Fall 2015 Midterm Solutions
Fall 2015
MID-TERM EXAMINATION STUDENT NAME
STUDENT NUMBER
MANAGEMENT ACCOUNTING ACCT 361 VERSION 1
PROFESSOR:
KEVIN PARENT
DATE:
October 23, 2015
TIME:
9-11am
INSTRUCTIONS: 1.
TRANSLATION dictionaries ARE PERMITTED.
2.
Calculators ARE PERMITTED in this examination.
3.
ANSWER BOOKLET to be used for answers.
4.
This examination has a total of 6 pages including this cover page. Please ensure that you have a complete examination paper before starting.
THIS EXAMINATION IS PRINTED ON BOTH SIDES OF THE PAGE THIS EXAMINATION PAPER MUST BE RETURNED
1. Financial accounting information and managerial accounting information have a number of distinguishing characteristics: a. b. c. d. e. f. g. h. i. j.
Reporting standard is relevant to the decision to be made Classified financial statements Reports generally pertain to the company as a whole Reports generally pertain to subunits Reports issued quarterly or annually General-purpose reports Reports are used internally Prepared in accordance with generally accepted accounting principles Special purpose reports Limited to historical cost data
Required: For each of the characteristics listed, indicate which characteristics are more closely related to financial accounting by placing the letter "F" and indicate those characteristics which are more closely associated with managerial accounting by placing the letter "M". a. b. c. d. e. f. g. h. i. j.
M F F M F F M F M F
2. The following categories are used by manufacturing companies for costs: DM DL MO
Direct Materials Direct Labour Manufacturing Overhead
Presented below is a list of costs and expenses incurred in the factory by Bates Corporation, a manufacturer of recreational vehicles. a. b. c. d. e. f. g. h. i. j.
Property taxes on the factory land Rubber used in manufacturing Welder’s wages Sandpaper used in production Factory supervisors’ salaries Depreciation on factory machines Factory electric Carpeting for the recreational vehicles Tissue paper for the factory workers’ washrooms Insurance on factory equipment
Required: Select the category to which each cost or expenses belongs and write the abbreviation of the cost. a. b. c. d. e. f. g. h. i. j.
MO DM DL MO MO MO MO DM MO MO
3. Urban Auto Glass specializes in the repair and replacement of windshields for passenger vehicles. Variable and fixed costs related to installation activities for the most recent month (July) are listed below: Number of windshields installed
1000
Variable expenses: Direct materials
$200,000
Direct labour (1 hour per installation)
30,000
Indirect materials
10,000
Fixed expenses: Installation supervisor’s wages
$4,000
Installation scheduler’s wages
2,000
Warehouse expenses
5,000
Required: a. Calculate the per unit amounts for each of the variable expense and fixed expense items in July. b. Management expects that 1,200 windshields will be installed in August and that this level of activity is within the relevant range for all variable and fixed expenses. Calculate: i. The total expense for each of the variable and fixed cost items above. ii. The per unit amounts for each of the variable and fixed cost items above. Explain any differences in the per unit amounts between July and August. c. Identify some factors that might cause variable costs per unit to change if the actual level of activity in a given month falls above or below the relevant range. a. Per unit amounts: Item Variable expenses: Direct materials Direct labour Indirect materials Fixed expenses: Installation supervisor’s wages Installation scheduler’s wages Warehouse expenses
Amount $200,000 $30,000 $10,000
July Activity 1,000 1,000 1,000
Per Unit $200 $30 $10
$4,000 $2,000 $5,000
1,000 1,000 1,000
$4 $2 $5
b. i & ii Item Variable expenses: Direct materials Direct labour Indirect materials Fixed expenses: Installation supervisor’s wages Installation scheduler’s wages Warehouse expenses
(1) August Activity 1,200 1,200 1,200 1,200 1,200 1,200
(2) July Per Unit $200 $30 $10 n/a n/a n/a
(3) August Total Cost $240,000 $36,000 $12,000
(3) ÷ (1) August Per Unit $200 $30 $10
$4,000 $2,000 $5,000
$3.33 $1.67 $4.17
Variable expenses per unit do not change within the relevant range of activity so the July and August amounts should not differ.
