tonnes of filling next year, calculate the expected after tax income, assuming costs and prices remain the same.
b. Vinnie`s cousin says he can sell pie filling to a new company in a nearby city but will require Vinnie to pay $61,500 to advertise the product. In addition, Vinnie will have to pay his cousin $25 for each tonne sold. Calculate the number of tones that will have to be sold to maintain the current after tax net income. d.
Vinnie wants to ramp up production by investing in a new machine that will cost $58,500. The benefit will be that variable costs will decrease by $25 per tonne. Calculate the new break even if the new machine is purchased.
e.
Assume instead that Vinnie does not purchase the machine or begin selling in the new city. He is worried that per-tonne selling prices will decline by 10% and variable costs will increase by $40 per tonne. Calculate the sales volume in dollars needed if Vinnie is to maintain his after tax income of $94,500.
5. John Plomly has operated Cedar Star Restorations for several years in Kitchener, Ontario, a business that was started by his father in 1981. The company restores residential buildings with wood exteriors, including log cabins built with either Ontario or British Columbia cedar logs. The company operates seasonally through the warm months, keeping his crews busy who are guaranteed a 40-hour work week (regardless of hours worked), Monday to Friday, from May to September (operating for 22 weeks per year). Customers refuse to give up the use of their yards on summer weekends and, therefore, always demand that the work be scheduled for weekdays. While vacationing and visiting at a friend’s cottage during the past weekend, John’s friend mentioned that his cedar log cottage is in desperate need of restoration after several years of neglect. His friend also mentioned that he knows of two other people in the area who also have log homes and who have been unable to find a service provider in the area to do cleaning and restoration work. The buildings are all too large for the owners to take on the project alone. Having returned from his weekend trip, John is wondering whether he should employ his company’s services to his friend and neighbours three hours away in cottage country. He knows his staff is eager to earn as much as possible during the summer months and would appreciate a weekend overtime opportunity to work at a remote location at double their regular rate. In addition, since taking over the business from his father, he has been considering expanding his service into this vacation area, as people are not always at their cottages and jobs can be scheduled on weekends. John’s friend indicated that he was certain that all three jobs would be awarded if John offered to do the work for $2,000 per building during the upcoming long weekend. The following are the annual crew wages and fixed costs of Cedar Star Restorations:
Property taxes Equipment/vehicle depreciation Equipment maintenance Worksite supervisor salary Crew annual wages* Insurance *based on a regular hourly rate of $16/hour
$5,000 12,500 3,200 50,000 98,560 4,000
Based on John’s knowledge of the size and condition of his friend’s cottage and the description of the other two buildings, he is sure each building can be washed and stained in a day with each member of his three-person crew working 10 hours per day over three days of the long weekend. Overtime pay will be required as the employees are working beyond their regular hours and double time is required on the statutory holiday (Monday). Given that John had already planned to be in the area on the weekend that the jobs would be completed, the worksite supervisor would not be needed. John would stay at his friend’s cottage and occasionally visit the job site during the weekend to drive the employees to and from their motel. He also plans to take the three employees up to the site with him in his minivan.
There are various other costs directly associated with each restoration job. John has estimated that each building will require 2.5 litres of their specially mixed cleaning solution at $32 per litre. The three employees will sleep at a nearby motel that is expected to cost $85 per person for each of the three nights of their stay. Power for the pressure washing equipment will be supplied by the owners. Meals for the crew are expected to be $75 per day per person. Required: 1.
Should John agree to complete these three jobs offered by his friend?
2.
If Cedar Star Restorations does expand operations into this new area, should John price other jobs of similar size at $2,000?
