Terri Ronsin had recently been transferred to the Home Security Systems Division of National Home Products. Shortly after taking over her new position as divisional controller, she was asked to develop the division’s predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any over applied or under applied overhead is closed out to Cost of Goods Sold at the end of the year. National Home Products uses direct labor-hours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Terri divided her estimate of the total manufacturing overhead for the coming year by the production manager’s estimate of the total direct labor-hours for the coming year. She took her computations to the division’s general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Home Security Systems Division, Harry Irving, went like this: Ronsin: Here are my calculations for next year’s predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job-order costing system right away this year. Irving: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is 440,000 hours. How about cutting that to about 420,000 hours? Ronsin: I don’t know if I can do that. The production manager says she will need about 440,000 direct labor-hours to meet the sales projections for the year. Besides, there are going to be over 430,000 direct labor-hours during the current year and sales are projected to be higher next year. Irving: Terri, I know all of that. I would still like to reduce the direct labor-hours in the base to something like 420,000 hours. You probably don’t know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labor-hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the fiscal year in December. We called it our Christmas bonus. Corporate headquarters always seemed pleased punch that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I don’t want to change it now. Required: 1. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year. 2. Should Terri Ronsin go along with the general manager’s request to reduce the direct labor-hours in the predetermined overhead rate computation to 420,000 direct labor-hours?
> What are cash equivalents, and why are they included with cash on a statement of cash flows?
> “All future costs are relevant in decision making.” Do you agree? Why?
> “Sunk costs are easy to spot—they’re simply the fixed costs associated with a decision.” Do you agree? Explain.
> Are variable costs always relevant costs? Explain.
> How will relating product contribution margins to the amount of the constrained resource they consume help a company maximize its profits?
> What is a relevant cost?
> How can budgeting assist a company in planning its workforce staffing levels?
> “As a practical matter, planning and control mean exactly the same thing.” Do you agree? Explain.
> What is the contribution margin?
> What is the difference between ordinary least-squares regression analysis and multiple regression analysis?
> What happens to overhead rates based on direct labor when automated equipment replaces direct labor?
> “If a product line is generating a loss, then it should be discontinued.” Do you agree? Explain.
> Provide two reasons why overhead might be underapplied in a given year.
> What is the major disadvantage of the high-low method?
> What adjustment is made for underapplied overhead on the schedule of cost of goods sold? What adjustment is made for overapplied overhead?
> What is meant by the term least-squares regression?
> Give the general formula for a mixed cost. Which term represents the variable cost? The fixed cost?
> What account is credited when overhead cost is applied to Work in Process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not?
> Does the concept of the relevant range apply to fixed costs? Explain.
> If fixed manufacturing overhead costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?
> If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?
> Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?
> Why is the sales forecast the starting point in budgeting?
> “Variable costs and differential costs mean the same thing.” Do you agree? Explain.
> What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.
> Are selling and administrative expenses treated as product costs or as period costs under variable costing?
> When would job-order costing be used instead of process costing?
> Why aren’t actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs?
> The questions in this exercise are based on Netflix, Inc. To answer the questions you will need to download the Netflix Form 10-K for the year ended December 31, 2005, at www.sec.gov/edgar/searchedgar/companysearch.html. Once at this website, input CIK c
> The questions in this exercise give you an appreciation for the complexity of budgeting in a large multinational corporation. To answer the questions, you will need to download the Procter & Gamble (P&G) 2005 Annual Report at www.pg.com/investors/annualr
> The questions in this exercise are based on Toll Brothers, Inc., one of the largest home builders in the United States. To answer the questions, you will need to download Toll Brothers’ 2004 annual report (www.tollbrothers.com/homesearch/servlet/HomeSear
> You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at cer
> Haglund Department Store is located in the downtown area of a small city. While the store had been profitable for many years, it is facing increasing competition from large national chains that have set up stores on the outskirts of the city. Recently th
> Understanding the nature of fixed and variable costs is extremely important to managers. This knowledgeis used in planning, making strategic and tactical decisions, evaluating performance, and controllingoperations. Required: Form a team consisting of f
> Define the following terms: incremental cost, opportunity cost, and sunk cost.
> The questions in this problem are based on Blue Nile, Inc. To answer the questions, you will need to download Blue Nile’s 2004 Form 10-K at www.sec.gov/edgar/searchedgar/companysearch.html. Once at this website, input CIK code 1091171 a
> TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxi
> Terry Travers is the manufacturing supervisor of Aurora Manufacturing Company, which produces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalog, while others are made to customer specificati
> After a dispute concerning wages, Orville Arson tossed an incendiary device into the Sparkle Company’s record vault. Within moments, only a few charred fragments were readable from the company’s factory ledger, as show
> Roller, Ltd., of Melbourne, Australia, is the exclusive distributor in Australia and the South Pacific of a popular brand of in-line skates manufactured in Mexico. The company is in the process of putting together its cash budget for the second quarter&a
> Assume that your team is going to form a company that will manufacture chocolate chip cookies. The team is responsible for preparing a list of all product components and costs necessary to make this product. Required: Prepare a list of all product compo
> Hector P. Wastrel, a careless employee, left some combustible materials near an open flame in Salter Company’s plant. The resulting explosion and fire destroyed the entire plant and administrative offices. Justin Quick, the company’s controller, and Cons
> M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year
> Use an online yellow pages directory to find a company in your area that has a website on which it has an annual report, including a statement of cash flows. Make an appointment with the controller or chief financial officer of the company. Before your m
> Bronson Company manufactures a variety of ballpoint pens. The company has just received an offer from an outside supplier to provide the ink cartridge for the company’s Zippo pen line, at a price of $0.48 per dozen cartridges. The company is interested i
> Airlines sometimes offer reduced rates during certain times of the week to members of a businessperson’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 of
> In the late 1980s and early 1990s, public universities found that they were no longer immune to the financial stress faced by their private sister institutions and corporate America. Budget cuts were in the air across the land. When the budget ax hit, th
> Angora Wraps of Pendleton, Oregon, makes fine sweaters out of pure angora wool. The business is seasonal, with the largest demand during the fall, the winter, and Christmas holidays. The company must increase production each summer to meet estimated dema
> Kelvin Aerospace, Inc., manufactures parts such as rudder hinges for the aerospace industry. The company uses a job-order costing system with a predetermined plantwide overhead rate based on direct labor-hours. On December 16, 2008, the company’s control
> 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
> Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for next year. Scott Ford has recently joined Norton’s accounting staff and is interested to learn as much as possible about the com
> 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
> Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez’s business is seasonal, with a heavy schedule during the summer months and holidays and a lighter schedule at other times. One
> Refer to the data for Provost Industries in Analytical Thinking in Chapter 4. Assume that the company uses the FIFO method in its process costing system. In Analytical Thinking in Chapter 4 “I think we goofed when we hired that new assistant controller,
> Visic Corporation, a manufacturing company, produces a single product. The following information has been taken from the company’s production, sales, and cost records for the just completed year. Production in units ....................
