Question: Haley Romeros had just been appointed vice
Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks.
The banks send checks presented for deposit or payment to BSC, which records the data on eachcheck in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made betweenbanks. The Rocky Mountain Region has three check processing centers, which are located in Billings,Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president,Ms. Romeros had been the manager of a check processing center in New Jersey.
Immediately after assuming her new position, Ms. Romeros requested a complete financialreport for the just-ended fiscal year from the region’s controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporateheadquarters for all regional performance reports. That report follows:
Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation.
Romeros: What’s the story on Clayton? It didn’t have a loss the previous year did it?
Littlebear: No, the Clayton facility has had a nice profit every year since it was opened six years ago,but Clayton lost a big contract this year.
Romeros: Why?
Littlebear: One of our national competitors entered the local market and bid very aggressively on thecontract. We couldn’t afford to meet the bid. Clayton’s costs—particularly their facility expenses—arejust too high. When Clayton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility.
Romeros: Why is Clayton’s facility expense so high? It’s a smaller facility than either Billings or GreatFalls and yet its facility expense is higher.
Littlebear: The problem is that we are able to rent suitable facilities very cheaply at Billings and GreatFalls. No such facilities were available at Clayton; we had them built. Unfortunately, there were bigcost overruns. The contractor we hired was inexperienced at this kind of work and in fact wentbankrupt before the project was completed. After hiring another contractor to finish the work, wewere way over budget. The large depreciation charges on the facility didn’t matter at first becausewe didn’t have much competition at the time and could charge premium prices.
Romeros: Well we can’t do that anymore. The Clayton facility will obviously have to be shut down. Itsbusiness can be shifted to the other two check processing centers in the region.
Littlebear: I would advise against that. The $1,200,000 in depreciation at the Clayton facility is misleading.
That facility should last indefinitely with proper maintenance. And it has no resale value;there is no other commercial activity around Clayton.
Romeros: What about the other costs at Clayton?
Littlebear: If we shifted Clayton’s business over to the other two processing centers in the region, wewouldn’t save anything on direct labor or variable overhead costs. We might save $90,000 or so inlocal administrative expense, but we would not save any regional administrative expense and corporateheadquarters would still charge us 9.5% of our sales as corporate administrative expense.In addition, we would have to rent more space in Billings and Great Falls in order to handlethe work transferred from Clayton; that would probably cost us at least $600,000 a year. And don’tforget that it will cost us something to move the equipment from Clayton to Billings and Great Falls. And the move will disrupt service to customers.
Romeros: I understand all of that, but a money-losing processing center on my performance report iscompletely unacceptable.
Littlebear: And if you shut down Clayton, you are going to throw some loyal employees out of work.
Romeros: That’s unfortunate, but we have to face hard business realities.
Littlebear: And you would have to write off the investment in the facilities at Clayton.
Romeros: I can explain a write-off to corporate headquarters; hiring an inexperienced contractor tobuild the Clayton facility was my predecessor’s mistake. But they’ll have my head at headquartersif I show operating losses every year at one of my processing centers. Clayton has to go. At the nextcorporate board meeting, I am going to recommend that the Clayton facility be closed.
Required:
1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain.
2. Do you think Haley Romeros’s decision to shut down the Clayton facility is ethical? Explain.
3. What influence should the depreciation on the facilities at Clayton have on prices charged byClayton for its services?