Fixed expenses per unit decrease in August because the total fixed expenses are being spread over a higher activity base (1,200 installations versus 1,000).
c. Factors that could cause variable costs per unit to change when activity levels fall outside the relevant range:
Direct material costs per unit could decrease if quantity discounts are received from the manufacturer for larger order quantities. Direct material costs could increase if quantity discounts currently being received are lost if order quantities decrease significantly. Direct labour costs per unit could increase if activity levels increase and installations have to be completed using more expensive overtime hours. Direct labour costs per unit could increase if activity levels decrease and less experienced, and lower paid, installers are laid off. Direct labour costs per unit could decrease as the number of installations increases due to the effects of learning (i.e., the time required for each installation may decrease with experience).
4. Gelinas Computer Company was organized on May 1. On that date, the company purchased 22,000 USB flash drives to be sold with personal computers, each pre-loaded with the company’s product information brochures. The front of the USB flash drives displays the company’s name and an attractive corporate logo. Each USB flash drive cost Gelinas $6. During May, 19,500 USB flash drives were drawn from the raw materials inventory account. Of these, 500 were taken by the sales manager to an important sales meeting with prospective customers and handed out as advertising. The remaining USB flash drives drawn from inventory were sold by bundling them with units of the company’s product that were being manufactured during May. Of the units of product that were bundled with the USB flash drive during May, 95% were completed and transferred from work in process to finished goods. Of the units completed during the month, 80% were sold and shipped to customers.
Required: Determine the cost of flash drives that would be in each of the following accounts at May 31: a. Raw Materials. b. Work in Process. c. Finished Goods. d. Cost of Goods Sold e. Advertising Expense. f.
a.
Specify whether each of the above accounts would appear on the balance sheet or on the income statement at May 31. USB flash drives purchased
22,000
USB flash drives drawn from inventory
19,500
USB flash drives remaining in inventory
2,500
Cost per USB flash drive Cost in Raw Materials Inventory at May 31 b.
× $6 $15,000
USB flash drives used in production (19,500 – 500)
19,000
Units completed and transferred to Finished Goods (95% × 19,000)
18,050
Units still in Work in Process at May 31
950
Cost per flash drive
× $6
Cost in Work in Process Inventory at May 31
$ 5,700
c.
Units completed and transferred to Finished Goods (above)
18,050
Units sold during the month (80% × 18,050)
14,440
Units still in Finished Goods at May 31 Cost per USB flash drive Cost in Finished Goods Inventory at May 31 d.
Units sold during the month (above) Cost per USB flash drive Cost in Cost of Goods Sold at May 31
e.
3,610 × $6 $21,660 14,440 × $6 $86,640
USB flash drives used in advertising
500
Cost per USB flash drive
× $6
Cost in Advertising Expense at May 31
$ 3,000
Raw Materials Inventory—balance sheet
$15,000
Work in Process Inventory—balance sheet
5,700
Finished Goods Inventory—balance sheet
21,660
Cost of Goods Sold—income statement
86,640
Advertising Expense—income statement
3,000 $132,000
5. Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $270,000 annually. Required: a. What is the product’s CM ratio? b. Use the CM ratio to determine the break-even point in sales dollars. c. The company estimates that sales will increase by $60,000 during the coming year due to increased demand. By how much should operating income increase? d. Refer to the original data. Assume that the company sold 23,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $40,000 increase in advertising expenditures, would cause annual sales in units to increase by 30%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? e. Refer to the original data. Assume again that the company sold 23,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $4 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. a. The CM ratio is 60%: Selling price .........................................
$30
100%
Variable expenses................................
12
40%
Contribution margin ............................
$18
60%
b. Break-even point in = Fixed expenses total sales dollars CM ratio =
$270,000 =$450,000 sales 0.60
c. $60,000 increased sales × 60% CM ratio = $36,000 increased contribution margin. Since fixed costs will not change, operating income should also increase by $36,000.
Last Year: 23,000 units
d.
Total
Proposed: 29,900 units*
Per Unit
Total
Per Unit
Sales .............................................