SOLUTIONS 1. A Balanced Scorecard seeks to establish a series of goals that an organization can set that will enable it to attain a comprehensive target. This target can have both financial (profit) or nonfinancial (quality) targets that need to be monitored along the way. Both of these two broad components require adequate tracking of data generated through the company’s activities. Generally, vice presidents of sales and production are focused mostly on their own areas and activities; the controller is the one person who has information available on both areas. The controller can work with these two people and help determine the information that they will need to meet their goals. Without effective information, it is unlikely that the company’s implementation of a Balanced Scorecard will offer expected results. 2. a. It is ethical for a company to use all available data in order to evaluate managers, and even to collect data not routinely available. In fact, such a method seems preferable to one in which the company may only use specified financial data in its evaluation of a manager's performance. It does not imply a departure from GAAP, nor that the company does not actually use the information prepared according to GAAP. It supplements the standard reports, it does not replace them. b. The company should make certain that the appropriate information is calculated in the same way each period. All the relevant data should be collected and reported each period. New data should be limited. The qualitative information should be complemented, not replaced, by the regular financial information. 3. a. Variable cost of special order ($500 + 128 + 50 + 50 +120) Additional time required (.75 hours x (128 + 120) / 4) Contribution margin foregone: Hours required for special order 2,000 x 4.75 = 9,500 Regular units lost 9,500 / 4 = 2,375 CM / regular unit $1,500 – 500 – 128 – 120 – 50 = $702 CM foregone (2,375 x $702) / 2,000 Minimum price of each unit of custom order
$848.00 46.50
833.63 $1,728.13
b. On the surface this looks like a good arrangement for Culpepper. But the company needs to look at the strategic aspects of the order. Can it take out 2,000 computers from its regular customer orders and expect to regain them once the special order is complete? Will its cost estimates be accurate, considering that there will be a learning curve from its workers who will have to adapt to making the new products? It appears that labour hours are already maxed out and any difficulties with the new order could set back its own production schedules for its regular products. Alternatively, could this be a breakthrough into a whole new market for Culpepper and if so, would there be other companies that would wish to have custom orders made for them? Culpepper currently appears to be a manufacturer of one or two products and is set up to operate in this fashion; changing to a specialty manufacturer requires it to view its production capabilities in more of a job-order manner. This may mean more pressure on its sales force as well as on its production operations.
4. a. CM/Unit = $405,000 ÷ 1,800 = $225 B/E point = $247,500 ÷ 225 = 1,100 tonnes b. [(2,100 x 225) – 247,500] x .6 = $135,000 c. B/E in new city: CM/Unit = $225 – 25 = $200 Incremental fixed costs = $61,500 B/E point = 61,500 ÷ 200 = 307.5 tonnes d. CM/unit = $250 FC = 247,500 + 58,500 = $306,000 B/E Point = $306,000 / 250 = 1,224 tonnes e. New Selling Price = 900,000 ÷ 1,800 x .9 = $450 New VC/unit = $275 + 40 = $315 CM/Unit = $135 CM ratio = 30% Before tax income = 94,500 ÷ .6 = 157,500 Sales = (247,500 + 157,500) ÷ .30 = $1,350,000 5. a. Relevant financial data: Number of people in crew Hourly rate of crew Overtime rate Hours required to complete each job Cost per litre of cleaning fluid Litres required per job Cost of motel per person per night Cost of meals per person per day
3 $16 2x 10 $32 2.50 $85 $75
Contribution margin per job/day: Revenue Variable cost: Crew of 3 Cleaning fluid Nightly accommodations (motel) Meals Total variable costs Contribution margin
Per Job/Day $2,000 $960 $80 $255 $225 $1,520 $480
Based on the financial analysis above, these jobs will contribute $480 each to fixed costs. In addition, this will help the company to establish a reputation into an area where John is interested in expanding. This will also provide the company with some limited experience operating in distant job sites. b. If John intends to be competitive and grow his business in this area over the long run, he must also consider fixed costs. Fixed costs: Property taxes Equipment/vehicle depreciation Equipment maintenance Worksite supervisor salary Insurance Days of operation Fixed costs per day
$5,000 12,500 3,200 50,000 4,000 $74,700 154 $485
Based on a 154 days of operations, fixed costs are incurred at a rate of $485 per day. For the company to be successful over the longer run, John must ensure that he is also covering fixed costs. In this situation, he is not doing that. John must make it clear to these three new customers that they are receiving special pricing based on his relationship with his friend. While this opportunity allows the company to establish a reputation in the area, future jobs must be priced higher so the all costs are covered and at least the minimum required return is generated.
