Hoyt Company uses a plantwide cost driver rate with machine hours as the cost driver. At the beginning of last year, Hoyt Company estimated its capacity-related (overhead) costs as $15,000,000 for a practical capacity of 100,000 machine hours per year. During the year, actual overhead costs were $14,200,000 and production required 90,000 machine hours. Required (a) Determine Hoyt Company’s plantwide cost driver rate and calculate the overhead cost applied to production last year. (b) Suppose the company charges the difference between actual and applied overhead costs to cost of goods sold at the end of the year. Calculate the difference and state whether the result will be an increase or decrease in the previously recorded cost of goods sold. (c) Suppose now that the company prorates the difference between actual and applied overhead costs to work in process, finished goods, and cost of goods sold. If the proportions of applied indirect cost in the ending balances of these accounts this period are 20% in ending work in process, 45% in finished goods inventory, and 35% in cost of goods sold, by how much will the three accounts be increased or decreased from their previously recorded amounts? (d) Now suppose that the company wishes to decompose the difference between actual and applied overhead costs to gain further insight into the difference. Compute the difference between actual and estimated overhead cost and the difference between estimated overhead cost and applied overhead cost. (e) What insight does management gain from the approach in part d as compared to the approaches in parts b and c?
> Refer to the time-driven ABC analysis of forecasting resource capacity for the Madison Dairy ice cream plant example on pages 181–184 of this chapter. Suppose that all the information is the same except for the following: Required (a)
> CAN Company sells multiple products and uses a time-driven ABC system. The company’s products must be wrapped individually before shipping. The packaging and shipping department employs 24 people. Each person works 20 days per month on average. Employees
> Zeta Department Store has developed the following information in order to develop a time driven ABC model for its Accounts Receivable Department: The time to process payments of customer invoices depends on whether the customer pays the bill manually or
> (Adapted from CMA, June 1992) Alaire Corporation manufactures several different types of printed-circuit boards; however, two of the boards account for the majority of the company’s sales. The first of these boards, a TV circuit board,
> The Manhattan Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model for years; the deluxe model was introduced recently to tap a new segment of the market. Since the in
> At its manufacturing plant in Duluth, Minnesota, Endo Electronics Company manufactures two products, X21 and Y37. For many years, the company has used a simple plant wide manufacturing support cost rate based on direct labor hours. A new plant accountant
> Smithers, Inc., manufactures and sells a wide variety of consumer products. The products are viewed as sufficiently profitable, but recently some product-line managers have complained about the charges for the call center that handles phone calls from cu
> Organizations in the public and nonprofit sector, such as government agencies and charitable social service entities, have financial systems that budget expenses and monitor and control actual spending. Explain why these organizations should consider dev
> (Adapted from CMA, December 1990) Moss Manufacturing has just completed a major change in its quality control (QC) process. Previously, products had been reviewed by QC inspectors at the end of each major process, and the company’s 10 Q
> Refer to the time-driven ABC analysis of the Madison Dairy ice cream plant example in the chapter. Required (a) Suppose indirect labor costs have increased by 10% from the original setting but all other information remains the same. Determine the total
> Potter Corporation has gained considerable market share in recent years for its specialty, low volume, complex line of products, but the gain has been offset by a loss in market share for its high-volume, simple line of products. This has resulted in a n
> Ken’s Cornerspot, a popular university eatery in a competitive market, has seating and staff capacity to serve about 600 lunch customers every day. For the past two months, demand has fallen from its previous near-capacity level. Concerned about his decl
> Halifax Brass Company manufactures pumps and valves and uses a time-driven activity-based cost (TDABC) system. Last year, Halifax recorded the following data for assigning manufacturing overhead costs to its products: Halifax also developed the followin
> The mayor of Gotham City is dissatisfied with the rising costs and deteriorating quality of the services provided by the city’s municipal workers, particularly in the transportation department: paving roads, repairing potholes, and cleaning the streets.
> Consider the case of the Cott Corporation, a Canadian private-label producer of high-quality cola beverages. Cott is attempting to get grocery retailers to stock its cola beverages as a lower price alternative to the more well-known brands of Coca-Cola a
> An article in the Wall Street Journal by Neal Templin and Joseph B. White (June 23, 1993) reported on the major changes occurring at General Motors. Its new chief executive officer, John Smith, had been installed after the board of directors requested th
> Towerton Financial Services13 Towerton Financial Services, a brokerage firm, started with a focus on stock trading and mutual funds. As the business grew, Towerton diversified into two new product lines, investment account management and financial plann
> Sippican Corporation (B)12 Refer to Case 5-36, the Sippican Corporation (A) case, which required time-drivenABC analysis. Sippican’s senior executive committee met to consider the implications from its time-driven ABC model. Frankly al
> The manager of a large semiconductor production department expressed his disdain for the cost information he was presently given: Cost variances are useless to me.2 I don’t want to ever have to look at a cost variance, monthly or weekly. Daily, I look at
> The Redwood City plant of Crimson Components Company makes two types of rotators for automobile engines: R361 and R572. The old cost accounting system at the plant traced support costs to four cost pools: Pool S1 included service activity costs related
> How is overhead cost estimated for individual jobs?