Transcribed Image Text:
Bank Services Corporation (BSC) Rocky Mountain Region Financial Performance Check Processing Centers Total Billings Great Falls Clayton Sales.. $50,000,000 $20,000,000 $18,000,000 $12.000,000 Operating expenses: Direct labor Variable overhead . Equipment depreciation. Facility expense. Local administrative expense". Regional administrative expense Corporate administrative expense'. 32,000,000 12,500,000 11,000,000 8,500,000 850,000 3,900,000 310,000 190,000 350,000 1,300,000 1,400,000 1,200,000 2,800,000 800,000 900,000 140,000 1,100,000 450,000 160,000 150,000 1,500,000 600,000 540,000 360,000 4,750,000 1,900,000 1.710,000 1,140,000 Total operating expense 46.250,000 17,690,000 15,920,000 12.640,000 Net operating income $ 3,750,000 $ 2,310,000 $ 2,080,000 $ (640,000) "Local administrative expenses are the administrative expenses incurred at the check processing centers. "Regional administrative expenses are allocated to the check processing centers based on sales. Corporate administrative expenses are charged to segments of the company such as the Rocky Mountain Region and the check processing centers at the rate of 9.5% of their sales.
> Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fi t nearly any small car. The company has a standard cost system in use for all of its products. According
> Tombro Industries is in the process of automating one of its plants and developing a flexible manufacturing system. The company is finding it necessary to make many changes in operating procedures. Progress has been slow, particularly in trying to develo
> Danson Company is a chemical manufacturer that supplies various products to industrial users. The company plans to introduce a new chemical solution, called Nysap, for which it needs to develop a standard product cost. The following information is availa
> John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, bec
> Benoit Company produces three products, A, B, and C. Data concerning the three products follow(per unit): Demand for the company’s products is very strong, with far more orders each month than the companycan produce with the available
> The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for thedolls is increasing, and management requests assistance from you in determining an economicalsales and production mix for the coming year. The company has prov
> Operating at a normal level of 30,000 direct labor-hours, Lasser Company produces 10,000 units of product each period. The direct labor wage rate is $12 per hour. Two and one-half yards of direct materials go into each unit of product; the material costs
> Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time between when a customer places an order and when the order is shipped. For the first quarter of operations during the current year the following data wer
> Logistics Solutions provides order fulfillment services for dot.com merchants. The company maintains warehouses that stock items carried by its dot.com clients. When a client receives an order from a customer, the order is forwarded to Logistics Solution
> SkyChefs, Inc., prepares in-flight meals for a number of major airlines. One of the company’s products is grilled salmon in dill sauce with baby new potatoes and spring vegetables. During the most recent week, the company prepared 4,000 of these meals us
> Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the company’s products, a football helmet for the North American market, requires a special plastic. During the quarter ending June 30, the company manufactured 35,000 helmets,
> Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is a raw material called Echol. Information concerning the purchase and use of Echol follows: Purchase of Echol Echol is purchased in 15-gallon containers at a co
> The auto repair shop of Quality Motor Company uses standards to control the labor time and labor cost in the shop. The standard labor cost for a motor tune-up is given below: The record showing the time spent in the shop last week on motor tune-ups has
> Erie Company manufactures a small CD player called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate CD player are as follows: During August, 5,750 hours of direct labor time w
> Refer to the data in Exercise 11–8. Assume that instead of producing 4,000 units during the month, the company produced only 3,000 units, using 14,750 pounds of material. (The rest of the material purchased remained in raw materials inventory.) Data fro
> Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $60,000 per ton, one-fourth of which is allocated to product X15. Seven thousand units of product X15 are produced from each ton
> Huron Company produces a commercial cleaning compound known as Zoom. The direct materials and direct labor standards for one unit of Zoom are given below: During the most recent month, the following activity was recorded: a. Twenty thousand pounds of ma
> Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrialand household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish.