$690,000
$30.00
$789,360
$26.40 **
Variable expenses ........................
276,000
12.00
358,800
12.00
Contribution margin .....................
414,000
$18.00
430,560
$14.40
Fixed expenses .............................
270,000
310,000
Operating income.........................
$144,000
$120,560
* 23,000 units × 1.3 = 29,900 units ** $30 per unit × (1 – 0.12) = $26.40 per unit No, the changes should not be made since operating income decreases. e. Expected total contribution margin: 23,000 units × 150% × $14 per unit*...................................................
$483,000
Present total contribution margin: 23,000 units × $18 per unit .................................................................
414,000
Incremental contribution margin, and the amount by which advertising can be increased with operating income remaining unchanged ............................................
$ 69,000
*$30 – ($12 + $4) = $14
6. Kenworth Company uses a job-order costing system. Only three jobs—Job 105, Job 106, and Job 107— were worked on during November and December. Job 105 was completed on December 10; the other two jobs were still in production on December 31, the end of the company’s operating year. Data from the job cost sheets of the three jobs follow: Job Cost Sheet Job 105
Job 106
Job 107
November cost incurred: Direct materials
$ 16,500
$ 9,300
$0
Direct labour
$ 13,000
$ 7,000
$0
Manufacturing overhead
$ 20,800
$ 11,200
$0
$0
$ 8,200
$ 21,300
$ 4,000
$ 6,000
$ 10,000
?
?
?
December cost incurred: Direct materials Direct labour Manufacturing overhead
The following additional information is available: Manufacturing overhead is applied to jobs on the basis of direct labour cost. Balances in the inventory accounts at November 30 were as follows: Raw Materials Work in Process Finished Goods
$ 40,000 ? $ 85,000
Required: a. Prepare T-accounts for Raw Materials, Work in Process, Finished Goods, and Manufacturing Overhead. Enter the November 30 inventory balances given above; in the case of Work in Process, compute the November 30 balance and enter it into the Work in Process T-account. b. Prepare journal entries for December as follows: i.
Prepare an entry to record the issue of materials into production, and post the entry to appropriate T-accounts. (In the case of direct materials, it is not necessary to make a separate entry for each job.) Indirect materials used during December totalled $4,000.
ii. Prepare an entry to record the incurrence of labour cost, and post the entry to appropriate T-accounts. (In the case of direct labour cost, it is not necessary to make a separate entry for each job.) Indirect labour cost totalled $8,000 for December. iii. Prepare an entry to record the incurrence of $19,000 in various actual manufacturing overhead costs for December (credit Accounts Payable). Post this entry to the appropriate Taccounts. c. What apparent predetermined overhead rate does the company use to assign overhead cost to jobs? Using this rate, prepare a journal entry to record the application of overhead cost to jobs for December (it is not necessary to make a separate entry for each job). Post this entry to the appropriate T-accounts. d. As stated earlier, Job 105 was completed during December. Prepare a journal entry to show the transfer of this job off the production line and into the finished goods ware-house. Post the entry to the appropriate T-accounts. e. Determine the balance at December 31 in the Work in Process inventory account. How much of this balance consists of costs charged to Job 106? Job 107? a. Raw Materials Bal.
40,000
Work in Process (a)
33,500
Bal.
77,800*
(a)
29,500
(b)
20,000
(d)
32,000
Bal.
98,600
Finished Goods
Manufacturing Overhead
Bal.
85,000
(a)
4,000
(e)
60,700
(b)
8,000
(c)
19,000
Salaries & Wages Payable (b)
(e)
60,700
(d)
32,000
(c)
19,000
Accounts Payable 28,000
*
Job 105 materials, labour, and overhead at November 30
$50,300
Job 106 materials, labour, and overhead at November 30
27,500
Total Work in Process inventory at November 30
$77,800
* b.
i. Work in Process Manufacturing Overhead
29,500 4,000
Raw Materials
33,500 *$8,200 + $21,300 = $29,500. This entry is posted to the T-accounts as entry (a) above.
