Managerial Accounting, 6th edition Karen W Braun Solution Manual by Ace Test Banks

Instructor’s Solutions Manual Jennifer Allen

Managerial Accounting Sixth Edition

Karen Wilken Braun Wendy M. Tietz

Contents Chapter 1

Introduction to Managerial Accounting ............................................ 1-1

Chapter 2

Building Blocks of Managerial Accounting ..................................... 2-1

Chapter 3

Job Costing........................................................................................ 3-1

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality .............................................................................. 4-1

Chapter 5

Process Costing .................................................................................. 5-1

Chapter 6

Cost Behavior..................................................................................... 6-1

Chapter 7

Cost-Volume-Profit Analysis............................................................ 7-1

Chapter 8

Relevant Costs for Short-Term Decisions ........................................ 8-1

Chapter 9

The Master Budget ........................................................................... 9-1

Chapter 10

Performance Evaluation ................................................................. 10-1

Chapter 11

Standard Costs and Variances ......................................................... 11-1

Chapter 12

Capital Investment Decisions and the Time Value of Money ........ 12-1

Chapter 13

Statement of Cash Flows ................................................................ 13-1

Chapter 14

Financial Statement Analysis ........................................................... 14-1

Chapter 15

Sustainability.................................................................................... 15-1

Chapter 1 Introduction to Managerial Accounting Quick Check Answers QC1-1. c QC1-2. d QC1-3. b

QC1-4. d QC1-5. d QC1-6. c

QC1-7. a QC1-8. c QC1-9. b

QC1-10. a QC1-11. c QC1-12. b

Short Exercises (5–10 min.) S1-1 a. b. c. d. e.

Planning Controlling Directing Directing Directing, Controlling

(5–10 min.) S1-2

a. b. c. d. e. f. g. h. i. j. k. l. m.

Financial accounting Financial accounting Financial accounting Managerial accounting Managerial accounting Managerial accounting Financial accounting Financial accounting Managerial accounting Managerial accounting Financial accounting Managerial accounting Financial accounting

1-1

Managerial Accounting 6e Solutions Manual

(5–10 min.) S1-3 a. b. c. d. e. f. g. h. i. j. k. l. m.

Internal Auditing Department Controller Internal Auditing Department Internal Auditing Department Treasurer Controller Controller Controller Controller Controller Controller Treasurer Treasurer

(5–10 min.) S1-4 Characteristic

Check (√) if related to internal auditing

Reports directly to the audit committee

Reports to treasurer or controller

Is part of the Accounting Department

Helps to ensure that company’s internal controls are functioning properly

Performs the same function as independent certified public accountants

Usually reports to a senior executive (CFO or CEO) for administrative matters

External audits can be performed by the internal auditing department

Required by the New York Stock Exchange if company stock is publicly traded on the NYSE

Ensures that the company achieves its profit goals

1-2

√

Chapter 1

Introduction to Managerial Accounting

(10 min.) S1-5 a.

The CEO is hired by the board of directors.

A subcommittee of the board of directors is called the audit committee.

Raising capital and investing funds are the direct responsibilities of the treasurer.

The CFO and the COO report to the CEO.

Financial accounting, managerial accounting, and tax reporting are the direct responsibilities of the controller.

Management accountants often work on cross-functional teams.

The internal audit function reports to the CFO or the CEO and the audit committee.

The company’s operations are the direct responsibility of the COO.

(5 min.) S1-6 1.

The Institute of Management Accountants (IMA) issues the Certified Management Accountant (CMA) certification.

The certification offered by IMA, focuses on accounting and finance topics.

The monthly professional magazine published by the Institute of Management Accountants is called Strategic Finance.

The certification launched in 2012 jointly by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) is called the Chartered Global Management Accountant (CGMA).

To earn CMA certification, a candidate must have a(n) baccalaureate degree. The CMA exam can be taken, however, before finishing this degree.

(5 min.) S1-7 a.

Failing to provide job description information to management because you fear it may be used to cut a position in your department violates the credibility standard.

Providing earnings information to your sister before it is publicly announced violates the confidentiality standard.

Failing to read the specifications of the software package before purchasing it violates the competence standard.

Stealing from your employer is a violation of the integrity standard.

Skipping continuing education sessions could violate the requirement to maintain professional competence. If your company paid for you to attend the conference, skipping the sessions also violates the integrity standard.

1-3

Managerial Accounting 6e Solutions Manual

(5 min.) S1-8 a. b. c. d.

Sustainability Sarbanes-Oxley Act (SOX) Enterprise resource planning (ERP) system Data analytics

(5 min.) S1-9 Letter a.

Scenario Jack, an accountant for a smartphone manufacturer, told his friends about a new model of smartphone being released by the company in the following quarter. For competitive reasons, the company keeps its models shrouded in secrecy until release date. The CFO directed that certain expenses be reclassified as assets, so that target profit could be achieved. The CFO rationalized that jobs would be saved by reaching the targeted income figures.

Even though Meagan's company is adopting a new ERP system that impacts the accounting system, Meagan (a management accountant) has not completed the required ERP training from the vendor.

Oliver provides an analysis of the profitability of a company-owned store that is managed by Oliver’s best friend, Bob. Oliver neglects to include allocated fixed costs in Bob’s report. If Oliver includes those allocated fixed costs, the store will show a loss and Bob’s job could be in danger.

Yimeng, a purchasing agent for her company, received two tickets from a supplier to the upcoming Ohio State versus University of Michigan football game. These tickets sell for over $500 each.

Standard violated

Confidentiality

Integrity

Competence

Credibility

Integrity

(10 min.) S1-10 a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p.

1-4

Financial accounting system Critical thinking IMA Treasurer Economic, environmental, and social Controller Internal audit Sarbanes-Oxley Act of 2002 Triple Bottom Line Controlling Directing ERP Sustainability CEO Planning CFO

Chapter 1

Introduction to Managerial Accounting

(5 min.) S1-11 a. b. c. d. e. f. g.

Descriptive Descriptive Prescriptive Diagnostic Predictive Diagnostic Adaptive and Autonomous

(10 min.) S1-12 Item 1. 2.

Term Adaptive and autonomous analytics Big data

Categorical (nominal data)

4. 5.

Data Data analytics

Data visualization

7. 8. 9.

Descriptive analytics Diagnostic analytics Ordinal data

10. 11. 12.

Predictive analytics Prescriptive analytics Quantitative data

13.

Structured data

14.

Unstructured data

Definition k. Analytics that collect, analyze, learn, and adjust without human intervention. d. Data characterized by five Vs: volume, velocity, variety, veracity, and value. h. Data that represents things that have no numerical value (such as customer name, state, and distribution channel). i. A collection of observations. b. The process of turning raw data into actionable insights that lead to good business decisions. j. The art and science of communicating quantitative information through visual presentations. m. Analytics that describe what has or is happening. f. Analytics that help uncover the root cause of the current state. c. Data that has a clearly defined order and may or may not have numbers associated with it (such as customer satisfaction rankings and employee rank). g. Analytics that seek to predict what will happen in the future. a. Analytics that seek to determine what should be done. n. Data that can be measured, counted, and aggregated (such as sales revenue, number of customers, and cost of product). l. Data that is highly organized into predefined discreet categories, often contains labels, and is fairly easy to search and manipulate. e. Data that is not organized into predefined categories.

1-5

Managerial Accounting 6e Solutions Manual

(10 min.) S1-13 Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Task Format as accounting number Insert new workbook Insert function Worksheet name Decrease decimal Active cell Ribbon Name of workbook (file name) Cell reference Formula bar Name box

Screen shot letter K I D H J E A G C F B

(10 min.) S1-14 Task 1. Change the order of the worksheets in the workbook 2. Copy and paste the contents of one cell to another cell 3. Copy the contents of a cell to a range of cell

Description of how to do the task in Excel (Windows) c. Drag and drop worksheet to desired location.

9. Select all data in a worksheet 10. Select one cell

j. In the first cell, hold down Ctrl + C, then navigate to the desired cell and hold down Ctrl + V. a. Drag the fill handle down the column or across the row. g. Hold down the Ctrl and End keys simultaneously. i. Click on a worksheet tab. d. Put dollar signs in front of both the column and row reference in the formula. h. Right click worksheet tab and select option to give the worksheet a new name. b. Click on the first cell in a range and drag your cursor to the final cell you are selecting. e. Hold down the Ctrl and A keys simultaneously. f. Click on a cell.

1-6

4. Go to the end of the data set in a worksheet 5. Move between worksheets 6. Refer to a cell as an absolute reference 7. Rename a worksheet 8. Select a range of cells

Chapter 1

Introduction to Managerial Accounting

(10 min.) S1-15 a. b. c. d. e. f. g. h. i.

=B2*C2 Drag the cell handle in the lower right corner of Cell D2 down to Cell D5. =SUM(B2:B5) =SUM(D2:D5) =B2+B4 =D2+D4 =B10/B9 =B3-B5 =D3-D5

(10 min.) S1-16 a. To quickly navigate to the end of the data in a worksheet when using Excel in a Windows environment, use the Ctrl + End keystrokes. b. The top bar in an Excel workbook that contains File, Home, Insert, and other tabs is called the ribbon. c. File, Home, Insert, Page Layout, Formulas, and Data are examples of tabs. d. The formula bar displays how the content of the active cell was generated. e. To select all data in a worksheet when using Excel in a Windows environment, use the Ctrl + A keystrokes. f. The worksheet tab is right clicked to rename it. g. The active cell will have a colored border around it and the cell reference will appear in the name box. h. A unique address for each cell in an Excel worksheet is called a cell reference. i. The cell reference for the active cell will appear in the name box. j. To quickly navigate to the first column of a row in Excel when using Excel in a Windows environment, use the Ctrl + arrow left keystrokes. k. There are separate tabs for each worksheet in a workbook.

1-7

Managerial Accounting 6e Solutions Manual

Exercises (Group A) (10 min.) E1-17A a.

Information on a company’s past performance is provided to external parties by financial accounting.

Managerial accounting systems are chosen by comparing the costs versus the benefits of the system and are not restricted by GAAP (or International Financial Reporting Standards, IFRS, in the case of companies headquartered in many countries outside of the United States).

Managerial accounting systems report on various segments or business units of the company.

Financial accounting develops reports for external parties such as creditors and shareholders.

When managers evaluate the company’s performance compared to the plan, they are performing the controlling role of management.

CPAs audit the financial accounting statements of public companies.

Companies must follow GAAP (or International Financial Reporting Standards, IFRS, in the case of companies headquartered in many countries outside of the Unites States) in their financial accounting systems.

Choosing goals and the means to achieve them is the planning function of management.

Decision makers inside a company are the managers.

(10 min.) E1-18A a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t.

1-8

Technical Nontechnical Technical Nontechnical Nontechnical Nontechnical Technical Technical Technical Technical Nontechnical Nontechnical Technical Nontechnical Technical Technical Nontechnical Nontechnical Technical Nontechnical

Chapter 1

Introduction to Managerial Accounting

(10 min.) E1-19A 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Financial accounting information Managerial accounting information Financial accounting information Financial accounting information Managerial accounting information Financial accounting information Both Financial accounting information Financial accounting information Financial accounting information Both Both Financial accounting information Financial accounting information

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Confidentiality Credibility Credibility Credibility Confidentiality Confidentiality Integrity Competence Competence Competence Integrity Integrity Competence

(10 min.) E1-20A

(10 min.) E1-21A Expected benefit (cost savings) Wages (20 workers x 40 hrs. x $15/hr.) Payroll taxes ($12,000 x 7.65%) Total expected cost savings

$12,000 918 $12,918

Expected costs Lettuce Bot cost (machine cost) Lettuce Bot delivery cost Cost of operating the lettuce bot Total expected costs

$8,000 500 1,500 $10,000

Net expected benefit in first year

$2,918

1-9

Managerial Accounting 6e Solutions Manual

(10 min.) E1-22A a. b. c. d. e. f. g. h. i. j. k. l. m. n.

Economic Social Environmental Social Environmental Social Economic Environmental Environmental Social Social Social Social Environmental

(10 min.) E1-23A a. b. c. d. e. f. g. h. i. j. k. l.

1-10

Categorical Ordinal Categorical Quantitative Quantitative Ordinal Quantitative Ordinal Categorical Quantitative Categorical Ordinal

Chapter 1

Introduction to Managerial Accounting

(20 min.) E1-24A Excel file should show:

Formulas in each cell should be:

1-11

Managerial Accounting 6e Solutions Manual

(10 min.) E1-25A

1. 2. 3. 4. 5. 6.

985 MD-Disability 389 3 49926 See below

a. $636.10 b. 12 c. $7,633.20 7. 80840 8. Click in the cell in the upper left corner of the worksheet (the intersection of the row and column headers)

1-12

Chapter 1

Introduction to Managerial Accounting

(10 min.) E1-26A Excel file should show:

1-13

Managerial Accounting 6e Solutions Manual

(continued) E1-26A Formulas in each cell should be:

1-14

Chapter 1

Introduction to Managerial Accounting

Exercises (Group B) (5 min.) E1-27B a.

U.S. companies must follow GAAP (or International Financial Reporting Standards, IFRS, in the case of companies headquartered in many countries outside of the United States) in their financial accounting systems.

Financial accounting develops reports for external parties, such as creditors and shareholders.

When managers evaluate the company’s performance compared to the plan, they are performing the controlling role of management.

Managers are decision makers inside a company.

Financial accounting provides information on a company’s past performance to external parties.

Managerial accounting systems are not restricted by GAAP (or International Financial Reporting Standards, IFRS, in the case of companies headquartered in many countries outside of the United States) but are chosen by comparing the costs versus the benefits of the system.

Choosing goals and the means to achieve them is the planning function of management.

Managerial accounting systems report on various segments or business units of the company.

Financial accounting statements of public companies are audited annually by CPAs.

a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t.

Nontechnical Nontechnical Nontechnical Technical Nontechnical Technical Technical Technical Nontechnical Technical Nontechnical Technical Nontechnical Technical Technical Technical Technical Nontechnical Nontechnical Nontechnical

(5–10 min.) E1-28B

1-15

Managerial Accounting 6e Solutions Manual

(5–10 min.) E1-29B 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Both Financial accounting information Financial accounting information Managerial accounting information Financial accounting information Managerial accounting information Financial accounting information Financial accounting information Financial accounting information Financial accounting information Both Both Financial accounting information Financial accounting information

(10 min.) E1-30B 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Credibility Competence Integrity Competence Integrity Credibility Confidentiality Competence Integrity Confidentiality Credibility Confidentiality Competence

(10 min.) E1-31B Expected benefit (cost savings) Wages (25 workers x 50 hrs. x $15/hr.) Payroll taxes ($18,750 x 7.65%) Total expected cost savings

$18,750 1,434 $20,184

Expected costs Lettuce bot cost (machine cost) Lettuce bot delivery cost Cost of operating the lettuce bot Total expected costs

$ 9,500 1,000 2,500 $13,000

Net expected benefit in first year

$7,184

1-16

Chapter 1

Introduction to Managerial Accounting

(10 min.) E1-32B a. b. c. d. e. f. g. h. i. j. k. l. m. n.

Social Environmental Environmental Economic Environmental Social Environmental Social Environmental Social Economic Social Environmental Social

(10 min.) E1-33B a. b. c. d. e. f. g. h. i. j. k. l.

Categorical Quantitative Categorical Categorical Ordinal Ordinal Quantitative Ordinal Quantitative Categorical Quantitative Ordinal

1-17

Managerial Accounting 6e Solutions Manual

(20 min.) E1-34B Excel file should show:

Formulas in each cell should be:

1-18

Chapter 1

Introduction to Managerial Accounting

(10 min.) E1-35B 1. 2. 3. 4. 5. 6.

386 NJ-Disability 693 9 57516 See below

a. $679.55 b. 12 c. $8,154.59 7. 56243 8. Click in the cell in the upper left corner of the worksheet (the intersection of the row and column headers)

1-19

Managerial Accounting 6e Solutions Manual

(10 min.) E1-36B Excel file should show:

1-20

Chapter 1

Introduction to Managerial Accounting

(continued) E1-36B Formulas in each cell should be:

1-21

Managerial Accounting 6e Solutions Manual

Problems (Group A) (45–60 min.) P1-37A Req. 1 Planning

Directing

Controlling

Sales

Increase sales

Setting competitive prices. Examine sales reports.

Repairs

Increase volume of repairs

Lessons

Increase number of lessons given

Web development

Increase Web traffic

Streamline process to save time. Set competitive prices; generate reports showing time used for each type of repair. Find out what customers want and need. Observe competitors for prices and lessons offered. Improve teacher qualifications. Improve design of website. Offer more products online. Make shopping easier and more intuitive. Increase marketing efforts.

Monitor sales numbers and prices from different products and locations over time. Investigate variances. Track total number of repairs and see if more repairs are being made and if time is utilized efficiently. Examine number of lessons given per instrument.

Accounting

Implement ERP system to monitor department activities and record finances Decrease employee turnover

Human resources

1-22

Train employees on new system. Find potential flaws in the system and fix before implementation.

Hire employees who are “a good fit” for the company. Raise employee morale; set clear job descriptions. Give feedback to employees.

Monitor both involuntary and voluntary turnover. Interview employees to determine potential problems with the workplace.

Chapter 1

Introduction to Managerial Accounting

(continued) P1-37A Req. 2 Planning

Directing

Controlling

Sales

A sales budget for the entire company and each individual product at each location is needed.

Compare budgets with actual sales numbers. Investigate variances to take corrective actions if needed. Change prices if deemed appropriate.

Repairs

Labor budgets would be needed to determine the time taken to repair instruments and if hiring more repair staff would be feasible. Budgets for types of lessons offered, time needed per lesson taught, and market analysis to determine which lessons potential customers want. An expense budget is needed to ensure money is spent efficiently. A budget would also be needed to set Web traffic goals. Time budgets as well as expense budgets are needed.

Analyze sales reports to monitor type and amount of sales made. Prices would be analyzed using these reports and market analysis of competitors. Employee training programs would be used. Monitor time taken per repair for each member of repair staff.

Ensure customer satisfaction by hiring qualified staff. Analyze market analysis to determine market needs and proper pricing schemes.

Compare budgets with actual results. Use customer feedback to improve lessons. Make changes if needed.

Monitor department expenses and website visits using online counting program.

Compare budgeted expenses with actual and compare expected Web traffic with actual. Investigate variances and make changes as needed. Compare budget with actual numbers. Investigate variances and make changes if needed. Consider employee suggestions and enact changes if needed.

Lessons

Web development

Accounting

Human resources

Employee satisfaction surveys and feedback reports.

Train employees on new system to keep within time budget. Monitor expenses closely. Active relationship between management and employees. Management would record needs and suggestions made by employees in feedback system.

Compare budgets with actual results. Investigate variances and take corrective action if needed.

Note: All the information needed in the table above would be generated almost entirely by the managerial accounting system. Managerial accounting systems provide much of the information needed for internal decision making, while financial accounting systems are geared towards external financial reporting.

1-23

Managerial Accounting 6e Solutions Manual

(15–20 min.) P1-38A a.

If the goods have been received, postponing recording of the purchases understates liabilities. This is unethical and inconsistent with the IMA standards even if the supplier agrees to delay billing.

The software has not been sold. Therefore, it would be inconsistent with the IMA standards to record it as sales.

Delaying year-end closing incorrectly records next year’s sales as this year’s sales. This is clearly wrong and unethical, and it is inconsistent with the IMA standards.

The appropriate allowance for bad debts is a difficult judgment. The decision should not be driven by the desire to meet a profit goal. It should be based on the likelihood that the company will collect. We cannot determine this without more information. However, because the company emphasizes earnings growth, which can lead to sales to customers with weaker credit records, reducing the allowance seems questionable. This strategy is likely inconsistent with the IMA standards.

If the maintenance is postponed, there is no transaction to record. This strategy is beyond the responsibility of the controller, so it does not violate IMA standards.

Strategies a, b, and c are clearly unethical and inconsistent with the IMA standards of integrity, credibility, and perhaps competence. Strategy d is likely unethical, but we cannot be certain without more information. The controller should resist attempts to implement a, b, and c, and she should gather more information about d. If the president ignores the controller’s concerns and still insists that these strategies be implemented, then the controller should probably resign rather than continuing to work for a company that engages in unethical behavior.

1-24

Chapter 1

Introduction to Managerial Accounting

(15–20 min.) P1-39A Req. 1 Benefits if the project is successful: Savings from more efficient order processing………………………… Savings from streamlining the manufacturing process……………… Savings from inventory reduction………………………………………..

$105,000 125,000 225,000

Profits from increased sales...........…………………………………….... Total benefits if the project is successful………………………………

155,000 $610,000

Req. 2 Costs of implementing the project: Software costs…………………………………………………………………. Customizing ERP and loading data……………………...………………… Employee training…………………………………………………………….. Total costs…………………………………..…………………………………..

$435,000 95,000 105,000 $635,000

Now compare the value of benefits to the costs: Expected benefits………….................................................. Expected costs...…………………………….......................... Net benefits (costs)…………..…...…………………………...

$610,000 (635,000) $ (25,000)

Because the expected value of the benefits is less than the total costs, the company should not undertake the project. Req. 3 The CEO formed a team to evaluate the feasibility of installing an ERP system for two reasons. First, the project was probably too big for one person. Second, representatives of the different functional business areas have different knowledge and information to contribute. a.

Estimating software costs

systems specialist

Estimating cost of loading data into the new ERP system

Customize the ERP software

Estimate customization costs

management accountant systems specialist management accountant systems specialist all team members

Estimate training costs

human resource director

Savings from more efficient order processing

Savings from streamlining the manufacturing process

Evaluate the effects of integrating purchasing, production, marketing, and distribution into a single system Estimate increase in sales from higher customer satisfaction Estimate benefits and costs

systems specialist management accountant plant engineer plant foreman plant foreman

i. j.

marketing director all team members

Student answers may vary. The main point is that different team members contribute different knowledge.

1-25

Managerial Accounting 6e Solutions Manual

(10–15 min.) P1-40A Costs: Financial assistance to dealers...............………….. Computer hardware upgrade………………….......... Software and consulting fees……………………….. Total costs...........................………………………............

$ 760,000 160,000 220,000 $1,140,000

Value of benefits (lower labor costs)………….……….. Total costs...............................………………………….… Excess of benefits over costs……………………………

$1,340,000 (1,140,000) $ 200,000

Because the benefits exceed the costs, a cost-benefit analysis suggests that the company should proceed with the online ordering system.

(20–25 min.) P1-41A Req. 1 The expected value of the benefits is the labor cost savings of $935,000. This is a downward revision from what was originally estimated in P1-28A. Req. 2 Expected value of benefits……….……………............ Total costs (from P1-28A)………………...……………. Net cost..........................…………………………………

$935,000 (1,140,000) $ (205,000)

The revised estimates mean the expected costs are greater than the expected benefits. The quantitative analysis suggests that the company should not undertake the project. Before deciding, the company should carefully consider other factors like those listed in Req. 3. Req. 3 Other factors management should consider before making a final decision include the following: •

The difficulty and costs of laying off employees may reduce the expected benefits.

•

Employee layoffs may hurt morale and efficiency in other areas of the company, thus increasing costs.

•

Electronic order processing should reduce human errors, thereby reducing costs.

•

Providing dealers with current availability, price information, and timely order processing will help the company manage and reduce its inventories.

Student answers to Req. 3 may vary.

1-26

Chapter 1

Introduction to Managerial Accounting

Problems (Group B) (45–60 min.) P1-42B Req. 1 Planning

Directing

Controlling

Sales

Increase sales

Setting competitive prices. Examine sales reports.

Repairs

Increase volume of repairs

Customization

Increase number of custom systems built

Web development

Increase Web traffic

Accounting

Implement ERP system to monitor department activities and record finances Decrease employee turnover

Streamline process to save time. Set competitive prices; generate reports showing time used for each type of repair. Find out what customers want and need. Observe competitors for prices and options offered. Improve employee certification and offer higher-quality parts. Improve design of website. Offer more products online. Make shopping easier and more intuitive. Increase marketing efforts. Train employees on new system. Find potential flaws in the system and fix before implementation.

Human resources

Hire employees who are “a good fit” for the company. Raise employee morale; set clear job descriptions. Give feedback to employees.

Monitor Web traffic by having an online counting device. Look at sales numbers to see if people are just surfing or actually buying merchandise. Track employee work schedules to stay on time. Double check entries to ensure system is working properly. Monitor both involuntary and voluntary turnover. Interview employees to determine potential problems with the workplace.

1-27

Managerial Accounting 6e Solutions Manual

(continued) P1-42B Req. 2 Planning

Directing

Controlling

Sales

Haas would need a sales budget for the entire company and each individual product at each location.

Analyze sales reports to monitor type and amount of sales made. Prices would be analyzed using these reports and market analysis of competitors.

Customization

Budgets for types of computers offered, time needed per job, and market analysis to determine which computers potential customers want.

Repairs

Labor budgets would be needed to determine the time taken to repair instruments and if hiring more repair staff would be feasible. Haas would need an expense budget to ensure money is spent efficiently. A budget would also be needed to set Web traffic goals.

Ensure customer satisfaction by hiring qualified staff. Research quality of available parts. Analyze market analysis to determine market needs and proper pricing schemes. Employee training programs would be used. Monitor time taken per repair for each member of repair staff.

Compare budgets with actual sales numbers. Investigate variances to take corrective actions if needed. Change prices if deemed appropriate. Compare budgets with actual results. Use customer feedback to improve custom builds. Make changes if needed.

Web development

Monitor department expenses and website visits using online counting program.

Accounting

Haas would need time budgets as well as expense budgets.

Train employees on new system to keep within time budget. Monitor expenses closely.

Human resources

Employee satisfaction surveys and feedback reports.

Active relationship between management and employees. Management would record needs and suggestions made by employees in feedback system.

Compare budgets with actual results. Investigate variances and take corrective action if needed. Compare budgeted expenses with actual and compare expected Web traffic with actual. Investigate variances and make changes as needed. Compare budget with actual numbers. Investigate variances and make changes if needed. Consider employee suggestions and enact changes if needed.

1-28

Chapter 1

Introduction to Managerial Accounting

(15–20 min.) P1-43B a.

If advertising is postponed, there is no transaction to record. This strategy is beyond the responsibility of the controller, so it does not violate IMA standards.

The value of each individual sales return may not be material. However, even if each is small on an individual basis, in aggregate, they may amount to a material level. Failing to record sales returns and allowances will falsely inflate this year’s sales, so it is inconsistent with the IMA standards.

If customers actually place orders in December and those orders are filled, then a transaction has occurred that can legitimately be recorded. This strategy does not violate IMA standards.

The appropriate allowance for bad debts is a difficult judgment. The allowance for bad debts should not be driven by the desire to meet a profit goal. It should be based on the collectability of the accounts receivable. Without more information on the collectability of accounts receivable, it is not clear whether this strategy would violate IMA standards.

The goods in the public warehouses have not yet been sold and therefore should not be recorded as sales. This strategy is inconsistent with the IMA standards.

Strategies b and e are clearly unethical and violate the IMA standards of integrity, credibility, and perhaps competence. Without more information, it is not clear whether strategy d violates the IMA standards. The controller should resist attempts to implement b and e and should gather more information about d. If the president ignores the controller’s concerns, then the controller should probably resign rather than continuing to work for a company that engages in unethical behavior.

(15–20 min.) P1-44B Req. 1 Benefits if the project is successful: Savings from more efficient order processing……………………………. Savings from streamlining the manufacturing process…………………. Savings from inventory reduction…………………………………………… Profits from increased sales...........………………………………………….. Total benefits if the project is successful…………………………………..

$185,000 255,000 215,000 150,000 $805,000

Req. 2 Costs of implementing the project: Software costs……………………………………………………….. Customizing ERP and loading data……………………...………. Employee training…………………………………………………… Total costs…………………………………..………………………...

$390,000 85,000 112,000 $587,000

Now compare the value of benefits to the costs: Expected benefits…………................................................. Costs ………………………………………….......................... Excess of benefits over costs…...………………………….

$805,000 (587,000) $218,000

Because the expected value of the benefits is greater than the total costs, the company should undertake the project.

1-29

Managerial Accounting 6e Solutions Manual

(continued) P1-44B Req. 3 A team was formed to evaluate the feasibility of installing an ERP system for two reasons. First, the project was probably too big for one person. Second, the representatives of the different functional business areas have different knowledge and information to contribute. a.

Estimating software costs

systems specialist

Estimating cost of loading data into the new ERP system

Customize the ERP software

Estimate customization costs

management accountant systems specialist management accountant systems specialist all team members

Estimate training costs

human resource director

Savings from more efficient order processing

Savings from streamlining the manufacturing process

Evaluate the effects of integrating purchasing, production, marketing, and distribution into a single system Estimate increase in sales from higher customer satisfaction Estimate benefits and costs

systems specialist management accountant plant engineer plant foreman plant foreman

i. j.

marketing director all team members

Student responses may vary. The main point is that different team members contribute different knowledge.

(10–15 min.) P1-45B Costs: Financial assistance to dealers...............………………………. Computer hardware upgrade…………………........................... Software and consulting fees……………………………………. Total costs...........................……………………….............................

Value of benefits (lower labor costs)………….……………………. Total costs...............................………………………………………… Excess of benefits over costs………………………………………..

$ 765,000 150,000 240,000 $1,155,000

$1,370,000 (1,155,000) $ 215,000

Because the benefits exceed the costs, a cost-benefit analysis suggests that the company should proceed with the online ordering system.

1-30

Chapter 1

Introduction to Managerial Accounting

(20–25 min.) P1-46B Req. 1 The expected value of the benefits is the labor cost savings of $936,000. This is a downward revision from what was originally estimated in P1-33B. Req. 2 Expected value of benefits……….……………................................ Total costs (from P1-33B)………………...………………………….. Net cost..........................………………………………………………..

$936,000 (1,155,000) $ (219,000)

The revised estimates mean the expected costs are greater than the expected benefits. The quantitative analysis suggests the company should not undertake the project. Before deciding, the company should carefully consider other factors like those listed in Req. 3. Req. 3 Other factors the company should consider before making a final decision include the following: •

The difficulty and costs of laying off employees may reduce the expected benefits.

•

Employee layoffs may hurt morale and efficiency in other areas of the company, thus increasing costs.

•

Electronic order processing should reduce human errors, thereby reducing costs.

•

Providing dealers with current availability, price information, and timely order processing will help Union Gas manage and reduce its inventories.

Student answers to Req. 3 may vary.

1-31

Managerial Accounting 6e Solutions Manual

Serial Case C1-47 Caesars’ managers use accounting information for much more than preparing annual financial statements. They use managerial accounting information to guide their actions and decisions. These decisions might include opening a new hotel tower and nightclub, renovating old hotel rooms and restaurants, or sourcing required materials from different suppliers. Management accounting information helps Caesars’ management decide whether any or all of these actions will help accomplish the company’s ultimate goals. Caesars’ management is continually making decisions while it plans, directs, and controls operations. Caesars Palace must decide where to open new hotels, which restaurants to refurnish, what prices to set for rooms and meals, what items to offer on its menu, and so forth. Managerial accounting gathers, summarizes, and reports on the financial impact of each of these decisions. Student answers will vary

1-32

Chapter 1

Introduction to Managerial Accounting

Discussion & Analysis A1-48 1.

What are the three main areas of management’s responsibility? How are these three areas interrelated? How does managerial accounting support each of the responsibility areas of managers? The three main areas of management’s responsibility are planning, directing, and controlling. Planning involves setting goals, directing means overseeing the day-to-day operations that support those goals, and controlling means evaluating the results of those operations. Budgets, variance analysis, and cost-volume-profit analysis are some of the ways managerial accounting supports the responsibility areas of management.

What is the Sarbanes-Oxley Act of 2002 (SOX)? How does SOX affect financial accounting? How does SOX impact managerial accounting? Is there any overlap between financial and managerial accounting in terms of the SOX impact? If so, what are the areas of overlap? The Sarbanes-Oxley Act of 2002 is a congressional act that enhances internal control and financial reporting requirements and establishes new regulatory requirements for publicly traded companies and their independent auditors. SOX requires company CEOs and CFOs to assume responsibility for the financial statements and disclosures. In addition, they assume responsibility for establishing an adequate and internal control structure and procedures for financial reporting. Managerial accounting is affected by SOX because internal control affects the entire company and managerial accounting systems provide information that is published in the company’s financial reporting.

Why is managerial accounting more suitable for internal reporting than financial accounting? Managerial accounting is more suitable than financial accounting for internal reporting because management needs timely information that will assist them in planning, analyzing, and making decisions. They cannot wait for the historical information that is provided by financial accounting. Managerial accounting information is futureoriented.

How can what is taught in managerial accounting help you in careers other than accounting? All professions require decision making. Techniques taught in managerial accounting can help in all careers.

A company currently has all its managerial accountants reporting to the controller. What might be inefficient about this organizational structure? How might the company restructure? What benefits would be offered by the restructuring? Having all managerial accountants report to the controller is the traditional way of structuring companies in the past when management accountants were viewed as recorders of historical transactions. Now the company should consider how management accountants make a better fit in cross-functional teams, which consist of employees representing various functions of the company. This would allow the management accountants to use their consultant and advisor roles more effectively for the company.

What skills are required of a management accountant? In what college courses are these skills taught or developed? What skills would be further developed in the workplace? Today’s management accountants need the following skills: (1) technical competencies such as computer skills and decision analysis, (2) nontechnical competencies such as communication skills and leadership, (3) critical thinking, and (4) accounting knowledge. These skills are taught and developed in a variety of college courses: accounting, management, communication, computer science, finance, and any courses that require students to work in teams and practice their communication skills. All skills would be further developed in the workplace especially as each company has its own needs and requirements based on its industry and culture.

1-33

Managerial Accounting 6e Solutions Manual

What is the Institute of Management Accountants (IMA)? What is the American Institute of Certified Public Accountants? How could being a member of a professional organization help a person’s career? The IMA is the professional association for management accountants. The American Institute of Certified Public Accountants is the national professional organization of certified public accountants. Being a member of a professional organization can help a person’s career because the association often provides certification programs, practice development, education, and networking.

How might a Certified Management Accountant (CMA) certification benefit a person in his or her career? What skills are assessed on the CMA exam? Most employers do not require the CMA certification, but it tends to command a higher salary and higher level positions for those who hold the certification. The CMA exam focuses on managerial accounting topics as well as economics and business finance.

What are the four ethical standards in the Institute of Management Accountants’ Statement of Ethical Professional Practice? Describe the meaning of each of the four standards. How does each of these standards impact planning, directing, and controlling? The four ethical standards are competence, confidentiality, integrity, and credibility. Competence includes the following: •

Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

•

Perform professional duties in accordance with relevant laws, regulations, and technical standards.

•

Provide decision support information and recommendations that are accurate, clear, concise, and timely.

•

Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Confidentiality includes the following: •

Keep information confidential except when disclosure is authorized or legally required.

•

Inform all relevant parties regarding appropriate use of confidential information.

•

Monitor subordinates’ activities to ensure compliance.

•

Refrain from using confidential information for unethical or illegal advantage.

Integrity includes the following: •

Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

•

Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

•

Abstain from engaging in or supporting any activity that might discredit the profession.

Credibility includes the following: •

Communicate information fairly and objectively.

•

Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

•

Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

Each of the standards affects all three of managers’ responsibilities.

1-34

Chapter 1

Introduction to Managerial Accounting

10. What business trends are influencing managerial accounting today? How do these trends impact management accountants’ roles in the organization? Some business trends, such as the shifting economy, have required managers to become knowledgeable in services as well as products. Global competition also has required managers to become skilled in e-commerce. Lean thinking and Six Sigma require management accountants to analyze new quality costs and develop costs and benefits for quality improvement initiatives. Sustainability, social responsibility reporting, and the triple bottom line have increased the types and amount of information the management accountant must obtain. The abundance of data from the Internet and other technology has resulted in the management accountant honing data analytic skills. 11. The effect of sustainability on the planet (environment) is probably the most visible component of the triple bottom line. For a company with which you are familiar, list two examples of its sustainability efforts related to the planet. Student responses will vary. 12. One controversial area regarding sustainability is whether organizations should use their sustainability progress and activities in their advertising. Do you think a company should publicize their sustainability efforts? Why or why not? Student responses will vary.

1-35

Managerial Accounting 6e Solutions Manual

Application & Analysis Mini Cases A1-49 Basic Discussion Questions 1.

When you think of an accountant, whom do you picture? Do you personally know anyone (family member, friend, relative) whose chosen career is accounting? If so, does the person “fit” your description of an accountant or not? Student answers will vary.

Before reading Chapter 1, what did you picture accountants doing, day-in and day-out, at their jobs? From where did this mental picture come (e.g., movies, first accounting class, speaking with accountants, etc.)? Student answers will vary.

What skills are highly valued by employers? What does that tell you about “what accountants do” at their companies? The skills required by employers are (1) technical competencies such as computer skills and decision analysis, (2) nontechnical competencies such as communication skills and leadership, (3) critical thinking, and (4) accounting knowledge. Today, management accountants are business advisors and analysts. Management accountants must ensure that the company’s financial records adequately capture economic events. They help design the information systems that capture and record transactions and make sure that the information system generates accurate data. They use professional judgment to record nonroutine transactions and adjust the financial records as needed. Because management accountants have been freed, due to technology, from the routine mechanical work, they spend more time planning, analyzing, and interpreting accounting data and providing decision support.

Many accounting majors start their careers in public accounting. Do you think most of them stay in public accounting? Discuss what you consider to be a typical career track for accounting majors. According to the IMA, about 85% of all accountants work in organizations, so it appears that most accounting majors do not stay in public accounting. Student answers will vary concerning the typical career track for accounting majors because there are many. It would start with the decision to enter public, corporate, governmental, or independent accounting.

If you are not an accounting major, how do the salaries of accountants compare with your chosen field? How do the opportunities compare (i.e., demand for accountants)? Student answers will vary depending on their chosen field.

1-36

Chapter 1

Introduction to Managerial Accounting

A1-50 Ethics at Enron Basic Discussion Questions 1.

Do you think such behavior is common at other companies, or do you think this was a fairly isolated event?

How important is the “tone at the top” (the tone set by company leadership)?

Do you think you could be tempted to follow along if the leadership at your company had the same mentality as the leadership at Enron, or do you think you would have the courage to “just say no” or even be a “whistleblower”?

Why do you think some people can so easily justify (at least to themselves) their unethical behavior?

In general, do you think people stop to think about how their actions will affect other people (e.g., the elderly in California who suffered due to electricity blackouts) or do they just “do their job”?

What was your reaction to the psychology experiment shown in the DVD? Studies have shown that unlike the traders at Enron (who received large bonuses), most employees really have very little to gain from following a superior’s directive to act unethically. Why then do some people do it?

Do you think people weigh the potential costs of acting unethically with the potential benefits?

You are a business student and will someday work for a company or own a business. How will watching this movie impact the way you intend to conduct yourself as an employee or owner?

The reporter from Fortune magazine asked the question, “How does Enron make its money?” Why should every employee and manager (at every company) know the answer to this question?

10. Considering the “mark-to-market” accounting that enabled Enron to basically record any profit it wished to record, can you understand why some of the cornerstones of financial accounting are “conservatism” and “recording transactions at historical cost”? 11. How did employees of Enron (and employees of the utilities company in Oregon) end up losing billions in retirement funds?

Student answers will vary.

1-37

Managerial Accounting 6e Solutions Manual

Decision Case A1-51 Sustainability This is an open-ended project, without definite solutions. However, the following observations may be helpful. This project works best with groups of four or five students. The person interviewed could be identified through a connection of one of the students, a connection made by the instructor, or a connection through the school. Requiring students to answer the first four questions before the interview will help ensure that they are prepared for the interview. It is important that students be prepared so they can make a favorable impression on the interviewee (for the school and future employment!) and so they do not waste the interviewee’s time. If the company is of any reasonable size, they should be able to gather information from the library or the Internet. 1.

What is the company’s primary product or service?

Does your company have a stated policy on sustainability? What is this policy?

How would this manager define “sustainability”? Is the manager’s definition similar to the definition of “sustainability” in the chapter?

Regardless of whether the company has a sustainability policy or not, what sustainability efforts does the company make with respect to the environment? For example, does the company recycle its waste? What specific types of waste are recycled? Does the company purchase recycled-content products?

Is the amount (or percentage) of waste that is recycled tracked in a reporting system? Who gets reports on the organization’s recycling efforts?

How does the company measure its impact on the environment (if it does)? (For example, does it measure its carbon footprint in total? Does it measure the carbon footprint of individual projects?)

Does the company do any external reporting on sustainability? If so, how long has the company been reporting on its sustainability efforts? If the company does not do any sustainability reporting at the current time, does it anticipate starting to report on its sustainability efforts in the near future?

In the manager’s opinion, is sustainability important within that organization’s industry? Why or why not?

Student responses to the preceding questions will vary by student and organization.

1-38

Chapter 1

Introduction to Managerial Accounting

A1-52 Ethics 1.

The ethical issue involves providing access to financial and other information about the company where Jane works to other individuals, in this case her boyfriend. Jane has made the company’s financial information available through conversations, phone conversations, and emails obtained through a cell phone passcode.

Jane has a responsibility to keep the company’s information confidential. Each IMA member has a responsibility to keep information confidential except when disclosure is authorized or legally required. She also has a responsibility to safeguard the company’s information from others who could profit from inside information. She has made the company’s information available to a third party who could profit from the information.

The ethical standard that Jane may have violated is confidentiality. She had a responsibility to keep her work details confidential. Tom, on the other hand, has committed illegal acts (insider trading at a minimum). If Jane discovers what Tom has been doing, she may have a responsibility to report his actions. If they get married before she discovers his wrongdoings, then that muddies the waters further.

Student answers will vary. Note from author: This case was based loosely on a real-life legal case. For additional information, please see SEC Sues 26-Year Old On Charges He Made $200,000 Insider Trading Off Ex-Girlfriend's Work Project http://www.businessinsider.com/toby-scammell-insider-trading-girlfriend-bain-capital-marvell-disney-2011-8

1-39

Managerial Accounting 6e Solutions Manual

A1-53 1.

Types of financial accounting information that may be generated or recorded include a. Ticket sales revenue b. Operating costs including salaries, utilities, cost of props, etc. Information needed by Mamma Mia! producers to decide to move to a different theater a. Financial accounting system i. Ticket revenues to date ii. Operating costs to date b. Managerial accounting system i. Projected rental costs of new theater for upcoming year ii. Projected rental costs of current theater for upcoming year iii. Projected operating costs of new theater iv. Projected operating costs of current theater v. Projected ticket revenues in new theater vi. Projected ticket revenues in current theater vii. Moving cost Information needed by Once producers to calculate return of original investment and to keep show open a. Financial accounting system i. Original investment costs ii. Ticket revenues to date iii. Operating costs to date b. Managerial accounting system i. Projected ticket revenues ii. Projected operating costs Information needed by Memphis producers to close the show early and renovate the theater versus producing another show a. Financial accounting system i. Ticket revenues to date ii. Operating expenses to date b. Managerial accounting system i. Projected ticket revenues ii. Projected operating costs iii. Cost of renovation iv. Projected receipts from new shows after renovation v. Projected receipts without renovation

Student answers will vary.

1-40

Chapter 2 Building Blocks of Managerial Accounting Quick Check Answers QC2-1. a QC2-2. c QC2-3. d

QC2-4. c QC2-5. d QC2-6. c

QC2-7. c QC2-8. a QC2-9. d

QC2-10. a QC2-11. d QC2-12. a

Short Exercises (10 min.) S2-1 a.

Manufacturing companies report three types of inventory on the balance sheet.

Inventory (merchandise) for a company such as Best Buy (consumer electronics) includes all the costs necessary to purchase products and get them onto the store shelves.

Most for-profit organizations can be described as belonging to one (or more) of three categories: merchandising companies, service companies, and manufacturing companies.

Work in process inventory is composed of goods partially through the manufacturing process (not finished yet).

Forever 21, Target, and Kohl’s are all examples of merchandising companies.

Service companies typically do not have an inventory account.

Johnson & Johnson, a personal care products manufacturer, converts raw materials inventory into finished products.

A law office, an advertising agency, and a hospital are all examples of service companies.

Wholesalers buy products in bulk from producers, mark them up, and resell them to retailers.

(5 min.) S2-2 Madison Co. is a manufacturer because it has three kinds of inventory: Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory. Dean Co. is a merchandiser because it has a single inventory account. Anderson Co. is a service company because it has no inventory.

2-1

Managerial Accounting 6e Solutions Manual

(5–10 min.) S2-3 a. b. c. d. e. f. g. h. i.

Marketing Design Production Distribution Distribution Customer service Production Production Research and Development (R&D)

(5–10 min.) S2-4 Cost a. Juniors Department sales clerks b. Cost of Juniors clothing c. Cost of hangers used to display the clothing in the store d. Electricity for the building e. Cost of radio advertising for the store f. Juniors clothing buyers’ salaries (these buyers buy for all Juniors Departments of Kohl’s stores) g. Depreciation of the building h. Cost of costume jewelry on the mannequins in the Juniors Department i. Cost of bags used to package customer purchases at the main registers for the store j. The Stow Kohl’s store manager’s salary k. Cost of security staff at the Stow store l. Manager of Juniors Department

Direct or Indirect cost? Direct Direct Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Direct

(10 min.) S2-5 a. b. c. d. e. f. g. h. i. j. k.

Cost object Direct cost Assign Indirect cost Allocate Direct cost Trace Allocate Indirect cost Trace Cost object

a. b. c. d. e. f. g. h. i.

Product cost Product cost Product cost Product cost Product cost Period cost Period cost Period cost Period cost

(5–10 min.) S2-6

2-2

Chapter 2

Building Blocks of Managerial Accounting

(5–10 min.) S2-7 a. b. c. d. e. f. g. h. i.

Product cost Period cost Product cost Product cost Period cost Product cost Period cost Product cost Period cost

(5–10 min.) S2-8 COST a. Property taxes – 30% of building is used for sales, marketing, and administrative offices; 70% of building is used for manufacturing b. Wages and benefits paid to assembly-line workers in the manufacturing plant c. Depreciation on automated production equipment d. Salaries paid to quality control inspectors in the plant e. Repairs and maintenance on factory equipment f. Standard packaging materials used to package individual units of product for sale (e.g., cereal boxes in which cereal is packaged) g. Lease payment on administrative headquarters h. Telecommunications costs for the customer service call center

Period Cost or Product Cost?

If a Product Cost: Is it DM, DL, or MOH?

30% Period; 70% Product

-MOH

Product Product Product Product

DL MOH MOH MOH

Product Period

Period

2-3

Managerial Accounting 6e Solutions Manual

(5–10 min.) S2-9 COST 1. Television advertisements for Bailey’s products 2. Lubricants used in running bottling machines 3. Research and development related to elimination of antibiotic residues in milk 4. Gasoline used to operate refrigerated trucks delivering finished dairy products to grocery stores 5. Company president’s annual bonus 6. Depreciation on refrigerated trucks used to collect raw milk from dairy farmers 7. Plastic gallon containers in which milk is packaged 8. Property insurance on dairy processing plant 9. Cost of milk purchased from local dairy farmers 10. Depreciation on tablets used by sales staff 11. Wages and salaries paid to machine operators at dairy processing plant

Period Cost or Product Cost? Period Product

If a Product Cost: Is it DM, DL, or MOH? MOH

Period Period Period Product Product Product Product Period

MOH DM MOH DM

Product

(5 min.) S2-10 Olson Frames Computation of Total Manufacturing Overhead Manufacturing overhead: Plant depreciation expense Plant supervisor’s salary Plant janitor’s salary Glue for picture frames* Oil for manufacturing equipment Total manufacturing overhead

6,000 3,100 1,800 400 250 $11,550

*Assuming that it is not cost-effective to trace the low-cost glue to individual frames. The following explanation is provided for instructional purposes, but it is not required. Depreciation on company cars used by the sales force is a marketing expense, interest expense is a financing expense, and the company president’s salary is an administrative expense. None of these expenses is incurred in the manufacturing plant, so they are not part of manufacturing overhead. The wood for frames is a direct material, not part of manufacturing overhead.

2-4

Chapter 2

Building Blocks of Managerial Accounting

(5–10 min.) S2-11 Salon Hair Income Statement For the Year Ended Sales revenue Cost of goods sold: Beginning inventory Purchases Cost of goods available for sale Less: Ending inventory Less: Cost of goods sold Gross profit Less: Operating expenses Operating income

$38,850,000 $ 3,500,000 23,975,000 27,475,000 (4,445,000) (23,030,000) 15,820,000 (7,100,000) $ 8,720,000

(5 min.) S2-12 Calculation of Cost of Goods Sold Beginning inventory Purchases Import duties Freight-in Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 3,800 $40,000 1,300 3,700

45,000 48,800 (5,900) $42,900

(5 min.) S2-13 Mason Bikes Calculation of Direct Materials Used Beginning raw materials inventory Purchases of direct materials Import duties Freight-in Materials available for use Less: Ending raw materials inventory Direct materials used

$ 4,700 $16,000 1,300 400

17,700 22,400 (1,200) $21,200

2-5

Managerial Accounting 6e Solutions Manual

(10 min.) S2-14 Robinson Manufacturing Schedule of Cost of Goods Manufactured Beginning work in process inventory Plus: Manufacturing costs incurred: Direct materials used Direct labor Manufacturing overhead Total manufacturing costs to account for Less: Ending work in process inventory Cost of goods manufactured

$ 72,400 $519,800 223,500 775,115

1,518,415 1,590,815 (87,600) $1,503,215

(10 min.) S2-15 a.

A(n) marginal cost is the cost of making one more unit.

Gasoline is one of many variable costs in the operation of a motor vehicle.

A product’s fixed costs and variable costs, not the product’s average cost, should be used to forecast total costs at different production volumes.

The average cost* per unit declines as a production facility produces more units.

Costs that differ between alternatives are called differential costs.

In the long run, most costs are controllable costs, meaning that management is able to influence or change the amount of the cost.

Sunk costs are costs that have already been incurred.

*or fixed cost

2-6

Chapter 2

Building Blocks of Managerial Accounting

(10 min.) S2-16 COST

Variable or Fixed

a. Cost of French fries used at a McDonald’s restaurant

Variable

b. Hourly wages paid to cashiers at The Home Depot

Variable

c. Monthly sugar costs for The Hershey Company

Variable

d. Cost of fuel used by Old Dominion Freight Line, a national trucking company

Variable

e. Shipping costs at Amazon.com

Variable

Fixed

Monthly rent for Onyx Nail Bar, a nail salon in Dallas, Texas

g. Sales commissions at Tampa Honda in Florida

Variable

h. Monthly insurance costs for the building housing the administrative offices of Panera Bread in St. Louis, Missouri

Fixed

Monthly depreciation of equipment used in the customer service department at Klaben Ford Lincoln, a car dealership in Kent, Ohio

Fixed

Cost of rubber used to manufacture L.L. Bean boots

Variable

k. Cost of oranges sold at a Kroger grocery store

Variable

Fixed

Monthly office lease costs for the Portland office of E & Y, a global audit firm

m. Monthly cost of coffee at a Dunkin’ Donuts store

Variable

n. Property taxes for an Applebees’ Neighborhood Grill & Bar

Fixed

o. Depreciation of exercise equipment at an LA Fitness club

Fixed

(10 min.) S2-17 a.

The total cost of performing 1,000 oil changes in May is $20,000 [(1,000 × $12) + $8,000].

The average cost of performing each oil change in May is $20 [(1,000 × $12) + $8,000] / 1,000.

The marginal cost of performing an oil change in May is $12 (the variable cost per unit).

If the company could reach full capacity one month, the total cost would be $56,000 [(4,000 × $12) + $8,000].

At full capacity, the average cost of each oil change would be $14 [(4,000 × $12) + $8,000] / 4,000.

Yes, as the shop operates closer to full capacity, the fixed costs are spread over more oil changes, thereby decreasing the average cost of each oil change. As the average cost declines, the shop could offer its service at a lower price point in order to stay competitive in the market.

2-7

Managerial Accounting 6e Solutions Manual

(5 min.) S2-18 1.

To reduce the company's tax bill, Jack uses total cost to value inventory instead of using product cost as required by law.

Competence—Perform professional duties in accordance with relevant laws, regulations, and technical standards.

Since Emilie works in the accounting department, she is aware that profits are going to fall short of analysts' projections. She tells her aunt to sell stock in the company before the earnings release date.

Confidentiality—Refrain from using confidential information for unethical or illegal advantage.

Veronica pays a Mexican official a bribe of $50,000 to allow the company to locate a factory in that jurisdiction so that the company can take advantage of the cheaper labor costs. Without the bribe, the factory cannot be located in that location. There is a failure in the company's backup systems after a system crash. Month-end reports will be delayed. Kayla, the manager of the division experiencing the system failure, does not report this upcoming delay to anyone because she does not want to be the bearer of bad news.

Integrity—Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

Credibility—Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

(10 min.) S2-19 1. 2. 3. 4. 5.

Filter Warehouse ID for Rocky River only and sort Item # alphabetically. Filter Item # for GR-113 only and sort Warehoue ID alphabetically. Filter Cost for greater than $3,000 and sort Warehouse ID alphabetically. Filter state to include only CA, filter cost greater than $5,000, and sort in alphabetical order. Filter inventory items by state to only include Ohio and then sort by date.

(10 min.) S2-20 1. 2. 3. 4.

2-8

Filter by Sales greater than $10,000. Filter by Salesperson = Cameron Howell. Sort by Sales. Filter by Salesperson; sort by Sales.

Chapter 2

Building Blocks of Managerial Accounting

Exercises (Group A) (10–15 min.) E2-21A Reqs. 1–2 Value Chain Cost Classification

R&D Newspaper advertisements Payment to consultant for advice on location of new store Purchases of merchandise Freight-in Salespeople’s salaries Depreciation expense on delivery trucks Research on selling satellite radio service Customer Complaint Department Rearranging store layout Total

Design

Purchases

Marketing

Distribution

Customer Service

$5,100

$2,700 $37,000 $3,700 $4,600 $1,500 $ 250 $550 $650 $2,950

$650

$40,700

$9,700

$1,500

$550

Req. 3 The total product costs are $40,700.

Req. 4 The total period costs are $15,350 (all categories except for purchases).

2-9

Managerial Accounting 6e Solutions Manual

(15 min.) E2-22A Reqs. 1–3 Value Chain Cost Classification

R&D Delivery expense to customers via UPS Salaries of salespeople Chipset (the set of chips used in a phone) Exterior case for phone Assembly-line workers’ wages Technical customer support hotline Depreciation on plant and equipment Rearrange production process to accommodate new robot 1-800 (toll-free) line for customer orders Scientists’ salaries

$10

Total costs

$10

Design

Direct Materials

Marketing Distribution

Customer Service

$9 $4 $56 $6 $8 $5 $60

$3 $1

$ 3

$62

Req. 4 Total product costs: Direct materials……………………………………… Direct labor…………………………………………… Manufacturing overhead…………………………… Total product cost………………….

Req. 5 The total prime cost is: Direct materials……………………………………… Direct labor……………………………………………

Req. 6 The total conversion cost is: Direct labor…………………………………………… Manufacturing overhead……………………………

2-10

Production Direct Mfg. Labor Overhead

$60

$ 62 8 60 $130

$ 62 8 $ 70

$ 8 60 $ 68

Chapter 2

Building Blocks of Managerial Accounting

(10 min.) E2-23A a. b. c. d. e. f. g. h. i. j. k. l. m. n. o.

Direct Indirect Direct Indirect Direct Indirect Indirect Direct Indirect Direct Direct Direct Indirect Indirect Indirect

(5–10 min.) E2-24A a. b. c. d. e. f.

Purchasing Marketing Design Distribution Customer Service Research and Development (R&D)

2-11

Managerial Accounting 6e Solutions Manual

(15-20 min.) E2-25A Req. 1

a. b. c. d. e. f. g. h. i. j. k. l. m.

Airplane seats Production supervisors’ salaries Depreciation on forklifts in factory Machine lubricants Factory janitors’ wages Assembly workers’ wages Property tax on corporate marketing office Plant utilities Cost of warranty repairs Machine operators’ health insurance Depreciation on administrative offices Cost of designing new plant layout Jet engines TOTAL

DM $240

Other MOH

$100 $40 $35 $15 $620 $30 $120 $260 $10 $60 $170 $1,400 $1,640

$630

$35

$115

$160

Req. 2

Total manufacturing overhead costs

= =

IM + IL + Other MOH $35 + 115 + 160 = $310

Req. 3

Total product costs

= =

DM + DL + MOH $1,640 + 630 + 310 = $2,580

Req. 4

Total prime costs

= =

DM + DL $1,640 + 630 = $2,270

Req. 5

Total conversion costs

= =

DL + MOH $630 + 310 = $940

Req. 6

Total period costs

$520

2-12

Period

$520

Chapter 2

Building Blocks of Managerial Accounting

(10–15 min.) E2-26A Outdoor Amenities Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold: Wood Stain Labor costs Indirect labor costs Utility costs Other manufacturing overhead Less: Cost of goods sold Gross profit Less: Operating expenses Salaries and wages Rent and utilities Marketing costs Total operating expenses Operating income

$255,000 $ 57,800 12,700 36,900 21,300 11,200 9,800 149,700 105,300 $37,400 12,000 17,300 66,700 $ 38,600

Note: For this exercise, the student is not required to prepare an income statement, but the income statement is presented here to show the calculations for each item in the exercise requirements.

(10–15 min.) E2-27A Cost of goods sold calculation: Beginning inventory Plus: Purchases and freight-in* Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 16,250 657,500 673,750 (16,000) $ 657,750 Prestigious Pugs Income Statement For Last Year

Sales revenue Less: Cost of goods sold Gross profit Less operating expenses: Website expenses Marketing expenses Freight-out expenses Total operating expenses Operating income

$ 1,105,000 (657,750) 447,250 $ 55,000 30,500 29,500 (115,000) $ 332,250

*purchases of $638,000 + freight-in of $19,500 = $657,500

2-13

Managerial Accounting 6e Solutions Manual

(5–10 min.) E2-28A Calculation of direct materials used Beginning raw materials inventory

Plus: Purchases of direct materials

17,000 55,000

Materials available for use

Less: Ending raw materials inventory

72,000 (12,000)

Direct materials used

60,000

22,000

Schedule of cost of goods manufactured Beginning work in process inventory Plus: Manufacturing costs incurred Direct materials used (from previous schedule)

60,000

Direct labor

121,000

Manufacturing overhead

151,000

Total manufacturing costs to account for

Less: Ending work in process inventory Cost of goods manufactured

2-14

(21,000) $

354,000 333,000

Chapter 2

Building Blocks of Managerial Accounting

(15–20 min.) E2-29A Calculation of direct materials used Beginning raw materials inventory

Plus: Purchases of direct materials

23,000 74,000

Materials available for use

Less: Ending raw materials inventory Direct materials used

97,000 (25,000)

72,000

35,000

Schedule of cost of goods manufactured Beginning work in process inventory Plus: Manufacturing costs incurred Direct materials used (from previous schedule)

72,000

Direct labor

86,000

Manufacturing overhead (42,000 + 11,500 + 13,400 + 3,700)

70,600

Total manufacturing costs to account for

Less: Ending work in process inventory Cost of goods manufactured

263,600 (31,000)

232,600

20,000

Calculation of cost of goods sold Beginning finished goods inventory

232,600

Plus: Cost of goods manufactured (from previous schedule) Cost of goods available for sale

Less: Ending finished goods inventory Cost of goods sold

(22,000) $

252,600

230,600

2-15

Managerial Accounting 6e Solutions Manual

(15–20 min.) E2-30A West Nautical Company Income Statement For Current Year Sales revenue (34,000 units x $12)

Less: Cost of goods sold (from previous exercise) Gross profit

408,000 230,600

177,400

Less operating expenses: Marketing expenses

77,000

General and administrative expenses

28,500

Total operating expenses Operating income

105,500

71,900

Students may simply use the $230,600 cost of goods sold computation from E2-26A rather than repeating the details of the computation of cost of goods sold here.