> How are indirect cost rates determined?
> What are predetermined indirect cost rates commonly called in practice?
> Provide several examples of cost objects.
> What does the term conversion costs mean?
> What are indirect cost pools?
> Define direct cost and indirect cost and provide an example of each.
> Compare the defining characteristic and cost behavior of a consumable (flexible) resource to those of a capacity-related resource.
> How do the cost flows in a retail organization or service organization differ from those in a manufacturing organization?
> Refer to the Madison Dairy ice cream plant example described in this chapter. Required (a) Suppose that production-related computer resource expenses of $18,000 per month have been inadvertently overlooked for inclusion in the cost system. Explain how t
> Describe the flow of costs from raw materials to cost of goods sold in a manufacturing organization.
> (Appendix) What is the difference between production departments and service departments?
> What are the similarities and differences between job order costing and multistage process costing systems?
> What is the basic procedure for determining product costs in continuous processing plants?
> How is practical capacity computed for machines and labor?
> How might computing the cost driver rate by using the planned level of the cost driver lead to a death spiral?
> What are the three options for dealing with the difference between actual and applied capacity (overhead) costs?
> “Use of a single cost driver rate when an indirect cost pool includes costs that have different cost drivers (causes of costs) leads to distortions in job costs.” Do you agree with this statement? Explain.
> Why are predetermined cost driver rates used when recording job costs?
> What problem arises when cost driver rates are based on planned or actual short-term usage?
> Provide several examples of the differences between high- and low-cost-to-serve customers.
> When do organizations use profit centers?
> Why do firms use multiple indirect cost pools?
> Why are costs estimated for individual jobs?
> In the context of computing a predetermined indirect cost rate, what is a cost driver?
> What has increased the need for cost systems that accurately deal with indirect manufacturing costs?
> Airport Coach Service Company operates scheduled coach service from Boston’s Logan Airport to downtown Boston and to Cambridge. A common scheduling service center at the airport is responsible for ticketing and customer service for both
> The Leblanc Company employs a job order costing system to account for its costs. The company has three production departments. Separate departmental cost driver rates are employed because the demand for overhead resources for the three departments is ver
> The Hillman Company sells and services lawn mowers, snow blowers, and other equipment. The service department uses a job order cost system to determine the cost of each job, such as oil changes, tune-ups, and repairs. The department assigns conversion co
> Sherman Company manufactures and sells small pumps made to customer specifications. It has two service departments and two production departments. Data on current year operations follow: Management allocates maintenance department costs using machine ho
> Boston Box Company has two service departments, maintenance and grounds, and two production departments, fabricating and assembly. Management has decided to allocate maintenance costs on the basis of machine hours used by the departments and grounds cost
> John Malone, general manager of Midwest Office Products (MOP), was concerned about the financial results for calendar year 2003. Despite a sales increase from the prior year, the company had just suffered the first loss in its history (see summary income
> Sanders Manufacturing Company produces electronic components on a job order basis. Most business is gained through bidding on jobs. Most firms competing with Sanders bid full cost plus a 30% markup. Recently, with the expectation of gaining more sales, S
> The information below pertains to October production at Zippy Company’s bottling plant, which produces and bottles sports drinks. Each unit consists of a case of 12 bottles: Required (a) Using the weighted-average method, determine th
> Connor Chemical Company’s plant processes batches of organic chemical products through three stages after starting with raw materials: (1) Mixing and blending, (2) Reaction chamber, and (3) Pulverizing and packing. Connor Chemical&ac
> The Gonzalez Company uses a job order costing system at its plant in Green Bay, Wisconsin. The plant has a machining department and a finishing department. The company uses two cost driver rates for allocating manufacturing overhead costs to job orders:
> Bravo Steel Company supplies 8structural steel products to the construction industry. Its plant has three production departments: cutting, grinding, and drilling. The estimated overhead cost and practical capacity direct labor hours and machine hours for
> Modern Metalworks Company has two departments, milling and assembly. The company uses a job costing system with a plantwide cost driver rate that is computed by dividing plantwide overhead costs by total plantwide practical capacity direct labor hours. T
> Calla Manufacturing Company has 40 machines in its factory. The machines run for two shifts each day, with 30 workers per shift. Allowing for machine maintenance and break time for machine operators, each machine can be used for production for an average
> The information below pertains to July production at Porter Company’s paint factory, which produces paints for household interiors: Using the weighted-average method, determine the number of equivalent units of production for materials
> Mackenzie Consulting computes the cost of each consulting engagement by adding a portion of firmwide overhead costs to the labor cost of the consultants on the engagement. The overhead costs are assigned to each consulting engagement using a cost driver
> Kappa Company runs two shifts each day. Workers on average have four weeks off per year and after training and breaks, average 34 hours per week. What is Kappa’s practical capacity number of labor hours per year?