ii. Work in Process
20,000
Manufacturing Overhead
*
8,000
Salaries and Wages Payable
28,000
*$4,000 + $6,000 + $10,000 = $20,000. This entry is posted to the T-accounts as entry (b) above. iii. Manufacturing Overhead
19,000
Accounts Payable
19,000
This entry is posted to the T-accounts as entry (c) above. c. Apparently, the company uses a predetermined overhead rate of 160% of direct labour cost. This figure can be determined by relating the November applied overhead cost on the job cost sheets to the November direct labour cost shown on these sheets. For example, in the case of Job 105:
November overhead cost = $20,800 = 160% of direct labour cost November direct labour cost $13,000
The overhead cost applied to each job during December was: Job 105: $4,000 × 160%
$ 6,400
Job 106: $6,000 × 160%
9,600
Job 107: $10,000 × 160%
16,000
Total applied overhead
$32,000
The entry to record the application of overhead cost to jobs would be as follows: Work in Process
32,000
Manufacturing Overhead
32,000
The entry is posted to the T-accounts as entry (d) above. d.
The total cost of Job 105 was: Direct materials
$16,500
Direct labour ($13,000 + $4,000)
17,000
Manufacturing overhead applied ($17,000 × 160%)
27,200
Total cost
$60,700
The entry to record the transfer of the completed job would be as follows: Finished Goods
60,700
Work in Process
This entry is posted to the T-accounts as entry (e) above.
60,700
e. As shown in the above T-accounts, the balance in Work in Process at December 31 was $98,600. The breakdown of this amount between Jobs 106 and 107 is: Job 106
Job 107
Total
Direct materials
$17,500
$21,300
$38,800
Direct labour
13,000
10,000
23,000
Manufacturing overhead
20,800
16,000
36,800
Total cost
$51,300
$47,300
$98,600
7. AnimPix Inc. is a small company that creates computer-generated animations for films and television. Much of the company’s work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies. The young founders of the company have become increasingly concerned with the economics of the business—particularly since many competitors have sprung up recently in the local area. To help understand the company’s cost structure, an ABC system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins. Technical staffs do almost all of the work involved in animation production, whereas administrative staffs are largely responsible for contract administration. The activity cost pools and their activity measures and rates are listed below: Activity Cost Pool
Activity Measure
Activity Rate
Animation concept
Number of proposals
$ 6,000 per proposal
Animation production
Minutes of animation
$ 7,700 per minute of animation
Contract administration
Number of contracts
$ 6,600 per contract
These activity rates include all of the costs of the company, except for the costs of idle capacity and organization-sustaining costs. There are no direct labour or direct materials costs. Preliminary analysis using these activity rates has indicated that the local commercials segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask several companies like AnimPix to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below: Activity Measure
Local Commercials
Number of proposals
20
Minutes of animation
12
Number of contracts
8
The total sales for local commercials amounted to $240,000.
Required: a. Determine the cost of the local commercials market. (Think of the local commercials market as a product.) b. Prepare a report showing the product margin of the local commercials market. (Remember, this company has no direct materials or direct labour costs.) c. What would you recommend to management concerning the local commercials market?
a. The cost of serving the local commercial market according to the ABC model can be determined as follows: (b) Activity
Animation concept .......
(a) Activity Rate $6,000 per proposal
Animation production ..
$7,700 per minute of animation
12 minutes
Contract administration
$6,600 per contract
Activity Cost Pool
(a) × (b) ABC Cost
20 proposals 8 contracts
$120,000 92,400 52,800 $265,200
b. The product margin of the local commercial market is negative, as shown below: Sales ..................................................................................
$240,000
Costs: Animation concept ........................................................
$120,000
Animation production ...................................................
92,400
Contract administration ................................................
52,800
Product margin .................................................................
265,200 ($25,200)
c. It appears that the local commercial market is losing money and the company would be better off dropping this market segment. However, not all of the costs included above may be avoidable. If more than $25,200 of the total costs of $265,200 is not avoidable, then the company really isn’t losing money on the local commercial market and the segment should not be dropped.
MID-TERM EXAMINATION STUDENT NAME
STUDENT NUMBER
MANAGEMENT ACCOUNTING ACCT 361 VERSION 1
PROFESSOR:
KEVIN PARENT
DATE:
October 23, 2015
TIME:
9-11am
INSTRUCTIONS: 1.