2-16

Chapter 2

Building Blocks of Managerial Accounting

(15-20 min.) E2-31A a. The fair market value of old manufacturing equipment when deciding whether or not to replace it with new equipment. (old equipment will be sold if new equipment is purchased) b. Cost of purchasing packaging materials from an outside vendor, when deciding whether to continue manufacturing the packaging materials in-house c. Depreciation expense on old manufacturing equipment when deciding whether or not to replace it with newer equipment d. The total amount of the restaurant’s fixed costs, when deciding whether to add additional items to the menu e. The cost of land purchased three years ago when deciding whether to build on the land now or wait two more years before building f. The interest rate received on invested funds, when deciding how much inventory to keep on hand g. Cost of computers purchased six months ago when deciding whether to upgrade to computers with faster processing speed h. The property tax rates in different locales, when deciding where to locate the company’s headquarters i. The type of fuel (gas or diesel) used by delivery vans, when deciding which make and model of van to purchase for the company’s delivery van fleet j. Cost of operating automated production machinery versus the cost of direct labor, when deciding whether to automate production

Relevant—the fair market value is the amount of money the company could expect to receive from selling the old equipment if they decide to replace it with newer equipment. Relevant—the cost is relevant if it differs between outsourcing and making the materials in-house.

Irrelevant—depreciation expense is simply the paper write-off (expensing) of a sunk cost. Most likely irrelevant—unless the additional items will require the restaurant to purchase additional kitchen equipment, the total fixed cost will probably not change. Irrelevant—the cost of the land is a sunk cost whether the company builds on the land now or in the future. Relevant—funds tied up in inventory cannot earn interest. The higher the interest rate, the more likely the company will want to decrease inventory levels and invest the extra funds to earn additional interest. Irrelevant—the cost of the computers, which were purchased in the past, is a sunk cost. Relevant—the company will incur different property taxes depending on where they locate. Relevant—the type of gas used by the delivery vans will affect the cost of operating the vans in the future because gas and diesel do not cost the same amount. Relevant—the cost of employing labor versus automating production will likely differ.

2-17

Managerial Accounting 6e Solutions Manual

(10 min.) E2-32A 1)

Variable costs + Fixed costs = Total costs

($2 x 25,000,000)

= = =

$50,000,000 7,000,000 $57,000,000

$57,000,000

25,000,000 units

$2.28 per unit

$ 7,000,000

25,000,000 units

$0.28 per unit

Variable costs + Fixed costs = Total costs

($2 x 35,000,000)

= = =

$70,000,000 7,000,000 $77,000,000

$77,000,000

35,000,000 units

$2.20 per unit

$ 7,000,000

35,000,000 units

$0.20 per unit

The average product cost decreases as production volume increases because the company is spreading its fixed costs over 10 million more units. The company will be operating more efficiently, so the average cost of making each unit decreases.

2-18

Chapter 2

Building Blocks of Managerial Accounting

(30 min.) E2-33A 1. Rocky River warehouse: First item: DT-331; Last item: SQ-998

2. Order: a. Albany b. Dayton c. Forest Hills d. Oakland First warehouse in list with Item GR-113: Albany Third warehouse in list with Item GR-113: Forest Hills Number of GR-113 items in stock: 46,352 Total cost of GR-113 items in total: $219,171

2-19

Managerial Accounting 6e Solutions Manual

(continued) E2-33A 3. Which warehouses have inventory items with a cost of more than $3,000? List warehouses in alphabetic order. What is the first warehouse listed? Albany What is the last warehouse listed? Tucson a. Albany b. Cordele c. Dayton d. Forest Hills e. Lansing f. Oakland g. Phoenix h. Rocky River i. Santa Clara j. Tucson

4. What inventory items in warehouses in California have a cost greater than $5,000? To get the list of items, filter State to include only CA and Cost to have a number filter of greater than $5,000. Several inventory items on the list fit these criteria. The inventory items should be listed in alphabetic order. What is the first inventory item listed? Highlighted below. What is the fifth inventory item listed? Highlighted below. Note: the rest of the list has been omitted from this solutions manual.

5. What are the oldest three inventory items in the warehouses located in Ohio? What is the total cost of inventory in Ohio warehouses that was purchased in 2018? Three oldest items in warehouses in Ohio:

2-20

Chapter 2

Building Blocks of Managerial Accounting

(continued) E2-33A Total cost of inventory in Ohio warehouses that was purchased in 2018:

(30 min.) E2-34A 1. How many orders total more than $10,000? 4

2-21

Managerial Accounting 6e Solutions Manual

(continued) E2-34A

2. Rupert Webster’s customers: 26 orders

3. Rank orders high to low. High: 31,130; Low: 1,306 4. Dolly Lopez orders: Dollar amount of largest order: 13,501 Dollar amount of smallest order: 1,312 Total of sales made by Lopez: 397,861 How many orders by Lopez: 116

2-22

Chapter 2

Building Blocks of Managerial Accounting

(continued) E2-34A

5. List of orders between $5,000 and $10,000 alphabetically by salesperson

2-23

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (10–15 min.) E2-35B Reqs. 1–2 Value Chain Cost Classification

R&D Newspaper advertisements Payment to consultant for advice on location of new store Purchases of merchandise Freight-in Salespeople’s salaries Depreciation expense on delivery trucks Research on whether store should sell satellite radio service Customer Complaint Department Rearrangement of store layout Total

Design

Purchases

Marketing

Distribution

$5,300

$2,400 $31,000 $3,600 $4,900 $1,400

$500 $900 $600 $2,900

$600

$34,600

$10,200

Req. 3 The total product costs are the $31,000 of purchases plus the $3,600 freight-in = $34,600. Req. 4 The total period costs are $16,000 (all categories except for purchases).

2-24

Customer Service

$1,400

$900

Chapter 2

Building Blocks of Managerial Accounting

(15 min.) E2-36B Reqs. 1–3 Cost Classification

R&D Delivery expense to customers via UPS Salaries of salespeople Chipset (the set of chips used in a phone Exterior case for phone Assembly-line workers’ wages Technical customersupport hotline Depreciation on plant and equipment Rearrange production process to accommodate new robot 1-800 (toll-free) line for customer orders Salaries of scientists who developed new model

Design

Production Direct Direct Mfg. Materials Labor Overhead

Marketing Distribution

Customer Service

$10 $6 $60 $4 $12 $5 $65

$1 $3

$11 -

Total costs

$11

$64

Req. 4 Total product costs: Direct materials……………………………………..….… Direct labor……………………………………… Manufacturing overhead…………………………… Total product cost…………………. Req. 5 The total prime cost is: Direct materials………………………………………...… Direct labor……………………………………… Req. 6 The total conversion cost is: Direct labor…………………………………………… Manufacturing overhead……………………………

$12

$65

$10

$ 64 12 65 $141

$ 64 12 $ 76

$ 12 65 $ 77

2-25

Managerial Accounting 6e Solutions Manual

(10 min.) E2-37B a. b. c. d. e. f. g. h. i. j. k. l. m. n. o.

Indirect Indirect Direct Direct Indirect Direct Indirect Direct Indirect Direct Direct Indirect Direct Indirect Direct

(5–10 min.) E2-38B a. b. c. d. e. f.

2-26

Customer Service Marketing Purchasing/Producing Distribution Design Research and Development

Chapter 2

Building Blocks of Managerial Accounting

(15-20 min.) E2-39B Req. 1

a. b. c. d. e. f. g. h. i. j. k. l. m.

DM $300

Airplane seats Production supervisors’ salaries Depreciation on forklifts in factory Machine lubricants Factory janitors’ wages Assembly workers’ wages Property tax on corporate marketing offices Plant utilities Cost of warranty repairs Machine operators’ health insurance Depreciation on administrative offices Cost of designing new plant layout Jet engines TOTAL

Other MOH

Period

$110 $90 $30 $50 $630 $20 $140 $230 $40 $100 $160 $1,400 $1,700

$670

$30

$160

$230

Req. 2

Total manufacturing overhead costs

= =

IM + IL + Other MOH $30 + 160 + 230 = $420

Req. 3

Total product costs

= =

DM + DL + MOH $1,700 + 670 + 420 = $2,790

Req. 4

Total prime costs

= =

DM + DL $1,700 + 670 = $2,370

Req. 5

Total conversion costs

= =

DL + MOH $670 + 420 = $1,090

Req. 6

Total period costs

$510

2-27

Managerial Accounting 6e Solutions Manual

(15 min.) E2-40B Backyard Amenities Income Statement For the Year Ended December 31 Sales revenue Cost of goods sold: Wood Stain Labor costs Indirect labor costs Utility costs Other manufacturing overhead Less: Cost of goods sold Gross profit Less: Operating expenses Salaries and wages Rent and utilities Marketing costs Total operating expenses Operating income

$267,000 $ 59,100 14,500 33,700 23,700 12,100 11,300 154,400 112,600 $38,100 13,200 15,200 66,500 $ 46,100

Note: For this exercise, students are not required to prepare an income statement, but the income statement is presented here to show the calculations for each item in the exercise requirements.

2-28

Chapter 2

Building Blocks of Managerial Accounting

(10–15 min.) E2-41B Cost of goods sold calculation: Beginning inventory Plus: Purchases and freight-in* Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 19,800 655,500 675,300 (13,100) $ 662,200

Charismatic Cats Income Statement For Current Year Sales revenue Less: Cost of goods sold Gross profit Less operating expenses: Website expenses Marketing expenses Freight-out expenses Total operating expenses Operating income

$ 1,060,000 (662,200) 397,800 $ 53,000 33,200 28,500 (114,700) $ 283,100

*purchases of $636,000 + freight-in of $19,500 = $655,500

(5–10 min.) E2-42B Calculation of direct materials used Beginning raw materials inventory

Plus: Purchases of direct materials Materials available for use

Less: Ending raw materials inventory Direct materials used

14,000 63,000 77,000 (19,000)

58,000

25,000

Schedule of cost of goods manufactured Beginning work in process inventory Plus: Manufacturing costs incurred Direct materials used (from previous schedule)

58,000

Direct labor

133,000

Manufacturing overhead

162,000

Total manufacturing costs to account for

Less: Ending work in process inventory Cost of goods manufactured

(24,000) $

378,000 354,000

2-29

Managerial Accounting 6e Solutions Manual

(15-20 min.) E2-43B Calculation of direct materials used Beginning raw materials inventory

Plus: Purchases of direct materials Materials available for use

79,000 $

Less: Ending raw materials inventory Direct materials used

25,000

104,000 (33,000)

71,000

42,000

Schedule of cost of goods manufactured Beginning work in process inventory Plus: Manufacturing costs incurred Direct materials used (from previous schedule)

71,000

Direct labor

84,000

Manufacturing overhead (46,000 + 7,500 + 13,100 + 4,400)

71,000

Total manufacturing costs to account for

Less: Ending work in process inventory Cost of goods manufactured

268,000 (36,000)

232,000

21,000

Calculation of cost of goods sold Beginning finished goods inventory Plus: Cost of goods manufactured (from previous schedule) Cost of goods available for sale

232,000 $

Less: Ending finished goods inventory Cost of goods sold

2-30

(28,000) $

253,000

225,000

Chapter 2

Building Blocks of Managerial Accounting

(15-20 min.) E2-44B Golden Bay Company Income Statement For Current Year Sales revenue (39,000 x $15)

Less: Cost of goods sold (from previous exercise) Gross profit

585,000 225,000

360,000

Less: operating expenses: Marketing expenses

76,000

General and administrative expenses

26,500

Total operating expenses Operating income

102,500

257,500

Students may simply use the $225,000 cost of goods sold computation from E2-38B rather than repeating the details of the computation here.

2-31

Managerial Accounting 6e Solutions Manual

(15–20 min.) E2-45B a. The cost of production when determining whether to continue to manufacture the screen for a smartphone or to purchase it from an outside supplier (old equipment will be sold if new equipment is purchased) b. The cost of land when determining where to build a new call center c. The average cost of vehicle operation when purchasing a new delivery van d. Real estate property tax rates when selecting the location for a new order processing center e. The purchase price of the old computer when replacing it with a new computer with improved features f. The cost of renovations when deciding whether to build a new office building or to renovate the existing office building g. The original cost of the current stove when selecting a new, more efficient stove for a restaurant h. Local tax incentives when selecting the location of a new office complex for a company’s headquarters i. The fair market value (trade-in value) of the existing forklift when deciding whether to replace it with a new, more efficient model j. Fuel economy when purchasing new trucks for the delivery fleet

2-32

Relevant—the cost is relevant if it differs between outsourcing and making the materials in-house.

Relevant—the company will incur different land cost depending on where they locate. Relevant—the average cost of vehicle operation will differ depending on which van is purchased. Relevant—the company will incur different property taxes depending on where they locate. Irrelevant—the cost of the computer, which was purchased in the past, is a sunk cost. Relevant—the cost of renovating the existing building versus building a new one will likely differ. Irrelevant—the cost of the current stove, which was purchased in the past, is a sunk cost. Relevant—the company will incur different tax incentives depending on where they locate. Relevant—the fair market value is the amount of money the company could expect to receive from selling the existing forklift if they decide to replace it with a newer model. Relevant—the average cost of fuel (fuel economy) will differ depending on which delivery vehicle is purchased.

Chapter 2

Building Blocks of Managerial Accounting

(10 min.) E2-46B 1)

Variable costs + Fixed costs = Total costs

20,000,000 units × $1 / unit

= = =

$20,000,000 3,000,000 $23,000,000

$23,000,000

20,000,000 units

$1.15 per unit

$ 3,000,000

20,000,000 units

$0.15 per unit

Variable costs + Fixed costs = Total costs

30,000,000 units × $1 / unit

= = =

$30,000,000 3,000,000 $33,000,000

$33,000,000

30,000,000 units

$1.10 per unit

$ 3,000,000

30,000,000 units

$0.10 per unit

2-33

Managerial Accounting 6e Solutions Manual

(30 min.) E2-47B 1. Elyria warehouse: First item: DT-331; Last item: SQ-998

2. Order: a. Cordele b. Dayton c. Kentwood d. Lansing e. Oakland f. Phoenix g. Santa Clara First warehouse in list with Item DR-114: Cordele Third warehouse in list with Item DR-114: Kentwood Number of DR-114 items in stock: 20,643 Total cost of DR-114 items in total: $85,726

2-34

Chapter 2

Building Blocks of Managerial Accounting

(continued) E2-47B 3. Which warehouses have inventory items with a cost of more than $3,000? List warehouses in alphabetic order. What is the first warehouse listed? Albany What is the last warehouse listed? Tucson h. Albany i. Cordele j. Dayton k. Elyria l. Kentwood m. Lansing n. Oakland o. Phoenix p. Santa Clara q. Tucson 4. What inventory items in warehouses in California have a cost greater than $5,000? To get the list of items, filter State to include only CA and Cost to have a number filter of greater than $5,000. Several inventory items on the list fit these criteria. The inventory items should be listed in alphabetic order. What is the first inventory item listed? Highlighted below. What is the fifth inventory item listed? Highlighted below. Note: the rest of the list has been omitted from this solutions manual.

2-35

Managerial Accounting 6e Solutions Manual

(continued) E2-47B Total cost of inventory in Ohio warehouses that was purchased in 2018:

2-36

Chapter 2

Building Blocks of Managerial Accounting

(30 min.) E2-48B 1. How many orders total more than $10,000? 4

2. Rosemary Laurel’s customers: 26 orders

3. Rank orders high to low. High: 29,480; Low: 1,309 4. Joanna Howard orders: Dollar amount of largest order: 13,504 Dollar amount of smallest order: 1,315 Total of sales made by Howard: 397,989 How many orders by Howard: 116

2-37

Managerial Accounting 6e Solutions Manual

(continued) E2-48B 5. List of orders between $5,000 and $10,000 alphabetically by salesperson

2-38

Chapter 2

Building Blocks of Managerial Accounting

Problems (Group A) (30 min.) P2-49A Reqs. 1–3

Cost Plant janitors’ wages Truck drivers’ wages Payment for new recipe Depreciation on delivery trucks Plant utilities Lime flavoring Rearranging plant layout Bottles Salt* Sales commissions Production costs of “cents-off” store coupons for customers Lemon syrup Replace products with expired dates Depreciation on plant and equipment Wages of workers who mix syrup Customer hotline Freight-in Total costs

R&D

Design

Direct Materials

ShaZam Cola Value Chain Cost Classification (In thousands) Production Direct Mfg. Labor Overhead

Marketing

Distribution

Customer Service

$1,000 $235 $1,300

$300 $ 350 $1,100 $1,000 $1,200 $35 $400

$630 $19,000

$40

$2,800

$8,500 $160 $1,300

$1,000

$2,000 $23,300*

$8,500

$4,185

$1,030

$535

$200

*Salt’s low value makes it likely treated as indirect materials. However, some students may classify salt as direct materials. Req. 4 Total product costs: Direct materials…................................….. Direct labor..........................................….. Manufacturing overhead.....................….. Total product costs.......….

$23,300 8,500 4,185 $35,985

2-39

Managerial Accounting 6e Solutions Manual

(continued) P2-49A Req. 5 The managers of R&D and design are likely to cut their costs. This can increase costs of later value-chain elements. For example, if the recipe is not adjusted to consumer tastes, more marketing may be required, or sales may decline. If the recipe is not designed so the soda is easy to produce, or if the production process is not well laid-out, production costs will be higher than they need to be. If cutting R&D and design costs leads to lower quality soda, customer service costs such as returns may also increase.

(30 min.) P2-50A Instructional note: This is a fairly challenging exercise that requires students to work backward through financial statement elements. a. Revenues Less: Cost of goods sold Gross profit

$27,200 14,600 $12,600

b. To determine beginning raw materials inventory, start with the materials used computation and work backward: Beginning raw materials inventory $ 2,300 Plus: Purchases of direct materials 9,100 Materials available for use 11,400 Less: Ending raw materials inventory (3,300) Direct materials used $ 8,100 c. To determine ending finished goods inventory, start by computing the cost of goods manufactured: Beginning work in process inventory $ 0 Plus: Manufacturing costs incurred: Direct materials used $8,100 Direct labor 3,600 Manufacturing overhead 6,400 18,100 Total manufacturing costs to account for 18,100 Less: Ending work in process inventory (1,900) Cost of goods manufactured $16,200 Now use the cost of goods sold computation to determine ending finished goods inventory: Beginning finished goods inventory Plus: Cost of goods manufactured (from above) Cost of goods available for sale Less: Ending finished goods inventory Cost of goods sold (from part A)

2-40

$ 4,000 16,200 20,200 (5,600) $14,600

Chapter 2

Building Blocks of Managerial Accounting

(30 min.) P2-51A Req. 1 The ending inventory costs derived from the following schedule are: Raw materials $112,000, Work in process $89,000, and Finished goods $355,000. Inventory Reconstruction Schedule Raw Materials Inventory Beginning inventory $75,000 (G) + Purchases

= Materials available for use − Ending inventory = Direct Materials used

608,000

Work in Process Inventory Beginning inventory $ 226,000 (G) + Direct materials used 496,000e + Direct labor 551,000 (G) + Manufacturing overhead 218,000 (G) = Total manufacturing costs to account for 1,491,000 (G)

112,000f

− Ending inventory

$496,000e

= Cost of goods manufactured

533,000 (G)

Finished Goods Inventory Beginning inventory $ 213,000 (G) + Cost of goods manufactured 1,402,000c

= Cost of goods available for sale

1,615,000 (G)

89,000d

− Ending inventory

355,000b

$1,402,000c

= Cost of goods sold

$1,260,000a

(G) = Amount given in the case. a

Cost of goods sold: Sales $1,800,000

× ×

(1 − Gross profit %) 70%

Ending finished goods inventory: Cost of goods available for sale $1,615,000

= =

− Ending finished goods inventory − Ending finished goods inventory Ending finished goods inventory

Cost of goods manufactured: Beginning finished goods inventory $213,000

+ Cost of goods manufactured + Cost of goods manufactured Cost of goods manufactured

Cost of goods sold $1,260,000

= Cost of goods sold = $1,260,000 = $ 355,000

= Cost of goods available for sale = $1,615,000 =

$1,402,000

2-41

Managerial Accounting 6e Solutions Manual

(continued) P2-51A d

Ending work in process inventory: Total manufacturing costs to account for $1,491,000

−

Ending work in process inventory

−

Ending work in process inventory Ending work in process inventory

= =

Cost of goods manufactured $1,402,000 $ 89,000

Direct materials used: Beginning work in process inventory

Direct + Direct + Manufacturing material labor overhead used

= Total manufacturing costs to account for

$226,000

Direct + $551,000 + $218,000 materials used

$1,491,000

Direct materials used

$ 496,000

Ending raw materials inventory: Materials available for use $608,000

−

Ending raw materials inventory

−

Ending raw materials inventory Ending raw materials inventory

= =

Direct materials used $496,000 $112,000

(45–55 min.) P2-52A Part One: Cost of goods sold calculation: Beginning inventory Plus: Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 12,000 36,000 48,000 (9,100) $ 38,900

Patsy’s Posies Income Statement Year Ended December 31, 2019 Sales revenue Less: Cost of goods sold Gross profit Less operating expenses: Utilities expense Rent expense Sales commission expense Operating income

2-42

$53,000 38,900 14,100 $ 1,100 4,600 4,000

9,700 $4,400

Chapter 2

Building Blocks of Managerial Accounting

(continued) P2-52A Part Two: Req. 1 Calculation of direct materials used Beginning raw materials inventory

Plus: Purchases of direct materials, freight-in, and import duties Materials available for use

30,000 $

Less: Ending raw materials inventory Direct materials used

14,000 44,000 (8,000)

36,000

Schedule of cost of goods manufactured Beginning work in process inventory Plus: Manufacturing costs incurred Direct materials used (from previous schedule)

36,000

Direct labor

23,000

Manufacturing overhead ($4,900 + $1,350 + $9,600)

15,850

Total manufacturing costs to account for

Less: Ending work in process inventory Cost of goods manufactured

74,850 (5,000)

69,850

Calculation of cost of goods sold Beginning finished goods inventory

Plus: Cost of goods manufactured (from previous schedule) Cost of goods available for sale

Less: Ending finished goods inventory Cost of goods sold

– 69,850 69,850 (2,500)

67,350

104,000

Req. 2 Floral City Manufacturing Income Statement For Year Ended December 31, 2020 Sales revenue Less: Cost of goods sold (from previous schedule) Gross profit

67,350 $

36,650

Less operating expenses: Delivery expense

1,500

Sales salaries expense

4,300 .

2-43

Managerial Accounting 6e Solutions Manual

(continued) P2-52A Customer service hotline

1,400

Total operating expenses Operating income

7,200

29,450

Req. 3 A manufacturer’s cost of goods sold is based on its cost of goods manufactured. In contrast, a merchandiser’s cost of goods sold is based on its merchandise purchases.

Part Three: Reqs. 1–2 Patsy’s Posies Partial Balance Sheet December 31, 2019

Floral City Manufacturing Partial Balance Sheet December 31, 2020

Inventory...........

$9,100

Raw materials inventory...... Work in process inventory... Finished goods inventory… Total inventory............……..

$ 8,000 5,000 2,500 $15,500

(10 min.) P2-53A 1) As shown below, the quantitative data suggests you would net $7,400 more by taking Job #1 and living at home.

Attributes:

Take Job #1 and live at home $49,000 0 0 0 $49,000

Salary Rent Food Cable and internet Salary, net of living expenses

Take Job #2 and rent an apartment $54,000 (8,500) (3,250) (650) $41,600

Net difference = $49,000 − $41,600 = $7,400 2) The costs of doing laundry, operating the car, and paying for cell phone service are irrelevant because they do not differ between the two alternatives. 3) You might consider whether you would like to live with your parents again or not! Even though you would benefit by $7,400 if you live at home, you may decide it isn’t worth it! 4) If you want Job #2 and to live at home, you will benefit by the higher salary and the lower living expenses. However, you’ll need to factor in the higher costs of commuting to work via car (gas, tolls, service) or train (fare). Qualitatively, you will want to consider whether the time spent commuting is worth the extra money you will be netting from living at home.

2-44

Chapter 2

Building Blocks of Managerial Accounting

(15–20 min.) P2-54A Req. 1 Monthly pizza volume

6,000

7,500

10,000

$ 12,000 11,625 $23,625

$ 12,000 15,500 $27,500

Total fixed costs Total variable costs Total costs

$ 12,000 9,300 $ 21,300

Fixed cost per pizza Variable cost per pizza Average cost per pizza

$ 2.00 1.55 $ 3.55

$ 1.60 1.55 $ 3.15

$ 1.20 1.55 $ 2.75

Selling price per pizza Average profit per pizza

$ 6.25 $ 2.70

$ 6.25 $ 3.10

$ 6.25 $ 3.50

Req. 2 Companies want to operate near or at full capacity to better utilize the resources they spend on fixed costs. The more units they produce, the lower the average fixed cost per unit. Req. 3 At the current volume, the restaurant’s monthly profit is $23,250 calculated as follows: Total Sales Revenue − Total Costs = Monthly Profit ($6.25 per pizza × 7,500 − $23,625 = $23,250 pizzas)

If the owner decreases the sales price to increase volume, the new monthly profit will be as follows: Total Sales Revenue at the new price and volume ($5.75 per pizza × 10,000 pizzas)

− Total Costs at the new volume

= New Monthly Profit

− $27,500

= $30,000

Because the restaurant will generate an additional profit of $6,750, the owner should decrease the sales price to increase the volume.

2-45

Managerial Accounting 6e Solutions Manual

Problems (Group B) (30 min.) P2-55B Reqs. 1–3

Cost Truck drivers’ wages Lemon syrup Depreciation on trucks Lime flavoring Payment for new recipe Customer hotline Sales commissions Production costs of “centsoff” store coupons for customers Rearranging plant layout Freight-in Depreciation on plant and equipment Bottles Salt* Plant utilities Wages of workers who mix syrup Plant janitors’ wages Replace products with expired dates Total costs

R&D

Design

Direct Materials

Crystal Cola Value Chain Cost Classification (In thousands) Production Direct Mfg. Labor Overhead

Marketing

Distribution

Customer Service

$285 $16,000 $175 $1,020 $1,090 $220 $450

$630 $1,200 $1,300

$2,900 $1,490 $15 $1,250

$7,900 $1,000

$1,090

$1,200

$19,810*

$7,900

$5,165

$1,080

$460

$40 $260

*Salt’s low value makes it likely treated as indirect materials. However, some students may classify salt as direct materials. Req. 4 Total product costs: Direct materials...................................….. Direct labor..........................................….. Manufacturing overhead.....................….. Total product costs.......….

2-46

$19,810 7,900 5,165 $32,875

Chapter 2

Building Blocks of Managerial Accounting

(continued) P2-55B Req. 5 The managers of R&D and design are likely to cut their costs. This can increase costs of later value-chain elements. For example, if the recipe is not adjusted to consumer tastes, more marketing may be required, or sales may decline. If the recipe is not designed so the soda is easy to produce, or if the production process is not well laid out, production costs will be higher than they need to be. If cutting R&D and design costs leads to lower quality soda, customer service costs such as returns may also increase.

(30 min.) P2-56B

Instructional note: This is a fairly challenging exercise that requires students to work backward through financial statement elements. a. Revenues Less: Cost of goods sold Gross profit

$27,400 15,300 $12,100

b. To determine beginning raw materials inventory, start with the materials used computation and work backward: Beginning raw materials inventory $ 2,100 Plus: Purchases of direct materials 9,300 Materials available for use 11,400 Less: Ending raw materials inventory (2,900) Direct materials used $ 8,500 c. To determine ending finished goods inventory, start by computing the cost of goods manufactured: Beginning work in process inventory $ 0 Plus: Manufacturing costs incurred: Direct materials used $8,500 Direct labor 3,200 Manufacturing overhead 6,500 18,200 Total manufacturing costs to account for 18,200 Less: Ending work in process inventory (1,800) Cost of goods manufactured $16,400 Now use the cost of goods sold computation to determine ending finished goods inventory: Beginning finished goods inventory Plus: Cost of goods manufactured (from above) Cost of goods available for sale Less: Ending finished goods inventory Cost of goods sold (from part A)

$ 4,400 16,400 20,800 (5,500) $15,300

2-47

Managerial Accounting 6e Solutions Manual

(30 min.) P2-57B Req. 1 The ending inventory costs derived from the following schedule are: Raw materials $51,000, Work in process $102,000, and Finished goods $255,000. Inventory Reconstruction Schedule Raw Materials Inventory Beginning inventory $85,000 (G) + Purchases

= Materials available for use − Ending inventory = Direct materials used

609,000

Work in Process Inventory Beginning inventory $ 187,000 (G) + Direct materials used 558,000e + Direct labor 545,000 (G) + Manufacturing overhead 218,000 (G) = Total manufacturing costs to account for 1,508,000 (G)

51,000f

− Ending inventory

$558,000e

= Cost of goods manufactured

524,000 (G)

Finished Goods Inventory Beginning inventory $ 209,000 (G) + Cost of goods manufactured 1,406,000c

= Cost of goods available for sale

1,615,000 (G)

102,000d

− Ending inventory

255,000b

$1,406,000c

= Cost of goods Sold

$1,360,000a

(G) = Amount given in the case. a

Cost of goods sold: Sales $1,600,000

× ×

(1 − Gross profit %) 85%

Ending finished goods inventory: Cost of goods available for sale $1,615,000

= =

Cost of goods sold $1,360,000

− Ending finished goods inventory − Ending finished goods inventory Ending finished goods inventory

Cost of goods manufactured: Beginning finished goods inventory $209,000

= Cost of goods sold = $1,360,000 = $ 255,000

+ Cost of goods manufactured

= Cost of goods available for sale = $1,615,000

+ Cost of goods manufactured Cost of goods manufactured

Ending work in process inventory: Total manufacturing costs to account for $1,508,000

2-48

−

Ending work in process inventory

−

Ending work in process inventory Ending work in process inventory

= =

$1,406,000

Cost of goods manufactured $1,406,000 $ 102,000

Chapter 2

Building Blocks of Managerial Accounting

(continued) P2-57B e

Direct materials used: Beginning work in process inventory

Direct + Direct + Manufacturing material labor overhead used

= Total manufacturing costs to account for

$187,000

Direct + $545,000 + $218,000 materials used

$1,508,000

Direct materials used

$ 558,000

Ending raw materials inventory: Materials available for use $609,000

−

Ending raw materials inventory

−

Ending raw materials inventory Ending raw materials inventory

= =

Direct materials used $558,000 $51,000

(45–55 min.) P2-58B Part One: Cost of goods sold calculation: Beginning inventory Plus: Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 12,600 38,000 50,600 (9,200) $ 41,400

Fran’s Flowers Income Statement Year Ended December 31, 2019 Sales revenue Less: Cost of goods sold Gross profit Less operating expenses: Utilities expense Rent expense Sales commission expense Operating income

$53,000 41,400 11,600 $ 1,000 4,400 4,100

9,500 $2,100

2-49

Managerial Accounting 6e Solutions Manual

(continued) P2-58B Part Two: Req. 1 Calculation of direct materials used Beginning raw materials inventory

18,000

Plus: Purchases of direct materials, freight-in, and import duties

31,000

Materials available for use

49,000

Less: Ending raw materials inventory

(7,500)

Direct materials used

41,500

Schedule of cost of goods manufactured Beginning work in process inventory

–

Plus: Manufacturing costs incurred Direct materials used (from previous schedule)

41,500

Direct labor

22,000

Manufacturing overhead ($4,300 + $1,250 + $9,400)

14,950

Total manufacturing costs to account for

78,450

Less: Ending work in process inventory

(4,000)

Cost of goods manufactured

74,450

Calculation of cost of goods sold Beginning finished goods inventory

–

Plus: Cost of goods manufactured (from previous schedule)

74,450

Cost of goods available for sale

74,450

Less: Ending finished goods inventory

(4,500)

Cost of goods sold

69,950

Req. 2 Floral Place Manufacturing Income Statement For Year Ended December 31, 2020 Sales revenue

109,000

Less: Cost of goods sold (from previous schedule)

69,950

Gross profit

39,050

Less operating expenses: Delivery expense

3,800

Sales salaries expense

4,800

Customer service hotline

1,700

Total operating expenses

10,300

Operating income

2-50

28,750

Chapter 2

Building Blocks of Managerial Accounting

(continued) P2-58B Req. 3 A manufacturer’s cost of goods sold is based on its cost of goods manufactured. In contrast, a merchandiser’s cost of goods sold is based on its merchandise purchases. Part Three: Reqs. 1–2 Fran’s Flowers Partial Balance Sheet December 31, 2019

Floral Place Manufacturing Partial Balance Sheet December 31, 2020

Inventory...........

$9,200

Raw materials inventory...... Work in process inventory.. Finished goods inventory… Total inventory............……..

$ 7,500 4,000 4,500 $16,000

(10 min.) P2-59B 1) As shown below, the quantitative data suggests you would net $10,800 more by taking Job #1 and living at home.

Attributes:

Take Job #1 and live at home $42,000 0 0 0 $42,000

Salary Rent Food Cable and internet Salary, net of living expenses

Take Job #2 and rent an apartment $47,000 (12,000) (3,000) (800) $31,200

Net difference = $42,000 − $31,200 = $10,800 2) The costs of doing laundry, operating the car, and paying for cell phone service are irrelevant because they do not differ between the two alternatives. 3) You might consider whether you would like to live with your parents again or not! Even though you would benefit by $10,800 if you live at home, you may decide it isn’t worth it! 4) If you want Job #2 and to live at home, you will benefit by the higher salary and the lower living expenses. However, you’ll need to factor in the higher costs of commuting to work via car (gas, tolls, service) or train (fare). Qualitatively, you will want to consider whether the time spent commuting is worth the extra money you will be netting from living at home.

2-51

Managerial Accounting 6e Solutions Manual

(15-20 min.) P2-60B Req. 1 Monthly pizza volume

5,000

8,000

10,000

$ 10,000 11,600 $21,600

$ 10,000 14,500 $24,500

Total fixed costs Total variable costs Total costs

$ 10,000 7,250 $17,250

Fixed cost per pizza Variable cost per pizza Average cost per pizza

$ 2.00 1.45 $ 3.45

$ 1.25 1.45 $ 2.70

$ 1.00 1.45 $ 2.45

Sales price per pizza Average profit per pizza

$6.25 $ 2.80

$6.25 $ 3.55

$6.25 $ 3.80

Req. 2 Companies want to operate near or at full capacity to better utilize the resources they spend on fixed costs. The more units they produce, the lower the average fixed cost per unit. Req. 3 At the current volume, the restaurant’s monthly profit is $28,400 calculated as follows: Total Sales Revenue ($6.25 per pizza × 8,000 pizzas)

− Total Costs

= Monthly Profit

− $21,600

= $28,400

If the owner decreases the sales price to increase volume, the new monthly profit will be: Total Sales Revenue at the new price and volume ($5.75 per pizza × 10,000 pizzas)

− Total Costs at the new volume

= New Monthly Profit

− $24,500

= $33,000

Because the restaurant will generate an additional profit of $4,600 ($33,000 − $28,400), the owner should decrease the sales price to increase the volume.

2-52

Chapter 2

Building Blocks of Managerial Accounting

Serial Case C2-61 Req. 1

Req. 2 Caesar’s operating income increased from 2016–17 and increased from 2017–18. Req. 3 The casino division had the most revenue in 2018 and generated the most expenses in 2018.

2-53

Managerial Accounting 6e Solutions Manual

Discussion & Analysis A2-62 1.

Briefly describe a service company, a merchandising company, and a manufacturing company. Give an example of each type of company, but do not use the same examples as given in the chapter. Service companies are in business to sell intangible services. Merchandising companies are in business to sell tangible products they buy from manufacturers. Manufacturing companies use labor, plant, and equipment to convert raw materials into new finished products. An accounting firm is an example of a service company; Barnes & Noble is an example of a merchandising company; and Johnson & Johnson is an example of a manufacturer.

How do service, merchandising, and manufacturing companies differ from each other? How are service, merchandising, and manufacturing companies similar to each other? List as many similarities and differences as you can identify. Differ: • Inventories • Primary output • Customers Student answers will vary Similar: • Profit motivated • Marketing • GAAP Student answers will vary

What is the value chain? What are the six types of business activities found in the value chain? Which type(s) of business activities in the value chain generate costs that go directly to the income statement once incurred? What type(s) of business activities in the value chain generate costs that flow into inventory on the balance sheet? The value chain is the activities that add value to a firm’s products and services. The six types of business activities in the value chain are R&D, design, production or purchases, marketing, distribution, and customer service. Costs that go directly to the income statement are all costs along the value chain for service companies, all costs except for purchases for merchandisers, and all costs except for production for manufacturers. Purchases flow into inventory for a merchandiser, and production flows into inventories for a manufacturer.

Compare direct costs to indirect costs. Give an example of a cost at a company that could be a direct cost at one level of the organization but would be considered an indirect cost at a different level of that organization. Explain why this same cost could be both direct and indirect (at different levels). A direct cost can be traced to a cost object, whereas an indirect cost relates to the cost object but cannot be traced to it. The salary of a car sales manager is a direct cost to the sales department, but an indirect cost of the car itself. The salary of a sales manager is directly traceable to the sales department because that is the only place the manager works in the company. The salary is an indirect cost of the car because it is impossible to determine how much of it belongs to a specific car. In other words, the sales manager’s salary affects the cost of all cars sold, but it is not traceable to individual cars.

2-54

Chapter 2

Building Blocks of Managerial Accounting

(continued) A2-62 5.

What is meant by the term “product costs”? What is meant by the term “period costs”? Why does it matter whether a cost is a product cost or a period cost? Product costs are all costs of a product that GAAP requires companies to treat as an asset (inventory) for external financial reporting. These costs are not expensed until the product is sold. Period costs are costs that are expensed in the period in which they are incurred and are often called Operating Expenses, or Selling, General, and Administrative Expenses. A product cost is treated as an asset until the product is sold; it will benefit a future period. A period cost is expensed when it is incurred as it has no future value.

Compare product costs to period costs. Using a product of your choice, give examples of product costs and period costs. Explain why you categorized your costs as you did. Levi Strauss makes jeans. The product costs would include denim, thread, zippers, labor, and factory overhead. All of these costs are related to the production of the jeans and are therefore inventoriable. The costs of advertising the jeans in magazines, commissions paid to employees who sell the jeans to merchandisers, and the cost of shipping the jeans to buyers are all period costs because they are incurred once the jeans have been produced and have no future value to the company.

Describe how the income statement of a merchandising company differs from the income statement of a manufacturing company. Also, comment on how the income statement from a merchandising company is similar to the income statement of a manufacturing company. The cost of goods sold section of the income statement is different for a merchandiser and a manufacturer because a merchandiser buys finished goods whereas a manufacturer produces finished goods. The merchandiser uses the cost of purchases in the computation of cost of goods sold, whereas the manufacturer uses the cost of goods manufactured in the computation of cost of goods sold. The rest of the income statement is the same for both merchandisers and manufacturers. It includes sales revenue, gross profit, operating expenses, and operating income.

How are the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet related for a manufacturing company? What specific items flow from one statement or schedule to the next? Describe the flow of costs between the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet for a manufacturing company. The cost of goods manufactured includes all the costs of production, direct materials, direct labor, and manufacturing overhead. This amount is used in the preparation of the income statement in the computation of cost of goods sold where it is added to beginning finished goods inventory to determine cost of goods available for sale. The ending finished goods inventory is deducted from cost of goods available for sale on the income statement to determine cost of goods sold. The remaining finished goods that have not been sold is shown on the balance sheet as inventory.

What makes a cost relevant or irrelevant when making a decision? Suppose a company is evaluating whether to use its warehouse for storage of its own inventory or whether to rent it out to a local theater group for housing props. Describe what information might be relevant when making that decision. When making a decision, a cost is considered relevant or irrelevant depending on whether it changes between the alternatives in the decision. Some relevant costs to consider in the evaluation of whether to use the warehouse for storage or whether to rent it would be the cost of storage elsewhere, how much rent could be charged for the warehouse, insurance costs, and so forth.

2-55

Managerial Accounting 6e Solutions Manual

(continued) A2-62 10. Explain why “differential cost” and “variable cost” do not have the same meaning. Give an example of a situation in which there is a cost that is a differential cost but not a variable cost. A differential cost is the difference in cost between two alternative courses of action, whereas a variable cost is a cost that changes in total in direct proportion to changes in volume. If a company was deciding between renting office space downtown (more expensive) or in the suburbs (less expensive), the cost of rent would be an example of a differential cost that is not a variable cost. Rent is a fixed cost. Student answers may vary. 11. Greenwashing, the practice of overstating a company’s commitment to sustainability, has been in the news over the past few years. Perform an online search of the term “greenwashing.” What examples of greenwashing can you find? Student answers may vary. 12. Ricoh is mentioned as a company that has designed its copiers so that at the end of the copier’s life, Ricoh will collect and dismantle the product for usable parts, shred the metal casing, and use the parts and shredded material to build new copiers. This product design can be called “cradle to cradle” design. Are there any other products you are aware of that have a “cradle to cradle” design? Perform an online search for “cradle to cradle design” or a related term if you need ideas. Student answers may vary.

2-56

Chapter 2

Building Blocks of Managerial Accounting

Application & Analysis A2-63 Basic Discussion Questions 1.

Describe the product that is being produced and the company that produces it. The product is jeans, and the company is Levi Strauss & Co.

Describe the six value chain business activities that this product would pass through from its inception to its ultimate delivery to the customer. The six value chain business activities are • R&D • Design • Production • Marketing • Distribution • Customer Service

List at least three costs that would be incurred in each of the six business activities in the value chain. • R&D—investigating new fabrics, customer needs surveys, innovation • Design—style, quality, durability • Production—material, labor, overhead • Marketing—advertisements, sponsorships, Internet presence • Distribution—shipping, administrative costs, storage • Customer Service—warranties, call center, customer e-mail support

Classify each cost you identified in the value chain as either being a product cost or a period cost. Explain your justification. All the costs, except production costs, are period costs. Only the production costs are inventoriable.

A cost object can be anything for which managers want a separate measurement of cost. List three different potential cost objects other than the product itself for the company you have selected. • • •

Advertising Internal control Environmental sustainability

List a direct cost and an indirect cost for each of the three different cost objects in question 5. Explain why each cost would be direct or indirect. •

•

Advertising o Direct—cost of advertising 501 brand jeans o Indirect—cost of advertising Levi Strauss & Co. Internal Control o Direct—cost of separating duties within a department o Indirect—Audit Committee costs for the company Environmental Sustainability o Direct—Zero waste within a department o Indirect—Companywide energy efficiency

Student answers will vary. .

2-57

Managerial Accounting 6e Solutions Manual

A2-64 Ethics Mini-Case a)

If Ryan were to increase income by adding sales commission costs and advertising costs to product costs, the following ethical principles would be violated: i. Competence: Perform professional duties in accordance with relevant laws, regulations, and technical standards. By adding in period costs to product costs, Ryan would be violating technical standards. ii. Competence: Provide decision support information that is accurate and clear. Adding in period costs would not be accurate or clear. iii. Credibility: Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports. Because these period costs would be buried in product costs, the user’s understanding would be lessened. iv. Integrity: Abstain from engaging in or supporting any activity that might discredit the profession. By manipulating the accounting numbers to serve his own purpose, Ryan would be violating the integrity principle. b) If Ryan were to make the company loan to Brandon, ethical principles would be violated because there is no company policy that allows loans to employees. Ryan would be violating the following ethical principles: i. Integrity: Mitigate actual conflicts of interest. Ryan is putting the needs of his friend before the company. This is a conflict of interest. Ryan wants to help his friend, which may be to the detriment of the company. If Brandon does not pay back the loan, the company loses money. If Brandon does not pay back the money on a timely basis, the company may have a cash shortage. ii. Competence: Perform professional duties in accordance with relevant laws, regulations, and technical standards. Ryan is using the company’s funds for personal reasons, and this is clearly a violation of his responsibility in a fiduciary position at the company. He does not have the right to disburse the company’s funds for personal reasons. c) Perhaps a third course of action would be to think of other alternatives: i. Refer Brandon to a credit counseling service or to an employee assistance program. ii. Talk with the board about the temporary downturn and persuade them that bonuses might be a good strategic option. Student answers may vary; the above answers are only a starting point for class discussion.

2-58

Chapter 2

Building Blocks of Managerial Accounting

A2-65 Real Life Mini-Case 1.

Starbucks could be considered both a service company and a merchandiser. The cafe part of Starbucks would be considered primarily service-oriented, while the sale of Starbucks’ coffee, mugs, teas, and merchandise would be primarily merchandiser-oriented. A typical value chain is composed of the following phases. Potential costs for a cup of coffee’s value chain are included with each phase: a. Research & Development: Performing research on the proper roasting methods for coffee beans and on the various types of coffee beans that might be used b. Design: Designing the coffee brewing machines to be used in the cafes for brewing the cup of coffee; designing store layouts; designing the cup and sleeve c. Production or Purchases: Brewing the coffee would include the coffee beans, the water, any milk or sugar used. Other costs at this point of the value chain would be the labor of the employees brewing and serving the coffee. i. Costs are increasing here for Starbucks (labor, rent) ii. Costs are decreasing here for Starbucks (coffee costs) d. Marketing: A variety of marketing of its coffee, including print and web advertisements e. Distribution: Delivery of services and products to customers through Starbucks stores, grocery stores and shipments from online sales f. Customer Service: If a customer is unhappy with the cup of coffee, Starbucks can be contacted for some resolution. The costs of providing customers with complimentary coffee to compensate for a less-than-perfect store visit would be in this part of the value chain. In addition, the cost of administering Starbucks’ loyalty program would be part of the customer service value chain. Starbucks cup of coffee served in Bellevue, Tennessee, café: a. Costs i. Direct material: Coffee beans, water, cup, cup sleeve, milk, sugar ii. Direct labor: Store barista who serves the cup of coffee iii. Overhead: Store lighting, store rent, depreciation on equipment, store manager salary, insurance on the store, and other similar costs iv. Direct material cost would have decreased and direct labor cost would have increased in the past few years. b. Direct costs assuming Bellevue store is the cost object would be coffee in the cup, water in the cup, labor of the barista, and possibly milk. Indirect costs would be the cost to light the store, the insurance on the store, and others. c. Direct costs of the cup of coffee assuming Starbucks Corporation is the cost object: Almost all costs would be direct, including advertising, corporate employees, depreciation, and other costs of the corporation. Starbucks café in Bellevue, Tennessee, and a pound of bagged coffee assuming coffee is ground at time of purchase: a. Costs of that pound of coffee i. Direct material: Coffee beans, bag ii. Direct labor: Store barista who grinds coffee and packages iii. Overhead: Store lighting, store rent, depreciation on equipment, store manager salary, insurance on the store, and other similar costs b. Direct costs assuming Bellevue store is the cost object would be coffee beans, the packaging, and the labor of the employees who processed the packaged coffee. Indirect costs would be the cost to light the store, the insurance on the store, and other similar costs. c. Direct costs of the pound of coffee assuming Starbucks Corporation is the cost object: Almost all costs would be direct, including advertising, corporate employees, depreciation, and other costs of the corporation.

Student answers may vary; the above answers are only a starting point for class discussion.

2-59

Chapter 3 Job Costing Quick Check Answers QC3-1. c QC3-2. c QC3-3. b

QC3-4. c QC3-5. a QC3-6. c

QC3-7. d QC3-8. b QC3-9. c

QC3-10. d QC3-11. c QC3-12. b

Short Exercises (5–10 min.) S3-1 Req. 1 a. Dextrose, flavorings, food coloring, wrapper b. Salaries and wages for employees who work in the manufacturing plant that physically convert the raw materials into the finished product, such as machine operators c. Depreciation of the factory and equipment, taxes and insurance for the factory, utilities and other miscellaneous costs of keeping the factory operating d. Advertising, marketing, salaries of nonfactory personnel, rent (other than for factory), utilities (other than factory), R&D, design expense, customer service Req. 2 Process costing. Smarties are produced in large batches through a series of uniform steps resulting in identical units. Req. 3 No, the company should still use process costing. The company is still producing Smarties and Smarties ‘n creme in mass quantities through a series of uniform steps. Job costing is for unique, custom-ordered products, which Smarties does not produce.

(5 min.) S3-2 a. b. c. d. e.

A legal firm would use job costing. An oil refinery would use process costing. A commercial plumbing contractor would use job costing. A cereal manufacturer would use process costing. A custom home builder would use job costing.

3-1

Managerial Accounting 6e Solutions Manual

(5 min.) S3-3

Action a. Lumber is delivered by the supplier to the plant, where it is stored in a materials storeroom until needed. b. Lumber is requisitioned from the storeroom to be used for tops and seats for the tables. c. Factory workers cut the lumber for the tables. d. Five tables are completed and moved to the inventory storage area to await sale. e. A customer purchases a table and takes it home.

Raw Materials Inventory Increase

Work in Process Inventory

Decrease

Increase

Finished Goods Inventory

Increase Decrease

(10 min.) S3-4 Statement 1. 2. 3. 4. 5. 6. 7. 8.

Term b. Job cost record f. Labor time record i. Invoice e. Raw materials record e. Raw materials record; h. Materials requisition d. Purchase orders g. Receiving report a. Bill of materials

(10 min.) S3-5 Req. 1 Hourly direct labor cost rate

= =

Req. 2 Professional labor cost per hour Plus: Indirect cost allocation rate per hour Total hourly cost Plus profit mark up: (20% x $51 hourly) Hourly billing rate for Nicole Grandstone

3-2

$67,600 per year 2,600 hours per year $26 per hour

$26.00 25.00 $51.00 10.20 $61.20

Chapter 3

Job Costing

(5 min.) S3-6 Req. 1 Predetermined manufacturing overhead rate

= =

Req. 2 Predetermined manufacturing overhead rate

= =

Req. 3 Predetermined manufacturing

overhead rate

$1,400,000 50,000 direct labor hours $28 per direct labor hour

$1,400,000 $1,000,000 of direct labor 140% of direct labor cost

$1,400,000 40,000 machine hours $35 per machine hour

(5–10 min.) S3-7 Note: The predetermined manufacturing overhead rates shown below are from the solutions to S3-6. Req. 1 Total manufacturing overhead allocated

Req. 2 Total manufacturing overhead allocated

Req. 3 Total manufacturing overhead allocated

= =

Actual use of cost allocation base × Predetermined manufacturing overhead rate 51,700 hours × $28 per direct labor hour

$1,447,600

= =

Actual use of cost allocation base × Predetermined manufacturing overhead rate $1,020,000 × 140%

$1,428,000

= =

Actual use of cost allocation base × Predetermined manufacturing overhead rate 39,500 machine hours × $35 per machine hour

$1,382,500

Req. 4 The total amount of manufacturing overhead allocated during the year depends on two factors: the allocation base used and the actual quantity of the base used. As a result, a company could either overallocate or underallocate manufacturing overhead, depending on the allocation base used and the actual manufacturing overhead for the year because the allocation of manufacturing overhead is an estimate. Note: Student answers may vary.

3-3

Managerial Accounting 6e Solutions Manual

(5–10 min.) S3-8 Note: The allocated manufacturing overhead amounts shown below were from the solutions to S3-7 Req. 1 Manufacturing Overhead (Actual)

(Allocated) 1,425,000

1,447,600 22,600

Manufacturing overhead is overallocated by $22,600. Req. 2 Manufacturing Overhead (Actual)

(Allocated) 1,425,000

1,428,000 3,000

Manufacturing overhead is overallocated by $3,000.

Req. 3 Manufacturing Overhead (Actual)

(Allocated) 1,425,000 42,500

1,382,500

Manufacturing overhead is underallocated by $42,500. Req. 4 None of the jobs were costed correctly. Using direct labor hours as an allocation base resulted in overcosting the jobs by $22,600. Using direct labor cost as an allocation was the best option, causing jobs to be slightly overcosted by $3,000 during the year. Using machine hours led to the least accurate allocation: Jobs were undercosted by a total of $42,500.

3-4

Chapter 3

Job Costing

(5–10 min.) S3-9 Req. 1 Predetermined manufacturing overhead rate

$1,800,000 $2,000,000 of direct labor cost

= =

Req. 2 Total manufacturing overhead allocated

90.00% of direct labor cost

Actual use of cost allocation base × Predetermined manufacturing overhead rate

$2,650,000 × 90%

$2,385,000

Req. 3 Manufacturing Overhead (Actual) 1,660,000

(Allocated) 2,385,000 725,000

Manufacturing overhead is overallocated by $725,000.

(5 min.) S3-10 Req. 1 Direct materials Direct labor (8 hours × $27) Shop overhead (8 hours × $14) Cost to sell appliance

$45 216 112 $373

Req. 2 Direct materials Labor (8 hours × $89) Price to charge customer

$45 712 $757

3-5

Managerial Accounting 6e Solutions Manual

(5–10 min.) S3-11 First calculate the predetermined overhead rate Estimated MOH Estimated DLH

$1,053,000 58,500

Predetermined MOH rate

$18

Then use the predetermined overhead rate to calculate the amount of allocated overhead Total manufacturing overhead allocated =

Actual use of cost allocation base × Predetermined manufacturing overhead rate

57,000 × $18

$1,026,000

Req. 1 Calculate the amount of under- or overallocated overhead. Manufacturing Overhead (Actual) 1,005,000

(Allocated) 1,026,000 21,000

Req. 2: MOH was overallocated for the year because the amount of allocated overhead exceeded the amount of actual overhead by $21,000.

3-6

Chapter 3

Job Costing

(5–10 min.) S3-12 Journal Entry DATE

a b

POST. REF.

ACCOUNTS

DEBIT

CREDIT

Raw Materials Inventory Accounts Payable To record purchase of materials.

70,700

Work in Process Inventorya Manufacturing Overheadb Raw Materials Inventory To record use of materials.

60,000 500

70,700

60,500

for direct materials used on jobs. for indirect materials used in factory Raw Materials Inventory 37,000 60,500 70,700 47,200

Bal. Purchased Bal.

Used

(5 min.) S3-13 Journal DATE

ACCOUNTS Work in Process Inventorya Manufacturing Overheadb Wages Payable To assign manufacturing wages.

a b

POST. REF.

DEBIT

CREDIT

77,000 1,510 78,510

for direct labor for indirect labor ($610 + $900)

3-7

Managerial Accounting 6e Solutions Manual

(5 min.) S3-14 Req. 1 Hourly direct labor cost rate

= Req. 2 Client 367:

$660,000 22,000 direct labor hours

$30.00 per direct labor hour

16 hours × $30.00 per direct labor hour = $480

Req. 5 Direct labor……………………. Indirect cost…………………… Total job cost...................

3-8

$90 per hour

16 hours × $90 / hour = $1,440

Req. 3 Indirect cost allocation rate

Req. 4 Client 367:

$207,000 per year 2,300 hours per year

$ 1,440 480 $1,920

Chapter 3

Job Costing

(5 min.) S3-15 1.

Joe added in sales commissions to product costs on the financial statements because it seemed reasonable to include those costs.

Competence—Perform professional duties in accordance with relevant laws, regulations, and technical standards.

At a neighborhood party, Megan talks about the upcoming bid her company is making for a city project. She shares specific cost estimates that are included in the bid.

Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Justin changed the way that manufacturing overhead is allocated to divisions on the monthly internal reports to better reflect resource usage. However, he did not note the change on any of the reports nor did he inform any managers of the change.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.

Raquel does not disclose to her employer, Alpha Company, that her brother is the owner of a company that is bidding on a major contract with Alpha Company. Raquel is on the committee that evaluates the bids and makes a recommendation for which bid to select. Anthony is asked to do an inventory count of a wide assortment of parts. Anthony does not know how to distinguish the various parts. He guesses when he enters the quantity. He does not ask for help because he does not want to look stupid.

Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

Competence—Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

(5–10 min.) S3-16 a.

Job costing is used by companies that produce unique services and products.

Raw materials are stored in a storeroom until a materials requisition is received requesting the transfer of materials to the production area.

Cost tracing is the assignment of direct costs to specific jobs.

Indirect costs cannot be traced to specific products, so they are divided up using a process called cost allocation.

A custom home builder would use a job costing system to determine product cost.

A cost driver is any activity that causes a cost to be incurred.

Process costing is used by companies that produce large numbers of identical units through a series of uniform production steps or processes.

The job cost record is used to track and accumulate all the costs for an individual job.

PepsiCo produces Ruffles potato chips; it would use a process costing system to determine product cost.

3-9

Managerial Accounting 6e Solutions Manual

(10 min.) S3-17 Situation 1. What was the total job cost for each lamp model?

2. What was the total job cost for each lamp model by plant?

3. What was the average cost per unit for each lamp model? 4. What was the average cost for each lamp model in each plant?

Pivot table fields required Lamp model in Rows Job cost in Values Summarize value field by Sum Lamp model in Rows Plant in Rows Job cost in Values Summarize value field by Sum Lamp model in Rows Cost per unit in Values Summarize value field by Average Lamp model in Rows Plant in Rows Cost per unit in Values Summarize value field by Average

(10 min.) S3-18 Situation 1. What was the total sales revenue for each product group? 2. What was the total sales revenue for each product group by plant?

3. What was the average cost per unit for each canoe model? 4. What was the average cost for each canoe model in each plant?

5. How many units were produced in each plant?

3-10

Pivot table fields required Product group in Rows Sales Rev in Values Summarize value field by Sum Product group in Rows Plant in Rows Sales Rev in Values Summarize value field by Sum Model in Rows Cost per unit in Values Summarize value field by Average Model in Rows Plant in Rows Cost per unit in Values Summarize value field by Average Plant in Rows Units in Values Summarize value field by Sum

Chapter 3

Job Costing

Exercises (Group A) (10 min.) E3-19A a. b. c. d. e. f. g. h. i. j. k. l. m. n.

