Carly Davis, production manager, was upset and puzzled by the latest performance report, which indicated that she was $100,000 over budget. She and her staff had worked hard to beat the budget. Now she saw that three items—direct labor, power, and setups—were over budget. The actual costs for these three items were as follows: Direct labor ………………………….. $210,000 Power …………………………………….. 135,000 Setups …………………………………… 140,000 Total …………………………………… $485,000 Carly felt that the additional labor and power cost were due to the fact that her team produced more units than originally budgeted. Uncertainty in scheduling had led to more setups than planned. She asked Sean Carpenter, the controller, why the performance report did not take the additional production into account. Sean assured Carly that he did adjust the report for increased production and showed her the budget formulas he used to predict the costs for different levels of activity. The formulas were based on direct labor hours as follows: direct labor Cost = $10X Power Cost = $5,000 + $4X Setup Cost = $100,000 Carly pointed out that power costs were unrelated to direct labor hours, but that they seemed to vary with machine hours instead. She also pointed out that setup costs were not fixed. They varied with the number of setups—which had increased due to scheduling changes. The increase in setups required her team to work overtime, adding to the costs. Each setup also took supplies that added significantly to overhead costs. Sean agreed that the formulas did not adequately take care of Carly’s concerns. He agreed to develop a new set of cost formulas based on better explanatory variables. After a few days, Sean shared the following cost formulas with Carly: direct labor Cost = $10X, where X = direct labor Hours Power Cost = $68,000 + 0:9Y, where Y = Machine Hours Setup Cost = $98,000 + $400Z, where Z Number of Setups The actual measure of each activity driver is as follows: Direct labor hours …………………….. 20,000 Machine hours ………………………… 90,000 Number of setups …………………………. 110 Required: 1. Prepare a performance report for direct labor, power, and setups using the direct labor based formulas. 2. Prepare a performance report for direct labor, power, and setups using the multiple cost driver formulas that Sean developed. 3. CONCEPTUAL CONNECTION Of the two approaches, which provides the more accurate picture of Carly’s performance? Why?
> What is the role of materials requisition forms in a job-order costing system? Time tickets? Predetermined overhead rates?
> What journal entry would be made as goods are transferred out from one department to another department? From the final department to the warehouse?
> What are the similarities in and differences between the manufacturing cost flows for job order firms and process firms?
> What is over applied overhead? When Cost of Goods Sold is adjusted for over applied overhead, will the cost increase or decrease? Why?
> What is under applied overhead? When Cost of Goods Sold is adjusted for under applied overhead, will the cost increase or decrease? Why?
> Why are actual overhead rates seldom used in practice?
> Why might a company decide to use departmental overhead rates instead of a plant wide overhead rate?
> What is normal costing? How does it differ from actual costing?
> Distinguish between sequential processing and parallel processing.
> Describe the two-stage process associated with plant wide overhead rates.
> Which of the following is typically a process-costing firm? a. Paint manufacturer b. Custom cabinetmaker c. Large regional medical center d. Law office e. Custom framing shop
> The cash budget serves which of the following purposes? a. Documents the need for liberal inventory policies. b. Reveals the amount of depreciation expense. c. Reveals the amount lost due to uncollectible accounts. d. Provides information about the abil
> Select the one budget below that is not an operating budget. a. Cost of goods sold budget b. Cash budget c. Production budget d. Overhead budget e. All of these are operating budgets.
> Which of the following is needed to prepare a budgeted income statement? a. The production budget b. Budgeted selling and administrative expenses c. The budgeted balance sheet d. The capital expenditures budget e. Last year’s income statement
> A company plans to sell 220 units. The selling price per unit is $24. There are 50 units in beginning inventory, and the company would like to have 20 units in ending inventory. How many units should be produced for the coming period? a. 250 b. 200 c. 2
> A company requires 100 pounds of plastic to meet the production needs of a small toy. It currently has 10 pounds of plastic inventory. The desired ending inventory of plastic is 30 pounds. How many pounds of plastic should be budgeted for purchasing duri
> A budget a. is a long-term plan. b. covers at least 2 years. c. is only a control tool. d. is a short-term financial plan. e. is necessary only for large firms.