> Dawson Toys, Ltd., produces a toy called the Maze. The company has recently established a standard cost system to help control costs and has established the following standards for the Maze toy: During July, the company produced 3,000 Maze toys. Product
> Primara Corporation has a standard cost system in which it applies overhead to products based on the standard direct labor-hours allowed for the actual output of the period. Data concerning the most recent year appear below: Required: 1. Compute the fix
> Victoria Chocolates, Ltd., makes premium handcrafted chocolate confections in London. The owner of the company is setting up a standard cost system and has collected the following data for one of the company’s products, the Empire Truff
> You have recently accepted a position with Vitex, Inc., the manufacturer of a popular consumer product. During your first week on the job, the vice president has been favorably impressed with your work. She has been so impressed, in fact, that yesterday
> Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division. In looking over the past several years of quarterly income statements at the Home Se
> Trueform Products, Inc., produces a broad line of sports equipment and uses a standard cost system for control purposes. Last year the company produced 8,000 varsity footballs. The standard costs associated with this football, along with the actual costs
> Maple Products, Ltd., manufactures a super-strong hockey stick. The standard cost of one hockey stick is: Last year, 8,000 hockey sticks were produced and sold. Selected cost data relating to last year’s operations follow: The followi
> Bliny Corporation makes a product with the following standard costs for direct material and direct labor: During the most recent month, 5,000 units were produced. The costs associated with the month’s production of this product were as
> Bill has just returned from a duck hunting trip. He has brought home eight ducks. Bill’s friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John has presented him with the following cost estimate per
> Genola Fashions began production of a new product on June 1. The company uses a standard cost system and has established the following standards for one unit of the new product: During June, the following activity was recorded regarding the new product:
> “Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. â
> Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of productionand sales are given below: The Rets normally sell for $50 ea
> “If a product line is generating a loss, then it should be discontinued.” Do you agree? Explain.
> “Variable costs and differential costs mean the same thing.” Do you agree? Explain.
> Define the following terms: incremental cost, opportunity cost, and sunk cost.
> Airlines sometimes offer reduced rates during certain times of the week to members of a business person’s family if they accompany him or her on trips. How does the concept of relevant costs enter into the decision by the airline to offer reduced rates o
> From a decision-making point of view, should joint costs be allocated among joint products?
> Give at least four examples of possible constraints.
> How does opportunity cost enter into the make or buy decision?
> Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencinglosses on its bilge pump product line for several years. The most recent quarterly contributionformat income statement for the bilge pump product line follow
> Flandro Company uses a standard cost system and sets predetermined overhead rates on the basis of direct labor-hours. The following data are taken from the company’s budget for the current year: The standard cost card for the company&a
> “In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,”said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of 18 florins per drum, we would be paying 5 florins less than it costs
> Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level ofactivity are given below: A number of questio
> Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below: The North Store has consistently shown losses over the past two years. For th
> Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of wi
> Jackson County Senior Services is a nonprofit organization devoted to providing essential servicesto seniors who live in their own homes within the Jackson County area. Three services areprovided for seniors—home nursing, meals on wheel
> Birch Company normally produces and sells 30,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $22 per unit, variable costs are $14 per unit, fixed manufacturing overh
> Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is as follows: Direct materials . . . . . . . . . . . . . . . . . . . . $ 3.60 Direct labor. . . . . .
> Hollings Company sells and delivers office furniture in the Rocky Mountain area. The costs associated with the acquisition and annual operation of a delivery truck are given below: Insurance . . . . . . . . . . . . . . . . . . . . . . . . . $1,600 Licen
> QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the DenverCover Plant, which makes seat covers. Ted Vosilo is the plant manager of
> Wesco Incorporated’s only product is a combination fertilizer/weedkiller called GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores. Zwinger Nursery plans to sell a similar fertilizer/weedkiller compound throug
> The Scottie Sweater Company produces sweaters under the “Scottie” label. The company buys raw wool and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one
> Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they are initially cut or to process them further into fi
> Chilczuk, S.A., of Gdansk, Poland, is a major producer of classic Polish sausage. The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours. According to the
> TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in thechemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic
> The questions in this exercise are based on the Nordstrom, Inc., 2004 annual report at http:// phx.corporate-ir.net/phoenix.zhtml?c=93295&p=irol-reportsAnnual. You do not need to print theannual report in order to answer the questions. Required: 1. What
> The questions in this exercise are based on FedEx Corporation. To answer the questions youwill need to download FedEx’s Form 10-K for the fiscal year ended May 31, 2005 at www.sec.gov/edgar/searchedgar/companysearch.html. Once at this website, input CIK
> Distinguish between a traceable cost and a common cost. Give several examples ofeach.
> Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, andcontribution margin for one unit of each product follow: The same raw material is used in all three products. Barlow Company has only 5,000 poundsof raw mater
> What benefits result from decentralization?
> Why does the balanced scorecard include financial performance measures as well as measuresof how well internal business processes are doing?
> In what way can the use of ROI as a performance measure for investment centers lead tobad decisions? How does the residual income approach overcome this problem?
> How is it possible for a cost that is traceable to a segment to become a common cost if thesegment is divided into further segments?
> Kristen Lu purchased a used automobile for $8,000 at the beginning of last year and incurred the following operating costs: Depreciation ($8,000 ÷ 5 years) . . . . . . . . . $1,600 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,200 G
> Dorsey Company manufactures three products from a common input in a joint processing operation.Joint processing costs up to the split-off point total $350,000 per quarter. The company allocatesthese costs to the joint products on the basis of their relat
> Morton Company’s variable manufacturing overhead should be $4.50 per standard direct laborhour and fixed manufacturing should be $270,000 per year. The company manufactures a single product that requires two direct labor-hours to comple
> Privack Corporation has a standard cost system in which it applies overhead to products based on the standard direct labor-hours allowed for the actual output of the period. Data concerning the most recent year appear below: Required: 1. Compute the pre
> A fellow accountant has solicited your opinion regarding the classification of short-term obligations repaid prior to being replaced by a long-term security. Cheshire Foods, Inc., issued $5,000,000 of short-term commercial paper during 2017 to finance co
> The following events are indicated in note 15 of J. Crew’s 10-K annual report for the fiscal year ended January 29, 2011, and its 10-K was filed on March 21, 2011. Acquisition On November 23, 2010, the Company entered into an Agreement and Plan of Merger
> Reporting requirements for contingent liabilities under IFRS differ somewhat from those under U.S. GAAP. Required: For each of the following, access the online version of the indicated financial report and answer the question. Also compare reporting und
> You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2018, you discover the following errors related to the 2016 and 2017 financial statements: a. Inventory at December 31, 2016, was understated by $6,00
> Refer to the situation described in BE 9–15. What steps would be taken to report the error in the 2018 financial statements? In BE 9–15 In 2018, Winslow International, Inc.’s controller discovered that ending inventories for 2016 and 2017 were overstate
> The following is an excerpt from USAToday.com: Microsoft (MSFT) on Thursday extended the warranty on its Xbox 360 video game console and said it will take a charge of more than $1 billion to pay for “anticipated costs.” Under the new warranty, Microsoft
> IGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution and sale of a variety of food products. Industry averages are derived from Troy’s The Almanac of Business and Industrial
> On January 1, 2018, the Taylor Company adopted the dollar-value LIFO method. The inventory value for its one inventory pool on this date was $400,000. Inventory data for 2018 through 2020 are as follows: Required: Calculate Taylor’s e
> In 2018, Wade Window and Glass changed its inventory method from FIFO to LIFO. Inventory at the end of 2017 is $150,000. Describe the steps Wade Window and Glass should take to report this change.
> Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $15 million and a
> For the Coca-Cola bonds described in BE 12-2, prepare journal entries to record (a) Any unrealized gains or losses occurring in 2018 and (b) The sale of the bonds in 2019. In BE 12-2 S&L Financial buys and sells securities expecting to earn profits on s
> As a second-year financial analyst for A.J. Straub Investments, you are performing an initial analysis on Fizer Pharmaceuticals. A difficulty you’ve encountered in making comparisons with its chief rival is that Fizer uses U.S. GAAP and the competing com
> Morgan Stanley is a leading investment bank founded in 1935. The company’s fiscal year ends December 31, 2013, and it filed its financial statements with the SEC on February 25, 2014. On February 5, 2014, Bloomberg reported that Morgan Stanley would make
> The Cloud Company employs a perpetual inventory system and the McKenzie Corporation uses a periodic system. Describe the differences between the two systems in accounting for the following events: (1) Purchase of merchandise, (2) Sale of merchandise, (3)
> Kevin Brantly is a new hire in the controller’s office of Fleming Home Products. Two events occurred in late 2018 that the company had not previously encountered. The events appear to affect two of the company’s liabil
> Late in 2018, you and two other officers of Curbo Fabrications Corporation just returned from a meeting with officials of the City of Jackson. The meeting was unexpectedly favorable even though it culminated in a settlement with city authorities that req
> In the March 2019 meeting of Valleck Corporation’s board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year ended December 31. A veteran board member brought to the
> Cates Computing Systems develops and markets commercial software for personal computers and workstations. Three situations involving compensation for possible future absences of Cates’s employees are described below. a. Cates compensates employees at the
> The balance sheet at December 31, 2018, for Nevada Harvester Corporation includes the liabilities listed below: a. 11% bonds with a face amount of $40 million were issued for $40 million on October 31, 2009. The bonds mature on October 31, 2029. Bondhold
> Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2018, the company decided to switch to the average cost method. Data for 2018 are as follows: Additional Information: a.
> Camden Biotechnology began operations in September 2018. The following selected transactions relate to liabilities of the company for September 2018 through March 2019. Camden’s fiscal year ends on December 31. Its financial statements are issued in Apri
> Carswell Electronics adopted the dollar-value LIFO method on January 1, 2018, when the inventory value of its one inventory pool was $720,000. The company decided to use an external index, the Consumer Price Index (CPI), to adjust for changes in the cost
> Consider the following liabilities of Future Brands, Inc., at December 31, 2018, the company’s fiscal year-end. Should they be reported as current liabilities or long-term liabilities? 1. $77 million of 8% notes are due on May 31, 2022. The notes are cal
> What is the effect of a company electing the fair value option with respect to a held-to-maturity investment or an available-for-sale investment?
> Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 12% promissory note to L&T Bank under a prearranged short-term line
> Alamar Petroleum Company offers its employees the option of contributing retirement funds up to 5% of their wages or salaries, with the contribution being matched by Alamar. The company also pays 80% of medical and life insurance premiums. Deductions rel
> Inverness Steel Corporation is a producer of flat-rolled carbon, stainless and electrical steels, and tubular products. The company’s income statement for the 2018 fiscal year reported the following information ($ in millions): Sales &a
> Lawler Clothing sold manufacturing equipment for $16,000. Lawler originally purchased the equipment for $80,000, and depreciation through the date of sale totaled $71,000. What was the gain or loss on the sale of the equipment?
> Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2018. Transit’s fiscal year ends on December 31. Its annual financial statements are issued in April. 1. Transit has o
> Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B a. Informal agreement b. Secured loan 1. Fa
> Van Rushing Hunting Goods’ fiscal year ends on December 31. At the end of the 2018 fiscal year, the company had notes payable of $12 million due on February 8, 2019. Rushing sold 2 million shares of its $0.25 par, common stock on February 3, 2019, for $9
> Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites. Below are four possibilities regarding the timing of (A) the alleged damage caused by Lincoln, (B) an
> The Cummings Company charged various expenditures made during 2018 to an account called repairs and maintenance expense. You have been asked by your supervisor in the company’s internal audit department to review the expenditures to determine if they wer
> The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated with the recall were originally thought to approximate $50 million. Now, though, while management feels it is probable the company will incur substantial
> During December, Rainey Equipment made a $600,000 credit sale. The state sales tax rate is 6% and the local sales tax rate is 1.5%. Prepare the appropriate journal entry.