Janitorial services company—Job costing Soup manufacturer—Process costing Commercial plumbing contractor—Job costing Toothpaste manufacturer—Process costing Catering service—Job costing Shipbuilder—Job costing Company providing Web design services—Job costing Medical practice of six doctors and four physician assistants—Job costing Soft drink bottler—Process costing Movie studio—Job costing Plastic bottle manufacturer—Process costing Architect—Job costing Temporary staffing agency—Job costing Oil refinery—Process costing

(10 min.) E3-20A

Job Cost Record Job Number: 804 Customer: Zucca Decor Job Description: 32 Model 5A (Mission-style table lamps) Date Started: Sep. 14 Date Completed: __Sept. 19__ Manufacturing Cost Information: Direct Materials Req. #1247: Direct Labor Manufacturing Overhead 8 Hours x $2 per Direct Labor Hour Total Job Cost Number of Units Cost per Unit

Cost Summary $147 $ 68 $ 16 $231 ÷ 32 $ 7.22

3-11

Managerial Accounting 6e Solutions Manual

(5–10 min.) E3-21A Req. 1 Calculate the total cost of Job 304. First, calculate the predetermined overhead rate: Predetermined manufacturing $586,600 = overhead rate 41,900 direct labor hours =

$14 per direct labor hour

Next, calculate the total cost of Job 304: Job #304 Direct materials Direct labor (190 direct labor hours × $38 per direct labor hour) Manufacturing overhead (190 direct labor hours × $14 per direct labor hour) Total job cost

$14,800 7,220 2,660 $24,680

Req. 2 Job #304 Total cost of Job #304 28% mark up on manufacturing cost Total price to charge

$24,680 × 128% $31,590

or, alternatively: Job #304 Total cost of Job #304 Add 28% mark up on manufacturing cost (28% × $24,680) Total price to charge

3-12

$24,680 + 6,910 $31,590

Chapter 3

Job Costing

(10 min.) E3-22A Req. 1 Calculate the predetermined overhead rate: Predetermined overhead rate

$61,500 4,100 direct labor hours

= =

$15 per direct labor hour

Req. 2 Allocate overhead using the predetermined overhead rate: Job 101: 155 direct labor hours × $15 per direct labor hour = $2,325 Job 102: 72 direct labor hours × $15 per direct labor hour = $1,080 Req. 3 Next, calculate the total job cost for each job: Job #101 Direct materials Direct labor (Job 101: 155 direct labor hours × $24 per direct labor hour) (Job 102: 72 direct labor hours × $24 per direct labor hour) Overhead (calculated in Req. 2) Total job cost

Job #102 $15,000

$10,000

3,720 1,728 2,325 $21,045

1,080 $12,808

3-13

Managerial Accounting 6e Solutions Manual

(10 min.) E3-23A Req. 1 Calculate the predetermined overhead rate: Predetermined overhead rate

$371,800 $572,000 direct labor cost*

= =

65% of direct labor cost

*26,000 direct labor hours × $22 per direct labor hour = $572,000 Req. 2 First, calculate direct labor cost for Job 371: 180 direct labor hours × $22 per direct labor hour = $3,960 Next, allocate overhead using the predetermined overhead rate: $3,960 × 65% = $2,574 Req. 3 Next, calculate the total job cost for each job: Job #371 Direct materials Direct labor (180 direct labor hours × $22 per direct labor hour) Overhead (calculated in Req. 2) Total cost of Job #371

$13,500 3,960 2,574 $20,034

(10 min.) E3-24A Req. 1 Virgin materials Recycled-content materials Direct labor Manufacturing overhead (based on DLH)

30 70 18 18

$ 3.80 $ 3.50 $19.00 $14.00

Total job cost Req. 2 Virgin materials Recycled-content materials Total pounds

30 70 100

Yes, the Summit County job meets the 40% recycled-content requirement.

3-14

$ 114.00 $ 245.00 $ 342.00 $ 252.00 $953.00

70% (= 70/100)

Chapter 3

Job Costing

(15 min.) E3-25A Req. 1 Job Cost Record for Job 310 Direct materials: Lumber: 45 units at $4.00 per unit Padding: 13 yards at $14 per yard Upholstery fabric: 25 yards at $30 per yard Total direct materials

$180 $182 $750

Total

Direct labor: Penny Rawls: 12 hours at $13 per hour Mark Frizzell: 16 hours at $22 per hour Total direct labor

$156 $352

$1,112

$ 508

Manufacturing overhead allocated: $12 per direct labor hour × 28 direct labor hours (12 + 16)

$ 336

Total job cost

$1,956

Req. 2 Sales price per unit Job cost per unit ($1,956 / 12 recliners) Gross profit per unit

$ 750.00 (163.00) $ 587.00

(10 min.) E3-26A Req. 1 First, calculate the predetermined overhead rate: Predetermined manufacturing overhead rate

$370,000 10,000 direct labor hours

= $37 per direct labor hour Next, tabulate the total job cost: Direct materials Direct labor (1,650 direct labor hours × $11 per direct labor hour) Manufacturing overhead (1,650 direct labor hours × $37 per direct labor hour) Total job cost

$ 25,400 18,150 61,050 $104,600

Then, compute bid price: Total manufacturing cost of job 31% mark up on manufacturing cost Bid price

$104,600 × 131% $137,026

3-15

Managerial Accounting 6e Solutions Manual

(continued) E3-26A or alternatively: Total manufacturing cost of job Add 31% mark up on manufacturing cost (31% × $104,600) Bid price Req. 2 First, calculate the predetermined overhead rate: Predetermined manufacturing overhead rate

$104,600 + 32,426 $137,026

$370,000 14,800 machine hours

= $25 per machine hour Next, tabulate the total job cost: Direct materials Direct labor (1,650 direct labor hours × $11 per direct labor hour) Manufacturing overhead (2,020 machine hours × $25 per machine hour) Total job cost Then, compute bid price: Total manufacturing cost of job 31% mark up on manufacturing cost Bid price

$25,400 18,150

50,500 $94,050

$ 94,050 × 131% $123,206

– or alternatively: Total manufacturing cost of job Add 31% mark up on manufacturing cost (31% × $94,050) Bid price

$ 94,050 + 29,156 $123,206

Req. 3 Whether or not Olney wins the bid will depend on the allocation base the company chose to use during the year. Olney’s bid price will be $137,026 if the company uses direct labor hours as the allocation base. In this case, the company will probably lose the job to Drund Recycling, since their bid was only $126,000. However, Olney will probably win the bid if machine hours are used as the allocation base. Using machine hours as an allocation base results in a bid price of $123,206. Note: Student answers may vary.

3-16

Chapter 3

Job Costing

(15–20 min.) E3-27A Req. 1 Predetermined manufacturing overhead rate

$630,000 90,000 machine hours

$7 per machine hour

56,500 actual machine hours × $7 per machine hour

$395,500

Req. 2 Allocated manufacturing overhead

Req. 3 Depreciation on plant and equipment........... Property taxes on plant.................................. Plant janitors’ wages...................................... Total manufacturing overhead.......................

$480,000 19,500 8,500 $508,000

Manufacturing overhead was underallocated by $112,500 during the year (actual $508,000 – allocated $395,500). Req. 4 Underallocating manufacturing overhead means that the jobs were undercosted by $112,500.

3-17

Managerial Accounting 6e Solutions Manual

(10–15 min.) E3-28A Req. 1 Journal Entry DATE

ACCOUNTS AND EXPLANATIONS Manufacturing Overhead Accumulated Depreciation—plant and equipment Property Tax Payable Wages Payable

POST. REF.

DEBIT $392,000

CREDIT 364,000 19,500 8,500

Req. 2 Note: Predetermined overhead rate $7 per MH

$630,000 90,000 machine hours

Journal Entry DATE

ACCOUNTS AND EXPLANATIONS Work in Process Inventory Manufacturing Overhead (56,500 x $7 per MH)

POST. REF.

DEBIT 395,500

CREDIT 395,500

Req. 3 Manufacturing Overhead 392,000

395,500 $ 3,500

After correcting the error, Manufacturing Overhead is overallocated by $3,500. Req. 4 Journal Entry DATE

ACCOUNTS AND EXPLANATIONS Manufacturing Overhead Cost of Goods Sold

POST. REF.

DEBIT 3,500

CREDIT 3,500

Req. 5 Unadjusted cost of goods sold……………….... Less: overallocated manufacturing overhead... Adjusted cost of goods sold…………………….

3-18

$610,000 (3,500) $606,500

Chapter 3

Job Costing

(10 min.) E3-29A Req. 1 Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

POST. REF.

DEBIT 215,000

CREDIT 215,000

Work in Process Inventory Manufacturing Overhead Raw Materials Inventory

164,000 26,000

Work in Process Inventory Manufacturing Overhead Wages and Salaries Payable

180,000 30,000

Manufacturing Overhead Accum. Depreciation — Plant and Equipment Utilities Payable (or A/P)

23,000

Work in Process Inventory Manufacturing Overhead

70,000

CAD Design Expense Accounts Payable

9,000

190,000

210,000

15,000 8,000

70,000

9,000

Req. 2 During January, actual manufacturing overhead costs totaled $79,000 ($26,000 + $30,000 + $23,000). By the end of January, a total of $70,000 had been allocated to jobs. Therefore, manufacturing overhead had been underallocated by $9,000. Note: T-account not required.

Manufacturing Overhead (Actual) (b) 26,000 (c) 30,000 (d) 23,000

(Allocated)

(e) 70,000 9,000

3-19

Managerial Accounting 6e Solutions Manual

(10 min.) E3-30A 1.

Direct materials used…………………

$ 27,500

Indirect materials used……………… (36,500 − 27,500)

$ 9,000

Direct labor………………………………

$ 64,000

Indirect labor……………………………. (75,000 − 64,000)

$ 11,000

Cost of goods manufactured…………

$ 127,000

Cost of goods sold……………………

$ 114,000

Actual manufacturing overhead…. (9,0000 + 11,000 + 42,500)

$ 62,500

Allocated manufacturing overhead….

$ 44,000

Predetermined manufacturing overhead rate, as a % of direct labor cost; $44,000 /$ 64,000............

10.

3-20

Manufacturing overhead is ($62,500 actual − $44,000 allocated) = $ 18,500

69%

Underallocated

Chapter 3

Job Costing

(15–20 min.) E3-31A Req. 1 a. Direct labor cost rate: Direct labor costs Direct labor hours

$2,150,000 14,000 hours

$154 / hour (rounded)

Indirect cost allocation rate: Indirect costs: Office rent....………………. Support staff salaries.…… Utilities..............…………… Total indirect costs..…….. Predetermined indirect cost allocation rate: Total estimated indirect costs Total estimated direct labor costs

$ 240,000 930,000 290,000 $1,460,000

$1,460,000 $2,150,000

68% of direct labor costs (rounded)

Req. 2 Predicted cost of Chase Resources job: Direct labor: 210 hours × $154 / hour…. Indirect costs: $32,340 × 0.68........……. Total predicted cost………………………

$32,340 21,991 $54,331

Req. 3 Predicted cost (from Req. 2)......……….. Desired profit ($54,331 x .25)…………………........……… Required service revenue.........………… or alternatively: Predicted cost (from Req. 2)......……….. 25% mark up on manufacturing cost Required service revenue.........…………

$54,331 13,583 $67,914

$54,331 x 125% $67,914

The bid price should be $67,914 to earn a profit of 25% of predicted cost.

3-21

Managerial Accounting 6e Solutions Manual

(10 min.) E3-32A Req. 1 Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

POST. REF.

DEBIT 205,000

CREDIT 205,000

Work in Process Inventory Manufacturing Overhead Raw Materials Inventory

155,000 3,000

Work in Process Inventory Manufacturing Overhead Wages and Salaries Payable

215,000 35,000

Manufacturing Overhead Accum. Depreciation—Plant and Equipment Utilities Payable (or A/P)

29,000

Work in Process Inventory Manufacturing Overhead

62,000

158,000

250,000

19,000 10,000

62,000

Req. 2 During January, actual manufacturing overhead costs totaled $67,000, while only $62,000 had been allocated to jobs. Therefore, by the end of January, manufacturing overhead had been underallocated by $5,000. Note: T-account not required.

Manufacturing Overhead (Actual) (b) 3,000 (c) 35,000 (d) 29,000

(Allocated)

(e) 62,000 5,000

3-22

Chapter 3

Job Costing

(20 min.) E3-33A 1.

What was the total job cost for each lamp model?

Pivot Table Fields: Lamp model in Rows Job cost in Values 2.

What was the total job cost for each lamp model by plant?

Pivot Table Fields: Plant in Rows Lamp model in Rows Job cost in Values

3-23

Managerial Accounting 6e Solutions Manual

(continued) E3-33A 3.

What was the average cost per unit for each lamp model?

Pivot Table Fields: Lamp model in Rows Cost per Unit in Values

What was the average cost for each lamp model in each plant?

Pivot Table Fields: Plant in Rows Lamp model in Rows Cost per Unit in Values

3-24

Chapter 3

Job Costing

(continued) E3-33A 5.

What is the total direct material (DM) used in each plant?

6. What is the total direct labor (DL) used in each plant?

Pivot Table Fields: Plant in Rows DM in Values DL in Values

(20 min.) E3-34A 1.

What was the total sales revenue for each product group?

Pivot Table Fields: Product group in Rows Sales Rev in Values

3-25

Managerial Accounting 6e Solutions Manual

(continued) E3-34A 2.

What was the total sales revenue for each product group by plant?

Pivot Table Fields: Plant in Rows Product group in Rows Sales Rev in Values

3-26

Chapter 3

Job Costing

(continued) E3-34A 3. 4.

What was the average cost per unit for each canoe model? What was the average cost for each canoe model in each plant?

Pivot Table Fields: Plant in Rows Model in Rows Cost per unit in Values .

3-27

Managerial Accounting 6e Solutions Manual

(continued) E3-34A 5.

How many units of each model were produced in each plant?

Pivot Table Fields: Plant in Rows Model in Rows Units in Values

3-28

Chapter 3

Job Costing

(continued) E3-34A 6. 7.

What is the average gross profit per unit for each canoe model? What is the average gross profit per unit for each canoe model in each plant?

Pivot Table Fields: Plant in Rows Model in Rows GP per unit in Values

3-29

Managerial Accounting 6e Solutions Manual

(continued) E3-34A 8.

How many jobs were produced in each plant? (Hint: Use Job # in the Values box to get the count.)

Pivot Table Fields: Plant in Rows Job # in Values

3-30

Chapter 3

Job Costing

Exercises (Group B) (10 min.) E3-35B a. b. c. d. e. f. g. h. i. j. k. l. m. n.

Yacht builder—Job costing Cereal manufacturer—Process costing Landscaper—Job costing Pet food processor—Process costing Wallpaper installation service—Job costing Aircraft builder—Job costing Hospital—Job costing Cement plant—Process costing Dentist—Job costing Advertising agency—Job costing Custom-home builder—Job costing Oil refinery—Process costing House painter—Job costing Computer chip manufacturer—Process costing

(10 min.) E3-36B

Job Cost Record Job Number: 951 Customer: Rose Decor Job Description: 34 Model 5A (Mission-style table lamps) Date Started: Sep. 14 Date Completed: _Sept. 19___ Manufacturing Cost Information: Direct Materials Req. #1298 Direct Labor Manufacturing Overhead 8 Hours x $3 per Direct Labor Hour Total Job Cost Number of Units Cost per Unit

Cost Summary $196 $ 79 $ 24 $299 ÷ 34 $ 8.79

3-31

Managerial Accounting 6e Solutions Manual

(5–10 min.) E3-37B Req. 1 Calculate the total cost of Job 302. First identify the formula, then calculate the predetermined overhead rate. Predetermined manufacturing $664,000 = overhead rate 41,500 direct labor hours =

$16 per direct labor hour

Next, calculate the manufacturing cost of Job 302. Job #302 Direct materials Direct labor (160 direct labor hours × $38 per direct labor hour) Manufacturing overhead (160 direct labor hours × $16 per direct labor hour) Total job cost of Job 302

$13,900 6,080 2,560 $22,540

Req. 2 Job #302 Total cost of Job 302 25% mark up

$22,540 × 125%

Total price to charge

$28,175

or alternatively: Job #302 Total cost of Job 302 Add 25% mark up on manufacturing cost (25% × $22,540) Total price to charge

3-32

$22,540 + 5,635 $28,175

Chapter 3

Job Costing

(10 min.) E3-38B Req. 1 Calculate the predetermined overhead rate: Predetermined overhead rate

$63,750 4,250 direct labor hours

= =

Req. 2 Job 101: $2,925 Job 102: $1,140

$15 per direct labor hour

($15 x 195 direct labor hours) ($15 x 76 direct labor hours)

Req. 3 Job #101 Direct materials Direct labor Job 101: (195 direct labor hours × $24 per direct labor hour) Job 102: (76 direct labor hours × $24 per direct labor hour) Overhead (calculated in Req. 2) Total job cost

Job #102 $17,500

$13,000

4,680 1,824 2,925 $25,105

1,140 $15,964

(10 min.) E3-39B Req. 1 Calculate the predetermined overhead rate: Predetermined overhead rate

$364,000 $728,000 direct labor cost*

= =

50% of direct labor cost

*28,000 direct labor hours × $26 per direct labor hour = $728,000 Req. 2 First, calculate direct labor cost for Job 371: 110 direct labor hours × $26 per direct labor hour = $2,860 Next, allocate overhead using the predetermined overhead rate: $2,860 × 50% = $1,430 Req. 3 Calculate the cost of Job 371: Job #371 Direct materials Direct labor (110 direct labor hours × $26 per direct labor hour) Overhead (calculated in Req. 2) Total cost of Job #371

$15,500 2,860 1,430 $19,790

3-33

Managerial Accounting 6e Solutions Manual

(10 min.) E3-40B Req. 1 Virgin materials Recycled-content materials Direct labor Manufacturing overhead (based on DLH)

80 120 12 12

$ 3.80 $ 2.60 $16.00 $8.00

$ 304.00 312.00 192.00 96.00 $904.00

Req. 2 Virgin materials Recycled-content materials

80 120

60% (=120/200)

Total pounds

200

Total job cost

Yes, the Lyon County job meets the 40% recycled-content requirement.

(15 min.) E3-41B Req. 1 Job Cost Record for Job 310 Direct materials: Lumber: 45 units at $6 per unit Padding: 14 yards at $21 per yard Upholstery fabric: 32 yards at $27 per yard Total direct materials

$270 $294 $864

Direct labor: Holly Powers: 14 hours at $16 per hour Patrick Aaronson: 13 hours at $22 per hour Total direct labor:

$224 $286

Manufacturing overhead allocated: $9 per direct labor hour x 27 direct labor hours (14 + 13) Total job cost

$1,428

$ 510

$ 243 $2,181

Req. 2 Sales price per unit Job cost per unit ($2,181 / 8, rounded to nearest cent) Gross profit per unit

3-34

Total

$ 725 (273) $ 452

Chapter 3

Job Costing

(10 min.) E3-42B Req. 1 First, calculate the predetermined overhead rate: Predetermined manufacturing overhead rate

$369,260 9,980 direct labor hours

= $37 per direct labor hour Next, calculate the total job cost: Direct materials Direct labor (1,600 direct labor hours × $12 per direct labor hour) Manufacturing overhead (1,600 direct labor hours × $37 per direct hour) Total job cost

$ 25,600 19,200 59,200 $104,000

Then, compute bid price: Total job cost 29% mark up Bid price

$104,000 × 129% $134,160

or alternatively: Total job cost Add 29% mark up on manufacturing cost (29% × $104,000)

$104,000 + 30,160

Bid price

$134,160

Req. 2 First, calculate the predetermined overhead rate: Predetermined manufacturing overhead rate

$369,260 18,463 machine hours

= =

Next, calculate the total job cost: Direct materials Direct labor (1,600 direct labor hours × $12 per direct labor hour) Manufacturing overhead (1,975 machine hours × $20 per machine hour) Total job cost Then, compute bid price: Total job cost 29% mark up Bid price

$20 per machine hour

$25,600 19,200 39,500 $84,300

$ 84,300 × 129% $108,747

3-35

Managerial Accounting 6e Solutions Manual

(continued) E3-42B or, alternatively: Total manufacturing cost of job Add 29% mark up on manufacturing cost (29% × $84,300) Bid price

$ 84,300 + 24,447 $108,747

Req. 3 Whether or not Nestor wins the bid will depend on the allocation base the company chose to use during the year. Nestor’s bid price will be $134,160 if the company uses direct labor hours as the allocation base. In this case, the company will probably lose the job to Kitson Recycling because their bid was only $125,500. However, Nestor will probably win the bid if machine hours is used as the allocation base. Using machine hours as an allocation base results in a bid price of $108,747. Note: Student answers may vary.

(15–20 min.) E3-43B Req. 1 Predetermined manufacturing overhead rate

$610,000 76,250 machine hours

$8 per machine hour

55,500 machine hours × $8 per machine hour

$444,000

Req. 2 Allocated manufacturing overhead

$470,000 19,000 8,000 $497,000

Manufacturing overhead was underallocated by $53,000 ($497,000 actual − $444,000 allocated) during the year. Req. 4 Because manufacturing overhead was underallocated, jobs were undercosted by $53,000.

3-36

Chapter 3

Job Costing

(10–15 min.) E3-44B Req. 1 Journal DATE

ACCOUNTS Manufacturing Overhead Accumulated Depreciation—plant and equipment Property Tax Payable Wages Payable

POST. REF.

DEBIT $442,000

CREDIT 415,000 19,000 8,000

Req. 2 Note: Predetermined overhead rate $8 per MH

$610,000 76,250 machine hours

Journal Entry DATE

POST. REF.

ACCOUNTS Work in process inventory Manufacturing overhead To record manufacturing overhead allocated

DEBIT 444,000

CREDIT 444,000

Req. 3 Manufacturing Overhead 442,000

444,000 2,000

After correcting the error, Manufacturing Overhead is overallocated by $2,000. Req. 4 Journal Entry DATE

ACCOUNTS AND EXPLANATIONS Manufacturing Overhead Cost of Goods Sold

POST. REF.

DEBIT 2,000

CREDIT 2,000

Req. 5 Unadjusted cost of goods sold……………….... Overallocated manufacturing overhead.......... Adjusted cost of goods sold…………………….

$560,000 (2,000) $558,000

3-37

Managerial Accounting 6e Solutions Manual

(10 min.) E3-45B Req. 1 Journal Entry DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

POST. REF.

DEBIT 205,000

CREDIT 205,000

Work in Process Inventory Manufacturing Overhead Raw Materials Inventory

152,000 18,000

Work in Process Inventory Manufacturing Overhead Wages and Salaries Payable

215,000 40,000

Manufacturing Overhead Accum. Depreciation—Plant and Equipment Utilities Payable (or A/P)

37,000

Work in Process Inventory Manufacturing Overhead

79,000

CAD Design Expense Accounts Payable

1,000

170,000

255,000

25,000 12,000

79,000

1,000

Req. 2 During January, actual manufacturing overhead costs totaled $95,000 ($18,000 + $40,000 + $37,000). By the end of January, a total of $79,000 had been allocated to jobs. Therefore, manufacturing overhead had been underallocated by $16,000.

3-38

Chapter 3

Job Costing

(10 min.) E3-46B 1.

Direct materials used…………………

$ 30,500

Indirect materials used……………… (34,500 − 30,500)

$ 4,000

Direct labor………………………………

$ 64,000

Indirect labor……………………………. (77,000 − 64,000)

$ 13,000

Cost of goods manufactured…………

$123,500

Cost of goods sold……………………

$115,500

Actual manufacturing overhead ($4,000 + $13,000 + $40,500)……….

$ 57,500

Allocated manufacturing overhead….

$ 43,000

Predetermined manufacturing overhead rate, as a % of direct labor cost; $43,000 / $64,000............ (rounded)

10.

Manufacturing overhead is ($57,500 actual − $43,000 allocated) =

67%

$ 14,500 underallocated

3-39

Managerial Accounting 6e Solutions Manual

(15–20 min.) E3-47B Req. 1 a. Direct labor cost rate: Direct labor costs Direct labor hours

= =

Indirect cost allocation rate: Indirect costs: Office rent....………………. Support staff salaries.…… Utilities..............…………… Total indirect costs..……..

Predetermined indirect cost allocation rate: Total indirect costs Total direct labor costs

$2,250,000 15,000 hours $150 per hour

$ 250,000 940,000 310,000 $1,500,000

$1,500,000 $2,250,000

67% of direct labor costs (rounded)

Req. 2 Predicted cost of Granite Resource job: Direct labor: 250 hours × $150 / hour…. Indirect costs: $37,500 × 0.67........……. Total predicted cost………………………

$37,500 25,125 $62,625

Predicted cost (from Req. 2)......……….. Desired profit (0.30 × $62,625).....……… Required service revenue.........…………

$62,625 18,788 $81,413

or alternatively: Predicted cost (from Req. 2)......……….. Desired profit ......……….. Required service revenue.........…………

$62,625 x 130% $81,413

Req. 3

The bid price should be $81,413 to earn a profit of 30% of predicted cost.

3-40

Chapter 3

Job Costing

(10 min.) E3-48B Req. 1 Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

POST. REF.

DEBIT 210,000

CREDIT 210,000

Work in Process Inventory Manufacturing Overhead Raw Materials Inventory

143,000 35,000

Work in Process Inventory Manufacturing Overhead Wages and Salaries Payable

220,000 25,000

Manufacturing Overhead Accum. Depreciation—Plant and Equipment Utilities Payable (or A/P)

24,000

Work in Process Inventory Manufacturing Overhead

74,000

178,000

245,000

16,000 8,000

74,000

Req. 2 During January, actual manufacturing overhead costs totaled $84,000, while only $74,000 had been allocated to jobs. Therefore, by the end of January, manufacturing overhead had been underallocated by $10,000.

Note: T-account not required.

Manufacturing Overhead (Actual) (b) 35,000 (c) 25,000 (d) 24,000

(Allocated)

(e) 74,000 10,000

3-41

Managerial Accounting 6e Solutions Manual

(20 min.) E3-49B 1.

What was the total job cost for each lamp model?

Pivot Table Fields: Lamp model in Rows Job cost in Values 2.

What was the total job cost for each lamp model by plant?

Pivot Table Fields: Plant in Rows Lamp model in Rows Job cost in Values

3-42

Chapter 3

Job Costing

(continued) E3-49B 3.

What was the average cost per unit for each lamp model?

Pivot Table Fields: Lamp model in Rows Cost per unit in Values

4. What was the average cost for each lamp model in each plant?

Pivot Table Fields: Plant in Rows Lamp model in Rows Cost per unit in Values

3-43

Managerial Accounting 6e Solutions Manual

(continued) E3-49B 5. 6.

What is the total direct material (DM) used in each plant? What is the total direct labor (DL) used in each plant?

Pivot Table Fields: Plant in Rows DM in Values DL in Values

(20 min.) E3-50B 1.

What was the total sales revenue for each product group?

Pivot Table Fields: Product group in Rows Sales Rev in Values

3-44

Chapter 3

Job Costing

(continued) E3-50B 2.

What was the total sales revenue for each product group by plant?

Pivot Table Fields: Plant in Rows Product group in Rows Sales Rev in Values

3-45

Managerial Accounting 6e Solutions Manual

(continued) E3-50B 3. 4.

What was the average cost per unit for each canoe model? What was the average cost for each canoe model in each plant?

Pivot Table Fields: Plant in Rows Model in Rows Cost per unit in Values

3-46

Chapter 3

Job Costing

(continued) E3-50B 5.

How many units of each model were produced in each plant?

Pivot Table Fields: Plant in Rows Model in Rows Units in Values

3-47

Managerial Accounting 6e Solutions Manual

(continued) E3-50B 6. 7.

What is the average gross profit per unit for each canoe model? What is the average gross profit per unit for each canoe model in each plant?

Pivot Table Fields: Plant in Rows Model in Rows GP per unit in Values 3-48

Chapter 3

Job Costing

(continued) E3-50B 8.

How many jobs were produced in each plant? (Hint: Use Job # in the Values box to get the count.)

Pivot Table Fields: Plant in Rows Job # in Values

3-49

Managerial Accounting 6e Solutions Manual

Problems (Group A) (25–30 min.) P3-51A Req. 1 Estimated yearly overhead costs* Estimated yearly machine hours

Predetermined overhead rate

$194,400 7,200 machine hours

$27 per machine hour * $48,500 + $70,000 + $40,000 + $35,900 = $194,400 Req. 2 Actual machine hours……………………. Predetermined overhead rate…......……. Manufacturing overhead allocated….…

6,300 $27 per machine hour $170,100

Req. 3 Manufacturing Overhead Actual Indirect materials Depreciation plant & equip Indirect manufacturing labor Plant utilities

Allocated 50,500 72,500 42,000 38,400 33,300

170,100

The underallocated overhead will be closed to Cost of Goods Sold in the following journal entry: Journal Entry POST. DATE ACCOUNTS REF. DEBIT Cost of goods sold 33,300 Manufacturing overhead

CREDIT 33,300

Req. 4 To help control manufacturing overhead, managers compare the actual line item amounts for manufacturing overhead with the budgeted amounts. Managers also investigate only large differences between actual and budgeted amounts to identify the reasons why actual costs differ from planned or budgeted costs.

(20–25 min.) P3-52A Req. 1 Total estimated indirect costs Direct labor hours Predetermined Indirect Cost Allocation Rate

= =

* $160,000 + $48,000 + $461,300 + $66,000 = $735,300

3-50

$735,300 * 17,100 direct labor hours

$43 per direct labor hour

Chapter 3

Job Costing

(continued) P3-52A Req. 2 Anderson & Little Estimated Cost of Jobs DreamVacation.com

Port Armour Golf Resort

Direct Costs: Direct Labor 750 hr. x $ 120* per DL Hr 30 hr. x $ 120* per DL Hr

$ 90,000 $

Software Licensing Costs Travel Total Direct Costs Indirect Costs:

2,500 8,000 $ 100,500 $ 43 per DL hr. x 750 Hr. $ 43 per DL hr. x 30 Hr.

3,600 150 0 3,750

32,250 1,290

Total Cost

$ 132,750

5,040

*DL Cost: $2,052,000 / 17,100 Hours = $120 / Hour. Req. 3 Sales revenue − Total cost Sales revenue − Total cost 0.80 × Sales revenue

= = =

Profit 0.20 × Sales revenue Total cost

Sales revenue

Total cost 0.80

DreamVacation.com: Total job cost % of costs to revenue

$132,750 0.80

$ 165,937.50

$ 5,040 0.80

$ 6,300.00

Port Armour: Total job cost % of costs to revenue

Req. 4 Anderson & Little assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients can also help the company control costs.

3-51

Managerial Accounting 6e Solutions Manual

(20–25 min.) P3-53A Req. 1 Total estimated indirect costs Direct labor cost

$ 275,000* $1,100,000

25%

* $140,000 + $46,000 + $26,000 + $63,000 = $275,000 Req. 2 Sierra Design Estimated Cost of Delightful Dining and DineNow.com Jobs Delightful Dining

DineNow.com

Direct Costs: Direct Labor 710 Hrs. × $ 110* 40 Hrs. × $ 110*

$ 78,100

Licensing Costs Travel Total Direct Costs Indirect Costs:

2,300 10,000 $ 90,400 25% × $78,100 25% × $ 4,400

$ 4,400 300 0 $ 4,700

19,525

Total Cost

$ 109,925

1,100 $ 5,800

*DL Cost $1,100,000/10,000 Hours = $110/Hr. Req. 3 Sales revenue − Total cost Sales revenue − Total cost 0.80 × Sales revenue

= = =

Profit 0.20 × Sales revenue Total cost

Sales revenue

Total cost 0.80

Delightful Dining: $109,925 0.80

$137,406

$5,800 0.80

$7,250

DineNow.com:

Req. 4 Sierra Design assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients can also help Sierra Design control costs.

3-52

Chapter 3

Job Costing

(30–35 min.) P3-54A Req. 1 Job Cost Record JOB NO. 298 CUSTOMER NAME AND ADDRESS: ATV Corporation JOB DESCRIPTION: 110 TX tires DATE PROMISED 7-10 DATE STARTED 6-30 DATE COMPLETED 7-3 DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD ALLOCATED REQUISITION LABOR TIME RECORD DATE NO. AMOUNT NO. AMOUNT DATE RATE AMOUNT 20 XX 6 30 437 $600 1896 $240 7 3 $28 per direct 7 2 439 480 labor houra $1,176 7 3 501 1,400 1904 480 OVERALL COST SUMMARY

Totals

$2,480 aPredetermined mfg. overhead rate Overhead allocated

= =

DIRECT MATERIALS.………... DIRECT LABOR............……… MANUFACTURING OVERHEAD ALLOCATED…... $720 TOTAL JOB COST.......….. $490,000 = $28 per direct labor hour 17,500 (12 hrs + 30 hrs) × $28 per DL hour =

$2,480 720 1,176 $4,376

$1,176

Req. 2 Job 298 $ 9,900 4,376 $ 5,524 ÷ 110 $ 50.22

Sales ($90 × 110 tires) Less cost of job (from Req. 1) Total profit on job Divide by number of tires Per-unit profit

3-53

Managerial Accounting 6e Solutions Manual

(30–45 min.) P3-55A Req. 1 Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

DEBIT 490,000

84,500 30,500

Work in Process Inventory Raw Materials Inventoryb

227,000

Manufacturing Overhead Accum. Depr.—Equipment

6,300

Manufacturing Overhead Cash Prepaid Insurance

18,600

Work in Process Inventory ($84,500 × 0.60) Manufacturing Overhead

115,000

227,000

6,300

10,600 8,000

50,700 50,700

Finished Goods Inventoryc Work in Process Inventory

259,900

Accounts Receivable ($92,000 + $141,000) Sales Revenue

233,000

Cost of Goods Sold ($64,120 + $101,540) Finished Goods Inventory

165,660

$14,200 + $28,500 + $19,900 + $21,900 $41,400 + $56,700 + $62,400 + $66,500 c 13: $14,200 + $41,400 + 0.6 ($14,200) = $64,120 15: $19,900 + $62,400 + 0.6 ($19,900) = $94,240 16: $21,900 + $66,500 + 0.6 ($21,900) = $101,540 $259,900 b

CREDIT 490,000

Work in Process Inventorya Manufacturing Overhead ($115,000 − $84,500) Wages Payable

3-54

POST. REF.

259,900

233,000

165,660

Chapter 3

Job Costing

(continued) P3-55A Req. 2 (b) (c) (f) Bal.

Work in Process Inventory 84,500 (g) 227,000 50,700 102,300

259,900

(g)

Bal.

Finished Goods Inventory 259,900 (h)

165,660

94,240

Req. 3 Veon Homes Reconciliation of Work in Process Inventory Subsidiary and Control Accounts Chalet #14 Unfinished chalet (#14): Direct materials Direct labor Manufacturing overhead (60% of labor) (28,500 x 0.6) Total cost equals work in process balance

$ 56,700 28,500 17,100 $102,300

Req. 4 Veon Homes Reconciliation of Finished Goods Inventory Subsidiary and Control Accounts Chalet #15 Completed, unsold chalet (#15): Direct materials Direct labor Manufacturing overhead (60% of labor) Total cost equals finished goods balance

$62,400 19,900 11,940 $94,240

Req. 5 Veon Homes Gross Profit on Chalets Sold in May Chalet #13 $92,000 (64,120) $27,880

Sales revenue Cost of goods sold Gross profit

Chalet #16 $141,000 (101,540) $ 39,460

The gross profit must cover these type of costs (answers may vary): • Administration • Customer service • Design • Distribution • Marketing • Research and development

3-55

Managerial Accounting 6e Solutions Manual

(25–35 min.) P3-56A Req. 1

Date June 30

July 31

Stewart Engine, Inc. Computation of Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold for June and July (a) Work in Process Inventory (b) Finished Goods (c) Cost of Goods Inventory Sold Job Cost Job Cost Job Cost 4 $ 900 3 $1,300 1 $1,600 2 1,500 Total $3,100 6

$1,400

None

3 4 5 Total

$1,300 1,200 500 $3,000

Req. 2 Journal DATE

ACCOUNTS AND EXPLANATIONS Finished Goods Inventory Work in Process Inventory To record completion of Jobs 1, 2, and 3 in June. ($1,600 + $1,500 + $1,300) Finished Goods Inventory Work in Process Inventory To record completion of Jobs 4 and 5 in July. ($1,200 + $500)

3-56

POST. REF.

DEBIT 4,400

CREDIT 4,400

1,700 1,700

Chapter 3

Job Costing

(continued) P3-56A Req. 3 Journal DATE July

ACCOUNTS AND EXPLANATIONS 14 Accounts Receivable

POST. REF.

DEBIT 1,900

Sales Revenue

CREDIT 1,900

To record the sale of Job 5.

July

14 Cost of Goods Sold

500

Finished Goods Inventory

500

To record the cost of goods sold for Job 5. Req. 4 The gross profit for Job 5 is: Sales revenue............……….. Cost of goods sold......……... Gross profit....................…....

$ 1,900 (500) $ 1,400

The gross profit must be high enough to these types of costs (answers may vary): • • • • • • •

Administration Customer service Design Distribution Marketing Other costs (interest expense and income taxes) Research and development

3-57

Managerial Accounting 6e Solutions Manual

Problems (Group B) (25–30 min.) P3-57B Req. 1 Predetermined manufacturing overhead rate: Estimated yearly overhead costs* Estimated yearly machine hours

$196,000 7,000 hours

$28 per machine hour

* $50,500 + $68,000 + $39,500 + $38,000 = $196,000 Req. 2 Actual machine hours x Predetermined overhead rate 6,500 machine hours x $28 per machine hour = $182,000 Req. 3 Manufacturing Overhead 54,000 182,000b

Indirect materials Depreciation on plant and equipment Indirect manufacturing labor Plant utilities Balance b

Allocated

69,000 42,500 40,500 24,000

6,500 actual machine hours × $28 per machine hour (see Req. 2)

The underallocated overhead will be closed to Cost of Goods Sold in the following entry: Journal DATE

ACCOUNTS AND EXPLANATIONS Cost of goods sold Manufacturing overhead To close underallocated manufacturing overhead to cost of goods sold.

POST. REF.

DEBIT 24,000

CREDIT 24,000

Req. 4 To help control manufacturing overhead, managers compare the actual line-item amounts for manufacturing overhead with the budgeted amounts. Managers will also investigate only large differences between actual and budgeted amounts to identify the reasons why actual costs differ from planned or budgeted costs. Note: Student answers may vary.

3-58

Chapter 3

Job Costing

(20–25 min.) P3-58B Req. 1 Predetermined indirect cost allocation rate: Estimated indirect costs: Support staff salaries...............…….. Rent and utilities..................………… Supplies.......................................…… Leased computer hardware………… Total estimated indirect costs.......……

$305,000 46,000 319,300 65,000 $735,300

Estimated indirect costs Direct labor hours

$735,300 17,100

Predetermined indirect cost allocation rate

$43 per hour

Req. 2 Unchil & Doshak Estimated Cost of GoTrip.com and Port South Jobs GoTrip.com Direct Costs: Direct Labor 770 Hours × $120* per Hour 65 Hours × $120* per Hour Software Licensing Costs Travel Total Direct Costs Indirect Costs: $43 per Hour × 770 Hours $43 per Hour × 65 Hours Total Costs

Port South Golf Resort

$ 92,400 2,100 7,000 101,500

$ 7,800 400 0 8,200

33,110 $ 134,610

2,795 $10,995

* $2,052,000 / 17,100 = $120 per Hour Req. 3 Sales revenue − Total cost Sales revenue − Total cost 0.80 × Sales revenue

= = =

Profit 0.20 × Sales revenue Total cost

Sales revenue

Total cost 0.80

3-59

Managerial Accounting 6e Solutions Manual

(continued) P3-58B GoTrip.com: $134,610 0.80

$168,262.50

$13,743.75

Port South Golf Resort: $10,995 0.80

Req. 4 Unchil & Doshak assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients can also help the company control costs.

(20–25 min.) P3-59B Req. 1 Predetermined indirect cost allocation rate: Estimated indirect costs: Support staff salaries................………. Computer leases…………………….…... Office supplies.......................………….. Office rent..........................................…. Total estimated indirect costs........……… Estimated indirect costs Estimated direct labor cost

$ 170,000 49,000 29,000 60,000 $ 308,000 =

$ 308,000 $1,400,000

22%

Req. 2 Thomas Design Estimated Cost of Organic Foods and AllNews.com Jobs Organic Foods Direct Costs: Direct Labor 730 Hours × $140* per Hour 25 Hours × $140*per Hour Software Licensing Costs Travel Total Direct Costs Indirect Costs: 22% × $102,200 22% × $ 3,500 Total Cost

$ 102,200 2,700 7,000 111,900

$ 3,500 400 0 3,900

22,484 $ 134,384

* $1,400,000 / 10,000 = $140 per Hour

3-60

AllNews.com

770 $ 4,670

Chapter 3

Job Costing

(continued) P3-59B Req. 3 Sales revenue − Total cost Sales revenue − Total cost 0.70 × Sales revenue

= = =

Profit 0.30 × Sales revenue Total cost

Sales revenue

Total cost 0.70

Organic Foods: $134,384 0.70

$191,977

$4,670 0.70

$6,671

AllNews.com:

Req. 4 Thomas Design assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients can also help the company control costs.

3-61

Managerial Accounting 6e Solutions Manual

(30–35 min.) P3-60B Req. 1 Job Cost Record JOB NO. 298 CUSTOMER NAME AND ADDRESS: ATV Corporation JOB DESCRIPTION: 100 TX tires DATE PROMISED 12-10 DATE STARTED 11-30 DATE COMPLETED 12-3 DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD ALLOCATED REQUISITION LABOR TIME RECORD DATE NO. AMOUNT NO. AMOUNT DATE RATE AMOUNT 20 XX 11 30 437 $840 1896 $192 12 3 $23 per direct 12 2 439 480 labor houra $966 3 501 800 1904 540 OVERALL COST SUMMARY

Totals

$2,120

$732

aPredetermined

mfg. overhead rate Overhead allocated

DIRECT MATERIALS.………... DIRECT LABOR............……… MANUFACTURING OVERHEAD ALLOCATED…... TOTAL JOB COST.......…..

$529,000 23,000

$2,120 732 966 $3,818

$23 per direct labor hour

(12 hrs + 30 hrs) × $23 per DL hour =

$966

Req. 2 Job 298 $ 6,000 3,818 $ 2,182 ÷ 100 $ 21.82

Sales ($60 × 100 tires) Less cost of job (from Req. 1) Total profit on job Divide by number of tires Per-unit profit

3-62

Chapter 3

Job Costing

(30–45 min.) P3-61B Req. 1 Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable Work in Process Inventory (14,600 + 28,000 + 19,300 + 21,400) Manufacturing Overhead Wages Payable

Work in Process Inventory (41,500 + 56,700 + 62,700 + 66,000) Raw Materials Inventory

POST. REF.

DEBIT 470,000

470,000 83,300 31,700 115,000

226,900 226,900

Manufacturing Overhead Accum. Depr.—Equipment

6,500

Manufacturing Overhead Cash Prepaid Insurance

16,000

Work in Process Inventory ($83,300 × 0.60) Manufacturing Overhead

49,980

CREDIT

6,500

10,000 6,000

49,980

3-63

Managerial Accounting 6e Solutions Manual

(continued) P3-61B Req. 1 Journal DATE g.

POST. REF.

ACCOUNTS AND EXPLANATIONS Finished Goods Inventory Work in Process Inventory

DEBIT 258,680

CREDIT 258,680

Accounts Receivable ($93,000 + $144,000) Sales Revenue

237,000

Cost of Goods Sold (64,860 + 100,240) Finished Goods Inventory

165,100

237,000

165,100

Completed: 13: 14,600 + 41,500 + (14,600 x 0.6) = 15: 19,300 + 62,700 + (19,300 x 0.6) = 16: 21,400 + 66,000 + (21,400 x 0.6) =

64,860 93,580 100,240 $258,680

Req. 2

(b) (c) (f) Bal.

Work in Process Inventory 83,300 (g) 226,900 49,980 101,500

258,680

(g) Bal.

Finished Goods Inventory 258,680 (h) 93,580

165,100

Req. 3 Red Canyon Homes Reconciliation of Work in Process Inventory Subsidiary and Control Accounts Chalet #14 Unfinished chalet (#14): Direct materials Direct labor Manufacturing overhead (60% of labor) Total cost = Work in process balance

3-64

$ 56,700 28,000 16,800 $101,500

Chapter 3

Job Costing

(continued) P3-61B Req. 4 Red Canyon Homes Reconciliation of Finished Goods Inventory Subsidiary and Control Accounts Chalet #15 Completed, unsold chalet (#15): Direct materials Direct labor Manufacturing overhead (60% of labor) Total cost equals finished goods balance

$ 62,700 19,300 11,580 $ 93,580

Req. 5 Red Canyon Homes Gross Profit on Chalets Sold in May Chalet #13 $93,000 (64,860) $28,140

Sales revenue Cost of goods sold Gross profit

Chalet #16 $144,000 (100,240) $ 43,760

The gross profit must cover these types of expenses (answers may vary): • Administration • Customer service • Design • Distribution • Marketing • Research and development

(25–35 min.) P3-62B Req. 1

Date April 30

May 31

Engine Pro, Inc. Computation of Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold for April and May (a) Work in Process Inventory (b) Finished Goods (c) Cost of Goods Inventory Sold Job Cost Job Cost Job Cost 4 $300 3 $1,500 1 $1,800 2 1,300 Total $3,100 6

$1,900

None

3 4 5 Total

$1,500 1,100 500 $3,100

3-65

Managerial Accounting 6e Solutions Manual

(continued) P3-62B Req. 2 Journal DATE

ACCOUNTS AND EXPLANATIONS Finished Goods Inventory Work in Process Inventory To record completion of Jobs 1, 2, and 3 in April. ($1,800 + $1,300 + $1,500)

POST. REF.

DEBIT 4,600

CREDIT 4,600

Finished Goods Inventory Work in Process Inventory To record completion of Jobs 4 and 5 in May. ($1,100 + $500)

1,600 1,600

Req. 3 Journal DATE May

May

ACCOUNTS AND EXPLANATIONS 14 Accounts Receivable Sales Revenue To record the sale of Job 5.

POST. REF.

500 500

Req. 4 The gross profit for Job 5 is: $2,300 (500) $ 1,800

The gross profit must be high enough to cover these types of costs (answers may vary): • • • • • • •

3-66

Administration Customer service Design Distribution Marketing Other costs (interest expense and income taxes) Research and development

CREDIT 2,300

14 Cost of Goods Sold Finished Goods Inventory To record the cost of goods sold for Job 5.

Sales revenue............……….. Cost of goods sold......……... Gross profit....................…....

DEBIT 2,300

Chapter 3

Job Costing

Serial Case C3-63 1.

Caesars is likely to use a job costing system for determining the costs and profit for each wedding. Job costing is used by Caesars because it offers unique, custom-ordered wedding packages. Each wedding package is considered a separate job. Different wedding packages can vary considerably in direct materials (materials needed), direct labor (time required to complete the job), and overhead costs. Because the jobs are so different, it would not be reasonable to assign them equal costs. Therefore, the cost of each wedding package is compiled separately.

2. a. b. c.

Direct material: Foods & beverages, flowers, cameras, and musical instruments. Direct labor: Salaries and wages paid to waiters, musicians, and coordinators. Overhead: Utilities, advertisement, insurance, rent, repairs, and taxes.

3-67

Managerial Accounting 6e Solutions Manual

Discussion & Analysis A3-64 1.

Why would it be inappropriate for a custom home builder to use process costing? Process costing is used to assign costs to a large number of identical units. Because each custom home is unique, this system would not be appropriate.

For what types of products is job costing appropriate? Why? For what types of products is process costing appropriate? Why? Job costing is used by companies that produce unique, custom-ordered products, or relatively small batches of different products. Different jobs can vary considerably in direct materials, direct labor, and manufacturing overhead costs, so job costing accumulates these costs separately for each individual job. Process costing is used for products that are made in large numbers of identical units through a series of uniform production steps or processes. Process costing averages manufacturing costs across all units so that each identical unit bears the same cost.

What product costs must be allocated to jobs? Why must these costs be allocated rather than assigned? Manufacturing overhead must be allocated to jobs. Manufacturing overhead is an indirect cost and as such is not traceable to individual jobs and must therefore be allocated.

When the predetermined manufacturing overhead rate is calculated, why are estimated costs and cost driver levels used instead of actual dollars and amounts? The predetermined manufacturing overhead rate is calculated at the beginning of the year to be used throughout the year. Because the actual amount of overhead will not be known until the end of the year, estimates are used so that overhead can be allocated to products as they are completed throughout the year.

Why should manufacturing overhead be allocated to a job even though the costs cannot be directly traced to a job? Give at least two reasons. Manufacturing overhead must be allocated to a job because it is one of the essential costs of converting raw materials into a finished product. If the cost of overhead were not allocated to a job, the cost of the job would be recorded incorrectly in the company’s accounting records, which would violate GAAP. Because the selling price of a product is determined in part by the cost of the product, the selling price could be too low and not provide a profit.

Why does management need to know the cost of a job? Discuss at least five reasons. Management needs to know the cost of a job for many reasons: • The cost of a job determines if it is feasible to continue. • Management uses the costs of a job to help control costs. • GAAP requires that companies keep accurate records of their costs. • The costs of a job are used for planning purposes, such as budgeting. Management needs to know the cost of a job to remain competitive in the market. • Management needs to know the cost to assign to Finished Goods Inventory and Cost of Goods Sold when the job is sold.

3-68

Chapter 3 7.

Job Costing

Why is it acceptable to close overallocated or underallocated manufacturing overhead to Cost of Goods Sold rather than allocating it proportionately to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold? Under what circumstances would it be advisable to allocate the overallocated or underallocated manufacturing overhead to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold? The amount of overallocated or underallocated manufacturing overhead is typically insignificant in relation to the total costs of manufacturing. Because the largest balance of the three accounts (Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold) is by far Cost of Goods Sold, it is acceptable to close the entire amount to Cost of Goods Sold. Another reason to close the overallocated or underallocated overhead to Cost of Goods Sold is because most of the inventory produced has been sold. If the overallocated or underallocated manufacturing overhead is a significant amount and the company has not sold most of the units produced during the period, it should be distributed among the three accounts according to their balances.

Describe a situation that may cause manufacturing overhead to be overallocated in a given year. Also describe a situation that may cause manufacturing overhead to be underallocated in a given year. Let’s say a company has underestimated the amount of the base for allocating overhead, such as direct labor hours, when computing the predetermined overhead rate. During the year, if the company has more jobs than it anticipated, the overhead could be overallocated due to the increase in direct labor hours. A company could experience an unanticipated increase in the costs of manufacturing overhead, which means that its predetermined rate could be too low. In that case, the amount of allocated overhead at the end of the year would be underallocated, meaning its actual costs of overhead was greater than their allocated costs of overhead.

Explain why cost of goods sold should be lower if manufacturing overhead is overallocated. Should operating income be higher or lower if manufacturing overhead is overallocated? Why? If manufacturing overhead is overallocated, it means that the company charged more overhead to jobs than it incurred. In this case, those overallocated costs were passed along to the Cost of Goods Sold when the jobs were sold to customers. When the manufacturing overhead account is closed, it will lower the balance in Cost of Goods Sold. Until the overallocated balance in manufacturing overhead is closed to Cost of Goods Sold, the operating income for the company will be lower than it should be because Cost of Goods Sold is too high.

10. What account is credited when manufacturing overhead is allocated to jobs during the period? What account is debited when manufacturing overhead costs are incurred during the period? Would you expect these two amounts (allocated and incurred manufacturing overhead) to be the same? Why or why not? Actual costs of overhead are debited to the manufacturing overhead account and allocated costs of overhead are credited to the manufacturing overhead account. These two amounts are not expected to be the same, or in other words, a zero balance in the manufacturing overhead account is not expected at the end of the year. The reason is that the allocated overhead is based on two estimates that are made at the beginning of the year. It would be quite unusual for those two estimates to result in a perfect allocation of the actual costs.

3-69

Managerial Accounting 6e Solutions Manual 11. How can job cost records help to promote sustainability efforts within a company? Job cost records serve a vital role for manufacturers who embrace sustainability. Because job cost records contain information about the direct materials, direct labor, and manufacturing overhead assigned to each job, they capture the essential resources required to manufacture a product. The summary information on the job cost records can be enhanced to provide management with further information about how the product or production process may affect the environment, employees involved in the manufacturing process, future consumers of the product, and future disposal of the packaging materials and product itself. Only by separately measuring these costs, will management have the information it needs to adequately weigh the costs and benefits associated with environmental and social responsibility initiatives. 12. Why should companies estimate the environmental cost of a given job? Why have EPR (extended producer responsibility laws come into existence? Job cost records should contain a section estimating the future environmental costs associated with each job to provide managers with better information from which to make decisions. EPR laws are more commonly known as “take-back” laws and create future costs associated with each job. The goal of EPR laws is to reduce the amount of potentially dangerous e-waste (electronic waste) in landfills by shifting the end-of-life disposal cost back to the manufacturer. By bearing the disposal cost, manufacturers should be motivated to design greener products that are repairable, more easily recyclable, and have a longer life cycle.

3-70

Chapter 3

Job Costing

Application & Analysis A3-65 Basic Discussion Questions 1.

Describe the product that is being produced and the company that makes it. The product selected was Kettle Brand Potato Chips. Kettle Foods is based in Salem, Oregon, and has been in business for more than 28 years.

Summarize the production process that is used in making this product. Truckloads of russet potatoes arrive at the manufacturing plant where they are first scrubbed, then crinkle sliced (unpeeled), and dropped into bubbling hot oil. A chip chef keeps the chips moving in the oil so the chips don’t stick together. Once they are cooked, they ride out of the oil on a conveyor belt and pass through an “optisort” machine that dumps out the overcooked chips. The last process a drum where seasonings are added.

What raw materials are used to make this product? Potatoes, oil, and seasoning are the raw materials used to make this product.

What indirect materials are used to make this product? The video did not show any indirect materials used in making the potato chips.

Describe the jobs of the workers who would be considered “direct labor” in making this product. The chip chef keeps the chips moving in the oil so they don’t stick together.

Describe the jobs of the workers who would be considered “indirect labor” in making this product. The video clip did not show any indirect labor in the process.

Define manufacturing overhead. In addition to the indirect materials and indirect labor previously described, what other manufacturing overhead costs would be incurred in this production process? Be specific and thorough. Make reasonable “guesses” if you do not know for sure. Manufacturing overhead are all the costs of production other than direct materials and direct labor. In addition to the cost of indirect materials and indirect labor, manufacturing overhead for Kettle Foods would be depreciation of the factory and equipment, taxes and insurance for the factory, utilities, and other miscellaneous costs of keeping the factory operating.

Would a job-order costing system or a process costing system be used for this production process? Give specific reasons for your choice of which costing system would be most appropriate for this manufacturer. Kettle Brand would use a process costing system because they have a series of steps that make large quantities of identical units. Note: Student answers will vary.

3-71

Managerial Accounting 6e Solutions Manual

(15-30 min.) A3-66 Ethics Mini-Case 1. a.

If Vicki were to change the allocation method to grant the employees their holiday bonuses, the following ethical principles would be violated: i. Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical standards.” By changing the allocation method used, Vicki would be violating technical standards. ii. Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” By changing the allocation method, Vicki would be adding information that is not accurate or clear. iii. Integrity: “Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.” Vicki would violate this principle by making decisions that result in her own bonus; she has a clear conflict of interest that she did not disclose. iv. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports.” Because the allocations would no longer correspond to the reality, the user’s understanding would be lessened. b. Thornton’s responsibilities as a management accountant are to make the correct ethical decisions by reporting information accurately and disclosing all potential conflicts of interest. The cost driver of manufacturing overhead costs is direct labor hours because the production process is labor intensive. It would not be correct to use a different cost driver, such as machine hours, in order to manipulate net income. First, Vicki should report her findings to the owner and CEO, Franklin Jackson. Second, if there is still a conflict, she should approach the audit committee or equivalent who can engage with her to gain a clear understanding of the situation.

(15–30 min.) A3-67 Real Life Mini-Case 1.

Do you think that Apple uses a process costing system or a job costing system? Give reasons for your answer. Apple should use a process costing system because every iPhone Xs will be produced exactly alike and it will be making many of them using the same process.

Assume that Apple assigns a cost of $10 to the iPhone Xs for “manufacturing cost.” What specific costs do you think would be included in that “manufacturing cost”? The “manufacturing cost” of the iPhone Xs is probably due to the labor, such as assembly and quality testing, and manufacturing overhead involved in making each iPhone Xs. Because Apple outsources the manufacture of most of its products to China, it doesn’t pay for manufacturing overhead costs directly. It probably pays a set amount ($10) for each iPhone that covers the cost of manufacturing (direct labor plus manufacturing overhead) the product. If Apple did manufacture its own products, manufacturing cost would include direct materials, direct labor, and manufacturing overhead.

In accounting terminology, what would the costs included in the Bill of Materials (BOM) be when discussing product cost? The accounting term used for the BOM would be the direct materials costs. This situation is because these costs are only incurred when an iPhone Xs is produced. A bill of materials is a list of the raw materials, subassemblies, subcomponents, and parts needed to manufacture an end product. The quantity of each item is also listed.

3-72

Chapter 3 4.

Job Costing

Assume that Apple assigns a cost of $10 for “manufacturing cost.” What would be the estimated gross profit per phone? What types of costs other than the costs estimated in this activity would gross profit have to go toward covering? Apple’s direct costs of manufacturing each phone would be $390 + $10, or $400. If we take the estimated retail price of $1,099 and subtract the cost of $400, the estimated gross profit per phone would be $699. The gross profit per iPhone Xs would also have to cover the nonmanufacturing elements in the value chain. There also would be shipping costs related to the products. In addition, Apple administrative costs must be covered (i.e., CEO salary, marketing campaigns, etc.).

The BOM costs for the units sold would appear on Apple’s income statement. In which income statement component, would these BOM costs appear? The BOM costs would be accounted for as cost of goods sold on the income statement.

Apple could start manufacturing some products in the United States rather than in China. If the iPhone Xs were to be manufactured in the United States, which cost components would you expect to increase? Which cost components might you expect to decrease? What other factors would Apple consider when deciding where to manufacture its products? If Apple started producing the iPhone Xs in the United States, a few things need to be assumed before answering this question. Student responses for this question are likely to vary greatly. One assumption is that the components that make up the BOM are made in the United States and therefore the unit cost may decline. However, some students may assume that the labor cost and overhead due to the plant building and equipment would be more expensive. Therefore the overall manufacturing cost could increase because of the increased cost of labor. Overhead would increase because building upkeep would be greater, and administrative expenses would also be higher. The only item that would decrease might be the cost of materials in the BOM, but that would be unlikely to drop enough to make the change to manufacture in the United States fiscally responsible. That is probably why Apple started manufacturing in China in the first place. However, social factors should be considered when looking at this issue. Americans are more willing to buy products that are made in the United States. This willingness to buy American could increase sales of the iPhone Xs, therefore the reduced gross profit on the product may be worth the trade-off.

(15–30 min.) A3-68 Req. 1 Custom Cookies allocates overhead costs to orders at the rate of 180% of direct labor cost ($0.90 / $0.50 = 180%; $1.17 / $0.65 = 180%). But direct labor cost does not drive overhead cost—direct labor cost has increased in recent months, but overhead cost has remained the same. Although actual overhead costs haven’t changed, allocated overhead has been artificially inflated because of the increase in direct labor cost, which is the overhead allocation base. Because actual overhead hasn’t changed, the same per-box overhead cost should be used for each order. If $0.90 overhead per box was appropriate for the first order, then $0.90 per box is appropriate for the second order also. Req. 2 Custom Cookies should account for each order as a separate job. The orders were received at different times, and the costs per box of the orders are not the same. Req. 3 The company has a tough decision. It can price the second order at $7.25 and keep the customer happy. But the gross profit will be less. It can raise the price to keep the profit margin intact, but this might anger the customer. The customer may think Custom Cookies is price gouging because the car dealer is in a bind. We would recommend pricing the second order at $7.25 per box and raising the sales price beginning with the new year. .