> Suppose that you and a friend decide to set up a lawn mowing service next summer. Describe the source documents that you would need to account for your activities.
> Which of the following is typically a job-order costing firm? a. Paint manufacturer b. Pharmaceutical manufacturer c. Cleaning products manufacturer d. Cement manufacturer e. Large regional medical center
> Companies may choose to use variable costing because it a. accords with GAAP. b. is most useful for management decision making. c. provides the gross margin. d. is useful for external reporting. e. None of these.
> Garrett Company provided the following information: Common fixed cost totaled $46,000. Garrett allocates common fixed cost to Product 1 and Product 2 on the basis of sales. If Product 2 is dropped, which of the following is true? a. Sales will increas
> A segment could be which of the following? a. Product b. Customer type c. Geographic region d. All of these. e. None of these.
> Suppose that a material has a lead time of four days and that the average usage of the material is 12 units per day. The maximum usage is 15 units per day. What is the safety stock? a. 3 b. 12 c. 9 d. 15 e. 5
> Suppose that a material has a lead time of four days and that the average usage of the material is 12 units per day. What is the reorder point? a. 3 b. 12 c. 15 d. 36 e. 48
> Which of the following is a reason for carrying inventory? a. To balance setup and carrying costs b. To satisfy customer demand c. To avoid shutting down manufacturing facilities d. To take advantage of discounts e. All of these.
> The EOQ for Part B-22 is 2,500 units, and four orders are placed each year. The total annual ordering cost is $1,200. Which of the following is true? a. The cost of placing one order is $4,800. b. The annual demand for the part is 2,500 units. c. The co
> In a segmented income statement, which of the following statements is true? a. Segment margin is greater than contribution margin. b. Common fixed expenses must be allocated to each segment. c. Contribution margin is equal to sales less all variable and
> McCartney Company produces a number of products and provides the following information: Annual demand for Product C ……………………………………… 20,000 Cost of setting up to make Product C ……………………………….. $ 45 Cost of carrying one unit of Product C in inventory ……………
> Does the purchase price of the part being ordered enter into the EOQ equation? Why or why not?
> McCartney Company produces a number of products and provides the following information: Annual demand for Product C ……………………………………… 20,000 Cost of setting up to make Product C ……………………………….. $ 45 Cost of carrying one unit of Product C in inventory ……………
> The overhead variance is over applied if a. actual overhead is less than applied overhead. b. actual overhead is more than applied overhead. c. applied overhead is less than actual overhead. d. estimated overhead is less than applied overhead. e. estima
> McCartney Company produces a number of products and provides the following information: Annual demand for Product C ……………………………………… 20,000 Cost of setting up to make Product C ……………………………….. $ 45 Cost of carrying one unit of Product C in inventory ……………
> Yates Company shows the following unit costs for its product: Direct materials ………………….. $40 Direct labor …………………………… 30 Variable overhead …………………… 2 Fixed overhead ………………………. 5 Yates started the year with 8,000 units in inventory, produced 50,000 unit
> Assume that the moving activity has an expected cost of $80,000. Expected direct labor hours are 20,000, and expected number of moves is 40,000. The best activity rate for moving is a. $4 per move. b. $1.33 per hour-move. c. $4 per hour. d. $2 per move.
> The receiving department employs one worker, who spends 25% of his time on the receiving activity and 75% of his time on inspecting products. His salary is $40,000. The amount of cost assigned to the receiving activity is a. $34,000. b. $40,000. c. $10,
> Interview questions are asked to determine a. what activities are being performed. b. who performs the activities. c. the relative amount of time spent on each activity by individual workers. d. possible activity drivers for assigning costs to products.