> Give at least four examples of possible constraints.
> Balance sheet accounts for Joyner Company contained the following amounts at the end of Years 1 and 2: The company’s income statement for Year 2 follows: Sales .......................................................... $900,000 Cost o
> Comparative financial statements for Weaver Company follow: During 2009, the company sold some equipment for $20 that had cost $40 and on which there was accumulated depreciation of $16. In addition, the company sold long-term investments for $10 that
> Below are a number of transactions that took place in Seneca Company during the past year: a. Common stock was sold for cash. b. Interest was paid on a note, decreasing Interest Payable. c. Bonds were retired. d. A long-term loan was made to a subsidiary
> The following changes took place during the year in Pavolik Company’s balance sheet accounts: Long-term investments that had cost the company $6 were sold during the year for $16, and land that had cost $15 was sold for $9. In additio
> Comparative financial statement data for Carmono Company follow: For 2009, the company reported net income as follows: Sales ........................................................ $275 Cost of goods sold ..................................... 150 Gros
> Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below: Item ______________________________Amount Accounts receivable ................................................ $90,000 decrease Acc
> Apex Company prepared the statement of cash flows for the current year that is shown below: Required: Compute Apex Company’s free cash flow for the current year. Apex Company Statement of Cash Flows-Indirect Method Operating activ
> For the just completed year, Hanna Company had a net income of $35,000. Balances in the company’s current asset and current liability accounts at the beginning and end of the year were: The Deferred Income Taxes Payable account on the
> Mary Walker, president of Rusco Products, considers $14,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $8,000 in cash was available at the end of 2009. Because the company reported a large ne
> “See, I told you things would work out,” said Barry Kresmier, president of Lomax Company. “We expanded sales from $1.6 million to $2.0 million in 2009, nearly doubled our warehouse space, and ended th
> How does opportunity cost enter into the make or buy decision?
> Below are transactions that took place in Placid Company during the past year: a. Equipment was purchased. b. A cash dividend was declared and paid. c. Accounts receivable decreased. d. Short-term investments were purchased. e. Equipment was sold. f. Pre
> 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 duck: Camper and
> Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line foll
> 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
> 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 .............
> Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow: The same raw material is used in all three products. Barlow Company has only 5,000 pounds of raw ma
> Imperial Jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $189.95 and its unit product cost is $149.00 as shown below: Direct mat
> Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor
> The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has pr
> 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 production and sales are given below: The Rets normally sell for $50
> What is a self-imposed budget? What are the major advantages of self-imposed budgets? What caution must be exercised in their use?
> “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 cost
> 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 of activity are given below: A number of ques
> The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Management is concerned about the continued losses shown by the raci
> 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
> 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 services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, meals on whe
> Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement f
> 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 Garage r
> For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended ag
> Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows: A study indicates that $340,000 of the fixed expenses being charged to Line
> Describe the flow of budget data in an organization. Who are the participants in the budgeting process, and how do they participate?
> Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 60,000 units per year is: Direct materials ................................................... $5.10 Direc
> A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts: Required: Copy the information above onto your answer sheet and place an X in the appropriate column to
> Gig Harbor Boating is the wholesale distributor of a small recreational catamaran sailboat. Management has prepared the following summary data to use in its annual budgeting process: Budgeted unit sales ..................................................
> Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows: The company’s beginning cash balance for the upcoming fiscal year will be
> The budgeted unit sales of Weller Company for the upcoming fiscal year are provided below: The company’s variable selling and administrative expense per unit is $2.50. Fixed selling and administrative expenses include advertising expe
> The direct labor budget of Yuvwell Corporation for the upcoming fi scal year contains the following details concerning budgeted direct labor-hours: The company’s variable manufacturing overhead rate is $3.25 per direct labor-hour and
> The production manager of Rordan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year: Each unit requires 0.35 direct labor-hours, and direct laborers are paid $12.00 per hour. Required: 1. C
> Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is 150 roubles per kilogram. (Siberia is located in Russia, whose currency is the rouble.) Bu
> Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang for the next four months as follows: ____________Sales in Units April ................................. 50,000 May .................................. 75,000 June .......
> Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter: a. As of December 31 (the end of the prior quart
> What is a master budget? Briefly describe its contents.
