Question 1

Choosing Performance Measures
The president of the Canby Insurance Company has just read an article on the balanced scorecard. A company has a balanced scorecard when there is a set of performance measures that reflect the diverse interests and goals of all the stakeholders (shareholders, customers, employees, and society) of the organization. Presently, Canby Insurance Company has only one performance measure for the top executives: profit. The board of directors claims that profit as the sole performance measure is sufficient. If customers are satisfied and employees are productive, then the company will be profitable. Any other performance measure will detract from the basic goal of making a profit.
Required:
Explain the costs and benefits of only having profit as a performance measure.

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The answer of Choosing Performance Measures
The president of the Canby...

Question 2

Plantwide vs. Department Overhead Rates
Rose Bach has recently been hired as controller of Empco Inc., a sheet-metal manufacturer. Empco has been in the sheet-metal business for many years and is currently investigating ways to modernize its manufacturing process. At the first staff meeting Bach attended, Bob Kelley, chief engineer, presented a proposal for automating the drilling department. Kelley recommended that Empco purchase two robots that could replace the eight direct labor workers in the department. The cost savings outlined in Kelley's proposal include two elements. First, direct labor cost in the drilling department is eliminated. Second, manufacturing overhead cost in the department is reduced to zero because Empco charges manufacturing overhead on the basis of direct labor dollars using a plantwide rate.
The president of Empco felt that Kelley's explanation of the cost savings made no sense. Bach agreed and explained that as firms become more automated, they should rethink their manufacturing overhead systems. The president asked Bach to look into the matter and prepare a report for the next staff meeting.
To refresh her knowledge, Bach reviewed articles on manufacturing overhead allocation for an automated factory and discussed the matter with some of her peers. She also gathered the historical data presented below on the manufacturing overhead rates experienced by Empco over the years. Bach also wanted to have some departmental data to present at the meeting. Using Empco's accounting records, she was able to estimate the annual averages presented below for each manufacturing department in the 1990s.   Required:
a. Disregarding the proposed use of robots in the drilling department, describe the shortcomings of Empco's current system for applying overhead.
b. Do you agree with Bob Kelley's statement that the manufacturing overhead cost in the drilling department will be reduced to zero if the automation proposal is implemented? Explain.
c. Recommend ways to improve Empco's method for applying overhead by describing how it should revise its overhead accounting system:
(i) in the cutting and grinding departments.
(ii) to accommodate the automation of the drilling department.
Source: CMA adapted.

Accepted Answer

The answer of Plantwide vs. Department Overhead Rates
Rose Bach has...

Question 3

Expected, Standard, and Actual Labor Hours
The Pizza Company makes two types of frozen pizzas: pepperoni and cheese. The Pizza Company allocates overhead to these two products based on the number of direct labor hours. The direct labor hours per unit for making a pepperoni pizza is 5 minutes or 1/12 of an hour. The direct labor hours per unit for making a cheese pizza is 4 minutes or 1/15 of an hour. At the start of the year the Pizza Company expected to make 12,000 pepperoni pizzas and 6,000 cheese pizzas. During the year, the Pizza Company actually made 9,000 pepperoni pizzas and 7,500 cheese pizzas. The time cards indicate that direct laborers worked for 1,300 hours. What are the total expected direct labor hours, standard direct labor hours, and actual direct labor hours?

Accepted Answer

The answer of Expected, Standard, and Actual Labor Hours
The Pizza...

Question 4

Different Overhead Allocation Bases
Set-Up Company produces blue things and gray things. Blue things are in much greater demand in the market and the firm sells 120,000 blue things a year. Set-Up Co. sells 6,000 gray things per year in small boutiques. Things have a short shelf life. They must be distributed, sold, and consumed within two months of manufacture.
Both things use the identical production process and production facilities. Direct labor is $0.50 per thing and direct material is $0.50 per thing. Things are produced in batches. Blue things are produced in batches of 600 units and gray things in batches of 30. Each batch of things goes through the thingamajig, which is the machine that converts raw inputs into things. Each batch requires engineers to reset the machine for the next batch, calibrate settings, and test the first 10 things for product quality and conformity to standards. Even if sequential batches of the same things are made, setups must be performed for each new batch. All the overhead costs are incurred in setups. Indirect labor, indirect materials, and supplies consumed during setup cost $360,000 per year. The only costs of producing things are direct labor, direct materials, and the overhead of setups. The company is currently allocating setup costs to things based on direct labor cost.
The firm has been selling blue things for $4 per unit and gray things for $6 per unit. But foreign competition for blue things is starting to put pressure on the $4 price. Some competitors are selling blue things for as low as $3 per unit. Management is considering putting more emphasis on selling gray things, whose margins are higher. On the other hand, management worries that the current system for allocating overhead costs is misrepresenting the costs of the two products because direct labor costs are not representative of the time spent by each product on the thingamajig. Management is considering allocating setup costs using machine hours on the thingamajig. A batch of gray things requires one hour of machine time and a batch of blue things requires 20 hours of machine time.
Required:
Analyze the present situation. Is there anything wrong with the costing system? If so, should management change to the proposed allocation base of machine hours?