> The second stage of ABC entails the assignment of a. activity costs to products or customers. b. resource costs to departments. c. resource costs to a plant wide pool. d. resource costs to individual activities. e. resource costs to distribution channel
> The first stage of ABC entails the assignment of a. resource costs to departments. b. activity costs to products or customers. c. resource costs to a plant wide pool. d. resource costs to distribution channels. e. resource costs to individual activities
> Consider the information given on two products and their activity usage: Suppose that machine hours are used to assign all overhead costs to the two products. Select the best answer from the following: a. Laser printers are over costed, and inkjet pri
> Explain the role of a sales forecast in budgeting. What is the difference between a sales forecast and a sales budget?
> Consider the information given on two products and their activity usage: The consumption ratios for the inspection activity for each product are a. 0.167; 0.833. b. 0.333; 0.667. c. 0.500; 0.500. d. 0.667; 0.333. e. None of these. Laser Printer In
> An example of an environmental prevention cost is a. restoring land to its natural state. b. auditing environmental activities. c. licensing facilities for producing contaminants. d. developing environmental management systems. e. treating toxic materia
> Applied overhead is a. an important part of normal costing. b. never used in normal costing. c. an important part of actual costing. d. the predetermined overhead rate multiplied by estimated activity level. e. the predetermined overhead rate multiplied
> Shumaker Company manufactures a line of high-top basketball shoes. At the beginning of the year, the following plans for production and costs were revealed: Pairs of shoes to be produced and sold ……â€&b
> Lynwood Company produces surge protectors. To help control costs, Lynwood employs a standard costing system and uses a flexible budget to predict overhead costs at various levels of activity. For the most recent year, Lynwood used a standard overhead rat
> Extrim Company produces monitors. Extrim’s plant in San Antonio uses a standard costing system. The standard costing system relies on direct labor hours to assign overhead costs to production. The direct labor standard indicates that four direct labor ho
> Moleno Company produces a single product and uses a standard cost system. The normal production volume is 120,000 units; each unit requires five direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhead
> At the beginning of last year, Jean Bingham, controller for Thorpe Inc., prepared the following budget for conversion costs at two levels of activity for the coming year: During the year, the company worked a total of 112,000 direct labor hours and inc
> Billy Adams, controller for Westcott Inc., prepared the following budget for manufacturing costs at two different levels of activity for 2014: During 2014, Westcott employees worked a total of 80,000 direct labor hours, used 250,000 machine hours, made
> Explain how overhead is assigned to production when a predetermined overhead rate is used.
> Fernando’s is a tiny sandwich shop just off the State University campus. Customers enter and place their orders at a small counter area. All orders are take-out because there is no space for dining in. The owner of Fernandoâ€
> Quarterly budgeted overhead costs for two different levels of activity follow. The 2,000 level was the expected level from the master budget. The actual activity level was 1,700 hours. Required: 1. Prepare a flexible budget for an activity level of 1,7
> Stillwater Designs is considering a new Kicker speaker model: Solo X18, which is a large and expensive subwoofer (projected price is $760 to distributors). The company controls the design specifications of the model and contracts with manufacturers in ma
> Spelzig Company manufactures radio-controlled toy cars. Spelzig has developed the following flexible budget for overhead for the coming year. Activity level is measured in direct labor hours. The factory produces two different toy cars. The production
> Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. Basic Diet is a standard mixture for healthy dogs. Special Diet is a reduced protein formu
> Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of dog food. Basic Diet is a standard mixture for healthy dogs. Special Diet is a reduced protein formu
> The Lubbock plant of Morril’s Small Motor Division produces a major subassembly for a 6.0 horsepower motor for lawn mowers. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:
> Tom Belford and Tony Sorrentino own a small business devoted to kitchen and bath granite installations. Recently, building contractors have insisted on up-front bid prices for a house rather than the cost-plus system that Tom and Tony were used to. They
> Basuras Waste Disposal Company has a long-term contract with several large cities to collect garbage and trash from residential customers. To facilitate the collection, Basuras places a large plastic container with each household. Because of wear and tea
> Jordana Krull owns The Eatery in Miami, Florida. The Eatery is an affordable restaurant located near tourist attractions. Jordana accepts cash and checks. Checks are deposited immediately. The bank charges $0.50 per check; the amount per check averages $
> Explain how both small and large organizations can benefit from budgeting.
> Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disk
> Dwight D. Eisenhower was the 34th president of the United States and the Supreme Commander of the Allied Forces during World War II. Much of his army career was spent in planning. He once said that ‘‘planning is everything; the plan is nothing.’’ Requir
> Ryan Richards, controller for Grange Retailers, has assembled the following data to assist in the preparation of a cash budget for the third quarter of 2014: a. Sales: May (actual) ………â&#
> Aragon and Associates has found from past experience that 25% of its services are for cash. The remaining 75% are on credit. An aging schedule for accounts receivable reveals the following pattern: a. Ten percent of fees on credit are paid in the month
> Consider the following independent environmental activities: a. A company takes actions to reduce the amount of material in its packages. b. After its useful life, a soft-drink producer returns the activated carbon used for purifying water for its bevera
> Goldman Company has a JIT system in place. Each manufacturing cell is dedicated to the production of a single product or major subassembly. One cell, dedicated to the production of telescopes, has four operations: machining, finishing, assembly, and qual
> John Thomas, vice president of Mallett Company (a producer of a variety of plastic products), has been supervising the implementation of an ABC management system. John wants to improve process efficiency by improving the activities that define the proces
> Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing report that she had just received. According to Larry Savage, marketing manager, a price decrease for the coming year was again needed to maintain the company’
> Levy Inc. manufactures tractors for agricultural usage. Levy purchases the engines needed for its tractors from two sources: Johnson Engines and Watson Company. The Johnson engine has a price of $1,000. The Watson engine is $900 per unit. Levy produces a
> Grundvig Manufacturing produces several types of bolts used in aircrafts. The bolts are produced in batches and grouped into three product families. Because the product families are used in different kinds of aircraft, customers also can be grouped into
> Describe the differences between process costing and job-order costing.
> Morrisom National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the th
> Elmo Clinic has identified three activities for daily maternity care: occupancy and feeding, nursing, and nursing supervision. The nursing supervisor oversees 150 nurses, 25 of whom are maternity nurses (the other nurses are located in other care areas s
> For years, Tamarindo Company produced only one product: backpacks. Recently, Tamarindo added a line of duffel bags. With this addition, the company began assigning overhead costs by using departmental rates. (Prior to this, the company used a predetermin
> Benson Pharmaceuticals uses a process-costing system to compute the unit costs of the over the counter cold remedies that it produces. It has three departments: Mixing, Encapsulating, and Bottling. In Mixing, the ingredients for the cold capsules are mea
> Sea crest Company uses a process costing system. The company manufactures a product that is processed in two departments: A and B. As work is completed, it is transferred out. All inputs are added uniformly in Department A. The following summarizes the p
> Janbo Company produces a variety of stationery products. One product, sealing wax sticks, passes through two processes: blending and molding. The weighted average method is used to account for the costs of production. After blending, the resulting produc
> Millie Company produces a product that passes through an assembly process and a finishing process. All manufacturing costs are added uniformly for both processes. The following information was obtained for the assembly department for June: a. WIP, June 1
> Mimasca Inc. manufactures various holiday masks. Each mask is shaped from a piece of rubber in the molding department. The masks are then transferred to the finishing department, where they are painted and have elastic bands attached. Mimasca uses the we
> Alfombra Inc. manufactures throw rugs. The throw-rug department weaves cloth and yarn into throw rugs of various sizes. Alfombra uses the weighted average method. Materials are added uniformly throughout the weaving process. In August, Alfombra switched
> Recently, Stillwater Designs expanded its market by becoming an original equipment supplier to Jeep Wrangler. Stillwater Designs produces factory upgraded speakers specifically for Jeep Wrangler. The Kicker components and speaker cabinets are outsourced
> Give some examples of service firms that might use job-order costing, and explain why it is used in those firms.