3-73

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Chapter 4 Activity-Based Costing, Lean Operations, and the Costs of Quality Quick Check Answers QC4-1. d QC4-2. c QC4-3. d

QC4-4. c QC4-5. d QC4-6. a

QC4-7. d QC4-8. c QC4-9. b

QC4-10. c QC4-11. d QC4-12. d

Short Exercises (5 min.) S4-1 a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q.

manufacturing cycle time Lean thinking batch-level costs prevention costs activity-based management DOWNTIME product-level costs Activity-based costing Internal failure costs Unit-level costs external failure costs Facility-level costs Kaizen appraisal costs Takt time POUS TQM

4-1

Managerial Accounting 6e Solutions Manual

(5 min.) S4-2 Req. 1 JOB 484 Departmental overhead rate Direct labor hours incurred in the Finishing Department Machine hours incurred in the Cutting Department Allocation of manufacturing overhead

Cutting Department $9 per machine hour

Finishing Department $18 per direct labor hour × 7 direct labor hours

× 8 machine hours $72

$126

*The total manufacturing overhead allocated to Job 484 is $72 + $126 = 198. Req. 2 The manufacturing cost of Job 484 is determined by summing the three manufacturing costs assigned to the job. Direct materials Direct labor ($24 per hour × 9 hours) Manufacturing overhead Total Job Cost

$2,400 216 198 $2,814

(5–10 min.) S4-3 Req. 1 Plantwide overhead rate

Estimated total manufacturing costs Estimated cost allocation base

= =

$3,311,500 17,900 machine hours

= =

$185 per machine hour

Req. 2 Production Departments Potato Chips Corn Chips Cheese Puffs TOTAL Req. 3 Potato Chips Corn Chips Cheese Puffs

Departmental Manufacturing Overhead $2,070,000 $763,000 $478,500 $3,311,500

÷ ÷ ÷

Machine Hours 11,500 3,500 2,900 17,900

= = =

Departmental Overhead Rates $180 per machine hour $218 per machine hour $165 per machine hour

Overcosted Undercosted Overcosted

(5 min.) S4-4 Activity

Manufacturing Overhead

Preparation

$510,000

Cooking and Draining

$928,000

Packaging

$400,000

4-2

Cost Driver 8,5000 preparation ÷ hours 32,000 cooking and ÷ draining hours ÷ 4,000,000 packages

Activity Cost Allocation Rate $60 per preparation hour

$29 per cooking and draining hour = $0.10 per package =

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(5–10 min.) S4-5 Req. 1 and 2 The total amount of manufacturing overhead allocated to the order (and the amount of manufacturing overhead per bag) is computed as follows:

Activity Cost Allocation Rate $60 per preparation hour $29 per cooking and draining hour $0.10 per package 1. TOTAL Number of bags 2. Manufacturing overhead per bag

Allocated Manufacturing Overhead $ 1,260 1,044 1,200 $3,504 ÷ 12,000 $ 0.29 (rounded)

Use of Cost Driver 21 preparation hours 36 cooking and draining hours 12,000 bags

Req. 3 In addition to the costs previously listed, the company needs to consider direct materials and direct labor.

(5–10 min.) S4-6 Req. 1

Activity Machine setup Machining Quality control

Estimated Total Manufacturing Estimated Total Usage of Overhead Costs Cost Driver (A) (B) $ 161,650 3,050 setups $ 1,100,000 5,000 machine hours $ 360,000 4,500 tests run

Activity Cost Allocation Rate (A ÷ B) $ 53 per setup $220 per machine hour $ 80 per QC test

Req. 2 Job Cost Record JOB #557 Direct Materials Direct Labor: Jeff: 10 × $25 = $250 Arabella: 4 × $28 = $112 Manufacturing Overhead: [(2 x $53) + (6 x $220) + (3 x $80)] TOTAL JOB COST

Manufacturing Costs $1,250

362 1,666 $3,278

4-3

Managerial Accounting 6e Solutions Manual

(15–20 min.) S4-7 a. b. c. d. e. f. g. h. i. j. k. l.

Product-level Unit-level or batch-level or facility-level Facility-level Unit-level Unit-level or batch-level or facility-level Product-level Batch-level Product-level Facility-level Unit-level Unit-level Facility-level

(15–20 min.) S4-8 1. Product-level 2. Product-level 3. Facility-level 4. Facility-level 5. Unit-level 6. Batch-level 7. Facility-level 8. Facility-level 9. Product-level 10. Unit-level

(5 min.) S4-9 1. 2. 3. 4. 5. 6.

In bidding for jobs, managers lost bids they expected to win and won bids they expected to lose. More likely The company operates in a very competitive industry. More likely The company produces few products, and the products consume resources in a similar manner. Less likely The company has very few indirect costs. Less likely The company produces high volumes of some of its products and low volumes of other products. More likely The company has reengineered its production process but has not changed its accounting system. More likely

(10–15 min.) S4-10 1.

(a) Facility-level (b) Facility-level

(a) Batch-level (b) Batch-level

An airport store would probably not use ABC cost for water pricing. The costs of computing ABC cost for a bottle of water probably would outweigh the benefits that the airport store would recognize from implementing it.

The airport store would probably incur more costs than benefits from implementing ABC/ABM. Most products sold in an airport store are relatively low cost goods, such as snacks, drinks, and magazines. They do not incur substantially different indirect costs for each product. Also, similar quantities of each product are sold, thus lowering the need for ABC/ABM.

4-4

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(10–15 min.) S4-11 a. b. c. d. e. f. g. h.

Non-value added Non-value added Non-value added Non-value added Value added Non-value added Value added Non-value added

(5 min.) S4-12 a. Lean production system b. Lean production system c. Lean production system d. Lean production system e. Lean production system f. Lean production system g. Traditional production system h. Lean production system i. Traditional production system j. Lean production system k. Traditional production system l. Lean production system m. Traditional production system

(10–15 min.) S4-13 a. b. c. d. e. f. g. h.

Not utilizing people to their full potential Excess processing Movement Waiting Defects Overproduction Transportation Inventory

4-5

Managerial Accounting 6e Solutions Manual

(15–20 min.) S4-14 a. b. c. d. e. f. g. h. i. j.

Not utilizing people to their full potential Waiting Movement Defects Overproduction Excess processing Transportation Waiting Transportation Not utilizing people to their full potential

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

External failure External failure Prevention Internal failure Internal failure Appraisal Appraisal Internal failure (or external failure if assuming units are found by customer) Prevention Prevention

(5–10 min.) S4-15

4-6

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(10–15 min.) S4-16 Req. 1 Cost (Benefit) Analysis Prevention costs: Negotiating with and training suppliers to obtain higher quality materials and on-time delivery Redesigning the speakers to make them easier to manufacture Appraisal costs: Additional 20 minutes of testing for each speaker Avoid inspection of raw materials Internal failure costs: Rework avoided because of fewer defective units Avoid lost profits from lost production time due to rework External failure costs: Reduced warranty repair costs Avoid lost profits from lost sales due to disappointed customers Net cost (benefit) from implementing quality program

Costs (Savings)

$ 300,000 1,402,000 607,000 (403,000) (652,000) (305,000) (205,000) (853,000) $ (109,000)

Req. 2 The company should implement the new quality program. The company should save $109,000 by implementing the new program.

4-7

Managerial Accounting 6e Solutions Manual

(15–20 min.) S4-17 Before: Current Production x Current Warranty Repair Rate (100,000 x 10%) x Variable Warranty Repair Costs per Unit Current Warranty Costs After: Current Units Additional Prevention Costs

10,000 x $30 $ 300,000

100,000 x 2 (200,000)

Additional External Failure Costs Current Units x New Rate (10% x (100%-90%))

100,000 x 1% 1,000 x $30

Variable Warranty repair costs

(30,000) Additional Units Sold x New Rate

1,000 x 1% 10 x $30

Variable warranty repair costs

(300) Price Variable Costs (80 + 2) Profit Additional Units Additional Profit Warranty costs

150 (82) 68 x 1,000 68,000 $ 162,300

Difference: $300,000 – $162,300 = 137,700 net benefit in favor of initiative

4-8

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(5 min.) S4-18 1.

Alexandria receives an iPad from a salesperson at a lean consulting group. She keeps the iPad, even though she knows that her department will be responsible for selecting a consulting firm to come in to offer lean training sessions next year.

Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

Bowes Company operates in a highly competitive environment and has developed some proprietary processes that allow it to maintain a market lead. Franklin, the CFO, does not have employees sign nondisclosure agreements because he feels that they are all family. He avoids talking about the topic.

Confidentiality—Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates' activities to ensure compliance.

Tammary Corporation has an activity-based costing system. Stephen prepares reports each month that are long and full of facts. The reports are hard to understand for anyone but Stephen.

Competence—Provide decision support information and recommendations that are accurate, clear, concise, and timely.

Cliff, an accountant at the Wall Corporation, did not attend the training for the new activitybased costing system because he figures it will not be much different from the current allocation system.

Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

Mack, the plant manager, does not disclose the quality issues he is aware of in the current production process. He figures that he can get them resolved in the next few months.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.

4-9

Managerial Accounting 6e Solutions Manual

(10 min.) S4-19 Rank the four variables from the most highly correlated with materials handling costs to the least correlated. 1. 2. 3. 4.

Volume of parts Weight of parts Time spent Number of parts moved

Which variable would you recommend be used as the allocation base for materials handling costs? Explain your answer. Volume of parts (pallets) is the most highly correlated variable with materials handling costs and should be used as the allocation base. The other variables are not as strongly correlated, and it makes sense that the volume of parts could be related to materials handling costs.

(10 min.) S4-20 Rank the four variables from the most highly correlated with utility costs to the least correlated. 1. 2. 3. 4.

Labor hours Number of units Machine hours Sales revenue

Which variable would you recommend be used as the allocation base for utility costs? Explain your answer. Labor hours is the most highly correlated variable with utility costs and should be used as the allocation base. The other variables are not as strongly correlated, and it makes sense that the labor hours could be related to utility costs.

4-10

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Exercises (Group A) (15–20 min.) E4-21A Req. 1 Plantwide overhead rate

Estimated total manufacturing overhead Estimated cost allocation base

= =

$1,000,000 20,000* direct labor hours

= =

$50 per direct labor hour

*When calculating plantwide overhead rates, all direct labor hours incurred in the plant are used. Req. 2 Departmental overhead rate

Estimated total department overhead Estimated departmental allocation base

Machining Dept. overhead rate

$660,000 15,000 machine hours

= =

Finishing Dept. overhead rate

$44 per machine hour

$340,000 17,000** direct labor hours

= =

$20 per direct labor hour

**When calculating the finishing departmental rate, only the direct labor hours incurred in the finishing department are used. Req. 3 Overhead allocation based on single, plantwide rate: Job 450 5 DL hours × $50/ DL hour $ 250

Cost allocation base (actual) × Plantwide cost allocation rate Overhead allocation

Job 455 5 DL hours × $50 / DL hour $ 250

4-11

Managerial Accounting 6e Solutions Manual

(continued) E4-21A Req. 4 Overhead allocation based on departmental rates: Job 450 Machining Department: Departmental allocation rate × Machine hours used by Job Overhead allocation

Finishing Department: Departmental allocation rate × DL hours used by Job Overhead allocation

Job 455 $44/ MH 3 MH $132

$20/DL hr. × 4 DL hrs. $80

Total overhead allocation (from both departments

$ 212

$44/ MH × 4 MH $176

$20/ DL hr. × 3 DL hrs. $60

$ 236

Req. 5 The single plantwide rate overcosts Job 450 by $38 and overcosts Job 455 by $14. Because the company sets the sales price at 125% of cost, and the job cost is affected by the allocation system used, the sales price will be affected by the allocation system used.

4-12

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-22A Req. 1

Activity Materials handling Machine setup Insertion Finishing

Fuller Company Computation of Cost Allocation Rates Estimated Quantity of Cost Total Estimated Cost Allocation Base $12,000 ÷ 3,000 parts $ 3,400 ÷ 10 setups $48,000 ÷ 3,000 parts $80,000 ÷ 2,000 hours

Activity Cost Allocation Rate $ 4 per part $340 per setup $ 16 per part $ 40 per hour

= = = =

Req. 2 The amount of manufacturing overhead to be assigned to Job 420 is computed as follows: Job 420 Manufacturing Overhead Allocation Actual Quantity of Cost Allocation Base Used Cost Allocation Rate

Activity Materials handling Machine setups Insertion of parts Finishing Total

200 parts 2 setups 200 parts 130 hours

× × × ×

$4 / part $340 / setup $16 / part $ 40 / hr.

MOH Assigned = = = =

800 680 3,200 5,200 $ 9,880

Req. 3 The amount of manufacturing overhead to be assigned to Job 510 is computed as follows: Job 510 Manufacturing Overhead Allocation Actual Quantity of Cost Allocation Base Used 425 parts 4 setups 425 parts 350 hours

Activity Materials handling Machine setups Insertion of parts Finishing Total

× × × ×

Cost Allocation Rate $4 / part $340 / setup $16 / part $ 40 / hr.

= = = =

MOH assigned $ 1,700 1,360 6,800 14,000 $23,860

4-13

Managerial Accounting 6e Solutions Manual

(15–20 min.) E4-23A Req. 1 Total overhead Divided by: Total machine hours Predetermined MOH rate

$ 970,000 10,000 $ 97

MOH cost of Job #356 Machine hours used Multiplied by: Predetermined MOH rate Total MOH

60 $ 97 5,820*

Cost of Job #356 — traditional plantwide overhead rate Direct material 290 lbs. × $35/lb. Direct labor 20 hrs. ×$20/hr. MOH

$ 10,150 400 *5,820

Total cost of job

$ 16,370

Req. 2 Job #356—ABC Direct material Direct labor

290 lbs. × $35 per lb. 20 DL hours × $20 per DL hour 60 x $40* per machine hour 9 x $50** per change order 60 x $280*** per lb. of hazardous

Machine hours No. of engineering change orders Pounds of hazardous waste generated Total cost of job

$ 10,150 400 2,400 450 16,800 $ 30,200

ABC cost allocation rates: Machine maintenance: $400,000 / 10,000 = *$40 per machine hour Engineering: $150,000 / 3,000 = **$50 per change order Hazardous waste: $420,000 / 1,500 = ***$280 per pound of hazardous waste Req. 3 The cost estimate based on the activity-based costing (ABC) rates would provide more useful information because this cost estimate considers the specific resources used by each product. This information can be used to price jobs based on more accurate costs.

4-14

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-24A Req. 1 Operating overhead $233,000

Total professional hours ÷

10,000

Current operating overhead allocation rate $23.30 per professional hour

Req. 2 Billing Calculations Based on Current Allocation System Professional time (25 hours × $63 per hour) Operating overhead (25 hours × $23.30 per professional hour) Total cost of job Mark up on cost Bill to client

$1,575 + 582.50 $2,157.50 × 130% $2,804.75

Req. 3 Activity Transportation to clients Blueprint copying Office support

Cost $ 6,000 $ 32,000 $195,000

Total activity allocation base ÷ 15,000 miles driven (4,500 + 10,500) ÷ 1,000 copies (250 + 750) ÷ 5,000 secretarial hours (2,500 + 2,500)

= = =

Activity allocation rate $0.40 per mile (rounded) $32 per copy $39 per secretarial hour

Req. 4

Total cost of job Multiplied by: Mark up percentage Amount billed to client

$2,338* 130% $3,039.40

* Total cost = $1,575 + $50 + $128 + $585 = $2,338 Professional time: 25 hours x $63 / hour = $1,575 Transportation: 125 miles x $0.40 / mile = $50 Blueprint copying: 4 copies x $32 = $128 Office support: 15 hours x $39 = $585 Req. 5 The ABC billing system should be more fair to clients because they are charged according to the resources they used. For example, copying blueprints is very expensive. Under the fairer ABC system, clients are charged according to the number of blueprint copies their job required. The fairer system better recognized the extent to which operating costs are incurred by each unique client job.

4-15

Managerial Accounting 6e Solutions Manual

(15–20 min.) E4-25A Req. 1 Total pharmacy cost allocation rate (using number of prescriptions): Total annual estimated cost $102,000 $45,600 $180,000 $327,600 ÷24,000 $ 13.65

Cost pools Pharmacy occupancy costs (utilities, rent, and other costs) Packaging supplies (bottles, bags, and other packaging) Professional training and insurance costs Total pharmacy overhead Divide by number of prescriptions Total pharmacy cost allocation rate per prescription Req. 2 Cost assigned using traditional overhead allocation Customer order #1247 4 prescriptions x $13.65

$54.60

Req. 3 Cost assigned using traditional overhead allocation Customer order #1248 2 prescriptions x $13.65

$27.30

Req. 4

Cost Pools Pharmacy occupancy costs Packaging supplies

Estimated Cost $102,000 $45,600

Professional training and insurance costs Req. 5 Customer order #1247

$180,000

Used: Technician hrs. for order Number of prescriptions Pharmacist hours

Cost Drivers Technician hours Number of prescriptions Pharmacists hours

Estimated Cost Driver Activity 85,000 24,000

Cost Allocation Rate $1.20 $1.90

20,000

$9.00

Used by this Order 0.5 4 1

Allocation Rate $1.20 $1.90 $9.00 Total ABC Cost

ABC Assigned Cost $ 0.60 $ 7.60 $ 9.00 $ 17.20

Used by this Order 0.5 2 2.5

Allocation Rate $1.20 $1.90 $9.00 Total ABC Cost

ABC Assigned Cost $ 0.60 $ 3.80 $ 22.50 $ 26.90

Req. 6 Customer order #1248 Used: Technician hrs. for order Number of prescriptions Pharmacist hours

Req. 7 The activity-based costing (ABC) would produce a more accurate product cost because this method considers the specific resources used by each order.

4-16

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-26A Req. 1 Machine setup: (120,000 / 2,000) = $60 Machining: (1,050,000 / 6,000) = $175 Polishing: (80,000 / 10,000) = $8 Quality control: (280,000 / 4,000) = $70 Facility level costs: (120,000 / 50,000) = $2.40 Req. 2 Job 624: Direct Materials Direct Labor (10 x $25) Manufacturing Overhead Total

1,050 250 1,115* 2,415

*Manufacturing Overhead: Machine Setup: 1 x $60 = Machine Hours: 5 x $175 = Polishing Cloths: 2 x $8 = Quality Control Tests: 2 x $70 = Facility Level: 10 x $2.40 = Total:

60 875 16 140 24 $1,115

Req. 3 ABC picks up on types of resources used (machine, testing, polishing) and amount of resources used (i.e., 2 tests vs. 10 tests). Student answers may vary. Req. 4 Plantwide Rate

DL hours MOH for job 624

1,650,000 ÷ 50,000 $33 / DL hour X 10 $330

Plantwide ABC Cost distortion difference

330 1,115 785

Plantwide would have undercosted the job by $785.

4-17

Managerial Accounting 6e Solutions Manual

(20–30 min.) E4-27A Req. 1 Dettling Corp. Total Budgeted Indirect Manufacturing Costs

Activity Materials handling [(4 x 1,000) + (6 x 1,000)] Machine setups 20 + 20 Insertion of parts [(4 x 1,000) + (6 x 1,000)] Finishing [(1.0 x 1,000) + (3.0 x 1,000)] Total budgeted indirect cost

Budgeted Quantity of Cost Allocation Base 10,000 40 10,000 4,000

Activity Cost Allocation Rate $ 4.50 $325.00 $ 31.00 $ 51.00

Total Budgeted Indirect Cost $ 45,000 13,000 310,000 204,000 $572,000

Req. 2

Activity Materials handling Machine setups Insertion of parts Finishing Total ABC allocated indirect cost

Dettling Corp. ABC Indirect Manufacturing Cost per Unit Cost Allocation Quantity of Cost Allocation Base Rate Used By: Standard Deluxe $ 4.50 4 6 $325.00 0.020 0.020 (=20/1,000) (=20/1,000) $ 31.00 4 6 $ 51.00 1.0 3.0

Req. 3 Total budgeted manufacturing overhead Total budgeted direct labor hours [(2.7 x 1,000) + (3.8 x 1,000)] Plantwide overhead rate

Allocated Activity Cost Per Wheel Standard Deluxe $ 18.00 $ 27.00 6.50 6.50

124.00 51.00 $199.50

186.00 153.00 $372.50

$572,000 (Req. 1) 6,500

$88 per direct labor hour

Manufacturing overhead cost per wheel based on direct labor hours: Standard: Deluxe:

2.70 × $88 = $237.60 3.80 × $88 = $334.40

Req. 1 Dettling Corp. Total Cost per Unit Using ABC Data Standard Direct materials $ 33.50 Direct labor 45.70 Manufacturing overhead (see E4-25A for calculations) 199.50 $ 278.70 Total manufacturing cost

4-18

Deluxe $ 48.00 52.00 372.50 $ 472.50

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(continues E4-27A) The gross profit (using ABC data) for the two models is: Dettling Corp. Gross Profit per Unit Using ABC Data Standard $ 460.00 278.70 $181.30

Deluxe $ 630.00 472.50 $157.50

Dettling Corp. Total Cost per Unit Using Plantwide Overhead Rate Standard Direct materials $ 33.50 Direct labor 45.70 Manufacturing overhead (see E4-25A for calculations) 237.60 $316.80 Total manufacturing cost

Deluxe $ 48.00 52.00 334.40 $434.40

Dettling Corp. Gross Profit per Unit Using Plantwide Overhead Rate Standard Sales price $460.00 Less: Total manufacturing costs 316.80 $143.20 Gross profit

Deluxe $630.00 434.40 $195.60

Sales price Less: Total manufacturing cost Gross profit Req. 2

Req. 3 The standard model is more profitable than the deluxe model. Activity-based costing data generally are more accurate than cost data generated by a plantwide overhead allocation rate. ABC systems have more cost categories (activities), each with its own allocation base. ABC cost assignments more accurately represent the cost of resources consumed to manufacture (and support) products. Req. 4 The ABC system is likely to pass the cost-benefit test because Dettling Corp. manufactures two different products that use different amounts of resources. The old cost system appears “broken” because profits have been declining even though the company shifted its product mix toward the product that had appeared most profitable under the old system.

(15–20 min) E4-29A 1. 2. 3. 4. 5. 6.

Lean organization Traditional organization Traditional organization Lean organization Lean organization Lean organization

7. 8. 9. 10. 11. 12.

Traditional organization Lean organization Traditional organization Lean organization Traditional organization Traditional organization

4-19

Managerial Accounting 6e Solutions Manual

(15–20 min.) E4-30A Req. 1 Prevention costs: Training employees in TQM Training suppliers in TQM Identifying preferred suppliers who commit to on-time delivery of perfect quality materials Appraisal costs: Strength-testing one item from each batch of panels Avoid inspection of raw materials Internal failure costs: Avoid rework and spoilage External failure costs: Avoid lost profits from lost sales due to disappointed customers Avoid warranty costs Req. 2 (Cost) / Benefit Analysis Prevention costs: Training employees in TQM…………………………… Training suppliers in TQM……………………………... Identifying preferred suppliers who commit to ontime delivery of perfect quality materials……….. Appraisal costs: Strength-testing one item from each batch of panels…………………………………………………... Savings on inspection of raw materials…………………

(Cost) / Savings

$ (27,000) (39,000) ( 52,000)

(63,000) 52,000

Internal failure costs: Savings on rework and spoilage……………………..

64,000

External failure costs: Savings on lost profits from lost sales due to disappointed customers……………………………. Savings on warranty costs………………………………..

93,000 19,000

Net benefit………………………………………………...

$47,000

Sinclair should adopt the new quality program. The program would save the company $47,000.

4-20

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(10–15 min.) E4-31A Req. 1 Category Prevention: Improving Design (1,000 x $75) Appraisal: Testing & Inspection [(½ x 5,000) x$ 40] Internal Failure: Rework [(10% x 5,000) x $400)] External Failure: Warranty [(8% x 5,000) x $450] Lost Sales [300 x (1,500 – 800)] Total

Cost

% of Total (rounded) 75,000

10%

100,000

13%

200,000

26%

180,000 210,000 390,000 765,000

23% 28% 51% 100%

Req. 2 The cost of service call including the truck, equipment, gas, and time. Req. 3 The COQ report shows the company where it is not spending enough money or where the company can reallocate funds to help reduce failure costs.

4-21

Managerial Accounting 6e Solutions Manual

(20 min.) E4-32A a.

Use the CORREL function in Excel to determine which variable would be the best allocation base for the company’s material handling costs. Rank the four variables from the most highly correlated with materials handling costs to the least correlated.

1. 2. 3. 4.

Volume of parts (pallets) Number of parts moved Weight of parts (pounds) Time spend (hours)

b. Which variable would you recommend be used as the allocation base for materials handling costs? Volume of parts (pallets) is the most highly correlated variable with materials handling costs and should be used as the allocation base. The other variables are not as strongly correlated, and it makes sense that the volume of parts could be related to materials handling costs.

4-22

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(20 min.) E4-33A a.

Use the CORREL function in Excel to analyze whether number of units produced, sales revenue, machine hours, or labor hours would be the appropriate cost allocation base for the company’s utility costs. Rank the four variables from the most highly correlated with utility costs to the least correlated.

1. 2. 3. 4.

Machine hours Sales revenue Number of units produced Labor hours

b. Which variable would you recommend be used as the allocation base for utility costs? Machine hours is the most highly correlated variable with the company’s utility costs and should be used as the allocation base. The other variables are not as strongly correlated, and it makes sense that the machine hours could be related to utility costs.

4-23

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (15–20 min.) E4-34B Req. 1 Plantwide overhead rate

Estimated total manufacturing overhead Estimated cost allocation base

$1,100,000 27,500 direct labor hours

= =

$ 40 per direct labor hour

Req. 2 Department overhead rate

Estimated total department overhead Estimated cost allocation base

Machining Dept. overhead rate

$740,000 14,800 machine hours

= =

Finishing Dept. overhead rate

$50 per machine hour* $360,000 18,000 direct labor hours

= =

$20 per direct labor hour*

*Rounded to the nearest dollar. Req. 3 Overhead allocation based on single, plantwide rate: Job 450 5 DL hours × $40/ DL hour $200

Total direct labor hours × Plantwide allocation rate Overhead allocation

Job 455 5 DL hours × $40/ DL hour $200

Req. 4 Overhead allocation based on departmental rates: Job 450

Job 455

Machining Department: Departmental allocation rate × Machine hours used by Job Overhead allocation

$50/ MH × 2 MH $100

Finishing Department: Departmental allocation rate × DL hours used by Job Overhead allocation

$20/ DL hr. × 4 DL hrs. $ 80

$20/ DL hr. × 3 DL hrs. $60

$180

$410

Total overhead allocation (from both departments

4-24

$50/ MH 7 MH $350

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(continued) E4-34B Req. 5 The single plantwide rate overcosts Job 450 by $20 and undercosts Job 455 by $210. Because the company sets its sales prices at 125% of cost, and the job cost is affected by the allocation system it uses, its sales price will be affected by the allocation system it uses.

(15–20 min.) E4-35B Req. 1 Farraway Company Computation of Indirect Cost Allocation Rates

Activity Materials handling Machine setups Insertion of parts Finishing

Total Estimated Cost $ 13,200 $ 5,200 $49,500 $86,100

÷ ÷ ÷ ÷

Estimated Quantity of Cost Allocation Base 3,300 parts 20 setups 3,300 parts 2,100 hours

= = = =

Activity Cost Allocation Rate $ 4 per part $260 per setup $ 15 per part $ 41 per hour

Req. 2 The amount of manufacturing overhead to be assigned to Job 420 is computed as follows: Job 420 Manufacturing Overhead Allocation Actual Quantity of Cost Allocation Base Used

Activity Materials handling Machine setups Insertion of parts Finishing Total

200 parts 2 setups 200 parts 150 hours

Cost Allocation Rate × × × ×

$4 / part $260 / setup $15 / part $ 41 / hr.

MOH Assigned = = = =

800 520 3,000 6,150 $10,470

Activity Materials handling Machine setups Insertion of parts Finishing Total

× × × ×

Cost Allocation Rate $4 / part $260 / setup $15 / part $ 41 / hr.

= = = =

MOH assigned $ 1,600 1,040 6,000 13,120 $21,760

4-25

Managerial Accounting 6e Solutions Manual

(15–20 min.) E4-36B Req. 1 Total overhead Divided by: Total machine hours Predetermined MOH rate

$1,440,000 12,000 $ 120

MOH cost of Job #356 Machine hours used Multiplied by: Predetermined MOH rate Total MOH

90 $120 10,800*

Cost of Job #356 — traditional plantwide overhead rate Direct material (250 lbs. ×$45/lb.) Direct labor (60 hrs. ×$25/hr.) MOH

$ 11,250 $1,500 $ 10,800* $ 23,550

Total cost of job

Req. 2 Job #356 — ABC Direct material Direct labor

(250 lbs. ×$45 per lb.) (60 DL hours × $25 per DL hour)

Machine hours No. of engineering changes Pounds of hazardous waste generated hazardous Total cost of job

90 x $70* per machine hour 6 x $20** per change order

11,250 $1,500 $6,300 $120

30 x $290*** per lb. of $

$8,700 27,870

ABC cost allocation rates: Machine maintenance: $840,000 / 12,000 = $70* per machine hour Engineering: $20,000 / 1,000 = $20** per change order Hazardous waste: $580,000 / 2,000 = $290*** per pound of hazardous waste Req. 3 The cost estimate based on the activity-based costing (ABC) rates would provide more useful information because this cost estimate takes into account the specific resources used by each product. This information can be used to price jobs based on more accurate costs.

4-26

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-37B Req. 1 Operating overhead $229,000

Total professional hours

10,000

Current operating overhead allocation rate $22.90 per professional hour

Req. 2 Billing Calculations Based on Current Allocation System Professional time (20 hours × $63 per hour) Operating overhead (20 hours × $22.90 per professional hour) Total cost of job Mark up on cost Bill to client

$1,260 + 458 $1,718 × 126% $2,164.68

Req. 3 Activity Transportation to clients Blueprint copying Office support

Cost $ 12,000 32,000 185,000

÷ ÷ ÷

Total activity allocation base 15,000 miles driven (4,500 + 10,500) 1,000 copies (500 + 500) 5,000 secretarial hours (2,900 + 2,100)

= = =

Activity allocation rate $0.80 per mile $32 per copy $37.00 per secretarial hour

To calculate the activity cost allocation rates, you must use the total activity for the year. Req. 4 Total cost of job $2,240*

x x

Mark up percentage 126%

= =

Amount billed $2,822.40

* Total cost = $1,260 + $112 + $128 + $740 = $2,240 Professional time: 20 hours x $63 / hour = $1,260 Transportation: 140 miles x $0.80 / mile = $112 Blueprint copying: 4 copies x $32 = $128 Office support: 20 hours x $37 = $740 Req. 5 The ABC billing system should be more fair to clients because they are charged according to the resources they used. For example, copying blueprints is very expensive. Under the fairer system, clients are charged according to the number of blueprint copies that their job required. The fairer system better recognized the extent to which operating costs are incurred by each unique client job.

4-27

Managerial Accounting 6e Solutions Manual

(15–20 min.) E4-38B Req. 1 Total pharmacy cost allocation rate (using number of prescriptions): Total Annual Estimated Cost $36,000 $39,100 $125,000 $200,100 23,000 $ 8.70

Cost Pools Pharmacy occupancy costs (utilities, rent, and other costs) Packaging supplies (bottles, bags, and other packaging) Professional training and insurance costs Total pharmacy overhead Divide by number of prescriptions Total pharmacy cost allocation rate per prescription Req. 2 Cost assigned using traditional overhead allocation: Customer order #1102 3 prescriptions × $8.70

$26.10

1 prescription × $8.70

$8.70

Req. 3 Cost assigned using traditional overhead allocation Customer order #1103

Req. 4

Cost Pools Pharmacy Occupancy Costs Packaging Supplies

Estimated Cost $36,000 $39,100

Training and Insurance Costs

$125,000

Cost Drivers Technician Hours Number of Prescriptions Pharmacist Hours

Estimated Cost Driver Activity 90,000 23,000

Cost Allocation Rate $.40 $1.70

25,000

$5.00

Req. 5 Customer order #1102 Used: Technician hrs. for order Number of prescriptions Pharmacist hours

Used by this order 0.5 3 2

Allocation rate $.40 $1.70 $5.00 Total ABC cost

ABC assigned cost $ 0.20 $ 5.10 $ 10.00 $ 15.30

Used by this order 0.5 1 2.5

Allocation rate $.40 $1.70 $5.00 Total ABC cost

ABC assigned cost $ 0.20 $ 1.70 $ 12.50 $ 14.40

Req. 6 Customer order #1103 Used: Technician hrs. for order Number of prescriptions Pharmacist hours

Req. 7 The activity-based costing (ABC) allocation method would produce a more accurate product cost because this method considers the specific resources used by each order. 4-28

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-39B Req. 1 Machine setup: ($180,000 / 2,000) = $90 Machining: ($1,050,000 / 12,000) = $87.50 Polishing: ($100,000 / 5,000) = $20 Quality control: ($320,000 / 4,000) = $80 Facility level costs: ($150,000 / 50,000) = $3 Req. 2 Job 804: Direct Materials Direct Labor (12 x $30) Manufacturing Overhead Total

1,250 360 971* 2,581

*Manufacturing overhead: Machine setup: 1 x$ 90 = 90 Machine hours: 6 x $87.50 = 525 Polishing cloths: 4 x $20 = 80 Quality control tests: 3 x $80 = 240 Facility level: 12 x $3 = 36 Total: $ 971 Req. 3 ABC picks up on types of resources used (machine, testing, polishing) and amount of resources used (i.e., 2 tests vs. 10 tests). Req. 4 Plantwide Rate

DL Hours MOH for Job 804

1,800,000 ÷ 50,000 $36 / DL Hour X 12 $432

Plantwide ABC Cost Distortion Difference

432 971 539

Plantwide would have undercosted the job by $539.

4-29

Managerial Accounting 6e Solutions Manual

(20–30 min.) E4-40B Req. 1 King Corp. Total Budgeted Indirect Manufacturing Costs

Activity Materials handling [(8.0 x 1,000) + (10.0 x 1,000)] Machine setups 20 + 20 Insertion of parts [(8.0 x 1,000) + (10.0 x 1,000)] Finishing [(2.0 x 1,000) + (3.5 x 1,000)] Total budgeted indirect cost

Budgeted Quantity of Cost Allocation Base 18,000

Activity Cost Allocation Rate $ 4.00

40 18,000 5,500

Total Budgeted Indirect Cost $ 72,000

$375.00 $ 28.00 $ 54.00

15,000 504,000 297,000 $888,000

Req. 2 King Corp. ABC Indirect Manufacturing Cost per Unit Cost Allocation Rate

Activity Materials handling Machine setups

$ 4.00 $375.00

Insertion of parts Finishing Total ABC allocated indirect cost

$ 28.00 $ 54.00

Quantity of Cost Allocation Base Used By: Allocated Activity Cost Per Wheel Standard Deluxe Standard Deluxe 8 10 $ 32.00 $ 40.00 0.020 0.020 7.50 7.50 (=20/1,000) (=20/1,000) 8 10 224.00 280.00 2.0 3.5 108.00 189.00 $371.50 $516.50

Req. 3 Total budgeted manufacturing overhead Total budgeted direct labor hours [(2.6 x 1,000) + (3.4 x 1,000)]

Plantwide overhead rate

$888,000 (Req. 1) 6,000 $148 per direct labor hour

Manufacturing overhead cost per wheel: Direct labor hours x

Plantwide overhead rate

Manufacturing overhead =

Standard

2.60

$148.00

$384.80

Deluxe

3.40

$148.00

$503.20

4-30

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-41B Req. 1 Begin by computing the total costs. King Corp Total Cost per Unit Using ABC Data Standard Direct materials $ 33.00 Direct labor 45.90 Manufacturing overhead (from E4-36B) 371.50 $ 450.40 Total manufacturing cost

Deluxe $ 46.75 54.00 516.50 $ 617.25

Now compute the gross profit. King Corp Gross Profit per Unit Using ABC Data Standard $575.00 450.40 $ 124.60

Deluxe $735.00 617.25 $ 117.75

King Corp Total Cost per Unit Using Plantwide Overhead Rate Standard Direct materials $ 33.00 Direct labor 45.90 Manufacturing overhead (from E4-36B) 384.80 $ 463.70 Total manufacturing cost

Deluxe $ 46.75 54.00 503.20 $ 603.95

Sales price Less: Total manufacturing costs Gross profit Req. 2 Begin by computing the total costs.

Now compute the gross profit. King Corp. Gross Profit per Unit Using Plantwide Overhead Rate Standard Sales price $575.00 Less: Total manufacturing costs 463.70 $ 111.30 Gross profit

Deluxe $735.00 603.95 $ 131.05

Req. 3 The standard model is more profitable than the deluxe model. Activity-based costing data generally is more accurate than cost data generated by a plantwide overhead allocation rate. ABC systems have more cost categories (activities), each with its own allocation base. ABC cost assignments more accurately represent the cost of resources consumed to manufacture (and support) products. Req. 4 The ABC system is likely to pass the cost-benefit test because the company manufactures two different products that use different amounts of resources. The old cost system appears “broken” because profits have been declining even though the company shifted its product mix toward the product that had appeared most profitable under the old system.

4-31

Managerial Accounting 6e Solutions Manual

(15–20 min.) E4-42B 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Lean organization Traditional organization Traditional organization Lean organization Lean organization Lean organization Lean organization Traditional organization Traditional organization Lean organization Traditional organization Traditional organization

(15–20 min.) E4-43B Req. 1 Prevention costs: Training employees in TQM Training suppliers in TQM Identifying preferred suppliers who commit to on-time delivery of perfect quality materials Appraisal costs: Strength-testing one item from each batch of panels Avoid inspection of raw materials Internal failure costs: Avoid rework and spoilage External failure costs: Avoid lost profits from lost sales due to disappointed customers Avoid warranty costs Req. 2 (Cost) / Benefit Analysis Prevention costs: Training employees in TQM…………………………… Training suppliers in TQM……………………………... Identifying preferred suppliers who commit to ontime delivery of perfect quality materials……….. Appraisal costs: Strength-testing one item from each batch of panels…………………………………………………... Savings on inspection of raw materials…………………

(Cost)/Savings $ (21,000) (31,000) (55,000)

(62,000) 50,000

Internal failure costs: Savings on rework and spoilage……………………..

65,000

External failure costs: Savings on lost profits from lost sales due to disappointed customers……………………………. Savings on warranty costs………………………………..

89,000 25,000

Net benefit ………………………………………………...

$60,000

The company should implement the new quality program. The program should save the company $60,000. 4-32

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(15–20 min.) E4-44B Req. 1 Category Prevention: Improving Design (1,000 x $85) Appraisal: Testing & Inspection [(1 x 6,000) x $45] Internal Failure: Rework [(10% x 6,000) x $600] External Failure: Warranty [(8% x 6,000) x $650] Lost Sales [(400 x (1,800 – 700)] Total

Cost

% of Total (Rounded)

85,000

270,000

18%

360,000

25%

312,000 440,000 752,000 1,467,000

21% 30% 51% 100%

4-33

Managerial Accounting 6e Solutions Manual

(20 min.) E4-45B a.

b. Which variable would you recommend be used as the allocation base for materials handling costs? Number of parts moved is the most highly correlated variable with materials handling costs and should be used as the allocation base. The other variables are not as strongly correlated, and it makes sense that the volume of parts moved could be related to materials handling costs.

4-34

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(20 min.) E4-46B a.

1. 2. 3. 4.

Machine hours Number of units produced Sales revenue Labor hours

4-35

Managerial Accounting 6e Solutions Manual

Problems (Group A) (40 min.) P4-47A Req. 1 Plantwide overhead rate

Estimated total manufacturing overhead Estimated cost allocation base

$1,056,000 9,600* direct labor hours

= =

$110 per direct labor hour

*When calculating plantwide overhead rates, all direct labor hours incurred in the plant are used. Req. 2 Departmental cost allocation rate

Estimated total department overhead cost Estimated department allocation base

Machining

$600,000 4,000 machine hours

= =

Assembly

$150 per machine hour $456,000 8,000 direct labor hours

= =

$57 per direct labor hour

Req. 3 Job 501 uses more of the company’s resources. Job 501 uses more machine hours than the other job. The accounting system should show that one job actually “costs” the company more resources than the other. Req. 4 Overhead allocation based on single, plantwide rate: Job 500 17 DL hours × $110 / DL hour $1,870

Total direct labor hours × Plantwide allocation rate Overhead allocation

4-36

Job 501 17 DL hours × $110 / DL hour $1,870

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(continued) P4-47A Req. 5 Overhead allocation based on departmental rates: Job 500 Machining Department: Departmental allocation rate × Machine hours used by Job Overhead allocation

$150/ MH × 10 MH $1,500

Assembly Department: Departmental allocation rate × DL hours used by Job Overhead allocation

$57/ DL hr. × 15 DL hrs. $855

Total overhead allocation (from both departments)

$2,355

Job 501 $150/ MH × 20 MH $3,000

$57/ DL hr. × 15 DL hrs. $855 $3,855

Req. 6 No. The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental rates assign more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems “more fair.” Req. 7 Manufacturing cost and sales price using current costing system: Direct materials Direct labor [(15 + 2) x $30] Manufacturing overhead (from Req. 4) Total manufacturing cost Mark up for pricing Sales price (rounded)

Job 500 $1,000 510 1,870 $3,380 × 120% $4,056

Job 501 $1,000 510 1,870 $3,380 × 120% $4,056

Req. 8 Gross profit using current costing system: Sales price (from Req. 7) Less: Total manufacturing cost (from Req. 7) Gross profit / (loss)

Job 500 $4,056 3,380 $ 676

Job 501 $4,056 3,380 $ 676

The company thought it earned $676 of profit on both Job 500 and Job 501.

4-37

Managerial Accounting 6e Solutions Manual

(continued) P4-47A Gross profit using departmental rate costing system: Sales price (from Req. 7 – Note: use sales price from current system because question specifies that the sales price calculated in Req. 7 be used) Less: Total manufacturing cost: Direct materials Direct labor [(15 + 2) x $30] Manufacturing overhead (from Req. 5) Total manufacturing cost Gross profit (loss)

Job 500 $4,056

Job 501 $4,056

$1,000 510 2,355 $3,865 $ 191

$1,000 510 3,855 $5,365 $ (1,309)

Based on departmental overhead rates and the sales price (determined in Req. 7), Job 500 earned a profit of $191 and Job 501 a loss of $1,309. Req. 9 When utilizing a single rate allocation method, the company believes that both jobs are equally profitable. When utilizing a refined costing method, the company will realize that Job 500 is profitable but Job 501 shows a loss.

4-38

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(20–30 min.) P4-48A Req. 1 Arnett Corp. Per-Unit Manufacturing Costs

Direct materials Materials handling (118,500 x $0.80); (28,500 x $0.80) Assembling (6,000 x $12.00); (1,200 x $12.00) Painting (7,500 x $4.90); (0) Total manufacturing costs Number of units Manufacturing product cost per unit (rounded)

Standard Desk $ 178,950 94,800 72,000 36,750 $382,500 ÷ 7,500 $ 51

Unpainted Desk $6,300 22,800 14,400 0 $43,500 ÷ 1,500 $ 29

Standard Desk $ 6 51 22 $79

Unpainted Desk $ 2 29 19 $50

Req. 2 Full Product Costs

Premanufacturing activities Manufacturing product costs (see Req. 1 above) Post manufacturing activities Full product cost per unit Req. 3 Manufacturing product costs are reported in the financial statements.

Managers use full product costs for decisions, such as pricing and product emphasis. Full product costs include the costs of premanufacturing activities and post manufacturing activities that are expensed as incurred for external financial reporting. However, these costs often are assigned to products for internal decisions. Req. 4 Full product cost……………………... Plus: Desired profit………………………….. Sales price per unit – standard desk

$ 79.00 42.00 $121.00

4-39

Managerial Accounting 6e Solutions Manual

(30–40 min.) P4-49A Req. 1 Durbin Pharmaceuticals ABC Cost Allocation Rates Materials Handling Packaging Estimated indirect activity costs ÷ Estimated cost allocation base Activity overhead rate (rounded)

Quality Assurance

$160,000

$390,000

$112,000

÷ 20,000 kilos $ 8 / kilo

÷ 2,000 hours $ 195 / hour

÷ 1,600 samples $ 70 / sample

Req. 2 Durbin Pharmaceuticals Activity Costs per Unit Commercial Container $ 69,600 175,500 18,900 $264,000 ÷ 3,000 $ 88.00

Materials handling (8,700 and 4,450) × $8 Packaging (900 and 300) × $195 Quality assurance (270 and 370) × $70 Total indirect costs ÷ Number of units Indirect activity cost per unit (rounded)

Travel Pack $ 35,600 58,500 25,900 $120,000 ÷ 20,000 $ 6.00

Req. 3 Product

Cost allocation rate

Actual quantity of allocation base

Indirect cost allocated

Commercial $350 x 900 = $315,000 Travel $350 x 300 = $105,000 Now compute the indirect cost per unit for each product under the original single-allocation-base system. Durbin Pharmaceuticals Costs per Unit Under Original Machine-Hour Based System Commercial Container Total indirect costs allocated $315,000 ÷ Number of units ÷ 3,000 Indirect cost per unit $ 105.00

Travel Pack $105,000 ÷ 20,000 $ 5.25

Req. 4 The original system overcosted the commercial containers and undercosted the travel packs. The original system allocated three times as much indirect cost to the commercial containers as to the travel packs. However, commercial containers did not use three times as much of the material handling and quality assurance resources. The ABC system recognizes that commercial containers do not require three times as much material handling and quality assurance as travel packs. So, relative to the original system, ABC allocates less of the material handling and quality assurance costs to commercial containers.

4-40

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(20–30 min.) P4-50A Req. 1 Giant Construction Toys Corp. Predicted Quality Cost Savings Predicted Reduction in Activity Units Activity Inspection of incoming materials Inspection of finished goods Number of defective units discovered in-house Number of defective units discovered by customers Lost sales to dissatisfied customers Total predicted quality cost savings

390 390 3,500 875 310

Activity Cost Allocation Rate = $19 $33 $17 $43 $61

Predicted Reduction in Activity Costs $ 7,410 12,870 59,500 37,625 18,910 $136,315

Req. 2 Giant Construction Toys Corp. Net Benefit of Design Engineering Effort Total predicted quality—cost savings Less: Cost of design engineering Net benefit of design engineering

$136,315 (70,000) $ 66,315

Req. 3 Measuring the cost of quality-related activities is difficult. As an alternative, they could monitor nonfinancial measures of quality and attempt to improve them.

4-41

Managerial Accounting 6e Solutions Manual

(20–40 min.) P4-51A Req. 1 Workflow Systems Product Costs per Unit (Original Cost System) Job A $195,700 155,000 267,300 $618,000 ÷ 100 $ 6,180

Direct materials Direct labor Allocated overhead (9,900 and 880) × $27 Total cost Divide by number of units Product cost per unit

Job B $100,640 25,000 23,760 $149,400 ÷ 20 $ 7,470

Req. 2 Workflow Systems Product Costs per Unit (ABC System) Direct materials Direct labor Allocated overhead: Materials handlinga Machine setupb Assemblingc Shippingd Total cost Divide by number of units Product cost per unit a

(17,000 (6 c (1,700 d (1 b

and and and and

4,000) 2) 400) 1)

× × × ×

Job A $ 195,700 155,000

Job B $100,640 25,000

18,700 2,820 204,000 1,280 $ 577,500 ÷ 100 $5,775.00

4,400 940 48,000 1,280 $180,260 ÷ 20 $ 9,013.00

$1.10 $470 $120 $1,280

Note: The change in costs of Job A does not exactly offset the change in costs of Job B between the original system and ABC because the company has more than these two jobs. If the company had only these two jobs, then the change in one job’s costs would exactly offset the change in the other job’s costs.

4-42

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(continued) P4-51A Req. 3 The single rate allocates all overhead costs based on direct labor hours. Per the data, you calculated in the preceding step, the single-rate system assigned to each unit of Job A is 225% of the overhead cost assigned to each unit of Job B. The activity-based costing system allocated overhead costs based on four different activities. The data you have calculated in the previous step shows that a unit of Job B actually consumes more of overhead resources than a unit of Job A. The ABC system recognizes the actual resource consumption. The single rate undercosts Job B and overcosts Job A. The activity-based costing system is more accurate than the single-rate system in assigning the costs of the resources each job consumes. Job A 99 170 (17,000/100) 0.06 (6/100) 17 (1,700/100) 0.01 (1/100)

Direct labor per unit Parts per unit Setups per unit Assembling hours per unit Shipments per unit

Job B 44 200 (4,000/20) 0.1 (2/20) 20 (400/20) 0.05 (1/20)

% (Job A / Job B) 225% 85% 60% 85% 20%

These data show that a unit of Job B actually consumes more of every overhead resource than a unit of Job A. The ABC system recognizes the actual resource consumption. The single rate undercosts Job B and overcosts Job A. Note: Students’ responses will probably not be this complete. The response above is intended to provide a basis for class discussion. Req. 4 a. If the company’s managers base their decision on original system costs, they will outsource both jobs. b.

If the managers base their decision on ABC system costs, they will only outsource Job B.

The company will have more income if they outsource Job B and manufacture Job A.

4-43

Managerial Accounting 6e Solutions Manual

Problems (Group B) (40 min.) P4-52B Req. 1 Plantwide overhead rate

Total manufacturing overhead Total direct labor hours

$1,050,000 10,000* direct labor hours

$105 per direct labor hour

*When calculating plantwide overhead rates, all direct labor hours incurred in the plant are used. Req. 2 Departmental cost allocation rate

Department overhead cost Department allocation base

Machining

$650,000 5,000 machine hours

= =

Assembly

$130 per machine hour

$400,000 8,000 direct labor hours

= =

$50 per direct labor hour

Req. 3 Job #501 uses more of the company’s resources. The accounting system should show that one job actually “costs” the company more resources than the other. Req. 4 Overhead allocation based on single, plantwide rate: Job 500 12 DL hours × $105 / DL hour $1,260

Total direct labor hours × Plantwide allocation rate Overhead allocation

4-44

Job 501 12 DL hours × $105 / DL hour $1,260

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(continued) P4-52B Req. 5 Overhead allocation based on departmental rates: Job 500

Job 501

Machining Department: Departmental allocation rate × Machine hours used by Job Overhead allocation

$130/ MH × 4 MH $520

$130/ MH × 8 MH $1,040

Assembly Department: Departmental allocation rate × DL hours used by Job Overhead allocation

$50/ DL hr. × 10 DL hrs. $500

$1,020

$1,540

Total overhead allocation (from both departments)

Req. 6 The single plantwide overhead rate assigned the same amount of overhead to both jobs. The departmental rates assign more overhead cost to Job 501 than Job 500 due to the extra machine hours used. This seems “more fair.” Req. 7 Manufacturing cost and sales price using current costing system: Direct materials Direct labor [(10 + 2) x $20] Manufacturing overhead (from Req. 4) Total manufacturing cost Mark up for pricing Sales price (rounded)

Job 500 $1,000 240 1,260 $2,500 × 110% $2,750

Job 501 $1,000 240 1,260 $2,500 × 110% $2,750

4-45

Managerial Accounting 6e Solutions Manual

(continued) P4-52B Req. 8 Gross profit using current costing system: Sales price (from Req. 7) Less: Total manufacturing cost (from Req. 7) Gross profit / (loss)

Job 500 $2,750 2,500 $ 250

Job 501 $2,750 2,500 $ 250

Gross profit using departmental rate costing system: Sales price (from Req. 7 – Note: use sales price from current system because question specifies that the sales price calculated in Req. 7 be used) Less: Total manufacturing cost: Direct materials Direct labor [(10 + 2) x $20] Manufacturing overhead (from Req. 5) Total manufacturing cost Gross profit (loss)

Job 500 $2,750

Job 501 $2,750

$1,000 240 1,020 $2,260 $ 490

$1,000 240 1,540 $2,780 $ (30)

Req. 9 When utilizing a single rate allocation method, the company believes that both jobs are equally profitable. When utilizing a refined costing method, the company will realize that Job 500 is profitable but Job 501 shows a loss.

4-46

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(20–30 min.) P4-53B Req. 1 Kimbro Corp. Per-Unit Manufacturing Costs

Direct materials Materials handling (119,500 and 29,500) x $0.90 Assembling (6,000 and 800) × $17 Painting (7,500 × $5.00) Total manufacturing costs Number of units Manufacturing cost per unit

Standard Desk $ 165,450 107,550 102,000 37,500 $412,500 ÷ 7,500 $ 55

Unpainted Desk $21,350 26,550 13,600 0 $61,500 ÷ 1,500 $ 41

Standard Desk $ 4 55 21 $80

Unpainted Desk $ 2 41 19 $62

Req. 2 Kimbro Corp. Full Product Costs

Premanufacturing activities Manufacturing product costs (from Req. 1) Post manufacturing activities Full product cost per unit

Req. 3 Manufacturing product costs are reported in the financial statements. Managers use full product costs for decisions such as pricing and product emphasis. Full product costs include the costs of premanufacturing activities and post manufacturing activities that are expensed as incurred for external financial reporting. However, these costs often are assigned to products for internal decisions. Req. 4 Full product cost……………………. Plus: Desired profit………………………… Sales price per unit – standard desk……...

$ 80 39 $119

4-47

Managerial Accounting 6e Solutions Manual

(30–40 min.) P4-54B Req. 1 Percival Pharmaceuticals ABC Cost Allocation Rates Materials Handling Packaging Estimated indirect activity costs ÷ Estimated cost allocation base Activity overhead rate (rounded)

Quality Assurance

$180,000

$460,000

$116,000

÷ 18,000 kilos $ 10 / kilo

÷ 2,600 hours $ 177 / hour

÷ 1,500 samples $ 77 / sample

Req. 2 Percival Pharmaceuticals Activity Costs per Unit Commercial Container $ 85,000 212,400 18,480 $315,880 ÷ 2,500 $ 126.35

Materials handling (8,500 and 6,000) × $10 Packaging (1,200 and 400) × $177 Quality assurance (240 and 340) × $77 Total indirect costs ÷ Number of units Indirect activity cost per unit (rounded)

Travel Pack $ 60,000 70,800 26,180 $156,980 ÷ 80,000 $ 1.96

Req. 3 Product Commercial Travel

Cost allocation rate

Actual quantity of allocation base

Indirect cost allocated

$350 $350

x x

1,200 400

= =

$420,000 $140,000

Percival Pharmaceuticals Costs per Unit Under Original Machine-Hour Based System Commercial Container Total indirect costs allocated $420,000 ÷ Number of units ÷ 2,500 Indirect cost per unit $ 168.00

Travel Pack $140,000 ÷ 80,000 $ 1.75

Req. 4 The original system overcosted the commercial containers and undercosted the travel packs. The original system allocated three times as much indirect cost to the commercial containers as to the travel packs. However, commercial containers did not use three times as much of the materials handling and quality assurance resources. The ABC system recognizes that commercial containers do not require three times as much materials handling and quality assurance as travel packs. So, relative to the original system, ABC allocates less of the materials handling and quality assurance costs to commercial containers.

4-48

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(20–30 min.) P4-55B Req. 1 Big Yellow Construction Toys Corp. Predicted Quality Cost Savings Predicted Reduction in Activity Units Activity Inspection of incoming materials Inspection of finished goods Defective units discovered in-house Defective units discovered by customers Lost sales to dissatisfied customers Total predicted quality cost savings

Activity Cost Allocation Rate =

305 305 3,100

$22 $34 $11

825 280

$41 $58

Predicted Reduction in Activity Costs $ 6,710 10,370 34,100 $33,825 16,240 $101,245

Req. 2 Big Yellow Construction Toys Corp. Net Benefit of Design Engineering Effort Total predicted quality cost savings Cost of design engineering Net benefit of design engineering

$101,245 (65,000) $ 36,245

Req. 3 Measuring the cost of quality-related activities is difficult. An alternative approach to measure quality improvement is to monitor nonfinancial measures of quality and attempt to improve them.

4-49

Managerial Accounting 6e Solutions Manual

(20–40 min.) P4-56B Req. 1 FirstServer Systems Product Costs per Unit (Original Cost System) Job A $246,000 180,000 184,000 $610,000 ÷ 100 $ 6,100

Direct materials Direct labor Allocated overhead (9,200 and 500) × $20 Total cost Divide by number of units Product cost per unit

Job B $46,900 18,000 10,000 $74,900 ÷ 10 $ 7,490

Req. 2 FirstServer Systems Product Costs per Unit (ABC System) Direct materials Direct labor Allocated overhead: Materials handlinga Machine setupb Assemblingc Shippingd Total cost Divide by number of units Product cost per unit a

(10,000 (20 c (1,000 d (1 b

and and and and

2,000) 8) 200) 1)

× × × ×

Job A $ 246,000 180,000

Job B $46,900 18,000

11,000 10,000 80,000 1,700 $ 528,700 ÷ 100 $5,287.00

2,200 4,000 16,000 1,700 $88,800 ÷ 10 $ 8,880.00

$1.10 $500 $80 $1,700

4-50

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

(continued) P4-56B Req. 3 The single rate allocates all overhead costs based on direct labor hours. Per the data, you calculated in the preceding step, the single-rate system assigned to each unit of Job A is 184% of the overhead cost assigned to each unit of Job B. The activity-based costing system allocated overhead costs based on four different activities. The data you have calculated in the previous step shows that a unit of Job B actually consumes more of every overhead resource than a unit of Job A. The ABC system recognizes the actual resource consumption. The single rate undercosts Job B and overcosts Job A. The activity-based costing system is more accurate than the single-rate system in assigning the costs of the resources each job consumes.

Direct labor per unit Parts per unit (10,000 / 100); (2,000 / 10) Setups per unit (20 / 100); (8 / 10) Assembling hours per unit (1,000 / 100); (200 / 10) Shipments per unit (1 / 100); (1 / 10)

Job A 92 100 0.2 10 0.01

Job B 50 200 0.8 20 0.1

% (Job A / Job B) 184% 50% 25% 50% 10%

These data show that a unit of Job B actually consumes more of every overhead resource than a unit of Job A. The ABC system recognizes the actual resource consumption. The single rate undercosts Job B and overcosts Job A. Note: Students’ responses will probably not be this complete. The response above is intended to provide a basis for class discussion. Req. 4 a. If the company managers base their decision on original system costs, they will outsource both jobs. b.

If the managers base their decision on ABC system costs, they will only outsource Job B.

4-51

Managerial Accounting 6e Solutions Manual

Serial Case C4-57 a.

4-52

Because “slot machine” is the only factor that has the effect of changing the level of total slot machines maintenance cost, it is the cost driver for the maintenance cost pool: Cost activity pool rate = Slot machine maintenance costs / Total Number of slot machines = $ 1,864,800 / 8,880 machines = $ 210 per slot machine Casino space (square feet) is the best cost driver for the casino utilities expenses pool. The larger the casino, the higher its utilities expenses would be: Cost activity pool rate = $ 40,948,000 / 706,000 ft2 = $ 58 per square feet Both casino space (square feet) and hotel rooms might be a cost driver for property taxes: Casino space: Cost activity pool rate = $ 6,400,000 / 706,000 ft2 = $ 9.07 per square feet (rounded) Hotel rooms: Cost activity pool rate = $ 6,400,000 / 23,160 rooms = $ 276 per room (rounded) Among all cost drivers, the number of hotel rooms and suites is the best cost driver for housekeeper wages and benefits cost pool because the more hotel rooms they clean, the higher their wages and benefits will be: Cost activity pool rate = $ 13,432,800 / 23,160 rooms = $ 580 per room Because casino dealers oversee table games, the best cost driver for casino dealer wages and benefits pool is the number of table games: Cost activity pool rate = $ 14,480,000 / 800 table games = $ 18,100 per table

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

Discussion & Analysis A4-58 1.

