Exam 1: Accounting for Decision Making and Control

Productivity Measures With Multiple Inputs and Outputs A farmer grows two crops: lettuce and beans. The farmer uses three inputs: labor, seed, and fertilizer. The past prices and the quantities of each are given in the following tables: Required: a. Calculate productivity measures for last year and this year using past prices. b. Calculate the percentage change in productivity.

Standard Labor Variances A CPA firm estimates that an audit will require the following work: The actual hours and costs were: Required: Calculate the direct labor, wage rate, and labor efficiency variances for each type of auditor and interpret.

An Inspection Decision With Quality Costs A company is considering additional final inspection costs of $1 per unit before delivery to customers. The additional inspection should reduce the defective rate from 3 percent to 1 percent. If a defective unit is found, it is scrapped at no additional cost. The manufacturing costs before the final inspection are $200 per unit. The management believes that the external failure costs are $40 per defective unit. Should the management incur the additional inspection costs?

Establishing a Standard Cost System The Tippa Canoe Company makes fiberglass canoes. The fiberglass resin is initially molded to the shape of a canoe, then sanded and painted. Metal or wooden seats and frames are added for stability. The Tippa Canoe Company was started several years ago in the owner's garage. The owner, Jeff George, did a lot of the initial manual labor with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Because of the expansion, Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system. Required: a. Describe the procedures Jeff should use in setting standards for direct labor and direct materials. b. Describe how Jeff could use standards for planning purposes, c. Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures. d. Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?

Productivity Measure With A Single Input and Output An tax accountant is examining his productivity. In 1996 he did 300 tax returns in 1400 hours. In 1997 he did 250 tax returns in 1200 hours. What was his percentage increase in productivity from 1996 to 1997?

Prorating Over/Underabsorbed Overhead A computer manufacturer has the following account balances at the end of the year. These accounts contain $500,000 of allocated overhead. Actual overhead, however, is $600,000. What are the account balances after prorating the underabsorbed overhead?

Different Types of Budgets The Sticky Company makes a glue that is used to glue the layers of wood veneer together to make plywood. The process for making the glue has been used for many years and the customers are satisfied with the product. The Sticky Company has had very low turnover of personnel and the president and the managers have all been with the company for many years. Although the company appears very stable today, plywood prices are rising and the construction industry is beginning to switch to a cheaper product called chipboard. Chipboard uses a different glue than the glue made by the Sticky Company. Given the present condition of Sticky Company, should the company use long-term budgets, line-item budgets, budget lapsing, flexible budgets, or zero-based budgeting?

Transfer Prices and Divisional Profit A chair manufacturer has two divisions: framing and upholstering. The framing costs are $100 per chair and the upholstering costs are $200 per chair. The company makes 5,000 chairs each year, which are sold for $500. Required: a. What is the profit of each division if the transfer price is $150? b. What is the profit of each division if the transfer price is $200?

Top-down versus Bottom-up Budgets Describe (a) the benefits of top-down budgeting and (b) the benefits of bottom-up budgeting.

Annuity Suppose the opportunity cost of capital is 10 percent and you have just won a $1 million lottery that entitles you to $100,000 at the end of each of the next ten years. Required: a. What is the minimum lump sum cash payment you would be willing to take now in lieu of the ten-year annuity? b. What is the minimum lump sum you would be willing to accept at the end of the ten years in lieu of the annuity? c. Suppose three years have passed and you have just received the third payment and you have seven left when the lottery promoters approach you with an offer to "settle-up for cash." What is the minimum you would accept (the end of year three)? d. How would your answer to part (a) change if the first payment came immediately (at t = 0) and the remaining payments were at the beginning instead of at the end of each year?

Breakeven and Cost-Volume-Profit with Taxes DisKing Company is a retailer for video disks. The projected after-tax net income for the current year is $120,000 based on a sales volume of 200,000 video disks. DisKing has been selling the disks at $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. DisKing's annual fixed costs are $600,000 and DisKing is subject to a 40 percent income tax rate. Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. Required: a. Calculate DisKing Company's break-even point for the current year in number of video disks. b. Calculate the increased after-tax income for the current year from an increase of 10 percent in projected unit sales volume. c. If the unit selling price remains at $16, calculate the volume of sales in dollars that DisKing Company must achieve in the coming year to maintain the same after-tax net income as projected for the current year. Source: CMA adapted

JIT and Stock-Out Costs James Industries is considering a shift to JIT. The president feels that considerable costs can be saved by reducing inventory. The marketing manager is worried, however. She recognizes that the inventory holding costs such as storage and the opportunity cost of cash used to hold inventory are high and will be reduced if the company changes to JIT. But she is worried that the president has forgotten about stock-out costs. Stock-out costs occur when customers want to purchase an item, but the item is not immediately available so the customer goes elsewhere to make the purchase. How should the company measure stock-out costs and what can be done to minimize stock-out costs?