> AU.S. automobile components plant had recently been reorganized so that quality and employee teamwork were to be the guiding principles for all managers and workers. One production worker described the difference: In the old production environment, we we
> The following costs pertain to job 923 at Becker Auto Shop. Determine the total cost for job 923. QUANITITY PRICE Direct materials: Engine oil 11 ounces $2 per ounce Lubricant 3 per ounce 15 per hour 2 ounces Direct labor 3 hours Overhead costs (ba
> Ernie’s Electronics, Inc., delivered 1,000 custom-designed computer monitors to its customer, Video Shack. The following cost information was compiled in connection with this order: Direct Materials Used Part A327: 1 unit costing $60 per monitor Part B1
> Famous Flange Company manufactures a variety of special flanges for numerous customers. Annual capacity-related (manufacturing overhead) costs are $4,000,000 and the practical capacity level of machine hours is 120,000. The company uses planned machine h
> Ming Company has two service departments (S1 and S2) and two production departments (P1 and P2). Last year, directly identified overhead costs were $300,000 for S1 and $300,000 for S2. Information on the consumption of their services follows: Required (
> Carleton Company has two service departments and two production departments. Information on annual manufacturing overhead costs and cost drivers follows: The company allocates service department costs using the sequential method. First, S1 costs are all
> San Rafael Company has two production departments, assembly and finishing, and two service departments, machine setup and inspection. Machine setup costs are allocated on the basis of number of setups, whereas inspection costs are allocated on the basis
> Pitman Chemical Company manufactures and sells Goody, a product that sells for $10 per pound. The manufacturing process also yields 1 pound of a waste product, called Baddy, in the production of every 10 pounds of Goody. Disposal of the waste product cos
> Fancy Foods Company produces and sells canned vegetable juice. The ingredients are first combined in the blending department and then packed in gallon cans in the canning department. The following information pertains to the blending department for Janua
> Morrison Company carefully records its costs because it bases prices on the cost of the goods it manufactures. Morrison also carefully records its machine usage and other operational information. Manufacturing costs are computed monthly, and prices for t
> Eastern Wood Products has two production departments: cutting and assembly. The company has been using a plantwide cost driver rate computed by dividing plantwide overhead costs by total plantwide direct labor hours. The estimates for overhead costs and
> A credit card company has classified its customers into the following types for customer profitability analysis: 1. Applies for credit card in response to a low introductory interest rate; transfers balance to new account, but when the low introductory
> The Brinker Company uses a job order costing system at its local plant. The plant has a machining department and a finishing department. The company uses machine hours to allocate machining department overhead costs to jobs and uses direct labor cost to
> Youngsborough Products, a supplier to the automotive industry, had seen its operating margins shrink below 20% as its customers put continued pressure on pricing. Youngsborough produced four products in its plant and decided to eliminate products that no
> Over the past 15 years, Anthony’s Auto Shop has developed a reputation for reliable repairs and has grown from a one-person operation to a nineperson operation, including one manager and eight skilled auto mechanics. In recent years, ho
> What are sunk costs? Explain whether they are relevant costs.
> What does the term breakeven point mean?
> What are the three components of a linear program?
> “When production capacity is constrained, determine what products to make by ranking them in order of their contribution per unit.” Do you agree with this statement? Explain.
> What is an opportunity cost that is relevant in a make-or-buy decision?
> Are avoidable costs relevant? Explain.
> What is an opportunity cost?
> Julie Martinez, manager of the new retail outlet of Super Printing, is pondering the management challenges in her new position. Super Printing is a long-established printing company in a major metropolitan area. The new Super outlet, located at the edge
> How are mixed costs and step variable costs similar and different?
> Explain the difference between the contribution margin ratio and contribution margin per unit.
> What does the term contribution margin per unit mean? How is the contribution margin used in cost analysis to support managerial decisions?
> Explain the difference between variable costs and fixed costs.
> What are some different managerial uses of cost information?
> “When production capacity is limited and it is possible to obtain additional customer orders, a firm must consider its opportunity costs to evaluate the profitability of these new orders.” Do you agree with this statement? If so, what are the opportunity
> “Prices must cover both variable and fixed costs of production.” Do you agree with this statement? Explain.
> In analyzing whether to drop a product or department, what are two difficulties that arise related to the impact on costs or revenues?
> What qualitative considerations are relevant in a make-or-buy decision?
> Provide an example of a fixed cost that would be relevant to a make-or-buy decision, and an example of a fixed cost that would not be relevant to such a decision.
> What is a cost center?
> Are fixed costs always irrelevant?
> What behavioral factors may influence some managers to consider sunk costs as being relevant in their decisions?
> Why should decision makers focus only on the relevant costs for decision making?
> What does the term incremental cost mean?