Explain why departmental overhead rates might be used instead of a single plantwide overhead rate. A single plantwide overhead rate doesn’t always do a good job of matching the cost of overhead resources with the products that consume those resources. By using department overhead rates, companies can more equitably assign overhead to their jobs, products, or services. As a result, less cost distortion occurs, and managers have more accurate information for making business decisions.

Using activity-based costing, why are indirect costs allocated while direct costs are not allocated? Because direct costs can be traced to products, they are not allocated. Indirect costs, such as overhead, cannot be traced as easily as direct costs, so must be allocated to products and services.

How can using a single predetermined manufacturing overhead rate based on a unit-level cost driver cause a high-volume product to be overcosted? When a company uses a plantwide allocation system that is based on a volume-related driver, such as direct labor hours, the high-volume products will be allocated more cost than the low volume products simply because more of them are produced, not necessarily because they use more overhead. This can result in the higher volume product being overcosted.

Assume a company uses a plantwide predetermined manufacturing overhead rate that is calculated using direct labor hours as the cost driver. The use of this plantwide predetermined manufacturing overhead rate has resulted in cost distortion. The company’s high-volume products are overcosted and its low-volume products are undercosted. What effects of this cost distortion will the company most likely be experiencing? A company that overcosts its high-volume products may be experiencing low sales for the high-volume products while the undercosted low-volume products are experiencing high sales. Why might the cost distortion be harmful to the company’s competitive position in the market? The cost distortion can be harmful to a company’s competitive position in the market because it could be losing sales of its high-volume products due to the overcosting and therefore overpricing. It could also be harmed by losing money on the undercosted low-volume products due to underpricing.

A hospital can use activity-based costing (ABC) for costing its services. In a hospital, what activities might be value-added activities? • • •

Operating on a patient Dispensing medication to a patient Evaluating test results

What activities at that hospital might be non-value-added? • • •

Waiting for a procedure Fixing equipment Inspecting prescriptions

4-53

Managerial Accounting 6e Solutions Manual 6.

A company makes shatterproof, waterproof cases for the S-series of Samsung smartphones. The company makes only one model and has been very successful in marketing its cases; no other company in the market has a similar product. The only customization available to the customer is the color of the case. There is no manufacturing cost difference among the different colors of the cases. Since this company has a high-volume product, its controller thinks that the company should adopt activity-based costing. Why might activity-based costing not be as beneficial for this company as for other companies? Activity-based costing is beneficial to companies who are • in highly competitive markets; • produce many different products that require different types and amounts of resources; or • produce high volume of some products and low volume of others. Because this company does not fit into these categories, it might not be beneficial for them to incur the cost of developing and using ABC.

Compare a traditional production system with a lean production system. Discuss the similarities and the differences. Some of the differences between a traditional production system and a lean production system are • like machines grouped together vs. production cells; • longer vs. shorter setup times; • larger vs. smaller batches; • higher vs. lower inventories; • many suppliers vs. fewer, well-coordinated suppliers; • single tasked labor vs. wider range of labor tasks; and • longer vs. shorter manufacturing cycles. Similarities include • machinery needed; • labor needed; and • inspection of products.

Think of a product with which you are familiar. Explain how activity-based costing could help the company that makes this product in its efforts to be “green.” Student answers will vary.

It has been said that external failure costs can be catastrophic and much higher than the other categories. What are some examples of external failure costs? • • • • • •

Lost sales Sales returns Warranty repairs/replacements Product liability claims Cost of recalls Service costs at customer sites

Why is it often difficult to arrive at the cost of external failures? Often the largest external failure cost—lost sales/profits—is hard to measure because of its nature. There are no records kept of lost sales. They must be estimated using subjective experiences and judgments. Defect rates, the number of customer complaints, and warranty repairs/replacements can help in the estimation.

4-54

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

10. What are the four categories of quality-related costs? Name a cost in each of the four categories for each of the following types of organizations: a. Restaurant b. Hospital c. Law firm d. Bank e. Tire manufacturer f. University The four categories of quality-related costs are prevention, appraisal, internal failure costs, and external failure costs.

a. Restaurant

Prevention Training for cooks/servers

b. Hospital

Training for ER employees

c. Law firm

Training for paralegals Training for tellers

d. Bank

e. Tire manufacturer

Training for factory employees

f. University

Training for admissions staff

Appraisal Wait staff inspects orders before serving Evaluating an ER patient Attorney review of paralegal’s work Manager approval for certain transactions Tires inspected before shipping Dean approval for departmental budgets

Internal Failure Costs Meals not as ordered

External Failure Costs Mold/insect found on meal by customer

Reissuing medication due to inaccurate recording Underestimated case time Cashed an NSF check

Re-casting improperly set broken arm Losing a case due to carelessness Customer reporting bank error on statement Warranty repairs

Tires returned to factory for rework or scraped Canceled classes

Losing alumni support

11. What are the similarities between sustainability and lean thinking? What are the differences between sustainability and lean thinking? Sustainability and lean thinking have many similarities; in particular, both practices seek to reduce waste. However, lean operations focus on eliminating waste and empowering employees in an effort to increase economic profits. On the other hand, sustainability focuses on eliminating waste and empowering employees not only to increase economic profits, but also to preserve the planet and improve the lives of all people touched by the company. 12. Why might a company want to take lean thinking a step further by including operations and methods associated with sustainability? While lean practices tend to center on internal operational waste, green practices also consider the external waste that may occur because of the product. To become greener, a lean company should be particularly cognizant of all waste that could harm the planet: packaging waste, water waste, energy waste, and emissions waste that would occur from both manufacturing the product and from consumers using and eventually disposing of the product.

4-55

Managerial Accounting 6e Solutions Manual

Application & Analysis A4-59 ABC in Real Companies Basic Discussion Questions 1.

Describe the company selected, including its products or services. A bookstore provides books and other products to its customers. In addition, it could offer events such as book signings or book clubs for its customers.

List eight key activities performed at this company. Choose at least one activity in the areas of production, sales, human resources, and accounting. 1. 2. 3. 4. 5. 6. 7. 8.

Process customer purchases Process customer special orders Handle customer inquiries Hiring and training new employees Stock shelves Advertise events Close out cash registers daily Record daily transactions

For each of the key activities, list a potential cost driver for that activity and describe why this cost driver would be appropriate for the associated activity. 1. 2. 3. 4. 5. 6. 7. 8.

Number of customer sales Number of special orders Number of customer inquiries Number of training sessions held Number of packages delivered Number of events scheduled Number of cash registers used Number of bookkeeper’s hours

Student responses will vary.

4-56

Chapter 4

Activity-Based Costing, Lean Operations, and the Costs of Quality

A4-60 ABC in Real Companies Basic Discussion Questions Go to a fast food restaurant (or think of the last time you were at a fast food restaurant). Observe the steps involved in providing a meal to a customer. You will be watching for value-added steps and non-value-added steps. Answer the following questions. 1. 2. 3.

Describe the steps involved with delivering the meal to the customer that you can observe. Describe the “behind-the-scenes” processes that are likely in the restaurant, such as cleaning, stocking, and cooking activities. With your answers for Questions 1 and 2 above, list all the possible activities, materials, and information that you think might be included on a value stream map for the restaurant. Include all steps you can think of (not necessarily of those you can observe). Make a list of the eight wastes as denoted by the acronym DOWNTIME (defects, overproduction, waiting, not utilizing people to their full potential, transportation, inventory, movement, and excess processing). Next to each waste category, list at least one possible non-value-added activity that might or might not be in the processes in that restaurant. Go back to the list of items for the potential value stream map. Circle potential areas for improvement and explain what wastes might be involved in those areas.

Student answers will vary.

4-57

Managerial Accounting 6e Solutions Manual

(20–30 min.) A4-61 Ethics Mini-Case 1.

The ethical issues in this situation are as follows: a. Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical standards.” By burying the cost for the silver line, he would be violating technical standards. b. Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” By burying the cost for the silver line, he would be providing inaccurate and unclear information that would affect business decisions about that line. c. Integrity: “Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.” He has a conflict of interest where he wants his friend to get her bonus, and he did not disclose this conflict. d. Credibility: “Communicate information fairly and objectively.” By burying the silver cost to help his friend, he is not communicating the information objectively or fairly. e. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” By burying the cost, he is removing information that would have affected future business decisions based on his report. This does not influence the analysis of whether Jacob has violated any ethical principles. Even though it cannot be used for external reporting, which would perhaps make his actions legal, it is used for internal reporting and decision making, so it would still violate ethical principles. I do not agree that no one is hurt by burying the cost in general cost pools; by burying the cost there, it is shared among all the product lines, which makes some other lines look less profitable (they would ordinarily have a lower disposal cost than the silver line) while making the silver line look more profitable than it should. This hurts the directors of the other lines. This also hurts the company because decisions are being made based on inaccurate information. Ultimately, investors and creditors will also be hurt. Jacob’s responsibilities as a management accountant are to report information ethically, objectively, and accurately. He should go to his immediate supervisor and disclose the conflict of interest and his concerns about Michelle’s influence over his raises and promotions. He should report the information on his report accurately and objectively, not favoring his friend, while seeking to prevent his ethical decision from negatively impacting him.

(20–30 min.) A4-62 Real Life Mini-Case 1.

Think about the value chain for a carton of eggs that is sold in the grocery store. (Start from the chicken and continue to the point of sale in the grocery store.) List as many steps in the value chain as you can imagine. At what points in the value chain does waste most likely occur? The steps in the value chain are as follows: Chicken lays the egg, eggs are collected from chickens, eggs are put into batches and marked with the necessary information, eggs are packaged and sent to the grocery store, unpacked and put on shelves, and then they are sold. The most likely place for eggs to break in this chain is when they are batched, packaged, and shipped.

In this chapter, the eight wastes of traditional operations were discussed. Which types of waste are in the value chain that you identified in Question 1? The types of waste that may be present in egg production are defects, overproduction, and spoiled inventory. Eggs can have natural defects, or they can be broken. They can be overproduced because of the new way of dealing with broken eggs. This can create an excess amount of eggs to be flooded into the market. Finally, the egg inventory can spoil if it sits in the store for too long (past expiration date).

4-58

Chapter 4 3.

Answer the following questions from the standpoint of Cal-Maine Foods, Inc., and its egg farms: a. What costs will be incurred to individually stamp each egg? b. What impact on revenue would the process of individually stamping each egg have? c. What wastes in the value chain occur at Cal-Maine Foods (and its egg farms)? a.

c. 4.

Activity-Based Costing, Lean Operations, and the Costs of Quality

To individually stamp each egg, the company must create a new stamp for each egg batch; it may not be hard to have stamps created. However, the time that it will take for each egg to be individually stamped may be costly. Costs to stamp the egg are labor cost, ink cost, stamp cost, cost of breakage, etc. The stamping process would not likely have an impact on revenue, unless the demand for eggs is greater than the production of eggs under the former system. Then the decreased waste in eggs would essentially turn into revenue, which would increase revenues greatly. However, without knowledge about demand, there would be no other impact on revenue (there would be on gross profit). Defects and overproduction can occur at Cal-Maine Foods. Spoilage and breakage are other areas of waste.

Now answer the following questions from the standpoint of Walmart: a. What costs might decrease because of purchasing eggs that are stamped individually with grade, size, traceability code, and freshness date information? b. What costs might increase because of purchasing individually stamped eggs? c. What wastes in the value chain occur at Walmart? a. The cost of throwing eggs away that are in the same batch as a broken egg would decrease because those eggs can now be saved. b. The costs that would increase would be the time it would take to physically replace those eggs with others that were of the same exact batch from the producer. Hopefully, the balance of these would be in Walmart’s favor. c. The waste that probably most frequently occurs at Walmart is spoilage and breakage.

Who should bear the cost of individual egg stamping operations: Cal-Maine Foods, Walmart, or the consumer? Because of the tremendous amount of waste involved with the current system of discarding entire cartons, should individual egg stamping be mandated by the government? Why or why not? Cal-Maine should bear the cost of the individual egg stamping operations because it is probably the one most affected by it. This statement assumes that most egg batches that were thrown away due to a single broken egg occurred at Cal-Maine. Therefore, this new process helps it to save eggs, and it ought to bear the weight of the cost. However, due to principles of economics, the consumer will probably end up bearing this cost. The price will increase up to the point that the market will bear it. It may be desirable for the government to mandate the stamping of eggs because the amount of waste that occurred before stamping was large and was a cost born by society in general. That is not at all environmentally acceptable and does not efficiently take advantage of all food sources. Another option would be that all food “waste” should be donated to people who don’t have food, such as homeless shelters. Wasting food that is perfectly good to eat is unacceptable when there are plenty of people who are starving.

Student answers will vary; these are only suggested answers.

4-59

Chapter 5 Process Costing Quick Check Answers QC5-1. b QC5-2. d QC5-3. a

QC5-4. c QC5-5. b QC5-6. c

QC5-7. d QC5-8. c QC5-9. b

QC5-10. c QC5-11. d QC5-12. d

Short Exercises (5–10 min.) S5-1 Job costing

Process costing

Most suitable manufacturing environment

Unique, custom-built products or relatively small batches of different products

Mass production of identical units in a series of uniform production processes

Cost object used for accumulating costs

Job

Process

Primary document for tracking costs

Job cost record

Production cost report

Manufacturing cost categories

Direct materials, direct labor, and manufacturing overhead

Direct materials and conversion costs

Flow of costs through accounts

Direct materials, direct labor, and manufacturing overhead are assigned to jobs. These costs flow into a single work in process inventory account. When completed, costs are transferred to finished goods inventory.

Direct materials and conversion costs are assigned to each manufacturing process. These costs are accumulated in separate work in process accounts— one for each manufacturing process. As units are transferred from one process to the next, the costs transfer to the next work in process account. When completed, costs are transferred to the finished goods inventory account.

5-1

Managerial Accounting 6e Solutions Manual

(5 min.) S5-2 Work in Process Inventory—Shells Beginning balance Direct materials used Direct labor Manufacturing overhead allocated Transferred in from centers Transferred to packaging Ending balance

$ 18,500 42,200 12,500 17,200 126,400 196,500 $ 20,300

The ending balance of $20,300 represents the cost of making the partially completed jelly beans. This includes the cost of making the jelly bean centers and includes the cost incurred so far on applying the shells.

(5 min.) S5-3 Req 1. Process costing. PEZ candies are produced in large batches through a series of uniform steps resulting in identical units. Req. 2 a. Sugar, fruit flavoring, coloring, and corn syrup b. Salaries and wages for employees who work in the manufacturing plant that physically convert the raw materials into the finished product, such as machine operators c. i. Janitorial supplies used in the factory and machine lubricants for factory machines ii. Salaries of factory supervisors and janitorial staff in the factory iii. Depreciation of the factory and equipment, taxes and insurance for the factory, utilities and other miscellaneous costs of keeping the factory operating Req. 3 The company would use job costing for birthday parties. Job costing is for unique, custom-ordered products, such as birthday parties.

(5 min.) S5-4 Lundeen Soda Bottling Department Flow of Physical Units Flow of Physical Units Units to account for: Beginning work in process, September 1 15,000 Plus: Started in production during September 125,000 Total physical units to account for 140,000 Units accounted for: b Completed and transferred out during June 111,000 Plus: Ending work in process, September 30 29,000 a Total physical units accounted for 140,000 _________ a “Total physical units accounted for” must equal the “Total physical units to account for” (140,000) in the top half of the schedule. b Back into this figure by subtracting the 29,000 units in ending work in process inventory from the “Total physical units to account for” (140,000).

5-2

Chapter 5

Process Costing

(5 min.) S5-5

Physical Units

Equivalent Units Direct Materials

Units accounted for: a Completed and transferred out 119,000 119,000 b Plus: Ending work in process, January 31 18,000 0 Total physical units accounted for: 137,000 Total equivalent units 119,000 __________ a 119,000 = 119,000 physical units × 100% complete b 0 = 18,000 physical units × 0% complete (Direct materials are added at the end of the process.) c 5,760 = 18,000 physical units × 32% complete with respect to conversion costs

Conversion Costs a

119,000 c 5,760 124,760

(5 min.) S5-6 1.

The “units completed and transferred out” are completely finished in the Frying Department; otherwise, they would not have been transferred out to the Packaging Department. 1,050,000 × 100% of direct materials = 1,050,000 equivalent units of direct materials 1,050,000 × 100% of conversion costs = 1,050,000 equivalent units of conversion costs

All the direct materials have been added, so they are 100% complete with respect to direct materials: 110,000 × 100% of direct materials = 110,000 equivalent units of direct materials. However, only 70% of the conversion had taken place, so 110,000 × 70% of conversion costs = 77,000 equivalent units of conversion costs.

The total equivalent units for the month are calculated as follows:

Completed and transferred out during July Plus: Ending work in process, July 31 Total equivalent units

Equivalent Units Direct Materials Conversion Costs 1,050,000 1,050,000 110,000 77,000 1,160,000 1,127,000

5-3

Managerial Accounting 6e Solutions Manual

(5 min.) S5-7 Kushner Company Month Ended March 31 Direct Materials $ 36,000 107,000 $143,000

Beginning work in process, March 1 Plus: Costs added during March Total costs to account for a

Conversion Costs $ 25,000 a 168,000 $193,000

Total $ 61,000 275,000 $336,000

Conversion costs ($168,000) = direct labor ($18,000) + manufacturing overhead ($150,000)

(5 min.) S5-8 Mixing Department Cost per Equivalent Unit Direct Materials $271,596 ÷ 52,230 $ 5.20

Total costs to account for ÷ Total equivalent units Cost per equivalent unit a

Conversion Costs a $468,135 ÷ 45,450 $ 10.30

$468,135 of conversion costs = Total costs to account for ($739,731) − Direct materials ($271,596)

(5–10 min.) S5-9 1a. Pharma-True Company Assignment of Costs Direct Materials Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred

370,000 x $ 3.80 $ 1,406,000

Conversion Costs 370,000 x $ 3.00 $ 1,110,000

Total

$2,516,000

1b. Pharma-True Company Assignment of Costs Direct Materials Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP

70,000 x $ 3.80 $ 266,000

2. The total costs accounted for are $2,941,000 ($2,516,000 + $425,000). 3. Pharma-True’s average cost of making one unit is $6.80 ($3.80 + $3.00).

5-4

Conversion Costs 53,000 x $ 3.00 $ 159,000

Total

$425,000

Chapter 5

Process Costing

(5 min.) S5-10 1.

Work in Process Inventory—Forming Department Beginning balance Direct materials used Direct labor Manufacturing overhead allocated Total costs to account for

$ 53,700 78,400 14,800 $126,100 $273,000

The following journal entry records the transfer of costs out of the forming department and into the Finishing Department: Journal Entry Date Accounts Debit Credit Work in process inventory—Finishing department $243,800 Work in process inventory—Forming department $243,800

After posting the journal entry in Req. 2, the work in process inventory account for the forming department appears as follows: Work in Process Inventory—Forming Department Beginning balance $ 53,700 Direct materials used 78,400 Direct labor 14,800 Manufacturing overhead allocated 126,100 Transferred to Finishing 243,800 Ending balance $ 29,200

5-5

Managerial Accounting 6e Solutions Manual

(5–10 min.) S5-11 1a. Peterson Corp. Assignment of Costs TransferredIn Costs

Direct Materials

Conversion Costs

72,000 x $2.34 $ 168,480

72,000 x $0.75 $ 54,000

72,000 x $1.56 $112,320

Peterson Corp. Assignment of Costs Transferred-In Costs Direct Materials

Conversion Costs

Assign costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

Total

$334,800

1b.

Assign costs Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP 2.

9,000 x $2.34 $ 21,060

7,900 x $0.75 $ 5,925

3,500 x $1.56 $ 5,460

Total

$ 32,445

The “Total costs accounted for” is $367,245 ($334,800 + $32,445). The “Total costs accounted for” figure must match the “Total costs to account for” figure. In other words, the company must assign all the costs that were in the WIP account during the period to either (1) the units that were completed and transferred out during the period or (2) to the units that are still in ending WIP inventory at the end of the period.

3) Peterson Corp.’s cost of making each unit is $4.65 ($2.34 + $0.75 + $1.56).

(5–10 min.) S5-12 1.

The company’s cost per square foot of making one unit is $5.30 ($2.94 + $0.90 + $1.46).

Most of the cost of producing the countertops occurred in the forming department. The transferred-in costs of $2.94 (incurred in the forming department) represent the bulk of the cost incurred per unit. Costs incurred after the forming department are $2.36 ($1.46 direct materials plus $0.90 conversion costs), which are less than $2.94.

Sales price per square foot Less: Cost per square foot Gross profit per square foot

$13.50 (5.30) $ 8.20

Square feet sold Gross profit per square foot Total gross profit

135,000 × $8.20 $1,107,000

5-6

Chapter 5

Process Costing

(10 min.) S5-13 Req. 1 Direct labor $18,680 ($9,380 + $9,300)

Manufacturing overhead

Conversion costs

$24,000

$42,680

= =

Average filtration cost per liter $0.81 (rounded)

Req. 2 Total filtration costs ÷ Total number of liters *$162,680 ÷ 200,000 *(18,680 DL (see Req. 1) + 24,000 MOH + 120,000 DM)

Req. 3 If only 160,000 liters were completely filtered and ozonated, and the remaining 40,000 were incomplete, the cost of a completely filtered and ozonated liter would be more than the average filtration cost per liter calculated in Req. 2. This is because a decrease in the denominator of the formula will result in a greater cost per liter.

5-7

Managerial Accounting 6e Solutions Manual

(10 min.) S5-14 Req. 1 Filtration Process Conversion costs incurred evenly throughout process Start 85% Complete

Direct materials (water added)

100% Complete

Transferred out to Bottling Department

160,000 liters completed and transferred out to bottling process 40,000 liters started but not finished (ending work in process inventory) Req. 2 Arctic Springs Filtration Department Flow of Physical Units and Computation of Equivalent Units Equivalent Units

Flow of Production

Flow of Physical Units

Direct Materials Conversion Costs Units to account for: Beginning work in process, December 1 0 Plus: Started in production during December 200,000 Total physical units to account for 200,000 Units accounted for: Completed and transferred out 160,000 160,000 160,000 a b Plus: Ending work in process 40,000 40,000 34,000 Total physical units accounted for 200,000 Total Equivalent Units 200,000 194,000 __________ a The ending inventory is 85% of the way through the filtration process, so it has passed the point where water is added. The ending inventory, therefore, has 40,000 equivalent units of water (direct materials). b 40,000 units × 85% complete as to conversion work = 34,000 equivalent units.

5-8

Chapter 5

Process Costing

(5 min.) S5-15 Artic Springs Filtration Department Cost per Equivalent Unit Flow of Production

Direct Materials $ 0

Plus: Costs added during December Total costs to account for Divide by total equivalent units (from Req. 2) Cost per equivalent unit

120,000 $ 120,000 ÷ 200,000 $ 0.60

Beginning work in process

Conversion Costs $ 0 42,680 $ 42,680a ÷ 194,000 $ 0.22

__________ a $9,380 + $9,300 + 24,000 of wages and manufacturing overhead (see S5-13 Req. 1)

(10 min.) S5-16 Reqs. 1–2 Arctic Springs Filtration Department Direct Materials

Assign Costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit (see S5-15) 1. Cost assigned to units completed and transferred out Ending WIP inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit (see S5-15) 2. Cost assigned to units in ending WIP Total costs accounted for

Conversion Costs

160,000 x $ 0.60 $ 96,000

160,000 x $ 0.22 $ 35,200

40,000 x $ 0.60 $24,000

34,000 x $ 0.22 $ 7,480

Total

$131,200

$31,480 $162,680

(5 min.) S5-17 Req. 1 Journal DATE

ACCOUNTS AND EXPLANATIONS Work in Process Inventory—Bottling Work in Process Inventory—Filtration

POST. REF.

DEBIT 131,200

CREDIT 131,200

Req. 2 Bal. December 1 Direct materials Direct labor Manufacturing overhead Bal., December 31

Work in Process Inventory—Filtration 0 Transferred to Bottling 120,000 18,680 24,000 31,480

131,200

5-9

Managerial Accounting 6e Solutions Manual

(15 min.) S5-18 Req. 1 Conversion costs incurred evenly throughout the process

Start

85% Complete

Transferred in from Filtration

100% Complete

Direct Materials added

Transferred Out to Finished Goods 147,000 liters completed and transferred out 22,000 liters incomplete (ending work in process) Req. 2 Arctic Springs Bottling Department Flow of Physical Units and Computation of Equivalent Units Flow of Equivalent Units Physical Units Transferred In Direct Conversion Flow of Production Materials Costs Units to account for: Beginning work in process December 1 9,000 Plus: Transferred in 160,000 Total physical units to account for 169,000 Units accounted for: Completed and transferred out during December 147,000 147,000 147,000 147,000 Plus: Ending work in process, December 31 22,000 22,000a 0b 18,700c Total physical units accounted for 169,000 Total equivalent units

169,000

147,000

165,700

__________ a Transferred-in costs are added at the beginning of the bottling process. The timeline shows that the 22,000 units in ending work in process inventory have all passed this point of the bottling process, so there are 22,000 equivalent units of transferred-in costs. b The timeline shows that direct materials are not added until the end of the bottling process. The ending inventory has not made it to the point where the materials are added, so the ending inventory contains no direct materials. c 22,000 × 85% = 18,700 The flow of physical units column and the footnoted explanations are not required. They are provided to help instructors explain the computations.

5-10

Chapter 5

Process Costing

(5–10 min.) S5-19 Arctic Springs Bottling Department Cost per Equivalent Unit Direct Materials

Transferred In

Conversion Costs

Total

Beginning work in process $

Plus: Costs added during December

$ 4,100 148,000

0 30,870

$ 2,675b 60,291a

$ 6,775 239,161

Total costs to account for

$152,100

$30,870

$62,966

$245,936

Divide by total equivalent Units (see S5-18 Req. 2) Cost per equivalent unit (rounded)

÷ 169,000 $ 0.90

÷ 147,000 $ 0.21

÷ 165,700 $ 0.38

__________ a $35,000 of direct labor + $25,291 of manufacturing overhead = $60,291 b $650 + $2,025 = $2,675

(10 min.) S5-20 Arctic Springs Bottling Department Assignment of Costs TransferredIn Costs

Direct Materials

Conversion Costs

Assign costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

147,000 x $0.90 132,300

147,000 x $0.21 $30,870

147,000 x $0.38 $55,860

$ 219,030

Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP

22,000 x $0.90 $ 19,800

0 x $0.21 $0

18,700 x $0.38 $ 7,106

$26,906

Total costs accounted for

Total

$245,936

5-11

Managerial Accounting 6e Solutions Manual

(5 min.) S5-21 Req. 1 Journal DATE

ACCOUNTS

POST. REF.

Finished Goods Inventory Work in Process Inventory—Bottling

DEBIT 219,030

CREDIT 219,030

Req. 2 Work in Process Inventory—Bottling 6,775 Transferred to Finished 148,000 Goods Inventory 30,870 35,000 25,291 26,906

Bal., December 1 Transferred in from Filtering Direct materials Direct labor Manufacturing overhead Bal. December 31

219,030

(5 min.) S5-22 1.

At a party, Eric gets carried away with bragging about the production process that he has helped to develop at his company. A party-goer who works for a competitor overhears.

Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Process costing has always confused Courtney, an accountant for Murdock Corporation. At the end of the year she just accepts the bookkeeper's numbers for ending inventory and cost of goods sold even though the bookkeeper does not have formal training in process costing.

Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

Lauren works in the Accounting Department at Blue Moon Consulting. She does not disclose that one of the companies bidding on a contract to provide payroll services for Blue Moon employs her daughter.

Integrity—Mitigate actual conflicts of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

Cassidy Ritter is a bubbly, fun person. She continually makes recommendations one day after the recommendations were needed. She figures that the managers will tolerate the tardiness of the recommendations because the recommendations are well researched and she gets along with everyone.

Competence—Provide decision support information and recommendations that are accurate, clear, concise, and timely.

This quarter, the company switched from using the FIFO method of process costing to the weightedaverage method of process costing. Andrew, the chief accountant, did not disclose the change in methods in the reports because he did not want to have to justify the change.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

5-12

Chapter 5

Process Costing

(10 min.) S5-23 Situation 1. How much gross profit will be generated by each packaging option? 2. How much gross profit will be generated by each customer? 3. How much gross profit will be generated by the open orders in each city? 4. How much gross profit will be generated by each packaging option for each customer?

5. How much gross profit will be generated by each packaging option in each city?

Pivot table fields required Package in Rows Gross Profit in Values Summarize value field by Sum Customer in Rows Gross Profit in Values Summarize value field by Sum City in Rows Gross Profit in Values Summarize value field by Sum Customer in Rows Package in Columns Gross Profit in Values Summarize value field by Sum City in Rows Package in Columns Gross Profit in Values Summarize value field by Sum

(10 min.) S5-24 Situation 1. How much gross profit will be generated by the open orders for each product size? Which product size is the most profitable? 2. How much gross profit will be generated by the open orders for each customer? Which customer is the most profitable? 3. How much gross profit will be generated by the open orders in each city? Which cities are the most profitable? 4. How much gross profit will be generated by each product size within each city?

5. How much gross profit will be generated by each customer within each city?

Pivot table fields required Product Size in Rows Gross Profit in Values Summarize value field by Sum Sort Largest to Smallest Customer in Rows Gross Profit in Values Summarize value field by Sum Sort Largest to Smallest City in Rows Gross Profit in Values Summarize value field by Sum Sort Largest to Smallest City in Rows Product Size in Columns Gross Profit in Values Summarize value field by Sum Customer in Rows City in Columns Gross Profit in Values Summarize value field by Sum

5-13

Managerial Accounting 6e Solutions Manual

Exercises (Group A) (15–20 min) E5-25A Reqs. 1–2 Raw Materials Inventory 23,200 179,000 11) Direct materials used in mixing 1) Direct materials used in packaging 12,200

12) Beginning balance 15) Direct materials purchased

Ending balance

8) Beginning balance 11) Direct materials used 3) Direct labor 10) Manufacturing overhead allocated Ending balance

Work in Process Inventory—Mixing Department 12,100 156,000 11,400 68,000 2) Transferred to baking 20,500

Work in Process Inventory—Baking Department 15,800 4,200 78,000 227,000 7) Transferred to packaging 17,000

4) Beginning balance 16) Direct labor 5) Manufacturing overhead allocated 2) Transferred in from mixing Ending balance

14) Beginning balance 1) Direct materials used 9) Direct labor 17) Manufacturing overhead allocated 7) Transferred in from baking Ending balance

Work in Process Inventory—Packaging Department 8,000 34,000 8,900 40,000 308,000 13) Transferred to finished goods 13,900 Finished Goods Inventory 4,600 385,000 18) Cost of goods sold 3,600

6) Beginning balance 13) Transferred in from packaging Ending balance

Req. 3 Total cost assigned to loaves transferred to finished goods Divided by: Completed and transferred out units Cost per unit (rounded)

5-14

156,000 34,000

227,000

308,000

385,000

386,000

$ 385,000 ÷ 3,025,000 $ 0.13

Chapter 5

Process Costing

(10–15 min.) E5-26A Patty’s Pumpkin Pies Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Physical Units Direct Materials

Conversion Costs Units to account for: Beginning work in process, November 1 203,000 Plus: Started in production during November 995,000 Total physical units to account for 1,198,000 Units accounted for: b Completed and transferred out during November 1,045,000 1,045,000 1,045,000 c d Plus: Ending work in process, November 30 153,000 114,750 122,400 a Total physical units accounted for 1,198,000 Total equivalent units 1,159,750 1,167,400 __________ a “Total physical units accounted for” must equal the “Total physical units to account for” (1,198,000) in the top half of the schedule b Back into this figure by subtracting the 153,000 units in ending work in process inventory from the “Total physical units to account for” (1,198,000) c 114,750 = 153,000 × 75% d 122,400 = 153,000 × 80%

(10–15 min.) E5-27A Note: Students may have filled out the chart, or they may have just given an answer for each lettered item. Equivalent Units Physical Units Transferred In Direct Materials Conversion Costs Units to account for: Beginning work in process, July 1 24,000 Plus: Transferred in during July 226,000 Total physical units to account for (a) 250,000 Units accounted for: Completed and transferred out during July Plus: Ending work in process, July 31 Total physical units accounted for Total equivalent units

(b) 221,000 29,000 (c) 250,000

(d) 221,000 (e) 29,000

(g) 221,000 (h) 26,100

(j) 221,000 (k) 17,400

(f) 250,000

(i) 247,100

(l) 238,400

Notes: (b) 250,000 – 29,000 = 221,000 (h) 29,000 x 90% = 26,100 (k) 29,000 x 60% = 17,400

5-15

Managerial Accounting 6e Solutions Manual

(20 min.) E5-28A Req. 1 Conversion costs incurred evenly throughout the process

Start

30% complete

100% complete

Direct materials (dyes) added

Transferred out to Packaging

6,500 gallons completed and transferred out

2,500 gallons started but not finished (ending work in process inventory) Req. 2 The Color World Paint Company Blending Department Flow of Physical Units and Computation of Equivalent Units Flow of Equivalent Units Physical Direct Conversion Flow of Production Units Materials Costs Units to account for: Beginning work in process, August 1 Plus: Started in production during August

0 9,000

Total physical units to account for

9,000

Units accounted for: Completed and transferred out during August Plus: Ending work in process, August 31 Total physical units accounted for Total equivalent units

6,500 2,500

6,500 2,500a

6,500 750b

9,000

7,250

9,000

__________ a The timeline shows that all direct materials are added at the beginning of the blending process, so the ending work in process inventory is complete as to materials. b 2,500 units × 30% = 750 equivalent units The footnoted explanations are not required.

5-16

Chapter 5

Process Costing

(continued) E5-28A Req. 3 The Color World Paint Company Blending Department Cost per Equivalent Unit Cost per Equivalent Unit: Beginning work in process, August 1 Plus: Costs added during August Total costs to account for Divide by total equivalent units (from Req. 2) Cost per equivalent unit c

Direct Materials $ 0 5,670 $5,670 ÷ 9,000 $ 0.63

Conversion Costs $ 0 2,900c $2,900 ÷ 7,250 $ 0.40

The Color World Paint Company Blending Department Direct Materials

Conversion Costs

Total $ 0 8,570 $8,570

$800 DL + $2,100 MOH = $2,900

Req. 4

Assign Costs a) Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out b) Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP Total costs accounted for

6,500 x $ 0.63 $ 4,095

6,500 x $ 0.40 $ 2,600

2,500 x $ 0.63 $1,575

750 x $ 0.40 $ 300

Total

$6,695

$1,875 $8,570

Req. 5 The average cost per gallon transferred out of blending is: $6,695 6,500 gallons

$1.03 per gallon

Managers will want to know this cost to compare it to their budgeted target costs. They may also use the cost information when setting selling prices.

5-17

Managerial Accounting 6e Solutions Manual

(15 min.) E5-29A (continues E5-28A) Req. 1 Note: Students may prepare three separate journal entries or one summary entry (as shown below) to record the three manufacturing costs. Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Work in Process Inventory—Blending 8,570 Raw Materials Inventory 5,670 Wages Payable 800 Manufacturing Overhead 2,100 Work in Process Inventory—Packaging Work in Process Inventory—Blending (from Req. 4 of E5-26A)

6,695 6,695

Req. 2 Work in Process Inventory—Blending 0 Transferred to packaging 5,670 800 2,100 1,875

Bal. Aug. 1 Direct materials Direct labor Manufacturing overhead Bal. Aug. 31

6,695

(10–15 min.) E5-30A Req. 1 Prepare a production cost report Woodson Dairy Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Physical Units Direct Materials Units to account for: Beginning work in process, January 1 Plus: Started in production during January Total physical units to account for Units accounted for: Completed and transferred out during January Plus: Ending work in process, January 31 Total physical units accounted for Total Equivalent Units a) Back into by subtracting 200,000 from 1,600,000 b) 200,000 x 40% = 80,000

5-18

Conversion Costs

100,000 1,500,000 1,600,000 a

1,400,000 200,000 1,600,000

1,400,000 200,000

1,400,000 b 80,000

1,600,000

1,480,000

Chapter 5

Process Costing

(continued) E5-30A Woodson Dairy Churning Department Cost per Equivalent Unit Direct Materials Beginning work in process, January 1 Plus: Costs added during January Total costs to account for Divide by total equivalent units Cost per equivalent unit

Conversion Costs

$ 110,000 1,730,000 $1,840,000 ÷ 1,600,000 $ 1.15

$24,000 568,000 $592,000 ÷ 1,480,000 $ 0.40

Woodson Dairy Churning Department Direct Materials

Conversion Costs

1,400,000 x $ 1.15 $1,610,000

1,400,000 x $ 0.40 $ 560,000

200,000 x $ 1.15 $230,000

80,000 x $ 0.40 $32,000

Total $ 134,000 2,298,000 $2,432,000

Total

$2,170,000

$262,000 $2,432,000

Req. 2 How much did it cost to make a pound of butter in the Churning Department? Direct material cost

1.15

Conversion cost

0.40

Total cost

1.55

Req. 3 How much did it cost to make a partially completed pound of butter in the Churning Department? Direct material cost

1.15

Conversion cost (40% complete x conversion cost .40)

0.16

Unit cost of partially completed pound

1.31

Also: Ending WIP balance

Divided by # of units

262,000 ÷ 200,000

Unit cost of partially completed pound

1.31

Yes, it is lower than the completed pounds because 60% of the conversion costs have not yet been incurred.

5-19

Managerial Accounting 6e Solutions Manual

(10–15 min.) E5-31A Req. 1 Journal entry during month to record manufacturing costs: Work In process inventory—churning

2,298,000

Raw materials inventory

1,730,000

Wages payable

10,000

Manufacturing overhead

558,000

To record manufacturing costs during month Req. 2 Journal entry at end of month to transfer cost of butter into forming department Work In process inventory—forming

2,170,000

Work In process inventory—churning

2,170,000

To transfer to forming department Req. 3 Work in Process Inventory—Churning 134,000 Transfer to Forming 2,298,000

Bal. January 1

Bal. January 31

2,170,000

262,000

(10–15 min.) E5-32A Req. 1 Unit total cost from churning department (see E5-28A Req. 2)

1.55

Cost per EU for direct materials in forming department

0.10

Cost per EU for conversion costs in forming department

0.15

1.80

2.55

Total cost

Req. 2 Selling price per unit Cost of goods sold per unit (see Req. 1) Gross profit per unit

(1.80) $

Times total number of completed units Total gross profit

5-20

0.75 1,400,000 1,050,000

Chapter 5

Process Costing

(15–20 min.) E5-33A Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

POST. REF.

DEBIT 9,300

CREDIT 9,300

Work in Process Inventory—Assembly Raw Materials Inventory

4,300

Work in Process Inventory—Finishing Raw Materials Inventory

2,400

Work in Process Inventory—Assembly Cash

10,500

Manufacturing Overhead Property Taxes Payable—Plant Utilities Payable—Plant Insurance Payable Accumulated Depreciation—Plant

12,100

Work in Process Inventory—Assembly Wages Payable Manufacturing Overhead

7,600

Work in Process Inventory—Finishing Wages Payable Manufacturing Overhead

11,300

Work in Process Inventory—Finishing Work in Process Inventory—Assembly

10,500

Finished Goods Inventory Work in Process Inventory—Finishing

15,600

4,300

2,400

10,500

1,800 4,800 1,700 3,800

5,000 2,600

4,700 6,600

10,500

15,600

(25–30 min.) E5-34A Req. 1 Easton Motors Assembly Department Flow of Physical Units and Computation of Equivalent Units Flow of Equivalent Units Physical Units Direct Materials Conversion Costs Completed and transferred out during September 22,000 22,000 22,000 b Plus: Ending work in process, September 30 6,000 a 2,100 4,200c Total physical units accounted for 28,000 Total equivalent units 24,100 26,200 a

28,000 – 22,000 = 6,000

6,000 × 0.35

6,000 × 0.70 5-21

Managerial Accounting 6e Solutions Manual

(continued) E5-34A Req. 2 Easton Motors Assembly Department Cost per Equivalent Unit Direct Materials Beginning work in process, September 1 Plus: Costs added during September Total costs to account for

Divide by total equivalent units (from Req. 1) Cost per equivalent unit

Conversion Costs

0 12,532 $ 12,532

÷ 24,100 $ 0.52

0 28,820 $ 28,820 ÷ 26,200 $ 1.10

Req. 3 Easton Motors Assembly Department Direct Materials

Conversion Costs

22,000 x $ 0.52 $ 11,440

22,000 x $ 1.10 $ 24,200

2,100 x $ 0.52 $1,092

4,200 x $ 1.10 $ 4,620

Total

$35,640

$5,712 $41,352

Req. 4 Journal DATE

ACCOUNTS AND EXPLANATIONS Work in Process Inventory—Testing Work in Process Inventory—Assembly

POST. REF.

DEBIT 35,640

CREDIT 35,640

Req. 5 Work in Process Inventory—Assembly 0 Transferred to Testing 12,532 28,820 5,712

Bal. September 1 Direct materials Conversion costs Bal. September 30

5-22

35,640

Chapter 5

Process Costing

(20 min.) E5-35A Req. 1 Conversion costs incurred evenly throughout the process

Start

80% complete

Direct materials (grapes) added

100% complete

Transferred out to Packaging

6,560 gallons completed and transferred out

1,400 gallons started but not finished (ending work in process inventory)

Req. 2 Paulson Winery Fermenting Department Flow of Physical Units and Computation of Equivalent Units Flow of Physical Units Units to account for: Beginning work in process, March 1 Plus: Started in production during March

2,100 5,860

Total physical units to account for

7,960

Units accounted for: Completed and transferred out during March Plus: Ending work in process, March 31 Total physical units accounted for

6,560 1,400 7,960

Total equivalent units

Equivalent Units Direct Conversion Materials Costs

6,560 1,400a

6,560 1,120b

7,960

7,680

The timeline shows that all direct materials are added at the beginning of the process, so the ending work in process inventory is complete as to materials.

1,400 units × 80% = 1,120

5-23

Managerial Accounting 6e Solutions Manual

(continued) E5-35A Req. 3 Paulson Winery Fermenting Department Cost per Equivalent Unit Direct Materials Beginning work in process, March 1 Plus: Costs added during March Total costs to account for Divide by total equivalent units (from Req. 2) Cost per equivalent unit c

Conversion Costs

$ 2,500 9,440 $11,940 ÷ 7,960 $ 1.50

$3,715 2,429c $6,144 ÷ 7,680 $ 0.80

Paulson Winery Fermenting Department Direct Materials

Conversion Costs

Total $ 6,215 11,869 $18,084

$600 DL + $1,829 MOH = $2,429

Req. 4

Assign Costs a) Completed and transferred out: Equivalent units completed and transferred out (Req.2) Multiply by: Cost per equivalent unit (Req. 3) Cost assigned to units completed and transferred out b) Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP Total costs accounted for

Total

6,560 x $ 1.50 $ 9,840

6,560 x $ 0.80 $ 5,248

1,400 x $ 1.50 $2,100

1,120 x $ 0.80 $ 896

$15,088

$2,996 $18,084

Req. 5 The average cost per gallon transferred out of fermenting is: $15,088 = $2.30 per gallon 6,560 gallons Managers will want to know this cost to compare it to their budgeted target costs. They may also use the cost information when setting selling prices.

(15 min.) E5-36A Reqs. 1–3 Option #1 # of tons 180 180

Material cost of machine drool Disposal cost

Cost per ton $76 $57

Monthly cost $13,680 $10,260

Annual (x 12 mos.) $164,160 $123,120

$23,940

$287,280

Monthly cost $3,240 $10,260

Annual (x 12 mos.) $38,880 $123,120

$13,500

$162,000

Option #2 # of tons 180 180

Receive from local recycler Waste disposal charges saved

5-24

Cost per ton $18 $57

Chapter 5

Process Costing

(continued) E5-36A Option #3

Reduction in plastics cost (180 x 50% = 90) Reduction in waste disposal fees Receive from local recycler (180 – 90 = 90)

# of tons 90 180

Cost per ton $76 $57

$18

Monthly cost $ 6,840 $ 10,260 $

Annual (x 12 mos.) $ 82,080 $ 123,120

1,620

$ 19,440

($55,000)

$18,720

$169,640

Less annual cost to reengineer

Req. 4 Student rationales will vary, but Revol industries should reengineer the production process because this alternative will result in the greatest annual savings.

(15–20 min.) E5-37A Cleveland Foundry Forming Department Physical Flow of Units and Equivalent Units Equivalent Units Flow of Physical Flow of Production Units Direct Materials Conversion Costs Units to account for: Beginning work in process, October 1 10,150 Plus: Started in production during October 71,050 Total physical units to account for 81,200 Units accounted for: a Completed and transferred out during October 73,000 73,000 73,000 b c Plus: Ending work in process, October 31 8,200 4,920 1,640 Total physical units accounted for 81,200 Total equivalent units 77,920 74,640 __________ a 81,200 physical units to account for minus the 8,200 still in ending work in process inventory = 73,000 that must have been transferred out. b 8,200 × 60% = 4,920 c 8,200 × 20% = 1,640

Beginning work in process, October 1 Plus: Costs added during October Total costs to account for Divide by total equivalent units Cost per equivalent unit

Cleveland Foundry Forming Department Cost per Equivalent Unit Direct Materials Conversion Costs $ 21,430 $ 25,500 196,746 161,100 $218,176 $186,600 ÷ 77,920 ÷ 74,640 $ 2.80 $ 2.50

Total $ 46,930 357,846 $404,776

5-25

Managerial Accounting 6e Solutions Manual

(continued) E5-37A Cleveland Foundry Forming Department Direct Materials

Conversion Costs

73,000 x $ 2.80 $ 204,400

73,000 x $ 2.50 $ 182,500

4,920 x $ 2.80 $13,776

1,640 x $ 2.50 $ 4,100

Total

$386,900

$17,876 $404,776

Journal DATE

POST. REF.

ACCOUNTS AND EXPLANATIONS Work in process inventory—finishing Work in process inventory—forming

DEBIT 386,900

CREDIT 386,900

(15-20 mins.) E5-38A Req. 1 Alpha Semiconductors Photolithography Department Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Direct Flow of Production Physical Units Transferred In Materials Units to account for: Beginning work in process, December 1 6,000 Plus: Transferred in during December 29,000 Total physical units to account for 35,000 Units accounted for: Completed and transferred out during December Plus: Ending work in process, December 31 Total physical units accounted for

28,000a

28,000

7,000

7,000b

4,900c

35,000

32,900

35,000

Total equivalent units

__________ a. 35,000 total units – 7,000 units in ending work in process = 28,000 units b Direct materials: 7,000 units each 100% completed in December = 7,000 c Conversion costs: 7,000 units each 70% completed in December = 4,900

5-26

Conversion Costs

Chapter 5

Process Costing

(continued) E5-38A Req. 2 Alpha Semiconductors Photolithography Department Cost per Equivalent Unit Transferred Direct In Materials

Conversion Costs

Total

Beginning work in process, December 1

$ 21,600

$20,350

$ 27,690

$ 69,640

Plus: Costs added during December Total costs to account for

97,400 $119,000

63,650 $84,000

90,750 $118,440

251,800 $321,440

Divide by total equivalent units (from Req.1) Cost per equivalent unit

÷ 35,000

÷ 32,900

$ 2.40

3.40

3.60

Req. 3 Apha Semiconductors Photolithography Department Assignment of Costs TransferredIn Costs

Direct Materials

Conversion Costs

Assign costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

28,000 x $3.40 $95,200

28,000 x $2.40 $67,200

28,000 x $3.60 $100,800

$263,200

Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP

7,000 x $3.40 $ 23,800

7,000 x $2.40 $ 16,800

4,900 x $3.60 $ 17,640

$58,240

Total costs accounted for

Total

$321,440

5-27

Managerial Accounting 6e Solutions Manual

(20 min.) E5-39A 1. How much gross profit will be generated by each packaging option?

Pivot Table Fields: Package in Rows Gross Profit in Values

2. How much gross profit will be generated by each customer?

Pivot Table Fields: Customer in Rows Gross Profit in Values *Note: Pivot table shown is not complete

3. How much gross profit will be generated by the open orders in each city?

Pivot Table Fields: City in Rows Gross Profit in Values *Note: Pivot table shown is not complete 5-28

Chapter 5

Process Costing

(continued) E5-39A 4. How much gross profit will be generated by each packaging option for each customer?

Pivot Table Fields: Package in Columns Customer in Rows Gross Profit in Values *Note: Pivot table shown is not complete 5.

How much gross profit will be generated by each packaging option in each city?

Pivot Table Fields: Package in Columns City in Rows Gross Profit in Values *Note: Pivot table shown is not complete

5-29

Managerial Accounting 6e Solutions Manual

(20 min.) E5-40A 1. How much gross profit will be generated by the open orders for each product size? Which product size is the most profitable?

Pivot Table Fields: Product Size in Rows Gross Profit in Values

2. How much gross profit will be generated by the open orders for each customer? Which customer is the most profitable?

Pivot Table Fields: Customer in Rows Gross Profit in Values

3. How much gross profit will be generated by the open orders in each city? Which city is the most profitable?

Pivot Table Fields: City in Rows Gross Profit in Values

5-30

Chapter 5

Process Costing

(continued) E5-40A 4. How much gross profit will be generated by each product size within each city?

Pivot Table Fields: Product Size in Rows City in Rows Gross Profit in Values

5. How much gross profit will be generated by each customer within each city?

Pivot Table Fields: City in Rows Customer in Rows Gross Profit in Values

5-31

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (15–20 min.) E5-41B Reqs. 1–2 Raw Materials Inventory 23,500 177,000

12) Beginning balance 15) Direct materials purchased

11) Direct materials used in mixing 1) Direct materials used in packaging Ending balance

19,500 Work in Process Inventory—Mixing Department 12,100 151,000 11,200 67,000

8) Beginning balance 11) Direct materials used 3) Direct labor 10) Manufacturing overhead allocated

2) Transferred to baking Ending balance

228,000

13,300 Work in Process Inventory—Baking Department 15,900 4,600 70,000 228,000 7) Transferred to packaging 17,500

4) Beginning balance 16)Direct labor 5) Manufacturing overhead 2) Transferred in from mixing Ending balance

301,000

Work in Process Inventory—Packaging Department 8,200 30,000 8,800 46,000 301,000 13)Transferred to finished goods 14,000

14) Beginning balance 1)Direct materials used 9) Direct labor 17) Manufacturing overhead 7) Transferred in from baking Ending balance

Finished Goods Inventory 4,900 380,000 18) Cost of goods sold 3,900

6) Beginning balance 13) Transferred in from packaging Ending balance Req. 3 The cost per loaf of bread is calculated as follows: Total cost of units transferred to finished goods Divided by: Completed and transferred out units Cost per unit (rounded)

5-32

151,000 30,000

380,000

381,000

$ 380,000 ÷ 3,375,000 $ 0.11

Chapter 5

Process Costing

(10–15 min.) E5-42B Paul’s Pies Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Physical Units Direct Materials Conversion Costs Units to account for: Beginning work in process, Nov. 1 207,000 Plus: Started in production during Nov. 985,000 Total physical units to account for 1,192,000 Units accounted for: b Completed and transferred out during Nov. 1,035,000 1,035,000 1,035,000 c d Plus: Ending work in process, Nov. 30 157,000 109,900 125,600 a Total physical units accounted for 1,192,000 Total equivalent units 1,144,900 1,160,600 __________ a “Total physical units accounted for” must equal the “Total physical units to account for” (1,192,000) in the top half of the schedule. b Back into this figure by subtracting the 157,000 units in ending work in process inventory from the “Total physical units to account for” (1,192,000). c 109,900 = 157,000 × 70% d 125,600 = 157,000 × 80%

(10–15 min.) E5-43B Note: Students may have filled out the chart, or they may have just given an answer for each lettered item.

Physical Units Units to account for: Beginning work in process, August 1 Plus: Transferred in during Aug. Total physical units to account for Units accounted for: Completed and transferred out during August Plus: Ending work in process, Aug. 31 Total physical units accounted for Total equivalent units

Equivalent Units Transferred In Direct Materials

Conversion Costs

25,000 229,000 (a) 254,000

(b) 224,000 30,000 (c) 254,000

(d) 224,000 (e) 30,000

(g) 224,000 (h) 27,000

(j) 224,000 (k) 12,000

(f) 254,000

(i) 251,000

(l) 236,000

Notes: (b) 254,000 – 30,000 = 224,000 (h) 30,000 x 90% = 27,000 (k) 30,000 x 40% = 12,000

5-33

Managerial Accounting 6e Solutions Manual

(20 min.) E5-44B Req. 1 Conversion costs incurred evenly throughout the process

Start

45% complete

100% complete

Direct materials (dyes) added

Transferred out to Packaging

6,800 gallons completed and transferred out

2,800 gallons started but not finished (ending work in process inventory) Req. 2 Bright Day Paint Company Blending Department Flow of Physical Units and Computation of Equivalent Units

Flow of Production

Flow of Physical Units

Units to account for: Beginning work in process, June 1 Plus: Started in production during June

0 9,600

Total physical units to account for

9,600

Units accounted for: Completed and transferred out during June Plus: Ending work in process, June 30 Total physical units accounted for Total equivalent units

6,800 2,800 9,600

Equivalent Units Direct Materials

Conversion Costs

6,800 2,800a

6,800 1,260b

9,600

8,060

__________ a The timeline shows that all direct materials are added at the beginning of the blending process, so the ending work in process inventory is complete as to materials. b 2,800 units × 45% = 1,260 equivalent units The footnoted explanations are not required.

5-34

Chapter 5

Process Costing

(continued) E5-44B Req. 3 Bright Day Paint Company Blending Department Cost per Equivalent Unit Cost per Equivalent Unit: Beginning work in process, June 1 Plus: Costs added during June Total costs to account for Divide by total equivalent units (from Req. 2) Cost per equivalent unit

Direct Materials $ 0 6,240 $6,240 ÷ 9,600 $ 0.65

Conversion Costs $ 0 a 2,821 $2,821 ÷ 8,060 $ 0.35

Bright Day Paint Company Blending Department Direct Materials

Conversion Costs

Total $ 0 $9,061 $9,061

__________ a $950 DL + $1,871MOH = $2,821 Req. 4

Assign Costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP Total costs accounted for

6,800 x $ 0.65 $ 4,420

6,800 x $ 0.35 $ 2,380

2,800 x $ 0.65 $1,820

1,260 x $ 0.35 $ 441

Total

$6,800

$2,261 $9,061

Req. 5 The average cost per gallon transferred out of blending is: $6,800 6,800 gallons

$1.00 per gallon

Managers will want to know this cost to compare it to their budgeted target costs. They may also use the cost information when setting selling prices.

5-35

Managerial Accounting 6e Solutions Manual

(15 min.) E5-45B Req. 1 Note: Students may prepare three separate journal entries or one summary entry (as shown below) to record the three manufacturing costs. Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Work in Process Inventory—Blending 9,061 Raw Materials Inventory 6,240 Wages Payable 950 Manufacturing Overhead 1,871 Work in Process Inventory—Packaging Work in Process Inventory—Blending (from Req. 4 of E5-40B)

6,800 6,800

Req. 2 Work in Process Inventory—Blending 0 Transferred to packaging 6,240 950 1,871 2,261

Bal. June 1 Direct materials Direct labor Manufacturing overhead Bal. June 30

5-36

6,800

Chapter 5

Process Costing

(10–15 min.) E5-46B Req. 1 Prepare a production cost report Landon Dairy Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Physical Units Direct Materials Units to account for: Beginning work in process, January 1 Plus: Started in production during January Total physical units to account for Units accounted for: Completed and transferred out during January Plus: Ending work in process, January 31 Total physical units accounted for Total equivalent units a b

Conversion Costs

35,000 385,000 420,000 a

400,000 20,000 420,000

400,000 20,000

400,000 b 12,000

420,000

412,000

Back into by subtracting 20,000 from 420,000 20,000 x 60% = 12,000 Landon Dairy Churning Department Cost per Equivalent Unit Direct Materials Beginning work in process, January 1 Plus: Costs added during January Total costs to account for Divide by total equivalent units Cost per equivalent unit

$ 122,500 1,347,500 $1,470,000 ÷ 420,000 $ 3.50

$14,000 315,600 $329,600 ÷412,000 $ 0.80

Landon Dairy Churning Department Direct Materials

Conversion Costs

400,000 x $3.50 $1,400,000

400,000 x $ 0.80 $ 320,000

20,000 x $ 3.50 $70,000

12,000 x $ 0.80 $9,600

Total $ 136,500 1,663,100 $1,799,600

Total

$1,720,000

$79,600 $1,799,600

5-37

Managerial Accounting 6e Solutions Manual

(continued) E5-46B

Req. 2 How much did it cost to make a pound of butter in the Churning Department? Direct material cost $ Conversion cost $ Total cost $

3.50 0.80 4.30

Req. 3 How much did it cost to make a partially completed pound of butter in the Churning Department? Direct material cost $ 3.50 Conversion cost (60% complete x conversion cost .80) 0.48 Unit cost of partially completed pound $ 3.98 Also: Ending WIP balance Divided by # of pounds Unit cost of partially completed pound

$ $

79,600 ÷ 20,000 3.98

Yes, it is lower than the completed pounds because 40% of the conversion costs have not yet been incurred.

5-38

Chapter 5

Process Costing

(10–15 min.) E5-47B Req. 1

Journal entry during month to record manufacturing costs: Work in process inventory—churning 1,663,100 Raw materials inventory Wages payable Manufacturing overhead To record manufacturing costs during month

1,347,500 25,000 290,600

Req. 2

Journal entry at end of month to transfer cost of butter into Forming Department Work in process inventory—forming 1,720,000 Work in process inventory—churning 1,720,000 To transfer to Forming Department Req. 3 Work in Process Inventory—Churning 136,500 Transfer to Forming 1,663,100

Bal. January 1

Bal. January 31

1,720,000

79,600

(10–15 min.) E4-48B Req. 1 Unit total cost from churning department Cost per EU for direct materials in forming department Cost per EU for conversion costs in forming department Total cost

$ $ $ $

4.30 0.10 0.15 4.55

5.50 4.55 0.95 400,000 380,000

Req. 2 Selling price per unit Cost of goods sold per unit Gross profit per unit Times total number of completed units Total gross profit

$ $

5-39

Managerial Accounting 6e Solutions Manual

(15–20 min.) E5-49B Journal DATE a.

ACCOUNTS AND EXPLANATIONS Raw Materials Inventory Accounts Payable

POST. REF.