TRANSLATION dictionaries ARE PERMITTED.
2.
Calculators ARE PERMITTED in this examination.
3.
ANSWER BOOKLET to be used for answers.
4.
This examination has a total of 6 pages including this cover page. Please ensure that you have a complete examination paper before starting.
THIS EXAMINATION IS PRINTED ON BOTH SIDES OF THE PAGE THIS EXAMINATION PAPER MUST BE RETURNED
1. Financial accounting information and managerial accounting information have a number of distinguishing characteristics: a. b. c. d. e. f. g. h. i. j.
Reporting standard is relevant to the decision to be made Classified financial statements Reports generally pertain to the company as a whole Reports generally pertain to subunits Reports issued quarterly or annually General-purpose reports Reports are used internally Prepared in accordance with generally accepted accounting principles Special purpose reports Limited to historical cost data
Required: For each of the characteristics listed, indicate which characteristics are more closely related to financial accounting by placing the letter "F" and indicate those characteristics which are more closely associated with managerial accounting by placing the letter "M". a. b. c. d. e. f. g. h. i. j.
M F F M F F M F M F
2. The following categories are used by manufacturing companies for costs: DM DL MO
Direct Materials Direct Labour Manufacturing Overhead
Presented below is a list of costs and expenses incurred in the factory by Bates Corporation, a manufacturer of recreational vehicles. a. b. c. d. e. f. g. h. i. j.
Property taxes on the factory land Rubber used in manufacturing Welder’s wages Sandpaper used in production Factory supervisors’ salaries Depreciation on factory machines Factory electric Carpeting for the recreational vehicles Tissue paper for the factory workers’ washrooms Insurance on factory equipment
Required: Select the category to which each cost or expenses belongs and write the abbreviation of the cost. a. b. c. d. e. f. g. h. i. j.
MO DM DL MO MO MO MO DM MO MO
3. Urban Auto Glass specializes in the repair and replacement of windshields for passenger vehicles. Variable and fixed costs related to installation activities for the most recent month (July) are listed below: Number of windshields installed
1000
Variable expenses: Direct materials
$200,000
Direct labour (1 hour per installation)
30,000
Indirect materials
10,000
Fixed expenses: Installation supervisor’s wages
$4,000
Installation scheduler’s wages
2,000
Warehouse expenses
5,000
Required: a. Calculate the per unit amounts for each of the variable expense and fixed expense items in July. b. Management expects that 1,200 windshields will be installed in August and that this level of activity is within the relevant range for all variable and fixed expenses. Calculate: i. The total expense for each of the variable and fixed cost items above. ii. The per unit amounts for each of the variable and fixed cost items above. Explain any differences in the per unit amounts between July and August. c. Identify some factors that might cause variable costs per unit to change if the actual level of activity in a given month falls above or below the relevant range. a. Per unit amounts: Item Variable expenses: Direct materials Direct labour Indirect materials Fixed expenses: Installation supervisor’s wages Installation scheduler’s wages Warehouse expenses
Amount $200,000 $30,000 $10,000
July Activity 1,000 1,000 1,000
Per Unit $200 $30 $10
$4,000 $2,000 $5,000
1,000 1,000 1,000
$4 $2 $5
b. i & ii Item Variable expenses: Direct materials Direct labour Indirect materials Fixed expenses: Installation supervisor’s wages Installation scheduler’s wages Warehouse expenses
(1) August Activity 1,200 1,200 1,200 1,200 1,200 1,200
(2) July Per Unit $200 $30 $10 n/a n/a n/a
(3) August Total Cost $240,000 $36,000 $12,000
(3) ÷ (1) August Per Unit $200 $30 $10
$4,000 $2,000 $5,000
$3.33 $1.67 $4.17
Variable expenses per unit do not change within the relevant range of activity so the July and August amounts should not differ.