Accepted Answer

The answer of Different Overhead Allocation Bases
Set-Up Company produces blue...

Question 5

Absorption Costing in a Bank
First Eastern Bank is a large, multibranch bank offering a wide variety of commercial and retail banking services. Eastern uses an absorption costing system to monitor the costs of various services and provide information for a variety of decisions.
One set of services is a retail loan operation providing residential mortgages, car loans, and student college loans. All loan applications are filed by the applicant at a branch bank, where the branch manager fills out the loan application. From there, the loan application is sent to the loan processing department, where the applicant's credit history is checked and a recommendation is made regarding loan approval based on the applicant's credit history and current financial situation. This recommendation is forwarded to the loan committee of senior lending officers, who review the file and make a final decision.
Thus, there are three stages to making a loan: application in a branch, the loan processing department, and the loan committee. Mr. and Mrs. Jones visit the West Street branch and file an application for a residential mortgage. The Jones's loan application is processed through the three stages.
• West Street Branch Bank. The branch manager spends one hour taking the application. The branch manager spends 1,000 hours per year of her total time taking loan applications and the remainder of her time providing other direct services to customers. Total overhead in the West Street Branch is budgeted to be $259,000, excluding the manager's salary, and is allocated to direct customer services using the branch manager's time spent providing direct customer services. The branch manager's annual salary is $42,600.
• Processing department. The processing department budgets its total overhead for the year to be $800,000, which is allocated to loans processed using direct labor hours. Budgeted direct labor hours for the year are 40,000 hours. Direct labor hours in the processing department cost $18 per hour. The Jones's loan requires five direct labor hours in the loan processing department.
• Loan committee. Ten senior bank executives are on the loan committee. The loan committee meets 52 times per year, every Wednesday, all day, to approve all loans. The average salary and benefits of each member of the loan committee are $104,000. The loan committee spends 15 minutes reviewing the Jones's loan application before approving it.
For costing purposes, all employees are assumed to work eight-hour days, five days per week, 52 weeks per year.
Required:
Calculate the total cost of taking the application, processing, and approving the Joneses' mortgage.

Accepted Answer

The answer of Absorption Costing in a Bank
First Eastern Bank...

Question 6

Cost, Volume, Profit Analysis
Kalifo Company manufactures a line of electric garden tools that are sold in general hardware stores. The company's controller, Sylvia Harlow, has just received the sales forecast for the coming year for Kalifo's three products: weeders, hedge clippers, and leaf blowers. Kalifo has experienced considerable variations in sales volumes and variable costs over the past two years, and Harlow believes the forecast should be carefully evaluated from a cost-volume-profit viewpoint. The preliminary budget information for 1996 is presented below.  For 1996, Kalifo's fixed factory overhead is budgeted at $2 million, and the company's fixed selling and administrative expenses are forecast to be $600,000. Kalifo has a tax rate of 40 percent.
Required:
a. Determine Kalifo Co.'s budgeted net income for 1996.
b. Assuming that the sales mix remains as budgeted, determine how many units of each product Kalifo must sell in order to break even in 1996.
c. Determine the total dollar sales Kalifo must sell in 1996 in order to earn an after-tax net income of $450,000.
d. After preparing the original estimates, Kalifo determines that its variable manufacturing cost of leaf blowers will increase 20 percent and the variable selling cost of hedge clippers can be expected to increase $1 per unit. However, Kalifo has decided not to change the selling price of either product. In addition, Kalifo learns that its leaf blower is perceived as the best value on the market, and it can expect to sell three times as many leaf blowers as any other product. Under these circumstances, determine how many units of each product Kalifo will have to sell to break even in 1996.
e. Explain the limitations of cost-volume-profit analysis that Sylvia Harlow should consider when evaluating Kalifo's 1996 budget.

Accepted Answer

The answer of Cost, Volume, Profit Analysis
Kalifo Company manufactures a...