DEBIT 9,900

CREDIT 9,900

Work in Process Inventory—Assembly Raw Materials Inventory

4,500

Work in Process Inventory—Finishing Raw Materials Inventory

2,200

Work in Process Inventory—Assembly Cash

10,900

Manufacturing Overhead Property Taxes Payable—Plant Utilities Payable—Plant Insurance Payable Accumulated Depreciation—Plant

10,100

Work in Process Inventory—Assembly Wages Payable Manufacturing Overhead

7,400

Work in Process Inventory—Finishing Wages Payable Manufacturing Overhead

10,800

Work in Process Inventory—Finishing Work in Process Inventory—Assembly

10,200

Finished Goods Inventory Work in Process Inventory—Finishing

15,600

4,500

2,200

10,900

1,200 4,300 1,000 3,600

5,200 2,200

4,400 6,400

10,200

15,600

(25–30 min.) E5-50B Req. 1 Thomas Motors Assembly Department Flow of Physical Units and Computation of Equivalent Units Flow of Equivalent Units Physical Units Direct Materials Conversion Costs Completed and transferred out during September 12,000 12,000 12,000 a b Plus: Ending work in process, September 30 11,000 3,850 8,800c Total physical units accounted for 23,000 Total equivalent units 15,850 20,800 a b

23,000 – 12,000 11,000 × 0.35 c11,000 × 0.80

5-40

Chapter 5

Process Costing

(continued) E5-50B Req. 2 Thomas Motors Assembly Department Cost Per Equivalent Unit Direct Materials

Conversion Costs

Beginning work in process, September 1 Plus: Costs added during September Total costs to account for

0 8,242 $ 8,242

0 27,040 $ 27,040

Divide by total equivalent units (from Req. 1) Cost per equivalent unit

÷ 15,850 $ 0.52

÷ 20,800 $ 1.30

Req. 3 Thomas Motors Assembly Department Direct Materials

Conversion Costs

12,000 x $ 0.52 $ 6,240

12,000 x $ 1.30 $ 15,600

3,850 x $ 0.52 $2,002

8,800 x $ 1.30 $ 11,440

Total

$21,840

$13,442 $35,282

Req. 4 Journal DATE

ACCOUNTS AND EXPLANATIONS Work in Process Inventory—Testing Work in Process Inventory—Assembly

POST. REF.

DEBIT 21,840

CREDIT 21,840

Req. 5 Work in Process Inventory—Assembly 0 Transferred to testing 8,242 27,040 13,442

Bal. September 1 Direct materials Conversion costs Bal. September 30

21,840

5-41

Managerial Accounting 6e Solutions Manual

(20 min.) E5-51B Req. 1 Conversion costs incurred evenly throughout the process

Start

80% complete

Direct materials (grapes) added

100% complete

Transferred out to Packaging

6,420 gallons completed and transferred out

1,250 gallons started but not finished (ending work in process inventory)

Req. 2 Newton Winery Fermenting Department Flow of Physical Units and Computation of Equivalent Units

Flow of Production Units to account for: Beginning work in process, March 1 Plus: Started in production during March

Flow of Physical Units 2,900 4,770

Total physical units to account for

7,670

Units accounted for: Completed and transferred out during March Plus: Ending work in process, March 31 Total physical units accounted for

6,420 1,250 7,670

Total equivalent units

Equivalent Units Direct Conversion Materials Costs

6,420 1,250a

6,420 1,000b

7,670

7,420

The timeline shows that all direct materials are added at the beginning of the process, so the ending work in process inventory is complete as to materials.

1,250 units × 80% = 1,000

5-42

Chapter 5

Process Costing

(continued) E5-51B Req. 3 Newton Winery Fermenting Department Cost per Equivalent Unit Direct Materials

Conversion Costs

Total

Beginning work in process, March 1 $ 2,100 10,172 $12,272 ÷ 7,670 $ 1.60

$1,409 2,301c $3,710 ÷ 7,420 $ 0.50

Newton Winery Fermenting Department Direct Materials

Conversion Costs

Plus: Costs added during March Total costs to account for Divide by total equivalent units (from Req. 2) Cost per equivalent unit

$ 3,509 12,473 $15,982

__________ c $1,000DL + $1,301MOH = $2,301 Req. 4

6,420 x $ 1.60 $ 10,272

6,420 x $ 0.50 $ 3,210

1,250 x $ 1.60 $2,000

1,000 x $ 0.50 $ 500

Total

$13,482

$2,500 $15,982

Req. 5 The average cost per gallon transferred out of fermenting is: $13,482 6,420 gallons

$2.10 per gallon

Managers will want to know this cost to compare it to their budgeted target costs. They may also use the cost information when setting selling prices.

5-43

Managerial Accounting 6e Solutions Manual

(15 min.) E5-52B Reqs. 1–3 Option #1 # of tons 140 140

Material cost of machine drool Disposal cost

Cost per ton $72 $54

Monthly cost $10,080 $7,560

Annual (x 12 mos.) $120,960 $90,720

$17,640

$211,680

Monthly cost $2,100 $7,560

Annual (x 12 mos.) $25,200 $90,720

$9,660

$115,920

Option #2 # of tons 140 140

Receive from local recycler Waste disposal charges saved

Cost per ton $15 $54

Option #3

Reduction in plastics cost (140 x 40%) Reduction in waste disposal fees Receive from local recycler (140 – 56) Less annual cost to reengineer

# of tons 56 140

Cost per ton $72 $54

Monthly cost $4,032 $7,560

Annual (x 12 mos.) $48,384 $90,720

$15

$ 1,260

$ 15,120

(70,000)

$12,852

$84,224

Req. 4 Student rationales will vary, but the machine drool should be sold to a local recycler. This alternative will result in the greatest net annual savings.

5-44

Chapter 5

Process Costing

(15–20 min.) E5-53B Denver Foundry Forming Department Physical Flow of Units and Equivalent Units Equivalent Units

Flow of Production Units to account for: Beginning work in process, October 1 Plus: Started in production during October Total physical units to account for Units accounted for: Completed and transferred out during October Plus: Ending work in process, October 31 Total physical units accounted for Total equivalent units

Flow of Physical Units

Direct Materials

Conversion Costs

10,470 67,530 78,000 a

69,000 9,000 78,000

69,000 b 5,400

69,000 c 1,800

74,400

70,800

78,000 physical units to account for minus the 9,000 still in ending work in process inventory = 69,000 that must have been transferred out. b 9,000 × 60% = 5,400 c 9,000 × 20% = 1,800

Beginning work in process, October 1 Plus: Costs added during October Total costs to account for Divide by total equivalent units Cost per equivalent unit

Denver Foundry Forming Department Cost per Equivalent Unit Direct Materials Conversion Costs $ 21,510 $ 49,600 171,930 162,800 $193,440 $212,400 ÷ 74,400 ÷ 70,800 $ 2.60 $ 3.00

Total 71,110 334,730 $405,840

5-45

Managerial Accounting 6e Solutions Manual

(continued) E5-53B Denver Foundry Forming Department Direct Materials

Conversion Costs

69,000 x $ 2.60 $179,400

69,000 x $ 3.00 $ 207,000

5,400 x $ 2.60 $14,040

1,800 x $ 3.00 $ 5,400

Total

$386,400

$ 19,400 $405,840

Journal DATE

5-46

ACCOUNTS AND EXPLANATIONS Work in process inventory—finishing Work in process inventory—forming

POST. REF.

DEBIT 386,400

CREDIT 386,400

Chapter 5

Process Costing

(15–20 mins.) E5-54B Req. 1 Brookman Semiconductors Photolithography Department Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Direct Flow of Production Physical Units Transferred In Materials Units to account for: Beginning work in process, May 1 9,000 Plus: Transferred in during May 23,000 Total physical units to account for 32,000 Units accounted for: Completed and transferred out during May Plus: Ending work in process, May 31

30,000a 2,000

Total physical units accounted for

32,000

Total equivalent units

Conversion Costs

30,000 2,000

30,000 2,000b

30,000 1,400c

32,000

31,400

__________ a 32,000 total units – 2,000 units in ending work in process = 30,000 units b Direct materials: 2,000 units each 100% completed in May = 2,000 c Conversion costs: 2,000 units each 70% completed in May = 1,400 Req. 2 Brookman Semiconductors Photolithography Department Cost per Equivalent Unit Transferred In

Direct Materials

Conversion Costs

Total

Beginning work in process, May 1

$ 1,600

$20,450

$ 37,890

$ 59,940

Plus: Costs added during May Total costs to account for

97,600 $99,200

53,150 $73,600

90,850 $ 128,740

241,600 $301,540

Divide by total equivalent units (from Req.1) Cost per equivalent unit

÷ 32,000

÷ 31,400

$ 2.30

3.10

4.10

5-47

Managerial Accounting 6e Solutions Manual

(continued) E5-54B Req. 3 Brookman Semiconductors Photolithography Department Assignment of Costs TransferredIn Costs

Direct Materials

Conversion Costs

Assign costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

30,000 x $3.10 93,000

30,000 x $2.30 $69,000

30,000 x $4.10 $123,000

$ 285,000

Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP

2,000 x $3.10 $ 6,200

2,000 x $2.30 $4,600

1,400 x $4.10 $ 5,740

$16,540

Total costs accounted for

Total

$301,540

(20 min.) E5-55B 1. How much gross profit will be generated by each packaging option?

Pivot Table Fields: Package in Rows Gross Profit in Values

2. How much gross profit will be generated by each customer?

Pivot Table Fields: Customer in Rows Gross Profit in Values *Note: Pivot table shown is not complete 5-48

Chapter 5

Process Costing

(continued) E5-55B 3. How much gross profit will be generated by the open orders in each city?

Pivot Table Fields: City in Rows Gross Profit in Values *Note: Pivot table shown is not complete

4. How much gross profit will be generated by each packaging option for each customer?

Pivot Table Fields: Package in Columns Customer in Rows Gross Profit in Values *Note: Pivot table shown is not complete

5-49

Managerial Accounting 6e Solutions Manual

(continued) E5-55B 5.

How much gross profit will be generated by each packaging option in each city?

Pivot Table Fields: Package in Columns City in Rows Gross Profit in Values *Note: Pivot table shown is not complete

5-50

Chapter 5

Process Costing

(20 min.) E5-56B 1. How much gross profit will be generated by the open orders for each product size? Which product size is the most profitable?

Pivot Table Fields: Product Size in Rows Gross Profit in Values

2. How much gross profit will be generated by the open orders for each customer? Which customer is the most profitable?

Pivot Table Fields: Customer in Rows Gross Profit in Values

3. How much gross profit will be generated by the open orders in each city? Which city is the most profitable?

Pivot Table Fields: City in Rows Gross Profit in Values

5-51

Managerial Accounting 6e Solutions Manual

(continued) E5-56B 4. How much gross profit will be generated by each product size within each city?

Pivot Table Fields: Product Size in Rows City in Rows Gross Profit in Values

5. How much gross profit will be generated by each customer within each city?

Pivot Table Fields: City in Rows Customer in Rows Gross Profit in Values 5-52

Chapter 5

Process Costing

Problems (Group A) (30–45 min.) P5-57A Req. 1 Conversion costs incurred evenly throughout the process

Start

30% complete

100% complete

Direct materials added

Units transferred out

15,000 units completed and transferred out

5,000 units started but not finished (ending work in process inventory) Req. 2 Decker Cosmetics Lip Balm Department Equivalent Unit Computation Month Ended June 30 Flow of Flow of Production Completed and transferred out during June Plus: Ending work in process, June 30 Total physical units accounted for Total equivalent units a b

15,000 5,000b 20,000

15,000 5,000

15,000 1,500a

20,000

16,500

5,000 × 0.30 20,000 – 15,000 = 5,000 Decker Cosmetics Lip Balm Department Cost per Equivalent Unit Month Ended June 30 Direct Materials $

Cost per equivalent unit: Beginning work in process June 1 Plus: Costs added during June Total costs to account for Divide by total equivalent units Cost per equivalent unit d

Physical Units

Equivalent Units Direct Materials Conversion Costs

0 5,800 $ 5,800 ÷ 20,000 $ 0.29

Conversion Costs $ 0 3,960d $ 3,960 ÷ 16,500 $ 0.24

$3,400 + $560 = $3,960 .

5-53

Managerial Accounting 6e Solutions Manual

(continued) P5-57A Req. 3 Decker Cosmetics Lip Balm Department Direct Materials

Conversion Costs

15,000 x $ 0.29 $ 4,350

15,000 x $ 0.24 $ 3,600

5,000 x $ 0.29 $1,450

1,500 x $ 0.24 $ 360

Total

$7,950

$1,810 $9,760

Req. 4 Work in Process Inventory 0 Transferred out 5,800 3,400 560 1,810

Bal. June 1 Direct materials Direct labor Manufacturing overhead Bal. June 30

7,950

(30–45 min.) P5-58A Req. 1 Conversion costs incurred evenly throughout the process

Start

70% complete

Direct materials added

Units Transferred out

12,000 units completed and transferred out

3,000 units started but not finished (ending work in process inventory)

5-54

100% complete

Chapter 5

Process Costing

(continued) P5-58A Req. 2 Timberbrook Furniture Company Sawing Department Flow of Physical Units and Computation of Equivalent Units Month Ended September 30 Flow of Equivalent Units Physical Units

Flow of Production Completed and transferred out Plus: Ending work in process, Sept. 30 Total physical units accounted for

Direct Materials

12,000 3,000 15,000

Total equivalent units a

12,000 3,000

12,000 2,100a

15,000

14,100

3,000 × 0.70 = 2,100 Timberbrook Furniture Company Sawing Department Cost per Equivalent Unit Month Ended September 30 Direct Materials Conversion Costs

Cost per Equivalent Unit: Beginning work in process September 1 Plus: Costs added during September Total costs to account for Divide by total equivalent units Cost per equivalent unit a

Conversion Costs

$ 0 1,830,000 $1,830,000 ÷ 15,000 $ 122

Total

$ 0 310,200 $310,200 ÷ 14,100 $ 22

$ 0 $2,140,200 $2,140,200

$144,900 DL + $165,300 MOH = $310,200

Req. 3 Timberbrook Furniture Company Sawing Department Direct Materials

Conversion Costs

12,000 x $ 122 $ 1,464,000

12,000 x $ 22 $ 264,000

3,000 x $ 122 $366,000

2,100 x $ 22 $ 46,200

Total

$1,728,000

$412,200 $2,140,200

Total cost accumulated in the Sawing Department during September are the same as the Total Costs to account for shown in Req. 2:

5-55

Managerial Accounting 6e Solutions Manual

(continued) P5-58A

Direct materials…………………………... Direct labor………………………………... Manufacturing overhead………………... Total costs…………………………………

$1,830,000 144,900 165,300 $2,140,200

Req. 4 Journal Entry DATE

ACCOUNT TITLE AND EXPLANATION Work in Process Inventory—Sawing Raw Materials Inventory Wages Payable Manufacturing Overhead Work in Process Inventory—Assembly Work in Process Inventory—Sawing

POST. REF.

DEBIT 2,140,200

CREDIT 1,830,000 144,900 165,300

1,728,000 1,728,000

Note: Students may prepare three separate journal entry or the one summary journal entry (as shown above) to record the three manufacturing costs.

5-56

Chapter 5

Process Costing

(30–40 min.) P5-59A Req. 1 Conversion costs incurred evenly throughout the process

Start

___________ 60% complete

100% complete

Chicken and cream added

Green peppers and mushrooms added

13,600 gallons completed and transferred out

700 gallons started but not finished (ending work in process inventory) Req. 2 Grammer Chicken Mixing Department Flow of Physical Units and Computation of Equivalent Units Equivalent Units Flow of Chicken & Green Peppers & Conversion Flow of Production Physical Units Cream Mushrooms Costs Units to account for: Beginning work in process, November 1 0 Plus: Started in production during November 14,300 Total physical units to account for 14,300 Units accounted for: Completed and transferred out during November Plus: Ending work in process, November 30 Total physical units accounted for Total equivalent units

13,600

700 14,300

700a

420b

14,300

13,600

14,020

The timeline shows that chicken and cream are added at the beginning of the process. Green peppers and mushrooms are not added until the end of the process. The ending inventory that is 60% of the way through the production process has passed the point where the chicken and cream are added (but not the point where the green peppers and mushrooms are added). The ending inventory is complete with respect to chicken and cream, but it has no equivalent units of green peppers and mushrooms. b 700 × 60% = 600

5-57

Managerial Accounting 6e Solutions Manual

(continued) P5-59A Req. 3 Grammer Chicken Mixing Department Cost per Equivalent Unit Month Ended November 30 Cost per Equivalent Unit Beginning work in process, November 1 Plus: Costs added during Nov. Total costs to account for Divide by total equivalent units Cost per equivalent unit (rounded) a b

Chicken & Cream $ 0 $25,740a $25,740 ÷ 14,300 $ 1.80

Green Peppers & Mushrooms Conversion Costs $ 0 $ 0 $ 5,440 $21,030b $ 5,440 $21,030 ÷ 13,600 ÷ 14,020 $ 0.40 $ 1.50

$21,740 + $4,000 = $25,740 $11,200 DL + $9,830 MOH = $21,030

Req. 4 Grammer Chicken Mixing Department Assignment of Costs

5-58

Green Peppers & Mushrooms

Conversion Costs

13,600 x $1.80 24,480

13,600 x $0.40 $5,440

13,600 x $1.50 $20,400

$ 50,320

700 x $1.80 $ 1,260

0 x $0.40 $0

420 x $1.50 $630

$1,890

Chicken & Cream

Total

$52,210

Chapter 5

Process Costing

(45–60 min.) P5-60A Req. 1 Conversion costs incurred evenly throughout the process

Start

_____ 50% complete

100% complete

Transferred in from shaping

Direct materials added

Transferred out to FG Inventory

2,200 racks completed and transferred out

1,400 racks started but not finished (ending work in process inventory) Req. 2 Vintage Accessories Plating Department Equivalent Unit Computations (Weighted-Average)

Flow of Production Units accounted for: Completed and transferred out during March Plus: Ending work in process, March 31 Total physical units accounted for Total equivalent units

Equivalent Units Conversion Direct Materials Costs

Flow of Physical Units

Transferred In

2,200 1,400

2,200 1,400a

2,200 0b

2,200 700c

3,600

2,200

2,900

3,600

The timeline shows that transferred-in costs are incurred at the beginning of the plating process. Ending inventory was started this period, so it did pass the point where transferred-in costs are added. The ending inventory is therefore complete with respect to transferred-in costs. b The timeline shows that direct materials are not added until the end of the plating process. The ending inventory is only 50% of the way through the plating process, so it has not yet incurred any plating direct materials costs. c 50% of the conversion work on the ending work in process inventory was done in March: 1,400 × 50% = 700

5-59

Managerial Accounting 6e Solutions Manual

(continued) P5-60A

Vintage Accessories Plating Department Production Cost Report Month Ended March 31 Transferred In Direct Materials

Conversion Costs

Total

Beginning work in process, March 1 $18,000 36,000 $54,000 ÷ 3,600 $ 15

Plus: Costs added during March Total costs to account for Divide by equivalent units Cost per equivalent unit

$ 0 24,200 $24,200 ÷ 2,200 $ 11

$12,480 57,120a $69,600 ÷ 2,900 $ 24

$ 30,480 117,320 $147,800

$21,732DL + $35,388 MOH = $57,120 Vintage Accessories Plating Department Production Cost Report TransferredIn Costs

Direct Materials

Conversion Costs

Assign costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

2,200 x $15 $33,000

2,200 x $11 $24,200

2,200 x $24 $52,800

$ 110,000

Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP

1,400 x $15 $ 21,000

0 x $11 $0

700 x $24 $ 16,800

$37,800

Total costs accounted for

5-60

Total

$147,800

Chapter 5

Process Costing

(continued) P5-60A Req. 3 Journal Entry DATE

ACCOUNT TITLE AND EXPLANATION Work in Process Inventory—Plating Work in Process Inventory—Shaping To transfer in costs from Shaping Department.

POST. REF.

DEBIT 36,000

CREDIT 36,000

Work in Process Inventory—Plating Raw Materials Inventory Wages Payable Manufacturing Overhead To record direct materials, direct labor, and manuf. costs to the Plating Department.

81,320

Finished Goods Inventory Work in Process Inventory—Plating To record cost of units completed and transferred out.

110,000

24,200 21,732 35,388

110,000

Note: Students may have prepared three separate journal entries, rather than the one summary entry shown above, to record the three manufacturing costs incurred in the Plating Department.

5-61

Managerial Accounting 6e Solutions Manual

(20–25 min.) P5-61A Req. 1 Cost per box for boxes completed and shipped out for immediate sale: Cost of boxes completed and shipped out Number of boxes completed and shipped out

$256,770 27,000

$9.51

Req. 2 Gross profit per box

Selling price per box

−

Cost per box

$10.26

−

$9.51

$0.75

Req. 3 Bradley’s Cricket Farm sold 27,000 boxes of crickets at a gross profit of $0.75 per box. In addition, monthly operating expenses of $8,250 must be covered. June operating income

Gross profit

−

Operating expenses

(27,000 boxes × $0.75 / box)

−

$8,250

$20,250

−

$8,250

$12,000

Req. 4 Monthly return on investment

Monthly operating income Investment

100%

$12,000 $375,000

100%

3.2% (rounded)

The monthly return on investment is 3.2%. Req. 5 In this requirement, we are proving that the current price of $10.26 per box does not provide the required 5% return. The monthly operating income that would provide a 5% rate of return is as follows: Monthly return on investment

Monthly operating income Investment

Monthly operating income $375,000

Monthly operating income

$375,000

$18,750

To achieve a 5% rate of return, Bradley’s Cricket Farm must charge a price that provides enough gross profit to cover operating expenses of $8,250 and then provide $18,750 in operating income. This requires a gross profit of $27,000.

5-62

Chapter 5

Process Costing

(continued) P5-61A Gross profit

= (Selling price per box – Cost per box)

× Boxes sold

$27,000

= (Selling price per box – $9.51)

× 27,000

$27,000 27,000

= Selling price per box – $9.51

$1.00

= Selling price per box – $9.51

$1.00 + $9.51

= Selling price per box

$10.51

= Selling price per box

Cost per box + Desired gross profit per box = Selling price per box 9.51 + 1.00 = 10.51

5-63

Managerial Accounting 6e Solutions Manual

Problems (Group B) (30–45 min.) P5-62B Req. 1 Conversion costs incurred evenly throughout the process

Start

45% complete

100% complete

Direct Materials added

Units transferred Out

15,700 units completed and transferred out

5,200 units started but not finished (ending work in process inventory) Req. 2 Cool Balm Lip Balm Department Equivalent Unit Computation Month Ended June 30 Flow of Flow of Production Completed and transferred out during June Plus: Ending work in process, June 30 Total physical units accounted for Total equivalent units a b

Physical Units 15,700 5,200b 20,900

15,700 5,200

15,700 2,340a

20,900

18,040

5,200 × 0.45 20,900 – 15,700 = 5,200 Cool Balm Lip Balm Department Cost per Equivalent Unit Month Ended June 30 Direct Materials $

Cost per Equivalent Unit: Beginning work in process June 1 Plus: Costs added during June Total costs to account for Divide by total equivalent units Cost per equivalent unit d

Equivalent Units Direct Materials Conversion Costs

0 5,225 $ 5,225 ÷ 20,900 $ 0.25

$3,360 + $248 = $3,608

5-64

Conversion Costs $ 0 3,608d $ 3,608 ÷ 18,040 $ 0.20

Chapter 5

Process Costing

(continued) P5-62B

Req. 3 Cool Balm Lip Balm Department Direct Materials

Conversion Costs

15,700 x $ 0.25 $ 3,925

15,700 x $ 0.20 $ 3,140

5,200 x $ 0.25 $1,300

2,340 x $ 0.20 $ 468

Total

$7,065

$1,768 $8,833

Req. 4 Work in Process Inventory Bal. June 1 Direct materials Direct labor Manufacturing overhead Bal. June 30

0 5,225 3,360 248 1,768

Transferred out

7,065

5-65

Managerial Accounting 6e Solutions Manual

(30–45 min.) P5-63B Req. 1 Conversion costs incurred evenly throughout the process

Start

70% complete

Direct materials added

100% complete

Units transferred out

14,000 units completed and transferred out

2,500 units started but not finished (ending work in process inventory)

Req. 2 Weaver Furniture Company Sawing Department Flow of Physical Units and Computation of Equivalent Units Month Ended September 30 Equivalent Units Flow of Conversion Flow of Production Physical Units Direct Materials Costs Units accounted for: Completed and transferred out 14,000 14,000 14,000 Plus: Ending work in process, Sept. 30 2,500 2,500 1,750a Total physical units accounted for 16,500 Total equivalent units 16,500 15,750 a

2,500 × 0.70 = 1,750

5-66

Chapter 5

Process Costing

(continued) P5-63B

Cost per Equivalent Unit: Beginning work in process, Sept. 1 Plus: Costs added during September Total costs to account for Divide by total equivalent units Cost per equivalent unit a

Weaver Furniture Company Sawing Department Cost per Equivalent Unit Month Ended September 30 Direct Materials Conversion Costs $ 0 1,848,000 $1,848,000 ÷ 16,500 $ 112

Total

$ 0 315,000 a $315,000 ÷ 15,750 $ 20

$ 0 $2,163,000 $2,163,000

$142,000 DL + $173,000 MOH = $315,000

Req. 3 Weaver Furniture Company Sawing Department Direct Materials

Conversion Costs

Total

14,000 x $ 112 $ 1,568,000

14,000 x $ 20 $ 280,000

2,500 x $ 112 $280,000

1,750 x $ 20 $ 35,000

$1,848,000

315,000 $2,163,000

Total costs accumulated in the Sawing Department during September are the same as the Total Costs to account for shown in Req. 2: Direct materials…………………………... Direct labor………………………………... Manufacturing overhead……………….. Total costs…………………………………

$1,848,000 142,000 173,000 $2,163,000

5-67

Managerial Accounting 6e Solutions Manual

(continued) P5-63B Req. 4 Journal DATE

ACCOUNT TITLE AND EXPLANATION Work in Process Inventory—Sawing Raw Materials Inventory Wages Payable Manufacturing Overhead To journalize the direct materials, direct labor, and manuf. overhead to the Sawing Department. Work in Process Inventory—Assembly Work in Process Inventory—Sawing To transfer costs of units completed to Assembly Department.

POST. REF.

DEBIT 2,163,000

CREDIT 1,848,000 142,000 173,000

1,848,000 1,848,000

Note: Students may prepare three separate journal entry or the one summary journal entry (as shown above) to record the three manufacturing costs.

(30–40 min.) P5-64B Req. 1 Conversion costs incurred evenly throughout the process

Start

70% complete

Chicken and cream added

Green peppers & mushrooms added

13,200 gallons completed and transferred out

800 gallons started but not finished (ending work in process inventory)

5-68

100% complete

Chapter 5

Process Costing

(continued) P5-64B Req. 2 Tastee Foods Mixing Department Flow of Physical Units and Computation of Equivalent Units Month Ended November 30 Equivalent Units Flow of Chicken & Green Peppers & Conversion Flow of Production Physical Units Cream Mushrooms Costs Units to account for: Beginning work in process, Nov. 1 0 Plus: Started in production during November 14,000 Total physical units to account for 14,000 Units accounted for: Completed and transferred out during November Plus: Ending work in process, Nov. 30 Total physical units accounted for

13,200 800 14,000

Total equivalent units

13,200 800a

13,200 0a

13,200 560b

14,000

13,200

13,760

The timeline shows that chicken and cream are added at the beginning of the process. Green peppers and mushrooms are not added until the end of the process. The ending inventory that is 70% of the way through the production process has passed the point where the chicken and cream are added (but not the point where the green peppers and mushrooms are added). The ending inventory is complete with respect to chicken and cream, but it has no equivalent units of green peppers and mushrooms.

800 × 70% = 560

Req. 3 Tastee Foods Mixing Department Cost per Equivalent Unit Month Ended November 30 Cost per Equivalent Unit: Beginning work in process, November 1 Plus: Costs added during Nov. Total costs to account for Divide by total equivalent units Cost per equivalent unit a b

Chicken & Cream $ 0 $26,600a $26,600 ÷ 14,000 $ 1.90

Green Peppers & Mushrooms $ 0 $6,600 $ 6,600 ÷ 13,200 $ 0.50

Conversion Costs $ 0 $22,016b $22,016 ÷ 13,760 $ 1.60

$22,300 + $4,300 = $26,600 $11,500 DL + $10,516 MOH = $22,016

5-69

Managerial Accounting 6e Solutions Manual

(continued) P5-64B Req. 4 Tastee Foods Mixing Department Assignment of Costs

Assign costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

Green Peppers & Mushrooms

Conversion Costs

13,200 x $1.90 25,080

13,200 x $0.50 $6,600

13,200 x $1.60 $21,120

$ 52,800

800 x $1.90 $ 1,520

0 x $0.50 $0

560 x $1.60 $896

$2,416

Chicken & Cream

Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP Total costs accounted for

Total

$55,216

(45–60 min.) P5-65B Req. 1 Conversion costs incurred evenly throughout the process

Start

50% complete

100% complete

Transferred in from shaping

Direct materials added

Transferred out to FG inventory 2,200 racks completed and transferred out

1,400 started but not finished (ending work in process inventory)

5-70

Chapter 5

Process Costing

(continued) P5-65B Req. 2 Antique Accessories Plating Department Equivalent Unit Computations (Weighted-Average)

Flow of Production Completed and transferred out during March

Flow of Physical Units 2,200 1,400 3,600

Plus: Ending work in process, March 31 Total physical units accounted for Total equivalent units

Transferred In

Equivalent Units Conversion Direct Materials Costs

2,200 1,400a

2,200 0b

2,200 700c

3,600

2,200

2,900

__________ a The timeline shows that transferred-in costs are incurred at the beginning of the plating process. Ending inventory was started this period, so it did pass the point where transferred-in costs are added. The ending inventory is therefore complete with respect to transferred-in costs. b

The timeline shows that direct materials are not added until the end of the plating process. The ending inventory is only 50% of the way through the plating process, so it has not yet incurred any plating direct materials costs.

50% of the conversion work on the ending work in process inventory was done in March: 1,400 × 50% = 700.

The explanations in the footnotes are not required. Antique Accessories Plating Department Production Cost Report (Weighted-Average)

Beginning work in process, March 1 Plus: Costs added during March Total costs to account for Divide by equivalent units Cost per equivalent unit a

Transferred In $14,400 28,800 $43,200 ÷ 3,600 $ 12

Direct Materials $ 0 28,600 $28,600 ÷ 2,200 $ 13

Conversion Costs $11,970 57,630a $69,600 ÷ 2,900 $ 24

Total $ 26,370 115,030 $141,400

$20,867DL + $36,763MOH = $57,630

5-71

Managerial Accounting 6e Solutions Manual

(continued) P5-65B Antique Accessories Plating Department Production Cost Report TransferredIn Costs

Direct Materials

Conversion Costs

Assign Costs Completed and transferred out: Equivalent units completed and transferred out Multiply by: Cost per equivalent unit Cost assigned to units completed and transferred out

2,200 x $12 $26,400

2,200 x $13 $28,600

2,200 x $24 $52,800

$ 107,800

Ending work in process inventory: Equivalent units in ending WIP Multiply by: Cost per equivalent unit Cost assigned to units in ending WIP

1,400 x $12 $ 16,800

0 x $13 $0

700 x $24 $ 16,800

$33,600

Total costs accounted for

Total

$141,400

Req. 3 Journal Entry DATE

ACCOUNT TITLE AND EXPLANATION Work in Process Inventory—Plating Work in Process Inventory—Shaping To transfer in costs from Shaping Department.

POST. REF.

DEBIT 28,800

CREDIT 28,800

Work in Process Inventory—Plating Raw Materials Inventory Wages Payable Manufacturing Overhead To requisition materials and assign conversion costs to the Plating Department.

86,230

Finished Goods Inventory Work in Process Inventory—Plating To transfer cost of units completed to finished goods.

107,800

28,600 20,867 36,763

107,800

Note: Students may have prepared three separate journal entries, rather than the one summary entry shown above, to record the three manufacturing costs incurred in the Plating Department.

5-72

Chapter 5

Process Costing

(20–25 min.) P5-66B Req. 1 Cost per box for boxes completed and shipped out for immediate sale: Cost of boxes completed and shipped out Number of boxes completed and shipped out

$283,220 34,000

$8.33

Req. 2 Gross profit per box

Selling price per box

−

Cost per box

$9.23

−

$8.33

$0.90

Req. 3 Anthony’s Cricket Farm sold 34,000 boxes of crickets at a gross profit of $0.90 per box. In addition, monthly operating expenses of $19,050 must be covered. June operating income

Gross profit

−

Operating expenses

(34,000 boxes × $0.90 / box)

−

$19,050

$30,600

−

$19,050

$11,550

5-73

Managerial Accounting 6e Solutions Manual

(continued) P5-66B Req. 4 Monthly return on investment

Monthly operating income Investment

100%

$11,550 $420,000

100%

2.75%

Req. 5 The monthly operating income that would provide a 4.45% rate of return is: Monthly return on investment

Monthly operating income Investment

4.45%

Monthly operating income $420,000

Monthly operating income

$420,000

$18,690

4.45%

To achieve a 4.45% rate of return, Anthony’s Cricket Farm must charge a price that provides enough gross profit to cover operating expenses of $19,050 and then provide $18,690 in operating income. This requires a gross profit of $37,740.

Gross profit

= (Selling price per box – Cost per box)

× Boxes sold

$37,740

= (Selling price per box – $8.33)

× 34,000

$37,740 34,000

= Selling price per box – $8.33

$1.11

= Selling price per box – $8.33

$1.11 + $8.33

= Selling price per box

$9.44

= Selling price per box

5-74

Chapter 5

Process Costing

Serial Case C5-67 1.

Caesars would use a process costing system when determining the cost of buffet per customer. Bacchanal Buffet uses a series of steps (called processes) to make brunch and dinner buffets ready. Different processes are used to make each menu item ready, but the same process is used to prepare a typical item several times during the week. Because Bacchanal Buffet mass offers its menu items, the accounting system it uses to find the cost of the buffet per customer differs from the job costing system.

In order to know how much profit it earns per buffet customer, Caesars needs to know the cost of the buffet per customer so that it can decide on the selling price of the buffet per customer. Bacchanal Buffet accumulates the costs of each process and then assign the costs to the typical buffet customer. The buffet cost varies per customer depending upon the time of day because the menu items are different for brunch and dinner buffets and as a result different processes with different costs are used in order to make each buffet ready. Caesars’ managers use this information to measure profits and make business decisions. They also use this information to determine how efficiently each process is operating in order to control costs.

5-75

Managerial Accounting 6e Solutions Manual

Discussion & Analysis A5-68 1.

What characteristics of the product or manufacturing process would lead a company to use a process costing system? A company that uses a series of steps or processes to make large quantities of identical units would use a process costing system. Give two examples of companies that are likely to be using process costing. Del Monte Foods and Rubbermaid are examples of companies that are likely to be using process costing. What characteristics of the product or manufacturing process would lead a company to use a job costing system? A company that produces unique goods in relatively small batches would use a job costing system. Give two examples of companies that are likely to be using job costing. Price Waterhouse Coopers (an accounting firm) and Universal Studios (moviemakers) are examples of companies that are likely to be using job costing.

How are process costing and job costing similar? How are they different? Process costing and job costing are similar in these respects: •

Inventory flow through the accounts are the same.

•

Both are cost accumulation systems for materials, labor, and overhead.

Processing costing and job costing are different in these respects:

•

Homogeneous products/services vs. heterogeneous products/services

•

Large quantities of identical units vs. single units or small batches with large difference between jobs

•

More averaging vs. less averaging

What are conversion costs? In a job costing system, at least some conversion costs are assigned directly to products. Why do all conversion costs need to be assigned to processing departments in a process costing system? Conversion costs are direct labor and overhead. They need to be assigned to processing departments in a process costing system because they are the costs incurred to convert raw materials into a finished product.

Why not assign all costs of production during a period to only the completed units? Some costs of production are included in the goods that were started but not completed. What happens if a company does this? If a company assigns all the costs of production to only the completed units, those units will be overcosted because they would include the costs of production that belong to the ending inventory. Why are the costs of production in any period allocated between completed units and units in work in process? The costs of production belong to all the units that were in process during the period. Some of the units are completed by the end of the period and some of the units are started but not yet completed. Is there any situation where a company can assign all costs of production during a period to the completed units? If so, when? If a company uses a just-in-time inventory system, they would not have any ending inventory. In that case, all the costs of production would be assigned to the completed goods.

5-76

Chapter 5 5.

Process Costing

What information generated by a process costing system can be used by management? How can management use this process costing information? Total and unit costs for the department—controlling costs, basis for setting selling prices, determining profitability, evaluate performance. Physical flow of units through the department—planning and directing.

Why are the equivalent units for direct materials often different from the equivalent units for conversion costs in the same period? Often direct materials are added at the beginning of the process where conversion costs are incurred evenly throughout the process. This typically results in higher equivalent units for direct materials than for conversion costs.

Describe the flow of costs in a process costing system. List each type of journal entry that would be made and describe the purpose of that journal entry. The flow of costs in a process costing system is similar to the flow of costs in a job order costing system. The main difference is that direct materials, direct labor, and manufacturing overhead are assigned to processing departments rather than jobs. In addition, a journal entry must be made at the end of the month to transfer costs to the next processing department.

Debit Raw Materials Inventory Credit Accounts Payable To record the purchase of raw materials

Debit Work in Process (WIP) Inventory – First Department Credit Raw Materials Inventory To record the requisition of raw materials to the first production department

Debit WIP Inventory – First Department Credit Wages Payable or Cash To record the direct labor in the first production department

Debit WIP Inventory – First Department Credit Manufacturing Overhead To record the allocation of overhead in the first production department

Debit WIP Inventory – Second Department Credit WIP Inventory – First Department To record the transfer of partially completed goods to the next department

Debit Finished Goods Inventory Credit WIP Inventory—Second Department To record the transfer of completed goods to finished goods storage

Debit Accounts Receivable Credit Sales To record sales revenue on account

Debit Cost of Goods Sold Credit Finished Goods Inventory To record the cost of sales

If a company has very little or no inventory, what effect does that lack of inventory have on its process costing system? The process costing system is easier to use because there is no need for determining equivalent units and distributing production costs between the completed units and the units in ending inventory. What other benefits result from having very little to no inventory? Companies with little to no inventory reduce the costs associated with it, such as the cost of storage, the risk of holding obsolete goods, the costs of insurance and taxes, and the cost of tying up capital. .

5-77

Managerial Accounting 6e Solutions Manual

How does process costing differ between a first processing department and a second or later processing department? A first processing department does not have any units or costs transferred in as does a second or later processing department.

10. “Process costing is easier to use than job costing.” Do you agree or disagree with this? Explain your reasoning. I agree with the statement because with process costing, no job cost sheets need to be maintained during the production process. In a process costing system, all the accounting for determining the unit costs takes place at the end of the period. 11. Think of a business or an organization that would use process costing. What types of waste are likely to be generated during the manufacturing process? Are there ways to avoid this waste or to minimize it? How might managerial accounting support the efforts to reduce waste in the production process? A restaurant will produce dirty fryer oil from its deep fryers that has to be changed frequently in order to produce tasty and sanitary meals. This unwanted by-product will have to be disposed of at some cost. One way to avoid this waste is to utilize separate fryers for different foods. For example, cook fish in one fryer, chicken in another, and French fries in yet another. Doing so can prolong the time needed between changes, which in turn will result in less overall waste. A restaurant could only cook so many chicken breasts before an undertone of chicken taste would attach itself to any other foods cooked in the oil, not just chicken. Customers, especially vegetarians, would not appreciate nor tolerate the taste of chicken in their zucchini spears or fried eggplant! Managerial accounting can support this process by conducting cost-benefit analysis to determine whether or not the costs associated with running additional fryers offsets the costs of fewer less frequent oil changes. Both the variable costs of running additional fryers along with the fixed costs of the initial investment depreciated over the life of the fryers would come into consideration. 12. Provide an example of how a company may change its processes to make its manufacturing more efficient or environmentally sustainable. How will the company benefit? There is often a direct correlation between being environmentally conscious and being economically efficient. For example, a taxi-cab business could reduce its own fuel costs and harmful emissions into the atmosphere by converting from traditional gas guzzling vehicles into more fuel efficient hybrids or alternative fuel vehicles. The benefit could be twofold. The taxi company can reduce its overhead fuel cost while promoting social responsibility and improving its public image. In today’s environment, special interest groups and stakeholders more than ever are exercising their influence over socially irresponsible corporations. They are capable of crippling companies that are not up to par with the eco-friendly movement of the twenty-first century. Boycotting, generating negative publicity, and lobbying for stricter compliance regulations are just some of the tactics that these special interest groups can use to accomplish their objectives.

5-78

Chapter 5

Process Costing

Application & Analysis A5-69 Process Costing in Real Companies Basic Discussion Questions 1.

Describe the product selected. The product selected was Kettle Brand Potato Chips.

Summarize the production process. Truckloads of russet potatoes arrive at the manufacturing plant where they are first scrubbed, then crinkle sliced unpeeled, and dropped into bubbling hot oil. A chip chef keeps the chips moving in the oil so the chips don’t stick together. Once they are cooked, they ride out of the oil on a conveyor belt and pass through an “optisort” machine that dumps out the overcooked chips. The last process is a drum where seasonings are added.

Justify why you think this production process would dictate the use of a process costing system. Kettle Brand would use a process costing system because they have a series of steps that make large quantities of identical units.

List at least two separate processes that are performed in creating this product. One process is scrubbing the potatoes, and another is slicing the unpeeled potatoes. What departments would house these processes? The cleaning department houses the scrubbing machines, and the slicing department houses the machines that crinkle-cut the unpeeled potatoes.

Describe at least one department that would have ending work in process. What do the units look like as they are “in process”? The only department that would have ending work in process would be packaging. Once the potatoes are started into production, they need to be completed all the way to packaging the individual bags.

Student responses will vary.

5-79

Managerial Accounting 6e Solutions Manual

A5-70 Ethical Mini-Case 1.

As a managerial accountant, Jackson’s responsibilities are to act ethically. The ethical issues in this situation are as follows: a. Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical standards.” By changing the inventory records to show more inventory than actually exists, Jackson is violating regulations and laws about reporting. b. Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” By changing the inventory records, Jackson would be providing inaccurate and unclear information that would affect business decisions about that line. c. Credibility: “Communicate information fairly and objectively.” By adjusting the records, he is not reporting information fairly or objectively. d. Integrity: “Mitigate actual conflicts of interest.” Because Jackson is concerned about granting bonuses to other employees, there is a conflict of interest. He has verbally promised bonuses to key employees he has recruited and does not want to go back on his word. This is a factor in his decision to overstate ending inventory. However, this is not a good reason to overstate ending inventory. Recording more units than are actually in inventory would impact the 2019 balance sheet and income statement by having the ending inventory overstated (net income overstated) and the 2020 beginning inventory overstated (net income understated). He should bring up his concerns about the bonuses and losing employees to the supervisory staff members above him who can control bonuses and personnel decisions. He should not overstate the inventory.

5-80

Chapter 5

Process Costing

A5-71 Real Life Mini-Case 1.

Which product(s) manufactured by Polly Products would use elements of a process costing system? Give a detailed description of why you think that product (or those products) would require a process costing system. The individual Polly Planks that are not customized lengths would use a process costing system because they are all made the same way and in relatively large batches. Also, if Polly Products produces a certain amount of park benches, picnic tables, and other things as a part of its everyday production, these products could also use some elements of a process costing system.

Within the process costing portion of the hybrid system at Polly Products, what costs would be considered to be direct materials? What costs are likely to be in conversion costs in the process costing system? (Use your imagination to brainstorm about potential conversion costs at Polly Products because these costs were not directly addressed in the case.) Direct materials would include the costs of the milk jugs, oils, colorants, foaming agents, and other plastics. Conversion costs could include direct labor, depreciation on factory machinery, factory supervision, factory utilities, factory insurance, and all other costs associated with the factory that are not direct materials.

Which products manufactured by Polly Products would be likely to use elements of a job costing system? Again, explain your reasoning and be specific. Custom length Polly Planks and special orders for its other products would use job costing because each job will have a different set of requirements and resource usage.

Within the job costing portion of the hybrid system at Polly Products, which are the direct materials? What would be direct labor? What costs are likely to be in manufacturing overhead? The direct materials for the hybrid system would likely be the planks used to create the park benches or whatever other product that is being produced. Direct labor would be the costs necessary for workers to manufacture the products, such as time taken to screw the Polly Planks together. Manufacturing overhead would include the depreciation on the factory building and the factory equipment used to manufacture the products.

In addition to manufacturing costs, Polly Products has sales, engineering, and general administrative support costs. Are these costs relevant to the hybrid costing system? Yes, these costs are relevant to the hybrid costing system because it is important to take all the costs associated with the production of the products into account to make certain that Polly Products are accurately aware of the costs of making its products. Under U.S. GAAP accounting, though, these period costs would not be included as part of product cost. However, being aware of all costs (not just product costs) will allow managers to make better business decisions, such as pricing decisions and product mix decisions.

What major issues do you see in a hybrid costing system? A hybrid costing system is difficult to implement because of the data requirements. A lot of data must be gathered during the production process and this data collection can be onerous.

5-81

Chapter 6 Cost Behavior Quick Check Answers QC6-1. b QC6-2. c QC6-3. c

QC6-4. d QC6-5. c QC6-6. c

QC6-7. b QC6-8. d QC6-9. a

QC6-10. a QC6-11. c QC6-12. c

Short Exercises (5–10 min.) S6-1 Cost A is a fixed cost. Total costs stay the same, and the per unit costs decrease as the volume increases. Cost B is a variable cost. Total costs increase, and the per unit costs remain constant as the volume increases. Cost C is a mixed cost. Total costs are not constant, and the per unit costs are not constant as the volume increases.

(5–10 min.) S6-2 a. b. c. d.

Fixed Fixed Variable Variable

e. f. g. h.

Variable Fixed Fixed Fixed

i. j. k.

Fixed Fixed Fixed

(5–10 min.) S6-3 Total fixed cost $45,000* *$3 × 15,000 = $45,000

÷ ÷

Number of soccer balls produced 22,500

= =

New fixed cost per soccer ball $2.00

(5–10 min.) S6-4 Total manufacturing costs $220,000 – $45,000 variable expenses = $175,000 fixed expenses $45,000 / 15,000 packages = $3.00 per package (rounded) Total variable costs $66,000* *$3.00 × 22,000 = $66,000

+ +

Total fixed costs $175,000

= =

Total production costs $241,000

6-1

Managerial Accounting 6e Solutions Manual

(5–10 min.) S6-5 Req. 1 a.

Call for 30 minutes $8.00 + (30 × $0.20) $8.00 + $6.00 = $14.00

Call for 60 minutes $8.00 + (60 × $0.20) $8.00 + $12.00 = $20.00

Call for 120 minutes $8.00 + (120 × $0.20) $8.00 + $24.00 = $32.00

Req. 2

(5–10 min.) S6-6 a. b. c. d. e. f. g.

Rubber used in bike tires Recycled aluminum used to make the bike frame Lubricant used on clipless pedal springs Quality inspector’s salary Depreciation on equipment used to machine the aluminum in the bike frame Renewable cork used to make the saddle (the seat) Patent on belt drive (used instead of chain)

6-2

Variable Variable Variable Fixed Fixed Variable Fixed

Chapter 6

Cost Behavior

(10–15 min.) S6-7 Req. 1

Req. 2 There appears to be a very strong relationship between the company’s operating expenses and the number of oil changes it performs. We can tell this because the scatterplot of the data almost falls in an almost straight line (it is very linear). If there were no relationship, or if the relationship were weak, the scatterplot of data points would appear almost random. In addition, because all of the data points fall in the same linear pattern, there do not appear to be any outliers. Req. 3 The operating expenses appear to be mixed costs. If the operating expenses were purely fixed, the data points would fall in a horizontal rather than sloped line. If the operating expenses were purely variable, the data points would fall in a sloped line as they do now, but the slope of the data points would intersect the scatterplot’s origin. Req. 4 The capacity of the facility is 4,000 oil changes, and the company performed 3,600 oil changes in May. Therefore, the current relationship between monthly operating expenses and number of oil changes performed each month should be used to project total monthly operating expenses at a volume of 3,800 oil changes.

6-3

Managerial Accounting 6e Solutions Manual

(5–10 min.) S6-8 First, identify the formula and calculate the variable cost component (slope). Change in costs ÷ Change in volume $5,100* ÷ 1,000* *Use May (high) and February (low) Change in cost = $37,000 – $31,900 Change in volume = $3,600 – $2,600

= =

Variable cost per unit $5.10

Next, identify the formula and compute the fixed cost component (the vertical intercept) using the costs for the highest level of activity. Total mixed (operating) cost $37,000 *$5.10 × 3,600 = $18,360

– –

Total variable cost $18,360*

= =

Total fixed costs $18,640

Complete the company’s operating cost equation. y = $5.10x + $18,640 The total monthly operating costs if the company performs 3,400 oil changes is $35,980 [$18,640 + ($5.10 × 3,400)].

(5–10 min.) S6-9 First, identify the formula and calculate the variable cost component (slope). Change in costs $2,200a a $27,800 – $25,600

÷ ÷

Change in volume 100b b 960 – 860

= =

Variable cost per unit $22

Next, identify the formula and compute the fixed cost component (the vertical intercept) using the costs for the highest level of activity. Total mixed (overhead) cost $27,800 *$22 × 960

–

Total variable cost

Total fixed costs

–

$21,120*

$6,680

Complete Brimfield Catering’s operating cost equation. y = $22x + $6,680 The total monthly operating costs if Brimfield Catering works 885 labor hours is $26,150 [$6,680 + ($22 × 885)].

6-4

Chapter 6

Cost Behavior

(5–10 min.) S6-10 First, identify the formula and calculate the variable cost component (slope). Change in costs $9,975a a $49,975 – $40,000

÷ ÷

Change in volume 475b b 1,325 – 850

= =

Variable cost per unit $21

Next, identify the formula and compute the fixed cost component (the vertical intercept) using the costs for the highest level of activity. Total mixed (overhead) cost $49,975 *$21 × 1,325

–

Total variable cost

Total fixed costs

–

$27,825*

$22,150

Complete Gold Care Health Group’s operating cost equation: y = $21x + $22,150. The total monthly operating costs if the company works 875 nursing hours is $40,525 [$22,150 + ($21 × 875)]. Student answers may vary.

6-5

Managerial Accounting 6e Solutions Manual

(5–10 min.) S6-11 Req. 1 There appears to be a fairly strong relationship between the number of room-nights rented per month and the monthly utilities cost. We can tell this because most of the data points fall in a tight, linear pattern, resembling something close to a straight line. Req. 2 The highest and lowest volume data points appear to be somewhat off-line from the rest of the data points. Whether these points are significant is a matter of judgment. These points are not extremely different from the rest of the points. The two ends might suggest that the cost behaves in a curvilinear fashion. Management may wish to check this data to make sure it is accurate before proceeding with any further analysis. Req. 3 Using the high-low method will result in a slightly skewed cost equation. The high-low method results in a cost equation for the straight line connecting the highest and lowest volume data points. The low volume data point is slightly high. The high-volume data point is slightly low. The line connecting these data points will be “flatter” than a line representing the rest of the data points. As a result, management may overestimate the fixed portion of the cost equation and underestimate the variable portion of the cost equation.

(5–10 min.) S6-12 1.

Generally speaking, regression analysis results in more accurate cost equations than does the high-low method. Regression analysis uses all of the data points to form the line and cost equation that best fits all of the data points. The high-low method uses only the highest and lowest volume data points to form the line and cost equation. In the scatter plot, the low volume data point is slightly high, while the high-volume data point is slightly low compared to the other data points. As a result, the high-low line will be flatter than the regression line.

The R-square value will range from 0 to 1. An R-square value of 1 is the highest possible value and occurs only if the data points fall in a perfectly straight line. The lowest possible R-square value of 0 occurs when the data points are extremely random. Therefore, an R-square of 0.939 is very high and indicates that the regression line fits the data very well.

With an R-square value of 0.939, a manager should be quite confident in using the regression cost equation to predict utilities costs for other volumes within the same relevant range.

(5–10 min.) S6-13 a.

y = $0.26x + $1,263.34

This equation probably should be used to predict costs. The R-square statistic can range from a high of 1.00 to a low of 0. In this case, the R-square indicates that the cost equation is very reliable, indicating a fairly strong relationship between the potential cost driver and the firm’s operating costs.

6-6

Chapter 6

Cost Behavior

(10–15 min.) S6-14 Naomi’s Quilt Shoppe Income Statement Month Ended February 28 Sales revenue (95 × $490) Less: Cost of goods sold (95 × $290) Gross profit Less: Operating expenses Sales commissions (8% × $46,550) Payroll costs Lease Operating income

$46,550 (27,550) 19,000 $ (3,724) (1,800) (1,300)

($6,824) $ 12,176

Naomi’s Quilt Shoppe Contribution Margin Income Statement Month Ended February 28 Sales revenue (95 × $490) Less variable expenses: Cost of goods sold (95 × $290) Sales commissions (8% × $46,550) Contribution margin Less fixed expenses: Payroll costs Lease Operating income

$46,550 ($27,550) ($3,724)

(31,274) 15,276

(1,800) (1,300)

(3,100) $ 12,176

(10–15 min.) S6-15 Req. 1 Dalton’s Products Income Statement (Variable Costing) Variable cost per unit (given)

$ 31

Sales revenue ($65 × 13,000) Less variable expenses: Variable cost of goods sold ($31 × 13,000) Variable operating expenses ($2 × 13,000) Contribution margin Less fixed expenses: Fixed MOH Fixed operating expenses Operating income

$845,000 $403,000 $ 26,000 $416,000 $208,000 $ 89,000 $ 119,000

6-7

Managerial Accounting 6e Solutions Manual

(continued) S6-15 Req. 2 Dalton’s Products Income Statement (Absorption Costing) Cost per unit Variable cost per unit (given) Fixed MOH per unit ($208,000 / 13,000 units) Total cost per unit Sales revenue Less: Cost of goods sold ($47 × 13,000) Gross profit Less: Operating expenses [($2 × 13,000) + $89,000] Operating income

$31 $16 $47 $845,000 ($611,000) $234,000 ($115,000) $ 119,000

(15 min.) S6-16 Req. 1 Gleason Manufacturing Income Statement (Variable Costing) Variable cost per unit

$23

Sales revenue ($47 × 18,000) Less variable expenses: Variable cost of goods sold ($23 × 18,000) Variable operating expenses ($1 × 18,000) Contribution margin Less fixed expenses: Fixed MOH Fixed operating expenses Operating income

$846,000 ($414,000) ($18,000) $414,000 ($322,000) ($ 47,000) $ 45,000

Req. 2 Gleason Manufacturing Income Statement (Absorption Costing) Variable cost per unit (given) Fixed MOH per unit ($322,000/23,000 units) Total cost per unit Sales revenue Less: Cost of goods sold ($37 × 18,000) Gross profit Less: Operating expenses [($1 × 18,000) + $47,000] Operating income

$23 $14 $37 $846,000 ($666,000) $180,000 ($65,000) $ 115,000

Req. 3 When inventory levels increase, operating income will be greater under absorption costing than it is under variable costing. This situation occurs because under variable costing, fixed MOH is expensed immediately as a period cost (operating expense). Under absorption costing, fixed MOH becomes part of the inventoriable cost of the product, which isn’t expensed (as cost of goods sold) until the inventory is sold, leaving a higher operating income due to less being expensed. 6-8

Chapter 6

Cost Behavior

(5–10 min.) S6-17 a. b. c. d. e. f. g. h. i. j.

Graph 4 Graph 2 Graph 2 Graph 10 Graph 4 Graph 5 Graph 5 Graph 12 Graph 5 Graph 12

(15 min.) S6-18 a. b. c. d. e. f. g. h. i. j. k. l. m.

curvilinear cost(s) Regression analysis Account analysis variable cost(s) Step cost(s) R-square fixed cost(s) Committed fixed cost(s) mixed cost(s) Average cost per unit high-low method fixed cost(s) Total cost(s); variable cost(s); fixed cost(s)

6-9

Managerial Accounting 6e Solutions Manual

(5 min.) S6-19 1.

6-10

Audrey is an accountant for Simply Green Consulting. At a party, she overhears a man talking about an upcoming contract on which his company will be bidding. She listens closer and hears specific variable cost information that the man shares. She returns to work the next day and shares this competitor's cost information with her friend, who is working on preparing Simply Green Consulting’s bid. Morgan does not disclose on the financial statements that variable costing, rather than absorption costing, was used.

Confidentiality—Refrain from using confidential information for unethical or illegal advantage.

Atwood Mobile operates in a highly competitive environment. Cost information is highly confidential since most jobs are obtained through a bidding process based on variable costing, or in some cases absorption costing. Joshua Gilner is the manager of the Accounting Department of Atwood Mobile. He neglects to talk with his new hires about the confidentiality of data, nor is there a formal policy in place about nondisclosure. The CEO of a small company visits a competitor’s dumpster and takes several trash bags containing discarded papers and reports. The CEO directs Brandon to go through the competitor’s trash to find any information about the competitor’s costs for a contract coming up for bid. Brandon goes through the papers to find the information because he does not want to lose his job.

Confidentiality—Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance.

Tyler struggled through regression analysis in his college courses. Now his manager has asked him to run a regression analysis to create a model for predicting overhead costs. He runs the regression and creates the model. He gives his manager the cost equation for overhead costs, even though he does not really understand it or have any way of checking to see if he did it correctly. He is hesitant to ask for help because he just started this job and he wants to look impressive.

Competence—Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.

Integrity—Abstain from engaging in or supporting any activity that might discredit the profession.

Chapter 6

Cost Behavior

(10 min.) S6-20 a.

Describe the steps you would undertake to create a scatterplot that includes a regression line, cost equation, and R-squared value using Excel. 1. 2. 3.

Start with a data set with the independent variable (x) in the column to the left of the dependent variable (y). Select both the x and y columns of data with your cursor. Choose the Insert tab on the Excel ribbon. Then click the scatter icon from the group of available charts. You’ll see the scatterplot on your worksheet. To add axis labels, click on Quick Layout icon on the ribbon and choose the first layout option. Type in descriptive titles for your chart in the text boxes given. You may also delete the legend if desired. To add the regression line, equation, and R-squared statistic to the scatterplot, point your cursor at any data point on the scatterplot and right click on your cursor. Click on add Trendline. The Format Trendline task pane will appear on the right side of the screen. Leave the default option: Linear. At the bottom of the task pane, check the two boxes next to Display equation on chart and Display R-squared value on chart. The cost equation and R-squared value will now appear on the scatterplot in a text box. You may drag the text box to a different area of the scatterplot as well as add dollar signs, if desired.

b. Evaluate Scatterplot #1. Would the number of client jobs be a good predictor of overhead costs? Explain. No, the number of client jobs would not be a good predictor of overhead costs. The scatterplot shows little or no relationship between the number of client jobs and overhead costs, the data points appear to be almost random. c.

Evaluate Scatterplot #2. Would the number of billable attorney hours be a good predictor of overhead costs? Explain. Yes, the number of billable attorney hours would be a good predictor of overhead costs. The scatterplot shows the data points in a linear pattern. (They resemble something close to a straight line.)

d. Examine both Scatterplot #1 and Scatterplot #2. Would the number of client jobs or the number of billable attorney hours be a better indicator of overhead costs? How do you know? Billable attorney hours would be a better indicator of overhead costs because the scatterplot shows the data points in a linear pattern which indicates a relationship between the number of billable attorney hours and overhead costs.

6-11

Managerial Accounting 6e Solutions Manual

(10 min.) S6-21 1.

Describe the steps you would undertake to perform a simple linear regression using Excel. a. b. c.

e. 2.