Fixed expenses per unit decrease in August because the total fixed expenses are being spread over a higher activity base (1,200 installations versus 1,000).
c. Factors that could cause variable costs per unit to change when activity levels fall outside the relevant range:
Direct material costs per unit could decrease if quantity discounts are received from the manufacturer for larger order quantities. Direct material costs could increase if quantity discounts currently being received are lost if order quantities decrease significantly. Direct labour costs per unit could increase if activity levels increase and installations have to be completed using more expensive overtime hours. Direct labour costs per unit could increase if activity levels decrease and less experienced, and lower paid, installers are laid off. Direct labour costs per unit could decrease as the number of installations increases due to the effects of learning (i.e., the time required for each installation may decrease with experience).
4. Gelinas Computer Company was organized on May 1. On that date, the company purchased 22,000 USB flash drives to be sold with personal computers, each pre-loaded with the company’s product information brochures. The front of the USB flash drives displays the company’s name and an attractive corporate logo. Each USB flash drive cost Gelinas $6. During May, 19,500 USB flash drives were drawn from the raw materials inventory account. Of these, 500 were taken by the sales manager to an important sales meeting with prospective customers and handed out as advertising. The remaining USB flash drives drawn from inventory were sold by bundling them with units of the company’s product that were being manufactured during May. Of the units of product that were bundled with the USB flash drive during May, 95% were completed and transferred from work in process to finished goods. Of the units completed during the month, 80% were sold and shipped to customers.
Required: Determine the cost of flash drives that would be in each of the following accounts at May 31: a. Raw Materials. b. Work in Process. c. Finished Goods. d. Cost of Goods Sold e. Advertising Expense. f.
a.
Specify whether each of the above accounts would appear on the balance sheet or on the income statement at May 31. USB flash drives purchased
22,000
USB flash drives drawn from inventory
19,500
USB flash drives remaining in inventory
2,500
Cost per USB flash drive Cost in Raw Materials Inventory at May 31 b.
× $6 $15,000
USB flash drives used in production (19,500 – 500)
19,000
Units completed and transferred to Finished Goods (95% × 19,000)
18,050
Units still in Work in Process at May 31
950
Cost per flash drive
× $6
Cost in Work in Process Inventory at May 31
$ 5,700
c.
Units completed and transferred to Finished Goods (above)
18,050
Units sold during the month (80% × 18,050)
14,440
Units still in Finished Goods at May 31 Cost per USB flash drive Cost in Finished Goods Inventory at May 31 d.
Units sold during the month (above) Cost per USB flash drive Cost in Cost of Goods Sold at May 31
e.
3,610 × $6 $21,660 14,440 × $6 $86,640
USB flash drives used in advertising
500
Cost per USB flash drive
× $6
Cost in Advertising Expense at May 31
$ 3,000
Raw Materials Inventory—balance sheet
$15,000
Work in Process Inventory—balance sheet
5,700
Finished Goods Inventory—balance sheet
21,660
Cost of Goods Sold—income statement
86,640
Advertising Expense—income statement
3,000 $132,000
5. Klein Company distributes a high-quality bird feeder that sells for $30 per unit. Variable costs are $12 per unit, and fixed costs total $270,000 annually. Required: a. What is the product’s CM ratio? b. Use the CM ratio to determine the break-even point in sales dollars. c. The company estimates that sales will increase by $60,000 during the coming year due to increased demand. By how much should operating income increase? d. Refer to the original data. Assume that the company sold 23,000 units last year. The sales manager is convinced that a 12% reduction in the selling price, combined with a $40,000 increase in advertising expenditures, would cause annual sales in units to increase by 30%. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. Would you recommend that the company do as the sales manager suggests? e. Refer to the original data. Assume again that the company sold 23,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $4 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. a. The CM ratio is 60%: Selling price .........................................
$30
100%
Variable expenses................................
12
40%
Contribution margin ............................
$18
60%
b. Break-even point in = Fixed expenses total sales dollars CM ratio =
$270,000 =$450,000 sales 0.60
c. $60,000 increased sales × 60% CM ratio = $36,000 increased contribution margin. Since fixed costs will not change, operating income should also increase by $36,000.
Last Year: 23,000 units
d.
Total
Proposed: 29,900 units*
Per Unit
Total
Per Unit
Sales .............................................
$690,000
$30.00
$789,360
$26.40 **
Variable expenses ........................