Question 7

Developing Additional Variances for Performance Evaluation
Maidwell Company manufactures washers and dryers on a single assembly line in its main factory. The market has deteriorated over the last five years and competition has made cost control very important. Management has been concerned about the materials costs of both washers and dryers. There have been no model changes in the past two years, and economic conditions have allowed the company to negotiate price reductions for many key parts.
Maidwell uses a standard cost system in accounting for materials. Purchases are charged to inventory at a standard price, and purchase discounts are considered an administrative cost reduction. Production is charged at the standard price of the materials used. Thus, the price variance is isolated at time of purchase as the difference between gross contract price and standard price multiplied by the quantity purchased. When a substitute part is used in production, a price variance equal to the difference in the standard prices of the materials is recognized at the time of substitution. The quantity variance is the actual quantity used compared with the standard quantity allowed, with the difference multiplied by the standard price.
The materials variances for several of the parts Maidwell uses are unfavorable. Part #4121 is one item that has an unfavorable variance. Maidwell knows that some of these parts are defective and will fail. The failure is discovered during production. The normal defective rate is 5 percent of normal input. The original contract price of this part was $0.285 per unit; thus, Maidwell set the standard unit price at $0.285. The unit contract purchase price of Part #4121 was increased to $0.325 from the original $0.285 due to a parts specification change. Maidwell chose not to change the standard; it treated the increase in price as a price variance. In addition, the contract terms were changed from payment due in 30 days to a 4 percent discount if paid in 10 days or full payment due in 30 days. These new contractual terms were the consequence of negotiations resulting from changes in the economy.
Data regarding the use of Part #4121 during December are as follows.  Maidwell's material variances related to Part #4121 for December were reported as follows:  Bob Speck, the purchasing director, claims the unfavorable price variance is misleading. Speck says that his department has worked hard to obtain price concessions and purchase discounts from suppliers. In addition, Speck says engineering changes in several parts have increased their prices, even though the part identification has not changed. These price increases are not his department's responsibility. Speck declares that price variances no longer measure purchasing's performance.
Jim Buddle, the manufacturing manager, thinks the responsibility for the quantity variance should be shared. Buddle states that manufacturing cannot control quality associated with less expensive parts, substitutions of material to use up otherwise obsolete stock, or engineering changes that increase the quantity of materials used.
The accounting manager, Mike Kohl, suggests that the computation of variances be changed to identify variations from standard with the causes and functional areas responsible for the variances. Kohl recommends the following system of materials variances and the method of computation for each:  Required:
a. Discuss the appropriateness of Maidwell Company's current method of variance analysis for materials and indicate whether the claims of Bob Speck and Jim Buddle are valid.
b. Compute the materials variances for Part #4121 for December using the system recommended by Mike Kohl.
c. Who would be responsible for each of the variances in Mike Kohl's system of variance analysis for materials?

Accepted Answer

The answer of Developing Additional Variances for Performance Evaluation
Maidwell Company...

Question 8

Opportunity Costs
The First Church has been asked to operate a homeless shelter in part of the church. To operate a homeless shelter the church would have to hire a full time employee for $1,200/month to manage the shelter. In addition, the church would have to purchase $400 of supplies/month for the people using the shelter. The space that would be used by the shelter is rented for wedding parties. The church averages about 5 wedding parties a month that pay rent of $200 per party. Utilities are normally $1,000 per month. With the homeless shelter, the utilities will increase to $1,300 per month.
What is the opportunity cost to the church of operating a homeless shelter in the church?

Accepted Answer

The answer of Opportunity Costs
The First Church has been asked...

Question 9

Opportunity Cost of Attracting Industry
The Itagi Computer Company From Japan is looking to build a factory for making CD-ROM's in the United States. The company is concerned about the safety and well-being of its employees and wants to locate in a community with good schools. The company also wants the factory to be profitable and is looking for subsidies from potential communities. Encouraging new business to create jobs for citizens is important for communities, especially communities with high unemployment.
Wellville has not been very well since the shoe factory left town. The city officials have been working on a deal with Itagi to get the company to locate in Wellville. Itagi officials have identified a 20 acre undeveloped site. The city has tentatively agreed to buy the site for $50,000 for Itagi and not require any payment of property taxes on the factory by Itagi for the first five years of operation. The property tax deal will save Itagi $3,000,000 in taxes over the five years. This deal was leaked to the local newspaper. The headlines the next day were: "Wellville Gives Away $3,000,000+ to Japanese Company".
Required:
a. Do the headlines accurately describe the deal with Itagi?
b. What are the relevant costs and benefits to the citizens of Wellville of making this deal?

Accepted Answer

The answer of Opportunity Cost of Attracting Industry
The Itagi Computer...