> Recently, Stillwater Designs expanded its market by becoming an original equipment supplier to Jeep Wrangler. Stillwater Designs produces factory upgraded speakers specifically for Jeep Wrangler. The Kicker components and speaker cabinets are outsourced
> Benson Pharmaceuticals uses a process-costing system to compute the unit costs of the over the counter cold remedies that it produces. It has three departments: Mixing, Encapsulating, and Bottling. In Mixing, the ingredients for the cold capsules are mea
> Med Services Inc. is divided into two operating departments: Laboratory and Tissue Pathology. The company allocates delivery and accounting costs to each operating department. Delivery costs include the costs of a fleet of vans and drivers that drive thr
> Lowder Inc. builds custom conveyor systems for warehouses and distribution centers. During the month of July, the following occurred: a. Purchased materials on account for $42,630. b. Requisitioned materials totaling $27,000 for use in production: $12,5
> Sea crest Company uses a process costing system. The company manufactures a product that is processed in two departments: A and B. As work is completed, it is transferred out. All inputs are added uniformly in Department A. The following summarizes the p
> Barrymore Costume Company, located in New York City, sews costumes for plays and musicals. Barrymore considers itself primarily a service firm, as it never produces costumes without a preexisting order and only purchases materials to the specifications o
> The following transactions occurred during the month of April for Nelson Company: a. Purchased materials costing $4,610 on account. b. Requisitioned materials totaling $4,800 for use in production, $3,170 for Job 518 and the remainder for Job 519. c. Rec
> During August, Leming Inc. worked on two jobs. Data relating to these two jobs follow: Overhead is assigned on the basis of direct labor hours at a rate of $11. During August, Job 64 was completed and transferred to Finished Goods. Job 65 was the only
> Suppose that back in the 1970s, Steve was asked to build speakers for two friends. The first friend, Jan, needed a speaker for her band. The second friend, Ed, needed a speaker built into the back of his hatchback automobile. Steve figured the following
> Thayn Company produces an arthritis medication that passes through two departments: Mixing and Tableting. Thayn uses the weighted average method. Data for February for Mixing is as follows: BWIP was zero; EWIP had 36,000 units, 50% complete; and 420,000
> What are job-order costing and process costing? What types of firms use job-order costing? Process costing?
> Xania Inc. uses a normal job-order costing system. Currently, a plant wide overhead rate based on machine hours is used. Xania’s plant manager has heard that departmental overhead rates can offer significantly better cost assignments th
> Pavlovich Prosthetics Company produces artificial limbs for individuals. Each prosthetic is unique. On January 1, three jobs, identified by the name of the person being fitted with the prosthetic, were in process with the following costs: During the mo
> Spade Millhone Detective Agency performs investigative work for a variety of clients. Recently, Alban Insurance Company asked Spade Millhone to investigate a series of suspicious claims for whiplash. In each case, the claimant was driving on a freeway an
> Heurion Company is a job-order costing firm that uses a plant wide overhead rate based on direct labor hours. Estimated information for the year is as follows: Overhead …………
> The management of Golding Company has determined that the cost to investigate a variance produced by its standard cost system ranges from $2,000 to $3,000. If a problem is discovered, the average benefit from taking corrective action usually outweighs th
> Buenolorl Company produces a well-known cologne. The standard manufacturing cost of the cologne is described by the following standard cost sheet: Direct materials: Liquids (4.5 oz. @ $0.40) …………………………………. $1.80 Bottles (1 @ $0.05) …………………………………