Start with a data set with the independent variable (x) in the column to the left of the dependent variable (y). Select both the x and y columns of data with your cursor. Choose the Insert tab on the Excel ribbon. Then click the scatter icon from the group of available charts You’ll see the scatterplot on your worksheet. To add axis labels, click on Quick Layout icon on the ribbon and choose the first layout option. Type in descriptive titles for your chart in the text boxes given. You may also delete the legend if desired. To add the regression line, equation, and R-squared statistic to the scatterplot, point your cursor at any data point on the scatterplot and right click on your cursor. Click on add Trendline. The Format Trendline task pane will appear on the right side of the screen. Leave the default option: Linear. At the bottom of the task pane, check the two boxes next to Display equation on chart and Display R-squared value on chart. The cost equation and R-squared value will now appear on the scatterplot in a text box. You may drag the text box to a different area of the scatterplot as well as add dollar signs, if desired.

Use the output from Regression #1 to construct the cost equation that managers could use to predict monthly occupancy costs. y = ($31.97 × room nights sold) + $65,757

Use the output from Regression #2 to construct the cost equation that managers could use to predict monthly occupancy costs. y = ($25.67 × room nights sold) + ($293.72 × average monthly high temperature) + $32,598

Is Regression #1 or Regression #2 a better predictor of monthly occupancy costs? How do you know? What type of regression (simple linear regression or multiple regression) is the better predictor in this case? Regression #2 is a better predictor of monthly occupancy costs because the adjusted R Square value is higher with multiple regression.

Assume that management expects to sell 10,000 room nights in a month when the average daily high outdoor temperature is expected to be 82 degrees. Predict the hotel’s occupancy costs for the month, using the output given for Regression #2. y = ($25.67 × 10,000) + ($293.72 × 82) + $32,598 y = $256,700 + $24,085 + $32,598 y = $313,383

6-12

Chapter 6

Cost Behavior

Exercises (Group A) (15 min.) E6-22A Req. 1

Total variable costs Total fixed costs Total operating costs

4,500 Garments $3,150 14,400 $17,550

6,000 Garments $4,200* 14,400 $18,600

7,500 Garments $ 5,250 14,400 $19,650

$0.70 3.20 $3.90

$0.70 2.40* $3.10

$0.70 1.92 $2.62

Variable cost per garment Fixed cost per garment Average cost per garment *given

Req. 2 The average cost per garment changes as volume changes, due to the fixed component of the dry cleaner’s costs. The fixed cost per unit decreases as volume increases, while the variable cost per unit remains constant. Req. 3 He would underestimate his costs by $5,760. Cost from Req. 1 for 4,500 units……………….

$17,550

Estimated costs @4,500 using $2.62………………….

$11,790

Underestimation of costs……..

$5,760*

(15 min.) E6-23A Farnsworth Drycleaners Projected Income Statement Month Ended July 31 Dry cleaning revenue (4,260 × $10) Less: Operating expenses [$14,400 + (4,260 × $0.70)] Operating income (loss) Farnsworth Drycleaners Projected Contribution Margin Income Statement Month Ended July 31 Dry cleaning revenue (4,260 × $10) Less: Variable expenses (4,260 × $0.70) Contribution margin Less: Fixed expenses Operating income (loss)

$42,600 (17,382) $25,218

$42,600 (2,982) 39,618 (14,400) $25,218

6-13

Managerial Accounting 6e Solutions Manual

(15 min.) E6-24A Req. 1 Average cost per unit $23.43 Average cost per unit × number of units $23.43 × 1,400 $32,802 Req. 2 Total costs Less: Fixed costs Total variable cost

= = = = =

Total cost ÷ number of units Total cost ÷ 1,400 units Total cost Total cost Total cost

$32,802 $20,202 $12,600

$12,600/1,400 units = $9.00 variable cost per unit. Req. 3 y

$9.00x + $20,202 where x = number of mailboxes

1,500 × $23.43 average cost per mailbox

Req. 4 $35,145 Req. 5 ($9.00 × 1,500) + $20,202 = $33,702 Req. 6 The plant manager’s forecast would be $1,443 ($35,145 – $33,702) too high if he/she uses the average cost per unit to predict costs. The average cost per unit is based on a mixed cost that will change as volume changes. If the manager uses this method, he/she is erroneously assuming that the average cost per unit does not change at different volumes. The manager should use the cost equation to predict costs because it correctly takes into account the variable and fixed components of producing mailboxes.

6-14

Chapter 6

Cost Behavior

(10–15 min.) E6-25A Req. 1 y = $15.00x + $143,000 where x = number of guests Req. 2 a. ($15.00 × 13,000) + $143,000 = $338,000 (see Req. 1) b. Average cost per unit = $26/guest =

Total cost ÷ number of units $338,000 ÷ 13,000 guests

Req. 3 a. ($15.00 × 11,000) + $143,000 = $308,000 (see Req. 1) b. Total cost = average cost × number of units $286,000 = $26 (see Req. 2b) × 11,000

c. The average cost per guest changes as volume changes, due to the fixed component of the buffet’s costs. The fixed cost per unit increases as volume decreases, while the variable cost per unit remains constant.

Req. 4 y = $15.00x + $165,000* where x = number of guests * $143,000 + $22,000 = $165,000

Req. 5 ($15.00 × 15,000) + $165,000 = $390,000 (see Req. 4)

6-15

Managerial Accounting 6e Solutions Manual

(10–15 min.) E6-26A Req. 1 Variable cost:

High pt. Low pt. Difference

Cost $810,000 $689,400 $120,600

Activity 750,000 616,000 134,000

Q3 Q1

Change in cost ÷ change in volume = variable cost $120,600 ÷ 134,000 = $0.90 Req. 2 Projected total number of bills

760,000

% of customers using paperless billing

Calculated number of customers

45% 342,000

Variable cost per bill saved

0.90

Total cost saved

$307,800

Less: cost of paperless system

$ 288,600

Net savings

$ 19,200

Req. 3 Projected total number of bills

760,000

% of customers using paperless billing

Calculated number of customers

40% 304,000

Variable cost per bill saved

0.90

Total cost saved

$273,600

Less: cost of paperless system

$ 288,600

Net savings (cost)

$ (15,000)

Should the company still offer the paperless billing system? The answer to this question depends on the student’s value system and is meant to be a discussion point. Because there is a net cost of $15,000, the paperless billing system would not be beneficial financially.

6-16

Chapter 6

Cost Behavior

(10–15 min.) E6-27A Req. 1 Excel will render the following scatter plot if students do not force the axes back to the origin:

Van Operating Costs

Relationship Between Van Operating Costs and Miles Driven $5,600 $5,400 $5,200 $5,000 $4,800 $4,600 0

5,000

10,000

15,000

20,000

Miles Driven

Req. 2 The data do not appear to contain any outliers. All data points fall in the same general pattern. Req. 3 There appears to be a very strong relationship between van operating costs and miles driven. We can tell this because the data points fall in a fairly tight, linear pattern.

(10–15 min.) E6-28A High point = February (17,400 miles, $5,280); Low point = July (14,400 miles, $4,680) Determine the formula that is used to calculate the variable cost component. Change in cost ($5,280 – $4,680)

Change in volume (17,400 – 14,400)

Variable cost (slope) ($0.20/mile)

Now determine the formula that is used to calculate the fixed cost component (selecting high point).

Total operating cost $5,280

Total variable cost (17,400 × $0.20)

–

Fixed cost $1,800

Use the high-low method to determine the company’s operating cost equation. y

$0.20x

$1,800

Use the operating cost equation you determined above to predict van operating costs at a volume of 16,500 miles. The operating costs at a volume of 16,500 miles is $5,100 [($0.20 × 16,500) + $1,800].

6-17

Managerial Accounting 6e Solutions Manual

(20–30 min.) E6-29A Req. 1 and 2 y

$0. 19x

$2,163.80

Req. 3 The R-square is 0.474592. This model indicates that the cost equation explains 47.5% of the variability in the data. In other words, it does not fit the data at all. The company will not feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 4 The van operating costs at 16,500 miles is $5,298.80 [($0.19 × 16,500) + $2,163.80]. Because the R-square is 0.475, the company should not rely on this cost estimate.

(5–10 min.) E6-30A Req. 1 y

$0.19x

$2,163.80

Req. 2 The R-square is 0.47. This indicates that the cost equation explains 47% of the variability in the data. In other words, it does not fit the data very well. The company will not feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 3 The van operating costs at 16,000 miles is $5,203.80 [($0.19 × 16,000) + $2,163.80]. The company should not rely on the cost estimate because the R-square is 0.47.

(10–15 min.) E6-31A

Total Laboratory Overhead Costs

Req. 1

6-18

Relationship Between Total Laboratory Overhead Costs and Number of Lab Tests Performed 40000 30000 20000 10000 0 0

1000

2000

3000

4000

Number of Lab Tests Performed

5000

Chapter 6

Cost Behavior

(continued) E6-31A Req. 2 The data do not appear to contain any outliers. All data points fall in the same general pattern. Req. 3 There appears to be a very strong relationship between total laboratory overhead costs and the number of tests performed. We can tell this because the data points generally fall within a fairly tight linear pattern.

(10–15 min.) E6-32A Req. 1 Variable cost:

High pt. Low pt. Difference Change in cost / change in volume = variable costs $7,800 / 2,000 = $3.90

Cost $28,000 $20,200 $7,800

Activity 3,900 1,900 2,000

May June

Req. 2 Using high point Total cost = y = $28,000 = $28,000 = $12,790 = Total fixed costs = $12,790

Variable cost component + fixed cost component vx + f 3,900 ($3.90) + f $15,210 + f f

y = $3.90x + $12,790

Req. 3 Total costs = Variable costs + fixed costs y = vx + f y = 3,100 ($3.90) + $12,790 Total costs = $24,880

(5–10 min.) E6-33A Req. 1 y = $6.84x + $3,187.94 Req. 2 The R-square is 0.77126. This indicates that the cost equation explains 77.1% of the variability in the data. In other words, it should be used with caution. The company may or may not feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 3 $6.84 (3,100) + $3,187.94 = $24,391.94.

6-19

Managerial Accounting 6e Solutions Manual

(15–20 min.) E6-34A Req. 1 Students prepare regression using Excel. Answers shown below are under related requirements. Req. 2 y = $3.17x + $14,368.13 Req. 3 The R-square is 0.633425. This indicates that the cost equation explains 63.3% of the variability in the data. In other words, it should be used with caution. Management may or may not feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 4 y = $3.17x + $14,368.13 y = $3.17 (3,500) + $14,368.13 y = $25,463.13

(15 min.) E6-35A High point: 90% × 800 units = 720 units, $220,040 Low point: 80% × 800 units = 640 units, $215,480 Determine the formula that is used to calculate the variable cost (slope). Change in cost

Change in volume

Variable cost (slope)

($220,040 – $215,480) ÷ (720 – 640) = $57 Now determine the formula that is used to calculate the fixed cost component. Total operating cost

–

Total variable cost

Fixed cost

Choosing the high point here: $220,040 = ($57 × 720) + FC FC = $179,000 Use the high-low method to determine Lakeview’s operating cost equation. y

$57x

$179,000

The owner should expect his operating costs to be $204,080 if occupancy falls to 55% [($57 × (440)) + $179,000] (55% occupancy = 55% × 800 units = 440 units)

6-20

Chapter 6

Cost Behavior

(15 min.) E6-36A Req. 1 High – June; Low – March Change in cost = $4,192 – $3,532 = $660 Change in volume = 1,480 – 1,080 = 400 Change in cost / Change in volume = Variable cost (slope) $660 / 400 = $1.65 Using the high-low method, the variable utilities cost per machine hour is $1.65. Req. 2 Total operating cost – Total variable cost = Fixed cost Using the high activity level: $4,192 – ($1.65 × 1,480) = Fixed cost, or $1,750. Using the high-low method, the fixed cost of utilities each month is $1,750. Req. 3 Total cost = $1,750 + $1.65 (1,210) = $3,747 (rounded). The total cost when 1,210 machine hours are used is $3,747.

6-21

Managerial Accounting 6e Solutions Manual

(15–20 min.) E6-37A Req. 1 Royal Industries Income Statement (Absorption Costing) Sales Revenue ($49 × 13,000) Less: Cost of Goods Sold ($37 (see Req. a) × 13,000) Gross Profit Less: Operating Expenses [($3 × 13,000) + $47,000] Operating Income (Req. g)

$637,000 ($481,000) $156,000 ($86,000) $ 70,000

a. Product Cost Per Unit Using Absorption Costing: Direct Materials $18 Direct Labor 6 Manufacturing Overhead 13 (Total Manufacturing Overhead $221,000 ÷ Total Units Manufactured 17,000) Total Unit Product Cost $37 Royal Industries Income Statement (Variable Costing) Sales Revenue ($49 × 13,000) Less Variable Costs: Variable Cost of Goods Sold ($26 (see Req. b) × 13,000) Variable Operating Expenses ($3 × 13,000) Contribution Margin Less Fixed Expenses: Fixed Manufacturing Overhead Fixed Operating Expenses Operating Income (Req. h)

$637,000 ($338,000) ($39,000) $260,000 ($187,000) ($47,000) $ 26,000

b. Product Cost Per Unit Variable Costing: Direct Materials $18 Direct Labor 6 Variable Manufacturing Overhead 2* Total Unit Product Cost $26 *[($221,000 Total Manufacturing Overhead – $187,000 Fixed Manufacturing Overhead)/17,000 Units Manufactured] = $2 c.

Ending Inventory Absorption Costing: Total Unit Product Cost (see Req. a) # of Units in Ending Inventory (17,000 Units Manufactured – 13,000 Units Sold) Cost of Ending Inventory Absorption Costing

$37 x 4,000 Units $148,000

Ending Inventory Variable Costing: Total Unit Product Cost (see Req. b) # of Units in Ending Inventory (17,000 Units Manufactured – 13,000 Units Sold) Cost of Ending Inventory Variable Costing

$26 x 4,000 Units $104,000

Cost of Goods Sold Absorption Costing: Total Unit Product Cost (see Req. a) # of Units in Sold Cost of Goods Sold Absorption Costing

$37 x 13,000 Units $481,000

6-22

Chapter 6

Cost Behavior

(continued) E6-37A f.

Cost of Goods Sold Variable Costing: Total Unit Product Cost (see Req. b) # of Units in Sold Cost of Goods Sold Variable Costing

$26 x 13,000 Units $338,000

Operating Income Absorption Costing $70,000 (See Absorption Costing Income Statement Above)

Operating Income Variable Costing $26,000 (See Variable Costing Income Statement Above)

Req. 2 Under variable costing, fixed MOH is expensed immediately as a period cost (operating expense). Under absorption costing, fixed MOH becomes part of the inventoriable cost of the product, which isn’t expensed (as Cost of Goods Sold) until the inventory is sold, leaving a higher operating income due to less being expensed.

(10–20 min.) E6-38A Five Macaws Contribution Margin Income Statement For the Year Ended December 31 Sales revenue Variable expenses: Cost of goods sold a Variable selling and marketing expenses b Variable website maintenance expenses c Other variable operating expenses Total variable expenses Contribution margin Fixed expenses: a Fixed selling and marketing expenses b Fixed website maintenances expenses c Other fixed operating expenses Total fixed expenses Operating income a

Calculations for selling and marketing expenses: Total selling and marketing expenses Variable freight-out Remaining selling and marketing expenses Variable: Fixed:

$990,000 673,000 28,620 14,500 1,760 717,880 272,120 36,880 43,500 15,840 96,220 $175,900

$ 65,500 (19,400) $ 46,100

$46,100 × 20% = $9,220 + $19,400 (freight out) = $28,620 $46,100 × 80% = $36,880

Calculations for website maintenance expenses: Variable: $58,000 × 25% = $14,500 Fixed: $58,000 × 75% = $43,500

Calculations for other operating expenses: Variable: $17,600 × 10% = $1,760 Fixed: $17,600 × 90% = $15,840

6-23

Managerial Accounting 6e Solutions Manual

(15–20 min.) E6-39A Req. 1 Charleston Carriage Company Contribution Margin Income Statement For the Month Ended April 30 Sales revenue (13,400 × 80% × $20.00) + (13,400 × 20% × $12.00) Variable expenses: Fee paid to city (10% × $246,560) Complimentary postcards (13,400 × $0.55) Brokerage fee (13,400 × 60% × $1.40) Carriage driver wages (13,400 × $3.90) Total variable expenses Contribution margin Fixed expenses: Leasing and boarding horses Non-carriage driver payroll expense Depreciation expense Other fixed operating expenses Total fixed expenses Operating income

$246,560 $24,656 7,370 11,256 52,260 95,542 $151,018 $48,000 7,600 2,900 7,350 65,850 $85,168

Req. 2 If passenger volume increases by 19% in May, we would expect all variable expenses to increase by 19% because revenues and variable costs change in direct proportion to changes in volume. As a result, the contribution margin would also increase by 19%. Assuming that a 19% increase in volume is still in the same relevant range, we would expect all fixed costs to remain at their present level.

6-24

Chapter 6

Cost Behavior

(15–20 min.) E6-40A Req. 1 Absorption Costing Units sold

Year 1 16,000

Year 2 24,000

$30 $11 $5 $8 $54

Direct material Direct labor Variable MOH Fixed MOH per unit ($176,000 ÷ 22,000 units produced) Cost per unit Year 1 Sales revenue 16,000 × $68 24,000 × $68 Less: Cost of goods sold (16,000 and 24,000 × $54) Gross profit Less: Operating expenses [$86,000 + (16,000 × $3)]; [$86,000 + (24,000 × $3)] Operating income

Year 2

$1,088,000 $864,000 $224,000

$1,632,000 $1,296,000 $336,000 $158,000

$134,000 $90,000

$178,000

6-25

Managerial Accounting 6e Solutions Manual

(continued) E6-40A Req. 2 Year 1

Year 2

Fixed MOH cost per unit (see Req. 1) Change in inventory (in units)

$8 6,000

$8 (2,000)

Difference in operating income

48,000

(16,000)

$42,000a $194,000b $178,000 (see Req. 1) – ($16,000) = $194,000

Predicted operating income using variable costing a

$90,000 (see Req. 1) – $48,000 = $42,000

Req. 3 Variable Costing Year 1 Direct Material Direct Labor Variable MOH Cost per Unit

Year 2 $30 $11 $5 $46

Year 1 Sales revenue 16,000 × $68 24,000 × $68 Less Variable Expenses: Variable Cost of Goods Sold (16,000 and 24,000 × $46) Variable Operating Expenses (16,000 and 24,000 × $3) Contribution Margin Less Fixed Expenses: Fixed MOH Fixed Operating Expenses Operating Income

6-26

$30 $11 $5 $46 Year 2

$1,088,000 $1,632,000 $736,000 48,000 $304,000

$1,104,000 72,000 $456,000

$176,000 86,000

$42,000

$194,000

Chapter 6

Cost Behavior

(15–20 min.) E6-41A Req. 1 Bruno’s operating income under variable costing will be lower than its operating income under absorption costing. This situation occurs because under absorption costing, some of the fixed MOH remains “trapped” on the balance sheet as part of the cost of inventory. Under variable costing, all fixed MOH incurred during the period is expensed as a period cost. Req. 2 Difference in operating income Fixed MOH cost per unit $152,000 /8,000 Change in inventory (in units)

$19 1,000

Difference in operating income

$19,000

Predicted operating income using variable costing

($15,000)a

$4,000 – $19,000 = ($15,000)

Req. 3 The figures below can be calculated using the percentage of produced units sold without the costs per unit, but you need to change the formula for Variable Cost of Goods Sold because the costs per unit are not provided in the problem. Sales Revenue (7,000 × $58) $406,000 Less Variable Expenses: Variable Cost of Goods Sold ($329,000 / 7,000 = $47 $47 – $19 = $28 (7,000 × $28) $196,000 Variable Operating Expenses * $11,000 Contribution Margin $199,000 Less Fixed Expenses: Fixed MOH $152,000 Fixed Operating Expenses $62,000 Operating Income

($15,000)

*Total Operating Expense Less Fixed Portion Variable Operating Expenses

$73,000 $62,000 $11,000

(15 min.) E6-42A Req. 1 Aqua Goggles Conventional (Absorption Costing) Income Statement Year Ended December 31 Sales revenue (198,000 × $45) $8,910,000 Cost of goods sold (198,000 × $29*) (5,742,000) Gross profit 3,168,000 Operating expenses [(198,000 × $7) + $250,000] (1,636,000) Operating income $1,532,000 __________ *Variable manufacturing expense per unit of $20 + $9 fixed manufacturing expense per unit ($1,980,000 fixed manufacturing overhead / 220,000 units produced.)

6-27

Managerial Accounting 6e Solutions Manual

(continued) E6-42A Aqua Goggles Contribution Margin (Variable Costing) Income Statement Year Ended December 31 Sales revenue (198,000 × $45) Variable expenses: Variable cost of goods sold (198,000 × $20) 3,960,000 Sales commission expense (198,000 × $7) 1,386,000 Contribution margin Fixed expenses: Manufacturing overhead $1,980,000 Operating expenses 250,000 Operating income

$8,910,000

(5,346,000) 3,564,000

(2,230,000) $ 1,334,000

Req. 2 Absorption costing operating income is higher than variable costing operating income. This situation occurs because absorption costing defers $198,000 of fixed manufacturing overhead as an asset in ending inventory. In contrast, variable costing expenses all of the fixed manufacturing overhead during the year. Variable costing expenses $198,000 more costs during the year, so variable costing operating income is $198,000 less than absorption costing income. Req. 3 Increase in contribution margin Increase in fixed expenses Increase in operating income

$396,000* (140,000) $256,000

* CM/unit $18 (3,564,000 contribution margin (see variable costing income statement) / 198,000 units sold) × 22,000 increase in sales units (220,000 – 198,000) = $396,000 The company should go ahead with the promotion because the increase in contribution margin exceeds the increase in fixed costs.

6-28

Chapter 6

Cost Behavior

(20 min.) E6-43A 1.

Using billable attorney hours as the independent variable and Overhead costs as the dependent variable, create a scatterplot using Excel that includes a regression line, cost equation, and R-squared value.

Using administrative staff hours as the independent variable and Overhead costs as the dependent variable, create a scatterplot using Excel that includes a regression line, cost equation, and R-squared value.

Using number of client jobs as the independent variable and Overhead costs as the dependent variable, create a scatterplot using Excel that includes a regression line, cost equation, and R-squared value.

6-29

Managerial Accounting 6e Solutions Manual

(continued) E6-43A 4.

Among billable attorney hours, administrative staff hours, and number of client jobs, which independent variable would most likely be the best predictor of overhead costs? Explain. Number of client jobs would be the best predictor of overhead costs because the scatterplot shows the data points in a linear pattern, which indicates a relationship between the number of client jobs and overhead costs.

Assume that management wants to predict overhead costs in a month when billable attorney hours are 1,720, administrative staff hours are 1,250, and the number of client jobs is 23. Predict the firm’s overhead costs, using the cost equation in the scatterplot for the independent variable that you found to be the best predictor for overhead costs in your analysis for Requirement 4. Using the model for overhead costs predicted using number of client jobs, the cost equation would be y = $309.25(23) + $62,700, or $69,812.75

(20 min.) E6-44A 1.

6-30

Perform a simple linear regression using Room nights sold as the independent variable and Occupancy costs as the dependent variable.

Chapter 6

Cost Behavior

(continued) E6-44A 2.

Perform a multiple regression using Room nights sold and Average monthly high temperature as the independent variables and Occupancy costs as the dependent variable.

Assume that management expects to sell 10,500 room nights in a month when the average daily high outdoor temperature is expected to be 78 degrees. Predict the hotel’s occupancy costs for the month using the output for the multiple regression that you created in Requirement 2. y = (33.4 × 10,500 room nights) + (4.49 × 78 degrees) + $19,203 (rounded) or $370,253.22

Between the simple linear regression and the multiple regression that you created for Requirements 1 and 2, which regression model is a better predictor of monthly occupancy costs? How do you know? The simple linear regression is a better predictor of monthly occupancy costs than the multiple reqression because its adjusted R-square is higher. However, the adjusted R-squares for the two models are similar.

6-31

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (15 min.) E6-45B Req. 1

Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment

3,000 garments $ 2,250 10,800 $13,050

4,500 garments $ 3,375* 10,800 $14,175

6,000 garments $ 4,500 10,800 $15,300

$0.75 3.60 $4.35

$0.75 2.40* $3.15

$0.75 1.80 $2.55

*Given Req. 2 The average cost per garment changes as volume changes, due to the fixed component of the dry cleaner’s costs. The fixed cost per unit decreases as volume increases, while the variable cost per unit remains constant. Req. 3 Cost from Req. 1 for 3,000 garments:

$13,050

Estimated cost @ 3,000 garments using $2.55:

$7,650

Underestimation total:

$5,400

She would underestimate her costs by $5,400.

(15 min.) E6-46B Whitman Dry Cleaners Projected Absorption Costing Income Statement Month Ended March 31 Dry cleaning revenue (4,220 × $9) Less: Operating expenses [$10,800 + (4,220 × $0.75)] Operating income Whitman Dry Cleaners Projected Contribution Margin Income Statement Month Ended March 31 Dry cleaning revenue (4,220 × $9) Less: Variable expenses (4,220 × $0.75) Contribution margin Less: Fixed expenses Operating income

6-32

$37,980 (13,965) $24,015

$37,980 (3,165) 34,815 (10,800) $24,015

Chapter 6

Cost Behavior

(15 min.) E6-47B Req. 1 Average cost per unit = $20.43 = Average cost per unit × # of units $20.43 × 1,000 = $20,430 =

Total cost ÷ number of units Total cost ÷ 1,000 units Total cost Total cost Total cost

Req. 2 Total cost y $20,430 $10,000 $10.00

= = = = =

Variable cost component + fixed cost component vx + f v (1,000) + $10,430 v (1,000) v The variable cost per unit is $10.00.

Req. 3 y =

$10.00x + $10,430 where × = number of mailboxes

Req. 4 $34,731

1,700 × $20.43 average cost per mailbox

Req. 5 y = ($10.00 × 1,700) + $10,430 y = $27,430 The total cost is $27,430. Req. 6 The plant manager’s forecast would be $7,301 too high ($34,731 – $27,430) if he/she uses the average cost per unit to predict costs. The average cost per unit is based on a mixed cost that will change as volume changes. If the manager uses this method, he/she is erroneously assuming that the average cost per unit does not change at different volumes. The manager should use the cost equation to predict costs because it correctly takes into account the variable and fixed components of producing mailboxes.

6-33

Managerial Accounting 6e Solutions Manual

(10–15 min.) E6-48B Req. 1 y = $14.00x + $148,500 where x = number of guests Req. 2 a. ($14.00 × 13,500) + $148,500 = $337,500 (see Req. 1) b. Average cost per unit = $25/guest =

Total cost ÷ number of units $337,500 ÷ 13,500 guests

Req. 3 a. ($14.00 × 11,700) + $148,500 = $312,300 (see Req. 1) b. Total cost = average cost × number of units $292,500 = $25 (see Req. 2b) × 11,700 c. The average cost per guest changes as volume changes, due to the fixed component of the buffet’s costs. The fixed cost per unit increases as volume decreases, while the variable cost per unit remains constant.

Req. 4 y = $14.00x + $201,500* where x = number of guests * $148,500 + $53,000 = $201,500 Req. 5 ($14.00 × 15,500) + $201,500 = $418,500 (see Req. 4)

6-34

Chapter 6

Cost Behavior

(10–15 min.) E6-49B Req. 1 Variable cost: High Low Difference

$750,000 $592,500 $157,500

700,000 475,000 225,000

Qtr 3 Qtr 1

$157,500/225,000 units = $0.70 variable cost per unit Req. 2 Projected total number of bills % of customers using paperless billing Calculated number of customers Variable cost per bill saved Total cost saved Less cost of paperless system Net savings

740,000 20% 148,000 $0.70 $103,600.00 81,800.00 $ 21,800.00

Req. 3 Projected total number of bills % of customers using paperless billing Calculated number of customers Variable cost per bill saved Total cost saved Less cost of paperless system Net savings (cost)

740,000 10% 74,000 $0.70 $51,800.00 81,800.00 $(30,000.00)

Should the company still offer the paperless billing system? The answer to this question is depends on the student’s value system and is meant to be a discussion point. Because there is a net cost to the paperless billing system, it would not be beneficial financially.

6-35

Managerial Accounting 6e Solutions Manual

(10–15 min.) E6-50B Req. 1 If students do not force the axes back to the origin, Excel will render the following scatter plot:

Van Operating Costs

Relationship Between Van Operating Costs and Miles Driven $6,000 $5,500 $5,000 $4,500 0

5,000

10,000

15,000

20,000

Miles Driven

(10–15 min.) E6-51B Use the high-low method to determine Fourth Street Floral’s operating cost equation. High point – February; Low point – July Determine the formula that is used to calculate the variable cost (slope). Change in cost

Change in volume

Variable cost (slope)

($5,680 – $4,880) ÷ (17,300 – 14,100) = $0.25 Determine the formula that is used to calculate the fixed cost component. Total operating cost

–

Total variable cost

Fixed cost

$5,680 – (17,300 × $0.25) = Fixed expenses = $1,355 y = $0.25x + $1,355 Use the operating cost equation you determined above to predict van operating costs at a volume of 15,500 miles. The operating costs at a volume of 15,500 miles is $5,230 [($0.25 × 15,500) + $1,355].

6-36

Chapter 6

Cost Behavior

(20–30 min.) E6-52B Req. 1 y = $0.28x + $931.23 Req. 2 The R-square is 0.895322. The R-square indicates that the cost equation explains 89.5% of the variability in the data. In other words, it fits the data quite well. The company should feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 3 The van operating costs at 15,500 miles are estimated to be $5,271.23 [($0.28 × 15,500) + $931.23]. The company can rely on this estimate because the R-square is 0.895322.

(5–10 min.) E6-53B Req. 1 y = $0.28x + $931.23 Req. 2 The R-square is 0.90. The R-square indicates that the cost equation explains 90% of the variability in the data. In other words, it fits the data quite well. The company should feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 3 The van operating costs at 15,000 miles are estimated to be $5,131.23 [($0.28 × 15,000) +$931.23]. The company can rely on this estimate because the R-square is 0.90.

6-37

Managerial Accounting 6e Solutions Manual

(10–15 min.) E6-54B Req. 1

Total Laboratory Overhead Costs

Relationship Between Total Laboratory Overhead Costs and Number of Lab Tests Performed $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 0

1,000

2,000

3,000

4,000

5,000

Number of Lab Test Performed

Req. 2 The data do not appear to contain outliers. All data points fall in the same general pattern. Req. 3 There appears to be a very strong relationship between the number of laboratory overhead costs and the number of lab tests performed. We can tell this because the data points fall in a fairly tight, linear pattern.

(10–15 min.) E6-55B Variable cost:

High pt. Low pt. Difference

Cost $27,000 $18,800 $8,200

Activity 4,200 2,200 2,000

Change in cost / change in volume = variable costs $8,200 / 2,000 = $4.10 Using high point Total cost y $27,000 $27,000 $9,780 Total fixed costs = $9,780

= = = = =

Variable cost component + fixed cost component vx + f 4,200 ($4.10) + f $17,220 + f f

Total costs = Variable costs + fixed costs y = vx + f y = 2,700($4.10) + $9,780 Total costs = $20,850

6-38

May June

Chapter 6

Cost Behavior

(10–15 min.) E6-56B Req. 1 y

$3.74x

$12,412.72

Req. 2 The R-square is 0.60721. This indicates that the cost equation explains 60.7% of the variability in the data. In other words, it should be used with caution. The company may or may not feel confident using this cost equation to predict total costs at other volumes within the same relevant range. Req. 3 y = $3.74x + $12,412.72 y = $3.74 (2,700) + $12,412.72 y = $22,510.72

(15–20 min.) E6-57B Req. 1 Students prepare regression using Excel. Answers shown below are under related requirements. Req. 2 y

$6.95x

$3,390.97

Req. 3 The R-square is 0.946123. This indicates that the cost equation explains 94.6% of the variability in the data, which indicates it fits the data quite well. Management should feel confident using the cost equation to predict total costs at other volumes within the same relevant range. Req. 4 y = $6.95x + $3,390.97 y = $6.95 (2,800) + $3,390.97 y = $22,850.97

6-39

Managerial Accounting 6e Solutions Manual

(15 min.) E6-58B High point: 90% × 900 units = 810 units, $223,360 Low point: 80% × 900 units = 720 units, $218,320 Determine the formula that is used to calculate the variable cost (slope). Change in cost

Change in volume

Variable cost (slope)

($223,360 – $218,320) / (810 – 720) = $56 Now determine the formula that is used to calculate the fixed cost component. Total operating cost

–

Total variable cost

Fixed cost

Choosing the high point here: $223,360 – ($56 × 810) = FC FC = $178,000 Cost equation: y = $56x + $178,0000 The owner should expect his operating costs to be $210,760 if occupancy falls to 65% [($56 × (65% × 900)) + $178,000].

(15 min.) E6-59B High point June; Low point March Req. 1 Change in cost = $4,076 – $3,388 = $688 Change in volume = 1,460 – 1,030 = 430 Change in cost ÷ Change in volume = Variable cost (slope) $688 ÷ 430 = $1.60 Using the high-low method, the variable utilities cost per machine hour is $1.60. Req. 2 Total operating cost – Total variable cost = Fixed cost Using the high activity level: $4,076 – ($1.60 × 1,460) = Fixed cost, or $1,740 Using the high-low method, the fixed cost of utilities each month is $1,740. Req. 3 Total cost = $1,740 + $1.60 (1,200) = $3,660

6-40

Chapter 6

Cost Behavior

(15–20 min.) E6-60B Req. 1 Chief Industries Income Statement (Absorption Costing) Sales revenue ($65 × 12,000) Less: Cost of goods sold ($46 (see Req. a) × 12,000) Gross profit Less: operating expenses [($1 × 12,000) + $32,000] Operating income (Req. g)

$780,000 ($552,000) $228,000 ($44,000) $ 184,000

a. Product cost per unit using absorption costing: Direct materials $20 Direct labor 8 Manufacturing overhead 18 (total manufacturing overhead $288,000 ÷ total units manufactured 16,000) Total unit product cost $46 Chief Industries Income Statement (Variable Costing) Sales revenue ($65 × 12,000) Less variable costs: Variable cost of goods sold ($32 (see Req. b) × 12,000) Variable operating expenses ($1 × 12,000) Contribution margin Less fixed expenses: Fixed manufacturing overhead Fixed operating expenses Operating income (Req. h)

$780,000 ($384,000) ($12,000) $384,000 ($224,000) ($32,000) $ 128,000

b. Product cost per unit variable costing: Direct materials $20 Direct labor 8 Variable manufacturing overhead 4* Total unit product cost $32 *[($288,000 Total manufacturing overhead – $224,000 Fixed manufactirng overhead)/16,000 Units manufactured] = $4

6-41

Managerial Accounting 6e Solutions Manual

(continued) E6-60B c.

Ending inventory absorption costing: Total unit product cost (see Req. a) # of units in ending inventory (16,000 units manufactured – 12,000 units sold) Cost of ending inventory absorption costing

$46 x 4,000 units $184,000

Ending inventory variable costing: Total unit product cost (see Req. b) # of units in ending inventory (16,000 units manufactured – 12,000 units sold) Cost of ending inventory variable costing

$32 x 4,000 units $128,000

Cost of goods sold absorption costing: Total unit product cost (see Req. a) # of units in sold Cost of goods sold absorption costing

$46 x 12,000 units $552,000

Cost of goods sold variable costing: Total unit product cost (see Req. b) # of units in sold Cost of goods sold variable costing

$32 x 12,000 units $384,000

Operating income absorption costing $184,000 (See absorption costing income statement above)

Operating income variable costing $128,000 (See variable costing income statement above)

Req. 2 Under variable costing, fixed MOH is expensed immediately as a period cost (operating expense). Under absorption costing, fixed MOH becomes part of the inventoriable cost of the product, which isn’t expensed (as cost of goods sold) until the inventory is sold, leaving a higher operating income due to less being expensed.

6-42

Chapter 6

Cost Behavior

(10–20 min.) E6-61B Three Turtles Contribution Margin Income Statement For the Year Ended December 31 Sales revenue Variable expenses: Cost of goods sold a Variable selling and marketing expenses b Variable website maintenance expenses c Other variable operating expenses Total variable expenses Contribution margin Fixed expenses: a Fixed selling and marketing expenses b Fixed website maintenance expenses c Other fixed operating expenses Total fixed expenses Operating income

$ 990,000 672,000 27,600 14,625 1,700 715,925 274,075 34,400 43,875 15,300 93,575 $ 180,500

Calculations for selling and marketing expenses: a

Total selling and marketing expenses Variable freight-out Remaining selling and marketing expenses Variable: Fixed:

$ 62,000 (19,000) $ 43,000

$43,000 × 20% = $8,600 + $19,000 (freight out) = $27,600 $43,000 × 80% = $34,400

Calculations for website maintenance expenses: Variable: $58,500 × 25% = $14,625 Fixed: $58,500 × 75% = $43,875 c

Calculations for other operating expenses: Variable: $17,000 × 10% = $1,700 Fixed: $17,000 × 90% = $15,300

6-43

Managerial Accounting 6e Solutions Manual

(15–20 min.) E6-62B Req. 1 Vintage Carriage Company Contribution Margin Income Statement For the Month Ended April 30 Sales revenue (13,500 × 80% × $26.00) + (13,500 × 20% × $18.00) Variable expenses: Fee paid to city (10% × $329,400) Complimentary postcards (13,500 × $0.75) Brokerage fee (13,500 × 60% × $1.50) Carriage driver wages (13,500 × $3.90) Total variable expenses Contribution margin Fixed expenses: Leasing and boarding horses Non-carriage driver payroll expense Depreciation expense Other fixed operating expenses Total fixed expenses Operating income

$329,400 $32,940 10,125 12,150 52,650 107,865 $221,535 $49,000 7,900 2,300 7,200 66,400 $ 155,135

Req. 2 If passenger volume increases by 18% in May, we would expect all variable expenses to increase by 18%. This situation occurs because revenues and variable costs change in direct proportion to changes in volume. As a result, the contribution margin would also increase by 18%. Assuming that an 18% increase in volume is still in the same relevant range, we would expect all fixed costs to remain at their present level.

6-44

Chapter 6

Cost Behavior

(15–20 min.) E6-63B Req. 1 Absorption Costing Units sold Direct material Direct labor Variable MOH Fixed MOH per unit ($184,000 ÷ 23,000 units produced) Cost per unit

Sales revenue (21,000 and 24,000 × $77) Less: Cost of goods sold (21,000 and 24,000 × $58) Gross profit Less: Operating expenses Operating income a b

Year 1 21,000

Year 2 24,000

$37 $9 $4 $8 $58

Year 1

Year 2

$1,617,000 $1,218,000 $399,000 $206,000 a 193,000

$1,848,000 $1,392,000 $456,000 $224,000 b $232,000

($6 × 21,000) + 80,000 = $206,000 ($6 × 24,000) + 80,000 = $224,000

6-45

Managerial Accounting 6e Solutions Manual

(continued) E6-63B Req. 2

Fixed MOH cost per unit Change in inventory (in units) Difference in operating income Predicted operating income using variable costing a

$193,000 – $16,000 = $177,000

Year 1 $8 2,000 16,000 $177,000a

Year 2 $8 1,000 (8,000) $240,000b

$232,000 – ( $8,000) = $240,000

Req. 3 Variable Costing Direct material Direct labor Variable MOH Cost per unit

Sales revenue (21,000 and 24,000 × $77) Less variable expenses: Variable cost of goods sold (21,000 and 24,000 × $50) Variable operating expenses (21,000 and 24,000 × $6) Contribution margin Less fixed expenses: Fixed MOH Fixed operating expenses Operating income

6-46

Year 1 $37 $9 $4 $50

Year 2 $37 $9 $4 $50

Year 1

Year 2

$1,617,000

$1,848,000

$1,050,000 126,000 $441,000

$1,200,000 144,000 $504,000

$184,000 80,000 $177,000

$184,000 80,000 $240,000

Chapter 6

Cost Behavior

(15–20 min.) E6-64B Req. 1 Rathke’s operating income under variable costing will be lower than its operating income under absorption costing. This situation occurs because under absorption costing, some of the fixed MOH remains “trapped” on the balance sheet as part of the cost of inventory. Under variable costing, all fixed MOH incurred during the period is expensed as a period cost. Req. 2 Reconciling between two methods Fixed MOH cost per unit $266,000/14,000 Change in inventory (in units) (0 + 14,000 – 8,500)

$19 × 5,500

Difference between methods

104,500

Predicted operating income using variable costing

($84,500)a

$20,000 – 104,500 =( $84,500)

Req. 3 The figures below can be calculated using the percentage of produced units sold without the costs per unit, but you need to change the formula for variable cost of goods sold because the costs per unit are not provided in the problem. Sales revenue (8,500 × $70) $595,000 Less variable expenses: Variable cost of goods sold $510,000 / 8,500 = $60 $60 – $19 = $41 8,500 × $41 $348,500 *Variable operating expenses $7,000 Contribution margin $239,500 Less fixed expenses: Fixed MOH $266,000 Fixed operating expenses $58,000 Operating income ($84,500) *Total operating expenses Less fixed portion Variable

$65,000 58,000 $ 7,000

6-47

Managerial Accounting 6e Solutions Manual

(15 min.) E6-65B Req. 1 Aquatic Optics Conventional (Absorption Costing) Income Statement Year Ended December 31 Sales revenue (192,000 × $47) Cost of goods sold (192,000 × $26*) Gross profit Operating expenses [(192,000 × $5) + $260,000] Operating income

$9,024,000 (4,992,000) 4,032,000 (1,220,000) $ 2,812,000

*Variable manufacturing expense per unit of $16 + $10 fixed manufacturing expense per unit ($2,000,000 fixed manufacturing overhead / 200,000 units produced.) Aquatic Optics Contribution Margin (Variable Costing) Income Statement Year Ended December 31 Sales revenue (192,000 × $47) Variable expenses: Variable cost of goods sold (192,000 × $16) Sales commission expense (192,000 × $5) Contribution margin Fixed expenses: Manufacturing overhead Operating expenses Operating income

$9,024,000 3,072,000 960,000

(4,032,000) 4,992,000

$2,000,000 260,000

(2,260,000) $ 2,732,000

Req. 2 Absorption costing operating income is higher than variable costing operating income. This situation occurs because absorption costing defers $80,000 of fixed manufacturing overhead as an asset in ending inventory. In contrast, variable costing expenses all of the fixed manufacturing overhead during the year. Variable costing expenses $80,000 more costs during the year, so variable costing operating income is $80,000 less than absorption costing income during the year. Req. 3 Increase in contribution margin (8,000* × $26**).... Increase in fixed expenses.......................………… Increase in operating income...........................…...

$208,000 (155,000) $ 53,000

The company should go ahead with the promotion. * 200,000 goggles sold with promotion – 192,000 goggles sold currently = 8,000 **Contribution margin per unit: Sales price.........................................………. Variable manufacturing cost.................…. Variable operating cost.....................…….. Contribution margin per unit............……..

6-48

$47 $16 5

(21) $ 26

Chapter 6

Cost Behavior

(20 min.) E6-66B 1.

6-49

Managerial Accounting 6e Solutions Manual

(continued) E6-66B 4.

Assume that management wants to predict overhead costs in a month when billable attorney hours are 1,820, administrative staff hours are 1,350, and the number of client jobs is 25. Predict the firm’s overhead costs, using the cost equation in the scatterplot for the independent variable that you found to be the best predictor for overhead costs in your analysis for Requirement 4. Using the model for overhead costs predicted using number of client jobs, the cost equation would be y = $445.15(25) + $62,300, or $73,428.75.

(20 min.) E6-67B 1.

6-50

Perform a simple linear regression using Room nights sold as the independent variable and Occupancy costs as the dependent variable.

Chapter 6

Cost Behavior

(continued) E6-67B 2.

Perform a multiple regression using Room nights sold and Average monthly high temperature as the independent variables and Occupancy costs as the dependent variable.

Assume that management expects to sell 10,500 room nights in a month when the average daily high outdoor temperature is expected to be 78 degrees. Predict the hotel’s occupancy costs for the month using the output for the multiple regression that you created in Requirement 2. y = (32.6 × 10,500 room nights) + (19.25 × 78 degrees) + $22,033 (rounded) or $370,253.22

6-51

Managerial Accounting 6e Solutions Manual

Problems (Group A) (45–60 min.) P6-68A Req. 1 The hospital’s overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it were a variable cost, it would remain constant on a per-unit (of activity) basis. Both the hospital’s overhead cost per nursing hour and overhead cost per patient day vary with volume. Req. 2

Relationship Between Overhead Cost and Number of Nursing Hours $700,000

Overhead Cost

$600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Number of Nursing Hours

Req. 3

Relationship between Overhead Cost and Number of Patient 700000

Overhead costs

600000 500000 400000 300000 200000 100000 0

1000

2000

3000

4000

5000

6000

Number of patient days Req. 4 There does not appear to be any outlier in the graph depicting overhead costs vs. nursing hours. In the graph of overhead costs vs. patient days, there does appear to be an outlier. The September data point appears out of line with the other data points. If any of the data points are out of line, management should check into this data before continuing with the analysis. 6-52

Chapter 6

Cost Behavior

(continued) P6-68A Req. 5 Variable cost:

High pt. Low pt. Difference

Cost $576,000 $411,000 $165,000

Activity 32,000 19,500 12,500

Nov Sep

Change in cost / change in volume = variable cost $165,000 / 12,500 = $13.20 Using high point Total cost = y = $576,000 = $576,000 = $153,600 = Total fixed costs = $153,600

Variable cost component + fixed cost component vx + f 32,000 ($13.20) + f $422,400 + f f

Total costs = Variable costs + fixed costs y = vx + f y = 25,500 ($13.20) + $153,600 Total costs = $490,200 Req. 6 y = $11.75x + $199,609.79 y = $11.75 (25,500) + $199,609.79 y = $499,234.79 Req. 7 y = $52.83x + $265,475.95 y = $52.83 (3,680) + $265,475.95 y = $459,890.35 Req. 8 We have the most confidence in the cost equation using nursing hours. The R-square value for that equation was the highest.

6-53

Managerial Accounting 6e Solutions Manual

(45–60 min.) P6-69A Req. 1 Pursell’s manufacturing overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it were a variable cost, it would remain constant on a per-unit (of activity) basis. Both MOH per DL hour and MOH per unit produced vary with volume. Req. 2

Relationship Between Overhead Cost and DL Hours $700,000

Overhead Cost

$600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

6,000

7,000

DL Hours

Req. 3

Relationship Between Overhead Cost and Units Produced $700,000

Overhead Cost

$600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0

1,000

2,000

3,000

4,000

5,000

Units Produced

Req. 4 There does not appear to be any outlier in the graph depicting MOH costs vs. DL hours. In the graph of MOH costs vs. units, there does appear to be an outlier. The September data point appears out of line with the other data points. If any of the data points are out of line, management should check into this data before continuing with the analysis.

6-54

Chapter 6

Cost Behavior

(continued) P6-69A Req. 5 Variable cost:

High pt. Low pt. Difference

Cost $586,000 $469,000 $117,000

Activity 31,000 22,000 9,000

Nov. Sept.

Change in cost / change in volume = variable cost $117,000 / 9,000 = $13.00 Using high point Total cost = y = $586,000 = $586,000 = $183,000 = Total fixed costs = $183,000

Variable cost component + fixed cost component vx + f 31,000 ($13.00) + f $403,000 + f f

y = $13.00x + $183,000 Req. 6 January’s estimated manufacturing overhead costs are $499,500. y = vx + f y = 26,000 ($13.00) + $183,000 Total costs = $521,000

6-55

Managerial Accounting 6e Solutions Manual

(15–20 min.) P6-70A Req. 1 The Willowick Ice Cream Shoppe Income Statement For the Month Ended June 30 Sales revenue (8,700 × $3.00) Cost of goods sold (8,700 × $0.65*) Gross profit Operating expenses: Lease expense Depreciation expense Other operating expenses Total operating expenses Operating income

$26,100 (5,655) $20,445 $1,600 200 2,600 (4,400) $16,045

*$12 per tub ÷ 30 servings = $0.40 for ice cream + $0.25 per ice cream cone = $0.65 Req. 2 The Willowick Ice Cream Shoppe Contribution Margin Income Statement For the Month Ended June 30 Sales revenue (8,700 × $3.00) Variable expenses: Cost of goods sold (8,700 × 0.65*) Other variable operating expenses Contribution margin Fixed expenses: Lease expense Depreciation expense Other fixed operating expenses Total fixed expenses Operating income a b

$2,600 × 25% variable = $650 $2,600 × 75% fixed = $1,950

6-56

$26,100 $5,655 650a

(6,305) $19,795

$1,600 200 1,950b (3,750) $16,045

Chapter 6

Cost Behavior

(30–45 min.) P6-71A Req. 1 Gross Profit Sales ($122.50 × 1,750*) Less: Cost of goods sold (1,750* violins × $100**) Gross profit

$214,375 175,000 $ 39,375

*2,500 – 750 = 1,750 ** ($125,500 + $50,000 + $32,000 + $42,500)/2,500 = $100 Req. 2 Contribution Margin Sales Less: Variable costs* Contribution margin

$ 214,375 (153,250) $ 61,125

*(125,500 + $50,000 + $32,000)/2,500 = $83 ($83 × 1,750) + $8,000 = $153,250 Req. 3 Total Expenses Shown Below the Gross Profit Line Variable selling and administrative expenses + Fixed selling and administrative expenses Total expenses below the gross profit line

$8,000 12,100 $20,100

Req. 4 Total Expenses Shown Below the Contribution Margin Line All fixed expenses: Fixed manufacturing Fixed selling and administrative Total fixed expenses

$42,500 12,100 $54,600

Req. 5 The dollar value of ending inventory under absorption costing is $75,000 ($100 × 750). Req. 6 The dollar value of ending inventory under variable costing is $62,250 ($83 × 750). The absorption (traditional) income statement will have a higher operating income by $12,750 [($42,500/2,500) × 750]. Under absorption costing, more fixed manufacturing overhead costs are trapped on the balance sheet when inventory increases. Under variable costing, fixed manufacturing overhead costs are expensed as fixed expenses (period costs) in the current period.

(25–35 min.) P6-72A Req. 1

Variable manufacturing expense per meal Fixed MOH (absorption only) ($700/2,000; $700/1,400) Total product cost.…………………...

January Absorption Variable Costing Costing $4.00 $4.00 $0.35 $0.00 $4.35 $4.00

February Absorption Variable Costing Costing $4.00 $4.00 $0.50 $0.00 $4.50 $4.00

6-57

Managerial Accounting 6e Solutions Manual

(continued) P6-72A Req. 2a Mario’s Foods Income Statement (Absorption Costing) Months Ended Sales revenue 1,400 and 1,800 × $8 Cost of goods sold (1,400 × $4.35); (600 × $4.35) + (1,200 × $4.50) Gross profit Operating expenses [($2 × 1,400) +$500]; [($2 × 1,800) +$500] Operating income

Jan. 31 $11,200 (6,090) 5,110 (3,300) $ 1,810

Feb. 28 $14,400 (8,010) 6,390 (4,100) $ 2,290

Req. 2b Mario’s Foods Income Statement (Variable Costing) Months Ended January 31 $11,200

Sales revenue Variable expenses: Variable cost of goods sold (1,400 and 1,800 × $4) Sales commission expense (1,400 × $2; 1,800 × $2) Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed marketing and administrative expenses Operating income

5,600 2,800

700 500

(8,400) 2,800

(1,200) $1,600

February 28 $14,400 7,200 3,600

700 500

(10,800) 3,600

(1,200) $2,400

Req. 3 In January, absorption costing operating income exceeds variable costing operating income. This situation occurs because units produced were greater than units sold. Absorption costing defers some of January’s fixed manufacturing overhead costs in the units of ending inventory. These costs will not be expensed until those units are sold. Deferring these fixed manufacturing overhead costs to the future increases January’s absorption costing income. In February, absorption costing operating income is less than variable costing operating income. This is because units produced were less than units sold for the month. As inventory declines, as was the case in February, January’s fixed manufacturing overhead costs that absorption costing assigned to that inventory are expensed in February. This decreases February’s absorption costing income. Students should be able to provide responses similar to those above.

6-58

Chapter 6

Cost Behavior

Problems (Group B) (45–60 min.) P6-73B Req. 1 The hospital’s overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it were a variable cost, it would remain constant on a per-unit (of activity) basis. Both of the hospital’s overhead cost per nursing hour and overhead cost per patient day vary with volume. Req. 2

Relationship Between Overhead Cost and Number of Nursing Hours $600,000

Overhead Cost

$500,000 $400,000 $300,000 $200,000 $100,000 $0 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

5,000

6,000

Number of Nursing Hours

Req. 3

Relationship Between Overhead Cost and Number of Patient Days $600,000

Overhead Cost

$500,000 $400,000 $300,000 $200,000 $100,000 $0

1,000

2,000

3,000

4,000

Number of Patient Days

Req. 4 There does not appear to be any outlier in the graph depicting overhead costs vs. nursing hours. In the graph of overhead costs vs. patient days, there does appear to be an outlier. The September data point appears out of line with the other data points. If any of the data points are out of line, management should check into this data before continuing with the analysis. .

6-59

Managerial Accounting 6e Solutions Manual

(continued) P6-73B Req. 5 Variable cost:

High pt. Low pt. Difference

Cost $555,000 $424,000 $131,000

Activity 30,000 20,000 10,000

Nov. Sep.

Change in cost / change in volume = variable cost $131,000 / 10,000 = $13.10 Using high point Total cost = y = $555,000 = $555,000 = $162,000 = Total fixed costs = $162,000

Variable cost component + fixed cost component vx + f 30,000 ($13.10) + f $393,000 + f f

Total costs = Variable costs + fixed costs y = vx + f y = 25,500 ($13.10) + $162,000 Total costs = $496,050 Req. 6 y = $14.26x + $131,004.69 y = $14.26(25,500) + $131,004.69 y = $494,634.69 Req. 7 y = $47.15x + $280,775.96 y = $47.15(3,680) + $280,775.96 y = $454,287.96 Req. 8 We have the most confidence in the cost equation using nursing hours. The R-square value for that equation is the highest.

6-60

Chapter 6

Cost Behavior

(45–60 min.) P6-74B Req. 1 Watson’s manufacturing overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it were a variable cost, it would remain constant on a per-unit (of activity) basis. Both MOH per DL hour and MOH per unit produced vary with volume. As in this company’s case, manufacturing overhead usually includes both fixed and variable components. Req. 2

Relationship Between Overhead Cost and DL Hours $700,000

Overhead Cost

$600,000

$500,000 $400,000

$300,000 $200,000

$100,000 $0 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

5,000

6,000

DL Hours

Req. 3

Relationship Between Overhead Cost and Units Produced $700,000

Overhead Cost

$600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0

1,000

2,000

3,000

4,000

Units Produced

6-61

Managerial Accounting 6e Solutions Manual

(continued) P6-74B Req. 5 Variable cost:

High pt. Low pt. Difference

Cost $579,000 $420,000 $159,000

Activity 32,000 20,000 12,000

Change in cost / change in volume = variable cost $159,000 /12,000 = $13.25 Using high point Total cost = y = $579,000 = $579,000 = $155,000 = Total fixed costs = $155,000

Variable cost component + fixed cost component vx + f 32,000 ($13.25) + f $424,000 + f f

y = $13.25x + $155,000 Req. 6 January’s estimated manufacturing overhead costs are $499,500. y = vx + f y = 26,000 ($13.25) + $155,000 y = $499,500

6-62

Nov. Sep.

Chapter 6

Cost Behavior

(15–20 min.) P6-75B Req. 1 Edgewater Ice Cream Shoppe Income Statement For the Month Ended June 30 Sales revenue (8,900 × $4.00) Cost of goods sold (8,900 × $0.60*) Gross profit Operating expenses: Lease expense Depreciation expense Other operating expenses Total operating expenses Operating income

$35,600 (5,340) 30,260 $ 1,950 210 2,000 (4,160) $ 26,100

*$15 per tub ÷ 30 servings = $0.50 for ice cream + $0.10 per ice cream cone = $0.60 Req. 2 Edgewater Ice Cream Shoppe Contribution Margin Income Statement For the Month Ended June 30 Sales revenue (8,900 × $4.00) Variable expenses: Cost of goods sold (8,900 × 0.60*) Other variable operating expenses Contribution margin Fixed expenses: Lease expense Depreciation expense Other fixed operating expenses Operating income a b

$35,600 $5,340 500a

$1,950 210 1,500b

(5,840) $29,760

(3,660) $ 26,100

$2,000 × 25% variable = $500 $2,000 × 75% fixed = $1,500

6-63

Managerial Accounting 6e Solutions Manual

(30–45 min.) P6-76B 1. Gross Profit Sales (1,900* × $120) Less: Cost of goods sold (1,900* violins × $103**)

$228,000 195,700

Gross profit

$ 32,300

*2,700 – 800 = 1,900 ** ($120,300 + $65,000 + $28,000 + $64,800)/2,700 = $103 2. Contribution Margin Sales Less: Variable expenses * Contribution margin

$ 228,000 (160,100) $ 67,900

*($120,300 + $65,000 +$28,000)/2,700 = $79 ($79 × 1,900) + $10,000 = $160,100

3. Total Expenses Shown Below the Gross Profit Line Variable selling and administrative expenses + Fixed selling and administrative expenses Total expenses below the gross profit line

$10,000 12,900 $22,900

4. Total Expenses Shown Below the Contribution Margin Line Fixed manufacturing overhead + Fixed selling and administrative expenses Total expenses below the contribution margin line

$64,800 12,900 $77,700

The dollar value of ending inventory under absorption costing is $82,400 ($103 × 800).

The dollar value of ending inventory under variable costing is $63,200 ($79 × 800). The absorption (traditional) income statement will have a higher operating income by $19,200 [($64,800/2,700) × 800]. Under absorption costing, more fixed manufacturing overhead costs are trapped on the balance sheet when inventory increases. Under variable costing, fixed manufacturing overhead costs are expensed as fixed expenses (period costs) in the current period.

(25–35 min.) P6-77B Req. 1

Variable manufacturing expense per meal Fixed MOH (absorption only) $700/2,000; $700/1,400 Total product cost……….…………...