Question 10

Basic Price and Quantity Variances for Labor and Materials
Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the direct costs of one unit of product.  During May, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for May were $42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.
Required:
a. Calculate the direct materials price variance for May.
b. Calculate the direct materials quantity variance for May.
c. Calculate the direct labor wage rate variance for May.
d. Calculate the direct labor efficiency variance for May.

Accepted Answer

The answer of Basic Price and Quantity Variances for Labor...

Question 11

Fixed and Variable Costs
The university athletic department has been asked to host a professional basketball game at the campus sports center. The athletic director must estimate the opportunity cost of holding the event at the sports center. The only other event scheduled for the sports center that evening is a fencing match that would not have generated any additional costs or revenues. The fencing match can be held at the local high school, but the rental cost of the high school gym would be $200. The athletic director estimates that the professional basketball game will require 20 hours of labor to prepare the building. Clean-up depends on the number of spectators. The athletic director estimates the time of clean-up to be equal to 2 minutes per spectator. The labor would be hired especially for the basketball game and would cost $8 per hour. Utilities will be $500 greater if the basketball game is held at the sports center. All other costs would be covered by the professional basketball team.
Required:
a. What is the variable cost of having one more spectator?
b. What is the opportunity cost of allowing the professional basketball team to use the sports center if 10,000 spectators are expected?
c. What is the opportunity cost of allowing the professional basketball team to use the sports center if 12,000 spectators are expected?

Accepted Answer

The answer of Fixed and Variable Costs
The university athletic department...

Question 12

Job Order Sheet
The Talbott Company has received an order (#324) for 100 widgets. On January 20 the shop supervisor requisitioned 100 units of part 503 at a cost of $5 per unit and 500 units part 456 at a cost of $3 per unit to begin work on the 100 widgets. On the same day 20 hours of direct labor at $20 per hour are used to work on the widgets. On January 21, 200 units of part 543 at $6 per unit are requisitioned and 10 hours of direct labor at $15 per hour are performed on the 100 units of widgets to complete the job. Overhead is allocated to the job based on $5 per direct labor hour.
Required:
Make a job order cost sheet for the 100 widgets.

Accepted Answer

The answer of Job Order Sheet
The Talbott Company has received...

Question 13

Flexible Budgets
A chair manufacturer has established the following flexible budget for the month.  Required:
a. What is the sales price per chair?
b. What is the expected profit if 1,600 chairs are made?

Accepted Answer

The answer of Flexible Budgets
A chair manufacturer has established the...

Question 14

Cost, Volume, Profit Analysis
Leslie Mittelberg is considering the wholesaling of a leather handbag from Kenya. She must travel to Kenya to check on quality and transportation. The trip will cost $3000. The cost of the handbag is $10 and shipping to the United States can occur through the postal system for $2 per handbag or through a freight company which will ship a container that can hold up to a 1000 handbags at a cost of $1000. The freight company will charge $1000 even if less than 1000 handbags are shipped. Leslie will try to sell the handbags to retailers for $20. Assume there are no other costs and benefits.
Required:
a. What is the break-even point if shipping is through the postal system?
b. How many units must be sold if Leslie uses the freight company and she wants to have a profit of $1000?
c. At what output level would the two shipping methods yield the same profit?
d. Suppose a large discount store asks to buy an additional 1000 handbags beyond normal sales. Which shipping method should be used and what is the minimum sales price Leslie should consider in selling those 1000 handbags?

Accepted Answer

The answer of Cost, Volume, Profit Analysis
Leslie Mittelberg is considering...

Question 15

Developing Standards
ColdKing Company is a small producer of fruit-flavored frozen desserts. For many years, ColdKing's products have had strong regional sales on the basis of brand recognition; however, other companies have begun marketing similar products in the area, and price competition has become increasingly important. John Wakefield, the company's controller, is planning to implement a standard cost system for ColdKing and has gathered considerable information from his co-workers on production and materials requirements for ColdKing's products. Wakefield believes that the use of standard costing will allow ColdKing to improve cost control and make better pricing decisions.
ColdKing's most popular product is raspberry sherbet. The sherbet is produced in 10-gallon batches, and each batch requires six quarts of good raspberries. The fresh raspberries are sorted by hand before entering the production process. Because of imperfections in the raspberries and normal spoilage, one quart of berries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct labor time for sorting to obtain one quart of acceptable raspberries. The acceptable raspberries are then blended with the other ingredients; blending requires 12 minutes of direct labor time per batch. After blending, the sherbet is packaged in quart containers. Wakefield has gathered the following pricing information:
• ColdKing purchases raspberries at a cost of $0.80 per quart. All other ingredients cost a total of $4.50 per 10-gallon batch.
• Direct labor is paid at the rate of $9.00 per hour.
• The total cost of material and labor required to package the sherbet is $0.38 per quart.
Required:
a. Develop the standard cost for the direct cost components of a 10-gallon batch of raspberry sherbet. For each direct cost component of a batch of raspberry sherbet, the standard cost should identify the
(i) standard quantity.
(ii) standard rate.
(iii) standard cost per batch.
b. As part of the implementation of a standard cost system at ColdKing, John Wakefield plans to train those responsible for maintaining the standards in the use of variance analysis. Wakefield is particularly concerned with the causes of unfavorable variances.
(i) Discuss the possible causes of unfavorable materials price variances and identify the individual(s) who should be held responsible for them.
(ii) Discuss the possible causes of unfavorable labor efficiency variances and identify the individual(s) who should be held responsible for them.