ABC and Average Cost in a Service Industry For many years the Honey Lake Summer Camp had used the number of campers per week to estimate weekly costs. The summer camp is open for ten weeks during the summer with a different number of campers each week. July is busiest with June and the end of August least busy. Costs from the last week of summer camp in 1998 are used to estimate costs for 1999 for pricing purposes. The following costs occurred during the last week of 1998 and the costs of each cost category are expected to be the same for 1999: Cost per camper: $12,200/50 campers = $244/camper The Honey Lake Summer Camp expects 75 campers during the second week of July. Required: a. What is the expected cost of that week using the average cost? b. What is the expected cost of that week using ABC?

Fixed Costs and Allocated Costs The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance. Required: a. What is the application rate for the maintenance department? b. What is the additional cost to the maintenance department of providing another hour of maintenance? c. What problem exists if the managers of other departments can choose how much maintenance to be performed? d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

Over/Underabsorbed Overhead The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be $600,000 and variable costs to be $800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are $700,000 and the actual variable overhead costs are $750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000. Required: a. How much overhead is allocated? b. What is the over/underabsorbed overhead?

Budgeting Direct Materials The Jung Corporation's budget calls for the following production: Each unit of production requires three pounds of direct material. The company's policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter's direct material requirements. Compute budgeted direct materials purchases for the third quarter.

Responsibility Centers The Maple Way Golf Course is a private club that is owned by the members. It has the following managers and organizational structure: Eric Olson: General manager responsible for all the operations of the golf course and other facilities (swimming pool, restaurant, golf shop). Jennifer Jones: Manager of the golf course and responsible for its maintenance. Edwin Moses: Manager of the restaurant. Mabel Smith: Head golf professional and responsible for golf lessons, the golf shop, and reserving times for starting golfers on the course. Wanda Itami: Manager of the swimming pool and family recreational activities. Jake Reece: Manager of golf carts rented to golfers. Describe each of the managers in terms of being responsible for a cost, profit, or investment center and possible performance measures for each manager.

JIT Accounting Warm Glo manufactures gas furnaces for residential use. It uses a standard cost system that isolates all variances at purchase so that all product costs are stated at standard cost. All variances are included as part of cost of goods sold. Overhead is allocated based on direct labor hours. Standard cost for the basic economy model furnace follows. Warm Glo manufactures the basic economy furnace in a dedicated flow line using just-in-time production principles. All raw materials and purchased parts needed to assemble a complete furnace are delivered to the plant by 8:00 am of the day the furnace begins production. While each furnace requires eight direct labor hours, total throughput time for each furnace is two working days (16 hours). The difference between total throughput time and the eight direct labor hours is waiting time. Furnaces that are started in production one day are finished the next day. Four hours of direct labor are used the first day and four hours of direct labor are worked the second day. All production for the week is accumulated and shipped out to the distributor by train on Saturday. Warm Glo maintains a finished-goods inventory account for basic economy furnaces that reflects the standard cost of furnaces not yet shipped out. Warm Glo uses a raw and in-process materials account (RIP) and JIT backflushing accounting. All accounts are updated at the end of each day for all production and transactions occurring that day. Conversion costs are charged directly to the finished goods inventory account as work is performed on furnaces. Through the end of Thursday of the current week the following table contains information about the plant's production of basic economy furnaces: Required: a. What is the balance in the RIP account for the basic economy model at the end of Thursday? b. What is the balance in the finished goods account (basic economy model) at the end of Thursday?

Estimating Production Costs The Fancy Umbrella Company makes beach umbrellas. The production process requires 3 square meters of plastic sheeting and a metal pole. The plastic sheeting costs $0.50 per square meter and each metal pole costs $1.00. At the beginning of the month, the company has 5,000 square feet of plastic and 1,000 poles in raw materials inventory. The preferred raw material amount at the end of the month is 3,000 square feet of plastic sheeting and 600 poles. The company has 300 finished umbrellas in inventory at the beginning of the month and plans to have 200 finished umbrellas at the end of the month. Sales in the coming month are expected to be 5,000 umbrellas. Required: a. How many umbrellas must the company produce to meet demand and have sufficient ending inventory? b. What is the cost of materials that must be purchased?

JIT and the Role of Accounting The president of Kelly Windows is an avid believer in JIT. Kelly Windows manufactures bay windows. The president wants no inventory or work-in-process on the floor at the end of each day. Windows are only manufactured after being ordered and throughput time is quick enough to complete most orders during the day of the order. The president is also trying to eliminate all non-value added activities. She considers accounting to be non-value added and would like to reduce accounting activities sharply if not completely. As the controller, how can you defend the accounting activities performed by your department?