276,000
12.00
358,800
12.00
Contribution margin .....................
414,000
$18.00
430,560
$14.40
Fixed expenses .............................
270,000
310,000
Operating income.........................
$144,000
$120,560
* 23,000 units × 1.3 = 29,900 units ** $30 per unit × (1 – 0.12) = $26.40 per unit No, the changes should not be made since operating income decreases. e. Expected total contribution margin: 23,000 units × 150% × $14 per unit*...................................................
$483,000
Present total contribution margin: 23,000 units × $18 per unit .................................................................
414,000
Incremental contribution margin, and the amount by which advertising can be increased with operating income remaining unchanged ............................................
$ 69,000
*$30 – ($12 + $4) = $14
6. Kenworth Company uses a job-order costing system. Only three jobs—Job 105, Job 106, and Job 107— were worked on during November and December. Job 105 was completed on December 10; the other two jobs were still in production on December 31, the end of the company’s operating year. Data from the job cost sheets of the three jobs follow: Job Cost Sheet Job 105
Job 106
Job 107
November cost incurred: Direct materials
$ 16,500
$ 9,300
$0
Direct labour
$ 13,000
$ 7,000
$0
Manufacturing overhead
$ 20,800
$ 11,200
$0
$0
$ 8,200
$ 21,300
$ 4,000
$ 6,000
$ 10,000
?
?
?
December cost incurred: Direct materials Direct labour Manufacturing overhead
The following additional information is available: Manufacturing overhead is applied to jobs on the basis of direct labour cost. Balances in the inventory accounts at November 30 were as follows: Raw Materials Work in Process Finished Goods
$ 40,000 ? $ 85,000
Required: a. Prepare T-accounts for Raw Materials, Work in Process, Finished Goods, and Manufacturing Overhead. Enter the November 30 inventory balances given above; in the case of Work in Process, compute the November 30 balance and enter it into the Work in Process T-account. b. Prepare journal entries for December as follows: i.
Prepare an entry to record the issue of materials into production, and post the entry to appropriate T-accounts. (In the case of direct materials, it is not necessary to make a separate entry for each job.) Indirect materials used during December totalled $4,000.
ii. Prepare an entry to record the incurrence of labour cost, and post the entry to appropriate T-accounts. (In the case of direct labour cost, it is not necessary to make a separate entry for each job.) Indirect labour cost totalled $8,000 for December. iii. Prepare an entry to record the incurrence of $19,000 in various actual manufacturing overhead costs for December (credit Accounts Payable). Post this entry to the appropriate Taccounts. c. What apparent predetermined overhead rate does the company use to assign overhead cost to jobs? Using this rate, prepare a journal entry to record the application of overhead cost to jobs for December (it is not necessary to make a separate entry for each job). Post this entry to the appropriate T-accounts. d. As stated earlier, Job 105 was completed during December. Prepare a journal entry to show the transfer of this job off the production line and into the finished goods ware-house. Post the entry to the appropriate T-accounts. e. Determine the balance at December 31 in the Work in Process inventory account. How much of this balance consists of costs charged to Job 106? Job 107? a. Raw Materials Bal.
40,000
Work in Process (a)
33,500
Bal.
77,800*
(a)
29,500
(b)
20,000
(d)
32,000
Bal.
98,600
Finished Goods
Manufacturing Overhead
Bal.
85,000
(a)
4,000
(e)
60,700
(b)
8,000
(c)
19,000
Salaries & Wages Payable (b)
(e)
60,700
(d)
32,000
(c)
19,000
Accounts Payable 28,000
*
Job 105 materials, labour, and overhead at November 30
$50,300
Job 106 materials, labour, and overhead at November 30
27,500
Total Work in Process inventory at November 30
$77,800
* b.
i. Work in Process Manufacturing Overhead
29,500 4,000
Raw Materials
33,500 *$8,200 + $21,300 = $29,500. This entry is posted to the T-accounts as entry (a) above.