Accepted Answer

The answer of Developing Standards
ColdKing Company is a small producer...

Question 16

Performance Measures for Cost Centers
A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company supplies each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores.
The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same equipment, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are:  Required:
a. Estimate the average cost per unit for each plant.
b. Why would the manager of plant A be unhappy with using the average cost as the performance measure?
c. What is an alternative performance measure that would make the manager of plant A happier?
d. Under what circumstances might the average cost be a better performance measure?

Accepted Answer

The answer of Performance Measures for Cost Centers
A soft drink...

Question 17

Transfer Prices
The Alpha Division of the Carlson Company manufactures product X at a variable cost of $40 per unit. Alpha Division's fixed costs, which are sunk, are $20 per unit. The market price of X is $70 per unit. Beta Division of Carlson Company uses product X to make Y. The variable costs to convert X to Y are $20 per unit and the fixed costs, which are sunk, are $10 per unit. The product Y sells for $80 per unit.
Required:
a. What transfer price of X causes divisional managers to make decentralized decisions that maximize Carlson Company's profit if each division is treated as a profit center?
b. Given the transfer price from part (a), what should the manager of the Beta Division do?
c. Suppose there is no market price for product X. What transfer price should be used for decentralized decision-making?
d. If there is no market for product X, is the operations of the Beta Division profitable?

Accepted Answer

The answer of Transfer Prices
The Alpha Division of the Carlson...

Question 18

Pro-Forma Financial Statements
The Gold Bay Hotel is in the process of developing a master budget and pro-forma financial statements for 1999. The beginning balance sheet for the fiscal year 1999 is estimated to be:  During the year the hotel expects to rent 30,000 rooms. Rooms rent for an average of $90 per night. The hotel expects to sell 40,000 meals during the year at an average price of $20 per meal. The variable cost per room rented is $30 and the variable cost per meal is $8. The fixed costs not including depreciation is expected to be $2,000,000. Depreciation is expected to be $500,000. The hotel also expects to refurbish the kitchen at a cost of $200,000, which is capitalized (included in the facility account). Interest of the note payable is expected to be $50,000 and $100,000 of the note payable will be retired during the year. The ending accounts receivable amount is expected to be $40,000 and the ending accounts payable is expected to be $30,000.
Prepare pro-forma financial statements for the end of the year.

Accepted Answer

The answer of Pro-Forma Financial Statements
The Gold Bay Hotel is...

Question 19

Identifying the Opportunity Cost of Capital
Don Phelps recently started a dry cleaning business. He would like to expand the business and have a coin-operated laundry also. The expansion of the building and the washing and drying machines will cost $100,000. The bank will lend the business $100,000 at 12 percent interest rate. Don could get a 10 percent interest rate loan if he uses his personal house as collateral. The lower interest rate reflects the increased security of the loan to the bank, because the bank could take Don's home if he doesn't pay back the loan. Don currently can put money in the bank and receive 6 percent interest.
Required:
Provide arguments for using 12 percent, 10 percent, and 6 percent as the opportunity cost of capital for evaluating the investment.

Accepted Answer

The answer of Identifying the Opportunity Cost of Capital
Don Phelps...

Question 20

Accounting and Control
The controller of a small private college is complaining about the amount of work she is required to do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an old English professor and probably doesn't know the difference between a cost and a revenue."
Required:
a. What is the probable role of the monthly report?
b. What is the controller's responsibility with respect to a president who doesn't know much accounting?

Accepted Answer

The answer of Accounting and Control
The controller of a small...

Exam 1: Accounting for Decision Making and Control

Flexible Budgets A chair manufacturer has established the following flexible budget for the month. Required: a. What is the sales price per chair? b. What is the expected profit if 1,600 chairs are made?