ii. Work in Process
20,000
Manufacturing Overhead
*
8,000
Salaries and Wages Payable
28,000
*$4,000 + $6,000 + $10,000 = $20,000. This entry is posted to the T-accounts as entry (b) above. iii. Manufacturing Overhead
19,000
Accounts Payable
19,000
This entry is posted to the T-accounts as entry (c) above. c. Apparently, the company uses a predetermined overhead rate of 160% of direct labour cost. This figure can be determined by relating the November applied overhead cost on the job cost sheets to the November direct labour cost shown on these sheets. For example, in the case of Job 105:
November overhead cost = $20,800 = 160% of direct labour cost November direct labour cost $13,000
The overhead cost applied to each job during December was: Job 105: $4,000 × 160%
$ 6,400
Job 106: $6,000 × 160%
9,600
Job 107: $10,000 × 160%
16,000
Total applied overhead
$32,000
The entry to record the application of overhead cost to jobs would be as follows: Work in Process
32,000
Manufacturing Overhead
32,000
The entry is posted to the T-accounts as entry (d) above. d.
The total cost of Job 105 was: Direct materials
$16,500
Direct labour ($13,000 + $4,000)
17,000
Manufacturing overhead applied ($17,000 × 160%)
27,200
Total cost
$60,700
The entry to record the transfer of the completed job would be as follows: Finished Goods
60,700
Work in Process
This entry is posted to the T-accounts as entry (e) above.
60,700
e. As shown in the above T-accounts, the balance in Work in Process at December 31 was $98,600. The breakdown of this amount between Jobs 106 and 107 is: Job 106
Job 107
Total
Direct materials
$17,500
$21,300
$38,800
Direct labour
13,000
10,000
23,000
Manufacturing overhead
20,800
16,000
36,800
Total cost
$51,300
$47,300
$98,600
7. AnimPix Inc. is a small company that creates computer-generated animations for films and television. Much of the company’s work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies. The young founders of the company have become increasingly concerned with the economics of the business—particularly since many competitors have sprung up recently in the local area. To help understand the company’s cost structure, an ABC system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating storyboards and prototype stills to be shown to the prospective client. After the client has accepted a project, the animation goes into production and contract administration begins. Technical staffs do almost all of the work involved in animation production, whereas administrative staffs are largely responsible for contract administration. The activity cost pools and their activity measures and rates are listed below: Activity Cost Pool
Activity Measure
Activity Rate
Animation concept
Number of proposals
$ 6,000 per proposal
Animation production
Minutes of animation
$ 7,700 per minute of animation
Contract administration
Number of contracts
$ 6,600 per contract
These activity rates include all of the costs of the company, except for the costs of idle capacity and organization-sustaining costs. There are no direct labour or direct materials costs. Preliminary analysis using these activity rates has indicated that the local commercials segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask several companies like AnimPix to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at standard rates according to the running time of the completed animation, the revenues from these short projects tend to be below average. Data concerning activity in the local commercials market appear below: Activity Measure
Local Commercials
Number of proposals
20
Minutes of animation
12
Number of contracts
8
The total sales for local commercials amounted to $240,000.
Required: a. Determine the cost of the local commercials market. (Think of the local commercials market as a product.) b. Prepare a report showing the product margin of the local commercials market. (Remember, this company has no direct materials or direct labour costs.) c. What would you recommend to management concerning the local commercials market?
a. The cost of serving the local commercial market according to the ABC model can be determined as follows: (b) Activity
Animation concept .......
(a) Activity Rate $6,000 per proposal
Animation production ..
$7,700 per minute of animation
12 minutes
Contract administration
$6,600 per contract
Activity Cost Pool
(a) × (b) ABC Cost
20 proposals 8 contracts
$120,000 92,400 52,800 $265,200
b. The product margin of the local commercial market is negative, as shown below: Sales ..................................................................................
$240,000
Costs: Animation concept ........................................................
$120,000
Animation production ...................................................
92,400
Contract administration ................................................
52,800
Product margin .................................................................
265,200 ($25,200)
c. It appears that the local commercial market is losing money and the company would be better off dropping this market segment. However, not all of the costs included above may be avoidable. If more than $25,200 of the total costs of $265,200 is not avoidable, then the company really isn’t losing money on the local commercial market and the segment should not be dropped.