6-64

January Absorption Variable Costing Costing $5.00 $5.00 0.35 0.00 $5.35 $5.00

February Absorption Variable Costing Costing $5.00 $5.00 0.50 0.00 $5.50 $5.00

Chapter 6

Cost Behavior

(continued) P6-77B Req. 2a Murphy’s Foods Income Statement (Absorption Costing) Month Ended January 31 Jan. 31 $9,800 (7,490) 2,310 (1,900) $ 410

Sales revenue (1,400 and 1,600 × $7) Cost of goods sold* Gross profit Operating expenses [($1 × 1,400) +$500]; [($1 × 1,600) +$500] Operating income

Feb. 28 $11,200 (8,710) 2,490 (2,100) $ 390

*Jan: 1,400 × $5.35 = $7,490 Feb: (600 × $5.35) + (1,000 × $5.50) = $8,710 Req. 2b Murphy’s Foods Income Statement (Variable Costing) Months Ended January 31 $9,800

Sales revenue Variable expenses: Variable cost of goods sold (1,400 and 1,600 × $5) Sales commission expense (1,400 and 1,600 x× $1) Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed marketing and administrative expenses Operating income

7,000 1,400

700 500

(8,400) 1,400

(1,200) $200

February 28 $11,200 8,000 1,600

700 500

(9,600) 1,600

(1,200) $400

Req. 3 In January, absorption costing operating income exceeds variable costing income. This situation occurs because the units produced were greater than the units sold. Absorption costing defers some of January’s fixed manufacturing overhead costs in the units of ending inventory. These costs will not be expensed until those units are sold. Deferring some of these fixed manufacturing overhead costs to the future increases January’s absorption costing income. In February, absorption costing operating income is less than variable costing operating income. This situation occurs because the units produced were less than the units sold for the month. As inventory declines, as was the case in February, January’s fixed manufacturing overhead costs that absorption costing assigned to that inventory are expensed in February. This decreases February’s absorption costing income. Students should be able to provide responses similar to those above.

6-65

Managerial Accounting 6e Solutions Manual

Serial Case C6-78 Req. 1 a. Variable food & beverage cost per hotel room/suite Variable cost:

High pt. Low pt. Difference

Cost $482,300,000 $76,500,000 $405,800,000

Activity 43,060 5,348 37,712

2005 1993

Change in cost / change in volume = variable cost $405,800,000 /37,712 = $10,761 (rounded) b. Fixed food & beverage cost per hotel room/suite Using high point Total cost = Variable cost component + fixed cost component y = vx + f $482,300,000 = 43,060 ($10,761) + f $482,300,000 = $463,368,660 + f $18,931,340 = f Total fixed costs = $18,931,340 Req. 2 a. $15,283.50 (rounded) b. $10,021,329.08 (rounded) c. Number of hotel rooms and suites is a good predictor of Caesar’s food & beverage costs because there is a R-square value of 0.936.

The estimates of variable and fixed costs calculated using the high-low method versus the regression method are different because the regression analysis model takes into consideration all of the data points in the data set, not just the high-volume and low-volume data points. The regression method is more likely accurate.

6-66

Chapter 6

Cost Behavior

A6-79 1.

Briefly describe an organization with which you are familiar. Describe a situation when a manager in that organization could use cost behavior information and how the manager could use the information. A Starbucks manager needs to understand how costs behave so that he/she can make sound decisions, such as budgeting. For example, the manager would need to know that the depreciation of the coffee machines is a committed fixed cost and that it will remain constant over a certain period of time. The manager needs to understand that the cost of coffee beans behaves differently. Coffee beans used is a variable cost. The more drinks prepared, the more coffee beans are used.

How are fixed costs similar to step fixed costs? How are fixed costs different from step fixed costs? Give an example of a step fixed cost and describe why that cost is not considered to be a fixed cost. Fixed and step costs are similar in that they remain constant over a certain range of activity. Step costs are fixed over a small range of activity and then jump to a different level with moderate changes in volume. Rent is an example of a fixed cost where the total cost of rent does not change no matter how much volume changes within the relevant range. The salary for an additional professor who must be hired because a department is expanding past the range where existing faculty can cover classes is an example of a step fixed cost.

Describe a specific situation when a scatter plot could be useful to a manager. The manager of a printing firm could use a scatter plot to analyze the monthly telephone expenses for a year to determine how much of the expense is fixed and how much is variable. A scatter plot graphs cost and volume data so that managers can visualize the relationship between the two. They are also useful because they allow managers to identify outliers (abnormal data points).

What is a mixed cost? Give an example of a mixed cost. Sketch a graph of this example. A mixed cost contains both variable cost and fixed cost components. The expense for a cell phone is often mixed because there is a fixed cost for a certain number of minutes and an additional per minute charge if the minutes exceed the limit.

Compare discretionary fixed costs to committed fixed costs. Think of an organization with which you are familiar. Give two examples of discretionary fixed costs and two examples of committed fixed costs that organization may have. Explain why the costs you have chosen as examples fit within the definitions of “discretionary fixed costs” and “committed fixed costs.” Discretionary fixed costs are controllable in the short run, but managers have little or no control over committed fixed costs in the short run. Advertising and R&D are examples of discretionary fixed costs because they can be increased or decreased in the short run by managers. Rent and depreciation are examples of committed fixed costs because they can only be changed in the long run. .

6-67

Managerial Accounting 6e Solutions Manual 6.

Define the terms “independent variable” and “dependent variable,” as used in regression analysis. Illustrate the concepts of independent variables and dependent variables by selecting a cost a company would want to predict and what activity it might use to predict that cost. Describe the independent variable and the dependent variable in that situation. The dependent variable is the amount you want to predict and is based on the amounts of the independent variables. For example, a company would like to know the total cost of paid compensation for their salespeople (dependent variable). The total cost would be based on their base salary and their commission percentage of sales revenue (independent variable).

Define the term “relevant range.” Why is it important to managers? The relevant range is the band of volume where total fixed costs and variable costs per unit remain constant. It is important to managers in understanding that cost behavior may change if they are making decisions that are outside the range.

Describe the term “R-square.” If a regression analysis for predicting manufacturing overhead using direct labor hours as the dependent variable has an R-square of 0.40, why might this be a problem? Given the low R-square value, describe the options a manager has for predicting manufacturing overhead costs. Which option do you think is the best option for the manager? Defend your answer. R-square is the “goodness-of-fit” statistic that tells how well the regression line fits the data points. The higher the R-square, the stronger the relationship between cost and volume. Generally an R-square over 0.80 indicates that the cost equation is very reliable for predicting costs at other volumes within the relevant range. An R-square of 0.40 is low and indicates that the manager should try using a different activity base for cost analysis because the current measure of volume is only weakly related to the costs. The manager could also use the high-low method to plan for costs at different volumes. Of the two methods, regression analysis usually gives better predictions because it uses more historical data where the high-low method only uses two data points.

Over the past year, a company’s inventory has increased significantly. The company uses absorption costing for financial statements, but internally, the company uses variable costing for financial statements. Which set of financial statements will show the highest operating income? What specifically causes the difference between the two sets of financial statements? The absorption costing financial statements will show higher operating income than the variable costing statements. The difference between the two sets of statements is caused by absorption costing deferring a portion of fixed manufacturing overhead to the balance sheet in ending inventory. In variable costing statements, total fixed manufacturing overhead is expensed as a period cost.

10. A company has adopted a lean production philosophy and, as a result, has cut its inventory levels significantly. Describe the impact on the company’s external financial statements as a result of this inventory reduction. Also describe the impact of the inventory reduction on the company’s internal financial statements, which are prepared using variable costing. The reduction in inventory will affect the balance sheet in that the three inventory accounts, raw materials, work in process, and finished goods, will have little to no balances. The costs of inventory will be expensed in the same period that they were incurred because the entire inventory that was produced was sold. The difference in operating income between the absorption and the variable costing statements will be zero or minimal. 11. What costs might a business incur by not adopting e-billing (paperless) services? Is e-billing only profitable to large businesses or is it applicable to small business? Explain what might be involved in changing over to paperless billing. A company that does not adopt e-billing will experience higher total variable costs for processing, printing, and mailing statements as opposed to a company that does adopt e-billing. However, in place of these variable costs, the company must incur additional fixed costs for banking and billing websites. This means that the company must be large enough that the savings from a reduction in variable costs offsets the increase in fixed costs. Changing over to a paperless billing system requires developing a secure banking website as well as convincing customers to adopt the new system.

6-68

Chapter 6

Cost Behavior

12. How might the principles of sustainability (such as increased efficiency) affect cost behavior overall? Think of an example of a sustainable change in process or material that could impact the cost equation of that cost (i.e., the total fixed cost versus the variable cost per unit). Describe this example in detail and what might happen to total fixed costs and per unit variable costs. The adoption of sustainable business practices can change either fixed or variable costs depending upon the change implemented. Student responses may vary; please see the previous question for an example of a sustainable change (e-billing).

6-69

Managerial Accounting 6e Solutions Manual

Application & Analysis A6-80 Cost Behavior in Real Companies Basic Discussion Questions 1.

Describe the company you selected and the products or services it provides. Pearson Prentice Hall is a publisher of textbooks. It provides both printed and ebooks, online resources for students and instructors, and customer service.

List ten costs that this company would incur. Include costs from a variety of departments within the company, including human resources, sales, accounting, production (if a manufacturer), service (if a service company), and others. Make sure that you have at least one cost from each of the following categories: fixed, variable, and mixed. Development of new texts/editions Training for customer service representatives Sales commissions Development of online resources such as narrated slides Advertising Handling textbook orders Accounting department salaries Cost of paper/ink Depreciation of binding machinery Shipping costs

Classify each of the costs you listed as either fixed, variable, or mixed. Justify why you classified each cost as you did. Development of new texts/editions: Mixed—includes salaried editors (fixed) and authors’ advances Training for customer service representatives: Fixed—scheduled training sessions Sales commissions: Variable—per book amount Development of online resources such as narrated slides: Mixed—salaried employees and outside contractors Advertising: Fixed—a discretionary amount not tied to activity levels Handling textbook orders: Variable—dependent on the number of books ordered Accounting department salaries: Fixed—salaried employees Cost of paper/ink: Variable—dependent on the number of books printed Depreciation of binding machinery: Fixed—committed cost of machinery Shipping costs: Variable—dependent on the amount of books shipped

6-70

Chapter 6 4.

Cost Behavior

Describe a potential cost driver for each of the variable and mixed costs you listed. Explain why each cost driver would be appropriate for its associated cost. Development of new texts/editions: Number of revision/new book projects Training for customer service representatives: Number of scheduled training sessions Sales commissions: Number of books sold Development of online resources such as narrated slides: Number of online resource projects Advertising: Number of educational institutions targeted Handling textbook orders: Number of orders received Accounting department salaries: Number of accounting department employees Cost of paper/ink: Number of orders received Depreciation of binding machinery: Time Shipping costs: Number of orders received

Discuss how easy or difficult it was for you to decide whether each cost was fixed, variable, or mixed. Describe techniques a company could use to determine whether a cost is fixed, variable, or mixed. Any cost that stays constant over a wide range of volumes is fixed. If a cost rises in direct proportion to increases in volume, it can be recognized as a variable cost. For mixed costs, a company can use scatter plots, the high-low method, or regression analysis to determine the fixed and variable components.

A6-81 Ethics Mini-Case 1.

a. The ethical issues in this situation are as folows: i. Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” Bethany is urging Kyle to increase production, which would end up with inaccurate and unclear information because the records would indicate a profit on a division that is actually operating at a loss. ii. Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” Bethany and Kyle would both be engaging in an action that may discredit the profession if Bethany encourages the increase in production and Kyle performs the increase for the primary reason of personal gain. iii. Credibility: “Communicate information fairly and objectively.” By increasing the production to gain a bonus, Kyle would be reporting the information in a nonobjective way. iv. Integrity: “Mitigate actual conflicts of interest.” Bethany has a conflict of interest because she wants to help her friend Kyle instead of following ethical guidelines. Kyle has a conflict of interest because he wants to receive a bonus and a promotion. b. Bethany’s responsibilities as a management accountant include encouraging Kyle to report the information accurately and objectively, and to put accuracy and the profession above personal gain. c. Bethany has violated portions of the IMA ethics standard, as stated above in 1.a.

By producing more units, more fixed overhead is “trapped” in ending inventory. The cost of that fixed overhead is added to assets (as inventory) and does not lower operating income until those units are sold. The fixed overhead that is sitting in ending inventory on the balance sheet causes the shift from a loss to a profit (if more units are produced).

The problems caused by building inventories at the end of the year are that it will impact the profitability of the next fiscal year, as well as being a poor business practice if the units are produced just for increasing the current on-paper profitability. The units will be obsolete and unsold due to rapidly changing technology. The units are already outdated before the increase in production.

6-71

Managerial Accounting 6e Solutions Manual 4.

Fanfare Products could establish internal policies that require including existing inventory in any evaluation of a division’s profitability. They could also make the individuals who are responsible for the bookkeeping control production, not have performance bonuses linked to these things. That would remove an ethical conflict. In addition, the company should use variable costing for performance evaluations. Absorption costing allows income manipulation whereas variable costing does not allow income manipulation.

Student answers will vary.

A6-82 Real Life Mini-Case 1.

Is the $179,750 cost per hour a fixed, variable, or mixed cost? Explain. Because the $179,750 includes both fixed and variable costs of Air Force One, it would be a mixed cost.

Exact details about the cost composition of the Air Force One travel are kept secret to protect the president. Use your imagination, and the reading above, to make a list of the costs that you think might be included in the $179,750 per hour cost estimate. Fuel costs, maintenance, engineering support, repairs, food and lodging, wages of the pilots, security crew and serving crew for the aircraft, storage of the planes when not in use, and similar costs. Other costs are depreciation on planes, the doctor’s salary, military staff salaries for onboard equipment, depreciation on equipment on aircraft, extra flights to scout for safety.

Categorize each cost in your list as fixed, variable, or mixed. Fuel costs: variable; maintenance cost: mixed; engineering support: variable; repairs: mixed; food and lodging: mixed; wages of the pilots, security crew and serving crew: mixed; storage: fixed; depreciation: fixed cost; doctor’s salary: fixed; military staff salaries for onboard equipment: mixed; extra flights to scout for safety: variable

The number of trips taken by the president in any given year fluctuates and is dependent upon the political climate, crises, economics, and the like. How useful to you think this cost per hour is? The cost per hour may not be useful. Air Force One will have a lot of downtime. When Air Force One is used, it can consume resources at vastly different rates given that it can perform flights of a simple nature (just the president) or a very complex nature (many people requiring much more security and other expenses). Given that this number is highly dependent upon how much it is used, the per hour cost may not be useful.

What purpose(s) can the $179,750 cost per hour be used for? Are there any purposes for which that cost is not representative of the “true” cost? This cost can be used as a political issue, if one party is looking to embarrass one president and infuriate the public on this issue. This strategy would not necessarily be a good strategy, but it would be one used for the per hour cost. If this cost is used to estimate the cost per president on Air Force One, it will not accurately reflect what the cost would be for each president because one president may use the plane more than another. The cost may not be representative because it is based on a small relevant range and it is an average cost that may not be representative at different volume levels due to fixed costs.

Can you think of a better way to represent/ communicate the cost of Air Force One? One could figure out all of the fixed costs associated with Air Force One and separately state these items. The variable costs could also be calculated. Then a cost equation could be used to predict costs so that decision-makers (like the president) can evaluate whether the given trip is worth the cost of that trip.

6-72

Chapter 6 7.

Cost Behavior

Do you think the reimbursement policy is fair to the president? Why or why not? Yes, I believe that the reimbursement policy is fair to the president because he only has to pay for what the normal transportation would be if he were an ordinary citizen. This seems reasonable for him because he must use Air Force One and no other legal alternatives are available to him.

Do you think the reimbursement policy is fair to the taxpayers? Why or why not? Yes, I believe that the reimbursement policy is fair to the taxpayers because the president is required to take Air Force One on his flights. We are paying for the cost of his safety to wherever he goes. Student answers will vary.

6-73

Chapter 7 Cost-Volume-Profit Analysis Quick Check Answers QC7-1. b QC7-2. d QC7-3. c

QC7-4. d QC7-5. c QC7-6. a

QC7-7. b QC7-8. d QC7-9. a

QC7-10. d QC7-11. b QC7-12. d

Short Exercises (5–10 min.) S7-1 a.

Sales price per passenger……………………. Less: Variable cost per passenger………….. Contribution margin per passenger…………

$ 50 30 $ 20

Contribution margin per passenger………… Divided by sales price per passenger………. Contribution margin ratio……………………..

$20 ÷ 50 40%

Total contribution margin (17,000 × $20)…... Less: Fixed expenses………………………….. Operating income……………………………….

$340,000 210,000 $130,000

Total contribution margin ($595,000 × 40%) ………………………….. Less: Fixed expenses………………………….. Operating income……………………………….

$238,000 210,000 $28,000

(5 min.) S7-2 The unit contribution margin tells managers how much income is earned on each unit of sales before considering fixed costs. Each sale contributes its unit contribution margin toward covering fixed costs and generating a profit. Therefore, if the number of dinner cruises sold increases by 700 and each sale generates $20 of contribution margin, operating income will increase by $14,000 (700 passengers × $20 per passenger).

7-1

Managerial Accounting 6e Solutions Manual

(5–10 min.) S7-3 Units sold (to break even)

Fixed expenses + Operating income Contribution margin per unit (passenger)

$210,000 + 0 $20*

= =

10,500 passengers

*Contribution margin per passenger

$50 sales price

−

$30 variable expense per passenger

Number of passengers to break even*……………. Sales price per passenger…………………………... Sales revenue to break even………………………..

10,500 × $50 $525,000

* from earlier calculation

(5 min.) S7-4 Sales in units

Fixed expenses + Operating income Contribution margin per unit

$210,000 + $30,000 $20

12,000 dinner cruise tickets

Or using the equation approach: Sales revenue

−

Variable expenses

−

Fixed expenses

Operating income

Sale price Units per unit × sold

−

Variable cost Units per unit × sold

−

Fixed expenses

Operating income

[($50 × Units sold)

−

($30 × Units sold)] [($50 − $30) × Units sold]

− $210,000 − $210,000 Units sold

To earn target income of $30,000, the cruiseline must sell 12,000 dinner cruise tickets.

7-2

= $30,000 = $30,000 = 12,000 tickets

Chapter 7

Cost-Volume-Profit Analysis

(10 min.) S7-5 Req. 1 If the sales price declines to $45, then the new unit contribution margin is $15 ($45 − $30). The new breakeven point in units is: Fixed expenses + Operating income = Sales in units Contribution margin per unit $210,000 + $0 $15

= =

14,000 dinner cruise passengers

To achieve breakeven, sales revenue needs to be $630,000 (14,000 passengers × $45 sales price per passenger). This can also be calculated as: Fixed expenses + Operating income = Sales in $ Contribution margin ratio $210,000 + $0 0.333333*

= =

$630,000 dinner cruise revenue (rounded) *CM ratio = $15/$45 = 0.333333

Or using the equation approach: Sales revenue

−

Variable expenses

−

Fixed expenses

Operating income

Sale price Units per unit × sold

−

Variable cost Units per unit × sold

−

Fixed expenses

Operating income

−

($30 × Units sold)

($45 × Units sold) [($45 − $30) × Units sold]

− $210,000 − $210,000 Units sold

= $0 = $0 = 14,000 passengers

14,000 passengers × $45 = $630,000 Alternatively, Contribution margin ratio

Contribution margin per unit Sale price per unit

$45 − $30 $45

= = Sales in dollars

0.333333 Fixed expenses + Operating income Contribution margin ratio

$210,000 + $0 0.333333

$630,000 (rounded)

All else being constant, a decrease in sales price will decrease the contribution margin per unit and the contribution margin ratio. The breakeven point will therefore increase. Increases in sales price will have the opposite effect. .

7-3

Managerial Accounting 6e Solutions Manual

(continued) S7-5 Req. 2 If the variable cost decreases to $20, then the new unit contribution margin is $30 ($50 − $20). The new breakeven point in units is: Fixed expenses + Operating income = Sales in units Contribution margin per unit =

$210,000 + $0 $30

7,000 dinner cruise passengers

To achieve breakeven, sales revenue needs to be $350,000 (7,000 passengers × $50 sales price per ticket). Or using the equation approach: Sales revenue

−

Variable expenses

−

Fixed expenses

Operating income

Sale price Units per unit × sold

−

Variable cost Units per unit × sold

−

Fixed expenses

Operating income

−

($20 × Units sold)

($50 × Units sold) [($50 − $20) × Units sold]

− $210,000 − $210,000 Units sold

= $0 = $0 = 7,000 passengers

7,000 passengers × $50 = $350,000 Alternatively, Contribution margin ratio

Contribution margin per unit Sale price per unit

$50 − 20 $50

= = Sales in dollars

0.60 Fixed expenses + Operating income Contribution margin ratio

$210,000 + $0 0.60

= =

$350,000

All else being equal, a decrease in variable costs will increase the contribution margin per unit and the contribution margin ratio. The breakeven point will therefore decrease. An increase in variable costs will have the opposite effect.

7-4

Chapter 7

Cost-Volume-Profit Analysis

(5–10 min.) S7-6 Req. 1 The decline in fixed costs does not affect the $20 unit contribution margin calculated in S7-1. The new breakeven point in units is: Fixed expenses + Operating income = Sales in units Contribution margin per unit $150,000 + $0 $20

= =

7,500 dinner cruise passengers

Or using the equation approach: Sales revenue

−

Variable expenses

−

Fixed expenses

Operating income

Sale price Units per unit × sold

−

Variable cost Units per unit × sold

−

Fixed expenses

Operating income

−

($30 × Units sold)

($50 × Units sold) [($50 − $30) × Units sold]

− $150,000 − $150,000 $20 × Units sold Units sold

= $0 = $0 = $150,000 = 7,500 passengers

7,500 passengers × $50 = $375,000 Alternatively, Contribution margin ratio

Contribution margin per unit Sale price per unit

$50 − 30 $50

= = Sales in dollars

0.40 Fixed expenses + Operating income Contribution margin ratio

$150,000 + $0 0.40

= =

$375,000

7-5

Managerial Accounting 6e Solutions Manual

(continued) S7-6 Req. 2 The breakeven point is lower than in S7-3. By cutting fixed costs, the cruiseline was able to decrease its breakeven point by 3,000 passengers (10,500 – 7,500). All else being equal, a decrease in fixed costs will decrease the breakeven point, while an increase in fixed costs will increase the breakeven point.

(5–10 min.) S7-7 Weighted-Average Contribution Margin per Unit Regular Cruise Sale price per ticket $ 50 Less: Variable expense per ticket 30 Contribution margin per ticket $ 20 Sales mix in units × 4 Contribution margin $80 Weighted-average contribution margin per unit ($140 / 5)

Executive Cruise $100 40 $ 60 × 1 $ 60

Total

5 $140 $ 28.00

A simple average contribution margin would be $40 [(20 + 60) / 2]. The weighted-average is less than the simple average because the cruiseline sells more regular cruises (with the lower contribution margin) than executive cruises. The weighted average contribution margin ($28.00) is higher than the contribution margin of regular cruises ($20) because the cruiseline sells some executive cruises and executive cruises have a higher contribution margin ($60) than regular cruises. Because the new sales mix creates a higher weighted average contribution margin, the cruiseline will need to sell fewer cruises, in total, to break even than when it just sold regular cruises.

(5–10 min.) S7-8 a. Sales in total tickets

Fixed expenses + Operating income Weighted-average contribution margin per unit

$210,000 + $0 $28.00*

= 7,500 passengers *Weighted-average contribution margin per unit from S7-7. b. Breakeven sales of regular cruises (7,500 × 4/5)……… Breakeven sales of executive cruises (7,500 × 1/5)...... Total cruise passengers.................................………..

7-6

6,000 1,500 7,500

Chapter 7

Cost-Volume-Profit Analysis

(5–10 min.) S7-9 a.

Margin of safety in units

Expected sales in units

= =

12,000 – 10,500*

1,500 passengers

Breakeven sales in units

−

*(from S7-3) b.

Margin of safety in dollars

Target level sales dollars

$600,000a - $525,000b

$75,000 a

Breakeven sales dollars

12,000 × $50 = $600,000 10,500 × $50 = $525,000

Margin of safety as a percentage of expected sales

Margin of safety in dollars Expected sales in dollars

$75,000 $600,000

= =

12.5%

(5–10 min.) S7-10 a.

Contribution margin (12,000 × $20 / cruise passenger)…………………………………...... Less: Fixed expenses…………………………. Operating income……………………………….. Operating Leverage Factor

$240,000 210,000 $30,000 =

Contribution margin Operating income

$240,000 $30,000

8.0

If volume increases 6%, operating income will increase 48% (operating leverage factor of 8.0 multiplied by 6%).

If volume decreases by 2%, operating income will decrease by 16% (operating leverage factor of 8.0 multiplied by 2%).

7-7

Managerial Accounting 6e Solutions Manual

(5–10 min.) S7-11 Req. 1 Breakeven sales in dollars

Fixed expenses + Operating income Contribution margin ratio

$4,200 + $0 0.40

= =

$10,500

Req. 2 Average daily sales needed

Breakeven sales in dollars Total number of days

$10,500 10 days

= =

$1,050/day

Req. 3 First calculate the number of customers buying from the company: 100,000 total × 5% purchasing = 5,000 customers purchasing from the company Next calculate how much each customer must buy from the company for them to break even: Purchase amt. Breakeven sales in dollars = needed per customer Total number of customers =

$10,500 5,000

$2.10/purchasing customer

Req. 4 Sales in dollars

Fixed expenses + Operating income Contribution margin ratio

$4,200 + $4,000 0.40

= =

7-8

$20,500

Chapter 7

Cost-Volume-Profit Analysis

(5 min.) S7-12 a. b. c. d. e. f. g. h. i. j.

Fixed expense line Total expense line Sales revenue line Dollars (vertical axis) Units (horizontal axis) Operating loss area Operating income area Breakeven point 150 $300

(5–10 min.) S7-13 First calculate the current operating income: Sales price per umbrella……………………. Less: Variable cost per umbrella ($10 + $3)………….. Contribution margin per umbrella………… Total contribution margin (2,000 × $12)…... Less: Fixed expenses………………………….. Current operating income………………………………. Then calculate operating income if changes are made: Sales price per umbrella……………………. Less: Variable cost per umbrella ($10 + $3)………….. Contribution margin per umbrella………… Total contribution margin (1,500* × $17)…... Less: Fixed expenses………………………….. Operating income if changes are made………………………………. *2,000 current sales × 75% (25% decrease) = 1,500 umbrellas

$ 25 13 $ 12 $24,000 2,500 $21,500

$ 30 13 $ 17 $25,500 2,500 $23,000

Operating income will be $23,000 if changes are made. Less $21,500 in current operating income means a $1,500 increase in operating income if changes are made. Therefore, even though the sales volume will decrease by 25%, the sales price should be raised to $30 because operating income will increase by $1,500 with the change in sales price.

7-9

Managerial Accounting 6e Solutions Manual

(5–10 min.) S7-14 Weighted-Average Contribution Margin per Unit Plain Popcorn $ 2.00 .80 $ 1.20 × 1 $1.20

Sale price per box Less: Variable expense per box Contribution margin per box Sales mix in units Contribution margin Weighted-average contribution margin per unit ($7.20 / 5) Sales in total boxes

Flavored Popcorn $4.00 2.50 $ 1.50 × 4 $ 6.00

Total

5 $7.20 $ 1.44*

Fixed expenses + Operating income Weighted-average contribution margin per unit

$3,240 + $0 $1.44*

= 2,250 boxes

Breakeven sales of plain boxes (2,250 × 1/5)……… Breakeven sales of flavored (2,250 × 4/5)...... Total boxes of popcorn.................................………..

7-10

450 1,800 2,250

Chapter 7

Cost-Volume-Profit Analysis

(5–10 min.) S7-15 a.

Margin of safety in units

Expected sales in units

= =

1,000 – 500*

500 quilts

Breakeven sales in units

−

*Breakeven in units = $50,000/($250-$150) = 500 units b.

Margin of safety in dollars

Target level sales dollars

= =

$250,000** - $125,000***

$125,000

Breakeven sales dollars

** Expected sales in dollars = 1,000 × $250 = $250,000 *** Breakeven in dollars = 500 × $250 = $125,000 c.

Margin of safety as a percentage of expected sales

Margin of safety in dollars Expected sales in dollars

= =

125,000 250,000 50%

7-11

Managerial Accounting 6e Solutions Manual

(5–10 min.) S7-16 Contribution margin (1,000 × $100 / quilt)……. Less: Fixed expenses…………………………. Operating income……………………………….. Operating leverage factor

$100,000 50,000 $50,000 =

Contribution margin Operating income

$100,000 $50,000

= 2.0 If volume increases 20%, operating income will increase 40% (operating leverage factor of 2.0 multiplied by 20%). Proof: Original volume (quilts)…………………………..

1,000

Add: Increase in volume (20% × 1,000)………

200

New volume (quilts)……………………………....

1,200

Multiplied by: Unit contribution margin………….

× $100

New total contribution margin……………………..

$120,000

Less: Fixed expenses……………………………...

(50,000)

New operating income………………………………

$70,000

Less: Operating income before change in volume (from above)……………………….....

(50,000)

Increase in operating income……………………...

$20,000

Percentage change ($20,000 / $50,000)……………..

7-12

40%

Chapter 7

Cost-Volume-Profit Analysis

(5–10 min.) S7-17 Req. 1 Product: Cupcakes Selling price per unit Less: Variable cost per unit CM

$ $ $

6.00 3.00 3.00

To find the indifference point, you need to set the costs of option 1 equal to the costs of option 2: $2,000 = $800 + [($6 × 0.05) × CUPCAKES] Then solve for CUPCAKES: CUPCAKES = 4,000 Proof: Lease costs under option 1: Fixed costs Variable costs (none) Total costs under option 1

$ 2,000 0 $ 2,000

Lease costs under option 2: Fixed costs Variable costs per unit ($6 × 0.05) Times # of units at pt. of indifference (4,000) Total variable costs Total costs under option 2

$ 800 $

0.30 4,000 1,200 $2,000

Because the number of units is 3,400 and is less than the 4,000 point of indifference, option 2 would be the lowest cost option. Option 1 costs = $2,000 Option 2 costs = $800 + ([$6 × 0.05] × 3,400) = $1,820 Req. 2 Option 1 is the better option for 5,200 units Option 1 costs = $2,000 Option 2 costs = $800 + ([$6 × 0.05] × 5,200) = $2,360

(5–10 min.) S7-18 1. 2. 3. 4. 5.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. Confidentiality—Keep information confidential except when disclosure is authorized or legally required standards. Competence—Perform professional duties in accordance with relevant laws, regulations, and technical standards. Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

7-13

Managerial Accounting 6e Solutions Manual

(10 min.) S7-19 a.

Describe the steps you would follow to create the Profit calculation portion of the worksheet. Within the Profit calculation portion of the worksheet pictured, which cells would contain formulas? Specify each cell that would contain a formula and what each of those formulas would be. Enter the following information that is contained in the box in the worksheet below into Excel:

Cell B4 would contain the formula =B2-B3 Cell B6 would contain the formula =B4*B5 Cell B8 would contain the formula =B6-B7

b. Describe the steps you would follow to create the Data table portion of the worksheet pictured. 1. In a new cell, indicate the cell address of the outcome you would like to see in the data table. This cell becomes the upper left corner cell of the data table.

2. Going across the row of the corner cell, list possible sales prices you would like to see in the data table. Format as currency. Going down the column of the corner cell, list the possible volumes you would like to see in the data table. 4. Use the cursor to select the entire data table area, including the row where the sales price is listed and the column where the volume is listed. Click on the data tab on the ribbon. Then click on the what-if analysis icon drop-down arrow. Then choose data table. 5. A dialog box will open. Use the cursor to select the cell containing the input variable listed along the row. Next, use the cursor to select the cell containing the input variable listed down the column. Excel automatically adds dollar signs to make the cell reference absolute. Then click OK. 6. You will now see the completed data table. If desired, format the data as currency using the number options on the home tab. Also, if desired, add a descriptive heading to the table. 3.

What is the current breakeven volume of sales if the selling price remains at $50? How do you know? The current breakeven volume of sales if the selling price remains at $50 is $400. Go to the column with the selling price of $50 and look down the column for the cell that contains a dash, which indicates breakeven is achieved at that corresponding volume.

7-14

Chapter 7

Cost-Volume-Profit Analysis

(continued) S7-19 d. If the company raises the selling price to $60 and sells 600 units, what would be the operating income? If the company raises the selling price to $60 and sells 600 units, the operating income would be $12,000. Go to the intersection of the column for the selling price of $60 and the row for the volume of 600 units and you will see that the operating income is $12,000. e.

If the company’s suppliers increase the cost of direct materials, would you expect the table to contain the same, fewer, or more shaded cells? If the company’s suppliers increase the cost of direct materials, you would expect the table to contain fewer shaded cells because profits will be reduced from the increased cost of direct materials.

If the company can negotiate lower plant property taxes with the county, would you expect the table to contain the same, fewer, or more shaded cells? If the company can negotiate lower plant property taxes with the county, you would expect the table to contain more shaded cells because the decreased property tax expense will increase profits.

If the company increased its target profit goal to $15,000 per month, would you expect the table to contain the same, fewer, or more shaded cells? If the company increases its target profit goal to $15,000 per month, you would expect the table to contain fewer shaded cells because fewer cells will reach that higher target profit goal.

7-15

Managerial Accounting 6e Solutions Manual

(10 min.) S7-20 Students should refer to the worksheet pictured in the exercise to answer the following questions; the cell references in the solutions refer to the worksheet depicted in the exercise itself. 1.

How many snow cones does Olivia need to sell in a month to break even if the selling price remains at $3.00 per snow cone? Olivia needs to sell 500 snow cones in a month to break even if the selling price remains at $3.00 per snow cone. See Cell F11.

How many snow cones does Olivia need to sell to break even if she increases the selling price to $3.50 per snow cone? Olivia needs to sell 400 snow cones to break even if she increases the selling price to $3.50 per snow cone. See Cell H13.

How many snow cones does Olivia need to sell to reach her monthly target profit if the selling price remains at $3.00 per snow cone? Olivia needs to sell 900 snow cones to reach her monthly target profit if the selling price remains at $3.00 per snow cone. See Cell F3.

How many snow cones does Olivia need to sell to reach her monthly target profit if she increases the selling price to $4.00 per snow cone? Olivia needs to sell 600 snow cones to reach her monthly target profit if she increases the selling price to $4.00 per snow cone. See Cell J9.

What would Olivia’s monthly profit be if she increases the selling price to $3.50 and sells 750 snow cones? Olivia’s monthly profit would be $875 if she increases the selling price to $3.50 and sells 750 snow cones. See Cell H6.

7-16

Chapter 7

Cost-Volume-Profit Analysis

Exercises (Group A) (15 min.) E7-21A Req. 1 Jamison Travel Contribution Margin Income Statements Sales revenue Less: Variable expenses (40% of sales revenue*) Contribution margin (60% of sales revenue**) Fixed expenses Operating income (loss) __________ *$210,000 / $525,000 = 0.40 **$315,000 / $525,000 = 0.60 (CM ratio)

$230,000 92,000 138,000 172,200 ($ 34,200)

$400,000 160,000 240,000 172,200 $ 67,800

Req. 2 Breakeven sales

$172,200 + $0 1 − 0.40

$172,200 + $0 0.60

$287,000

(10–15 min.) E7-22A This problem involves working backward through the shortcut contribution margin formula and then working backward through the contribution margin income statement to find the missing data. First, fill in the given data in the shortcut contribution margin formula, and solve for the contribution margin ratio: Sales needed to break even =

Fixed expenses Contribution margin ratio

$50,000 =

$30,000 Contribution margin ratio

Contribution margin ratio =

$30,000 $50,000

Contribution margin ratio = 0.60 Next, fill in the given data in the contribution margin income statement: Sales…………………………. Less: Variable expenses…. Contribution margin………. Less: Fixed expenses…….. Operating income…………..

$ ? 42,000 ? 30,000 $ ?

7-17

Managerial Accounting 6e Solutions Manual

(continued) E7-22A Because the contribution margin ratio is 60% of sales revenue, the variable expenses must be 40% of sales revenue. Therefore: Variable expenses = 40% × Sales revenue $ 42,000 = 40% × Sales revenue $ 105,000 = Sales revenue Or alternatively: Sales − $42,000 Sales − 40% sales 40% sales Sales

= = = =

Sales

40% Sales $42,000 $42,000 $42,000 40% $105,000

Once sales revenue is found, the rest of the income statement follows: Sales………………………………. Less: Variable expenses………. Contribution margin……………. Less: Fixed expenses………….. Operating income……………….

$ 105,000 42,000 $ 63,000 30,000 $ 33,000

Therefore, at the current level of operations, the company’s sales revenue is $105,000, and its operating income is $33,000.

(15 min.) E7-23A Req. 1 Contribution margin per unit: Sales price....................................………….. Less: Variable expenses.................................…. Contribution margin per unit....................

$2.00 1.20 $0.80

Contribution margin ratio: Contribution margin per unit Sale price per unit

$0.80 2.00

0.40

Req. 2 Breakeven sales in units

= =

Breakeven sales in dollars

= .

$85,000 + $0 $0.80 106,250 packages

Fixed expenses + Operating income Contribution margin ratio

7-18

Fixed expenses + Operating income Contribution margin per unit

$85,000 + $0 0.40 $212,500

Chapter 7

Cost-Volume-Profit Analysis

(continued) E7-23A Req. 3 Sales in units

Fixed expenses + Operating income Contribution margin per unit

$85,000 + $22,000 $0.80

133,750 packages

(5–10 min.) E7-24A New contribution margin per unit: Sales price....................................………….. Less: Variable expenses.................................…. Contribution margin per unit.................... Sales in units

$2.00 1.00 $1.00 Fixed expenses + Operating income Contribution margin per unit

$100,000 + $22,000 $1.00

122,000 packages

The company would have to sell 11,750 fewer packages of socks (122,000 – 133,750 from E7-21A Req. 3) to earn $22,000 of operating income. The increase in fixed costs was completely offset by the decrease in variable costs at the prior target profit volume of sales. Therefore, the company will need to sell fewer units in order to achieve its target profit level.

7-19

Managerial Accounting 6e Solutions Manual

(10–15 min.) E7-25A Req. 1 Contribution margin ratio

Contribution margin per unit Sales price per unit

$6.50 − $1.95 $6.50

= = Breakeven sales in dollars

0.70 Fixed expenses + Operating income Contribution margin ratio

= =

$8,400 + $0 0.70 $12,000

Req. 2 If franchisees require a monthly operating income of $7,000 Target sales = in dollars = =

Fixed expenses + Operating income Contribution margin ratio

$8,400 + $7,000 0.70 $22,000

Yes, the franchising concept is a good idea. Most locations are expected to sell more ($26,000) than the sales required to earn the target profit ($22,000).

(10–15 min.) E7-26A Req. 1 Prior to changes, the average restaurant location had the following operating income: Contribution margin per unit ($6.50 – $1.95) Average sales volume units………………… Contribution margin………………………….. Less: Fixed expenses………………………. Operating income……………………………...

$ 4.55 × 5,500 $25,025 (8,400) $16,625

Req. 2 After the price cut and advertising fees, the average restaurant location will have the following operating income: New contribution margin per unit ($6.00 sales price – $1.95 variable cost)……………………………………. $ 4.05 New sales volume (units)…………. × 6,000 Contribution margin………………... $24,300 Less: New fixed expenses ($8,400 + $500 advertising fee)…… (8,900) New operating income…………….. $ 15,400 Assuming volume increases according to plan, cutting the sales price and advertising will allow the franchise owners to continue to reach their target profits of $7,000 per month. However, their operating income will not be as high as before the changes.

7-20

Chapter 7

Cost-Volume-Profit Analysis

(10–15 min.) E7-27A Req. 1 Breakeven sales in dollars

= =

Fixed expenses + Operating income Contribution margin ratio $720,000 + $0 0.90 $800,000

Req. 2 Robert’s Steel Parts Operating Income Projections at Different Sales Levels Sales revenue × Contribution margin ratio Contribution margin Less: Fixed expenses Operating income (loss)

$ 540,000 0.90 486,000 720,000 $(234,000)

$1,040,000 0.90 936,000 720,000 $ 216,000

Req. 3 Yes, the income projections at the two different sales levels make sense given the breakeven sales level ($800,000) computed in Req. 1. Req. 2 shows that if the company’s revenue is only $540,000 (short of the revenue required to break even) the company incurs a loss. On the other hand, if revenue is $1,040,000 (higher than the revenue required to break even), the company earns a profit.

(15 min.) E7-28A Req. 1 =

Fixed expenses + Operating income Contribution margin ratio

$720,000 + $216,000 0.60

$1,560,000

Sales in dollars

Fixed expenses + Operating income Contribution margin ratio

$1,040,000

Fixed expenses + $216,000 0.60

$624,000

Fixed expenses + $216,000

$408,000

Fixed expenses

Target sales in dollars

Req. 2

Fixed expenses can only be $408,000 to maintain the prior profit level of $216,000 per month. Therefore, Robert will have to save at least $312,000 per month in fixed costs ($720,000 − $408,000) by moving operations overseas if he plans to maintain his prior profit level.

7-21

Managerial Accounting 6e Solutions Manual

(15–20 min.) E7-29A Req. 1 (Fixed expenses + Operating income) / CM per unit = Breakeven in units ($308,000 + $0) / ($2,200 – $500 – $160) = 200 units (Fixed expenses + Operating income) / CM ratio = Breakeven in sales dollars CM ratio = ($2,200 – $500 – $160) / $2,200 = 0.70 ($308,000 + $0) / 0.70 = $440,000 Req. 2 Total CM ($2,200 – $500 – $160) × 260 = $400,400 Projected operating income = $400,400 – $308,000 = $92,400 Req. 3 New fixed expenses = $308,000 + $70,400 = $378,400 New CM = $2,200 – ($500 – $220) – $160 = $1,760 (Fixed expenses + Operating income) / CM per unit = Breakeven in units ($378,400 + $0) / ($2,200 – [$500 – $220] – $160) = 215 units (Fixed expenses + Operating income) / CM ratio = Breakeven in sales dollars CM ratio = ($2,200 – [$500 – $220] – $160) / $2,200 = 0.80 ($378,400 + $0) / 0.80 = $473,000 Req. 4 Total CM ($2,200 – ($500 – $220) – $160) × 260 = $457,600 Projected operating income = $457,600 – $378,400 = $79,200 Req. 5 Based purely on the financial analysis presented above (operating income for Req. 2 is more than the operating income for Req. 4), the company should not implement the software control system. However, the new control system would reduce waste and contribute to the company’s sustainability objectives. The company should take into account not only the financial measures such as operating income, breakeven point, and operating leverage, but also the sustainability impact of the decision. Student answers may vary for Req. 5.

7-22

Chapter 7

Cost-Volume-Profit Analysis

(5–10 min.) E7-30A Use the shortcut contribution margin formula to determine the company’s current level of fixed expenses: Fixed expenses Sales needed to break even = Contribution margin ratio $350,000

Fixed expenses 0.40

$350,000 × 0.40

Fixed expenses

$140,000

Fixed expenses

After buying the equipment, the company’s fixed expenses will be $175,000 ($140,000 + $35,000 increase). Calculate breakeven (in sales) at the new level of fixed expenses: Fixed expenses Sales needed to break even = Contribution margin ratio =

$175,000 0.40

$437,500

The company will now have to generate $437,500 of sales revenue to break even.

(5–10 min.) E7-31A Req. 1 Variable costs: Concession fees Fixed costs: Ground service fees, parking permit fees, electrical service fee, admission fee, employee wages Req. 2 Variable fee: Concession fees [15% × sales ($4,000/day × 12 days)] Fixed fee: Ground service fees [$10 × linear feet (15’ × 12’)] Parking permit fees [$50 × # of permits (4)] 100-amp electrical service Fair admission fee – 1 employee included ($50 × 3 employees) Total fixed fee Total fee

($7,200 variable + $2,440 fixed)

$7,200 $1,800 $ 200 $ 290 $ 150 $2,440 $9,640

Req. 3 Sales needed to break even

Fixed expenses Contribution margin ratio

Sales needed to break even

$12,000* 0.40**

$30,000

*$2,440 fixed fee + $9,560 employee wages **1.00 – 0.60 = 0.40 Breakeven sales

7-23

Managerial Accounting 6e Solutions Manual

(continued) E7-31A Req. 4 Budgeted Sales (12 days × $4,000)

$48,000

Less: Breakeven Sales

$30,000

Margin of Safety in Dollars

$18,000

Margin of Safety in Dollars

$18,000

Divided by Budgeted Sales Dollars

$48,000

Margin of Safety %

37.5%

(5–10 min.) E7-32A Sales price per unit……………….. Contribution margin ratio………... Contribution margin per unit…….

$25.00 × 0.60 $15.00

Find the number of scarves needed to break even on (or pay for) the extra entrance fee cost of $375 (= $1,500 × 25% increase): Fixed expenses Breakeven in units = Contribution margin per unit =

$375 $15.00

25 extra scarves

Fixed expenses Contribution margin ratio

$375 0.60

Alternatively: Breakeven in sales revenue

= $625 in sales revenue Dividing $625 in sales revenue by the price per scarf ($25) yields 25 scarves. The owner will have to sell an additional 25 scarves next year to cover the increase in entrance fees.

7-24

Chapter 7

Cost-Volume-Profit Analysis

(15–20 min.) E7-33A

Sale price per unit Less: Variable cost per unit Contribution margin per unit Multiply by: Sales mix in units Contribution margin

Weighted-Average Contribution Margin per Unit Twig $14.00 2.00 $12.00 × 4 $48.00

Oak $40.00 18.00 $22.00 × 1 $22.00

Weighted-average contribution margin per unit ($70 / 5 units)

Total

5 $70.00 $14.00

Sales in total units: Fixed expenses + Operating income = Weighted-average contribution margin per unit =

$350 + $0 $14

25 units

Breakeven sales of twig stands (25 × 4/5)……………… Breakeven sales of oak stands (25 × 1/5).………………

20 units 5 units

By charging her husband part of the craft fair entrance fees, the wife’s fixed costs will decrease. Therefore, the wife will need to sell fewer scarves to break even when her husband decides to share her craft booths.

(15–20 min.) E7-34A

Sales price per unit Less: Variable cost per unit Contribution margin per unit Multiply by: Sales mix in units Contribution margin

Weighted-Average Contribution Margin per Unit Standard $55 45 $10 × 3 $30

Weighted-average contribution margin per unit ($70 / 5 units)

Deluxe $85 65 $20 × 2 $40

Total

5 $ 70 $ 14

Sales in total units: =

= =

Fixed expenses + Operating income Weighted-average contribution margin per unit $11,900 + $0 $14 850 units

Breakeven sales of standard units (850 × 3/5)……………… Breakeven sales of deluxe units (850 × 2/5).………………..

510 units 340 units

7-25

Managerial Accounting 6e Solutions Manual

(continued) E7-34A Sales in total units: Fixed expenses + Operating income Weighted-average contribution margin per unit

= =

$11,900 + $7,700 $14 1,400 units

Target sales of standard units (1,400 × 3/5)........……………… Target sales of deluxe units (1,400 × 2/5)............…................

840 units 560 units

(15 min.) E7-35A Req. 1 The company’s operating income can be computed as follows: Sales revenue……………………………………. Less: Variable expenses……………………… Contribution margin……………………………. Less: Fixed expenses……($2,200,000 – $1,260,000) Operating income………………………………..

$6,300,000 1,260,000 5,040,000 940,000 $4,100,000

Req. 2 Contribution margin ratio

5,040,000 contribution margin 6,300,000 sales revenue

80%

Req. 3 Breakeven in sales dollars

940,000 fixed costs 80% contribution margin ratio

$1,175,000

Req. 4 If the company embarks on this advertising campaign, sales revenue and variable costs will rise by 10%, which will cause the contribution margin to increase by 10%. Fixed costs will rise by only $190,000 due to the advertising campaign. Overall operating income will increase by $314,000. See the computations to follow. The change in operating income can be computed as follows: Current contribution margin Percentage increase Increase in contribution margin Less: Increase in fixed costs of advertising campaign Increase in operating income

7-26

$5,040,000 × 10% 504,000 190,000 $314,000

Chapter 7

Cost-Volume-Profit Analysis

(15 min.) E7-36A Req. 1 Contribution margin ratio

Breakeven sales in dollars

1.00 – 0.40

0.60

Fixed expenses + Operating income Contribution margin ratio $7,500 + $0 0.60

Target sales in dollars

Margin of safety

$12,500

Fixed expenses + Operating income Contribution margin ratio

$7,500 + $30,000 0.60

$37,500 0.60

$62,500

$62,500 − $12,500

$50,000

Req. 2 Margin of safety as a percentage of target sales

$50,000 $62,500

0.80 or 80% of target sales

Req. 3 Target sales……………………... Contribution margin ratio…….. Contribution margin…………… Less: Fixed expenses……….. Operating income………………. Operating leverage factor

$62,500 × 0.60 $37,500 7,500 $30,000 =

Contribution margin Operating income

$37,500 $30,000

1.25

Req. 4 If volume decreases 12%, operating income will decrease 15.0% (operating leverage factor of 1.25 multiplied by 12%).

7-27

Managerial Accounting 6e Solutions Manual

(10 min.) E7-37A First, find the company’s contribution margin: Sales……………………………… Contribution margin ratio…….. Contribution margin……………

$60,000 × 0.25 $15,000

Then, work backward to find the company’s operating income: Contribution margin Operating leverage factor = Operating income 1.25

$15,000 Operating income

Operating income

$15,000 1.25

Operating income

$12,000

Finally, finish the income statement to find the fixed expenses: Contribution margin…….. $15,000 Less: Fixed expenses…. Unknown Operating income……….. $12,000 Therefore, fixed expenses must be $3,000.

7-28

Chapter 7

Cost-Volume-Profit Analysis

(10–15 min.) E7-38A Req. 1 Selling price Less: Variable costs CM per unit

$15 7 $8

($4 + $2 + $1)

Lease costs under option A: Fixed costs Variable costs (none) Total costs under option A

$ 2,400 0 $ 2,400

Lease costs under option B: Fixed costs Total variable costs (20% × $15 × 350) Total costs under option B

$ 1,200 1,050 $ 2,250

The more attractive lease option is option B because it results in the lowest total lease costs. Req. 2 To solve the question, you need to set the costs of option A equal to the costs of option B: $2,400 = $1,200 + (20% × $15 × CANDLES) Then solve for CANDLES: CANDLES = 400 Req. 3 The lease option that is more attractive if the company plans to sell 500 candles a month is option A, the fixed lease payment, because the sales volume is higher than the indifference point.

7-29

Managerial Accounting 6e Solutions Manual

(20–25 min.) E7-39A Req. 1 Breakeven in units

Fixed expenses Contribution margin per unit

$880 $55*

16 tubs

Selling price

$84

Less: variable cost per unit

$29

CM per unit

$55

Req. 2 2a. Sales in units to reach desired profit

Fixed expenses + Operating Income Contribution margin per unit

$880 + $1,320 $55

$2,200 $55

40 tubs

breakeven units × selling price per unit

40 units × $84/each

$3,360

2b. Sales in dollars to reach desired profit

2c. Condensed Income Statement

7-30

Sales

$3,360

Less: variable expenses (40 × $29)

$1,160

Contribution margin

$2,200

Less: fixed expenses

$880

Operating income

$1,320

Chapter 7

Cost-Volume-Profit Analysis

(continued) E7-39A Req. 3 Margin of safety in dollars: Sales at target level:

$3,360

Sales at B/E level:

$1,344*

Margin of safety in dollars

$2,016

Margin of safety in units: Sales at target level:

Sales at B/E level:

Margin of safety in units

Margin of safety in %: Margin of safety in dollars:

$2,016

Sales at target level:

$3,360

$2,016/$3,360 =

60.00%

*Sales at B/E level: 16 tubs × $84 = $1,344

7-31

Managerial Accounting 6e Solutions Manual

(20–25 min.) E7-40A Req. 1 Total

Per Unit

Sales

$150,000

$30

100%

Less: Variable expenses

120,000

80%

Contribution margin

$30,000

20%

Less: Fixed expenses

13,500

Operating income

$16,500

1a) Total contribution margin is $30,000 ($16,500 + $13,500). 1b) Total variable expenses are $120,000 ($150,000 - $30,000). 1c) Units sold = Total sales / sales price = $150,000 / $30 = 5,000 units 1d) Per unit variable expense is $24 ($120,000 / 5,000). 1e) Per unit contribution margin is $6 ($30 – $24).

Req. 2 2a. Breakeven in units

Fixed expenses Contribution margin per unit

$13,500 $6

2,250 units

2b. Breakeven sales in dollars

Fixed expenses + Operating income Contribution margin ratio

$13,500 + 0 0.20 (from Req. 1)

$67,500

Req. 3 3a. Sales in units to reach desired profit

7-32

Fixed expenses + operating Income Contribution margin per unit

$13,500 + $48,000 $6

$61,500 $6

10,250 units

Chapter 7

Cost-Volume-Profit Analysis

(continued) E7-40A 3b. Actual sales units

5,000

Less: Breakeven sales units

2,250

Margin of safety in units

2,750

3c. Actual sales

$150,000

Less: Breakeven sales volume

$67,500

Margin of safety in dollars

$82,500

3d. Margin of safety in dollars

$82,500

Divided by: Actual sales dollars

$150,000

Margin of safety %

55.0%

(20–25 min.) E7-41A 1.

Sales price per unit............................................. Less: Variable cost per unit (6.70 + 7 + 2 + 1.80)......................................... Contribution margin per unit ............................. Contribution margin ratio

$2.50 $20.00

$20.00 $17.50 $ 2.50 = =

0.13(rounded) 13%(rounded)

Sales revenue (130,000 × $20.00)……………… Less: Variable expenses (130,000 × $17.50)… Contribution margin……………………………..

$ 2,600,000 (2,275,000) $ 325,000

Sales volume (units)……………………………… Unit contribution margin………………………… Contribution margin……………………………… Less: Fixed expenses ($102,300 + $187,800)……… Operating income………………………………….

160,000 × $2.50 $400,000 (290,100) $109,900

Sales revenue……………………………………… Contribution margin ratio……………………….. Contribution margin……………………………… Less: fixed expenses……………………………. Operating income………………………………….

$4,500,000 × 13% $585,000 (290,100) $ 294,900

B/E sales in units

$290,100 $2.50

116,040 units

B/E sales in dollars

$290,100 13% (rounded)

$2,231,538

7-33

Managerial Accounting 6e Solutions Manual

(continued) E7-41A 5.

$290,100 + $260,100 $2.50

Original contribution margin per unit.................. Less: Increase in direct labor cost per unit ($7.00 × 10%).......................................................... New contribution margin per unit………………...

$2.50 $0.70 $1.80

Original fixed expenses……………………………. Plus: Increase in fixed expenses………………..

$290,100 22,500

New fixed expenses…………………………………

$312,600

New breakeven in units

220,080 units

$312,600 $1.80

173,667 = (rounded) units

Contribution margin (from part 1)………………... Less: Fixed expenses……………………………... Operating income……………………………………

$325,000 (290,100) $ 34,900

Operating leverage factor

Increase in volume…………………….. × Operating leverage factor………….. Increase in operating Income……………………

Margin of safety

$325,000 $ 34,900

7% 9.31 65.2% (rounded)

Sales − Sales at breakeven $2,600,000 − $2,231,538 (from part 1) (from part 4) $368,462

= = Margin of safety as a percentage

$368,462 $2,600,000

0.14 (rounded)

256 GB

512 GB

Total

Sales price…………….. $20.00 Less: Variable cost………….. 17.50 Contribution margin…. $ 2.50 Sales mix………………. × 6 Multiply by: Contribution margin…. $15 Weighted-average contribution margin per unit ($32/7)

$45 28 $17 × 1 $17

__7 $32

10.

9.31 (rounded)

14% (rounded)

$5.00 (rounded) Sales in units

Smaller 256 GB: 110,040 × 6/7………………….. Larger 512 GB: 110,040 × 1/7….………………….

$290,100 + $260,100 $5

110,040 units

94,320 units (rounded) 15,720 units (rounded)

The target profit volume is lower than before (Req. 5) because now the company is selling a product with a much higher unit contribution margin. 7-34

Chapter 7

Cost-Volume-Profit Analysis

(20 min.) E7-42A Req. 1 Profit calculation and Data table in Excel:

a. b. c. d.

The company needs to sell 650 graphics cards in a month to break even if the selling price remains at $55. The company cannot reach its monthly target profit, in the current relevant range, if the selling price remains at $55 per graphics card. The company need to sell between 550 and 600 units to reach its monthly target profit if it increases the selling price to $75 per graphics card. The company’s monthly profit would be $15,550 if it increases the selling price to $90 and sells 500 graphics cards.

7-35

Managerial Accounting 6e Solutions Manual

(continued) E7-42A Req. 2 Profit calculation and data table in Excel with decreased variable cost and increased monthly fixed expenses:

a. b. c. d.

7-36

The company needs to sell 450 graphics cards in a month to break even if the selling price remains at $55. Yes, the company can reach its target profit goal if it sells between 900 and 950 graphics cards with the selling price remaining at $55 per graphics card. The company need to sell between 450 and 500 units to reach its monthly target profit if it increases the selling price to $75 per graphics card. The company’s monthly profit would be $18,650 if it increases the selling price to $90 and sells 500 graphics cards.

Chapter 7

Cost-Volume-Profit Analysis

(20 min.) E7-43A Req. 1 Profit calculation in Excel:

Req. 2 Data table in Excel:

Req. 3 a. b. c. d. e.

Dara needs to sell 600 snow cones in a month to break even if the selling price remains at $4.00 per snow cone. Dara needs to sell 400 snow cones to break even if she increases the selling price to $5.25 per snow cone. Dara’s monthly profit would be $750 if she keeps the selling price at $4.00 and sells 900 snow cones. Dara needs to sell 800 snow cones to reach her monthly target profit if she increases the selling price to $4.50 per snow cone. Dara’s monthly profit would be $1,100 if she increases the selling price to $4.75 and sells 800 snow cones.

7-37

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (15 min.) E7-44B Req. 1 Contribution Margin Income Statements Sales revenue Less: Variable expenses (24%* of sales revenue) Contribution margin (76%** of sales revenue) Fixed expenses Operating income (loss) __________ *$120,000 / $500,000 = 0.24 **$380,000 / $500,000 = 0.76 (CM ratio) Req. 2 Breakeven sales

$171,000 + $0 1 − 0.24

$171,000 + $0 0.76

7-38

$225,000

$200,000 48,000

$420,000 100,800

152,000 171,000 $ (19,000)

319,200 171,000 $ 148,200

Chapter 7

Cost-Volume-Profit Analysis

(10–15 min.) E7-45B This problem involves working backward through the shortcut contribution margin formula and then working backward through the contribution margin income statement to find the missing data. First, fill in the given data in the shortcut contribution margin formula, and solve for the contribution margin ratio: Sales needed to break even =

Fixed expenses Contribution margin ratio

$35,000 =

$28,000 Contribution margin ratio

Contribution margin ratio =

$28,000 $35,000

Contribution margin ratio = 0.80 Next, fill in the given data in the contribution margin income statement: Sales…………………………. Less: Variable expenses…. Contribution margin………. Less: Fixed expenses…….. Operating income…………..

$ ? 30,000 ? 28,000 $ ?

Because the contribution margin ratio is 80% of sales revenue, the variable expenses must be 20% of sales revenue. Therefore: Variable expenses $ 30,000 $150,000

= = =

20% × Sales revenue 20% × Sales revenue Sales revenue

Sales − $30,000 Sales − 80% Sales 20% Sales Sales

= = = =

Sales

80% Sales $30,000 $30,000 $30,000 20% $150,000

Or alternatively:

$150,000 30,000 $120,000 28,000 $ 92,000

Therefore, at the current level of operations, the company’s sales revenue is $150,000, and its operating income is $92,000.

7-39

Managerial Accounting 6e Solutions Manual

(15 min.) E7-46B Req. 1 Contribution margin per unit: Sale price....................................………….. Less: Variable expenses.................................…. Contribution margin per unit....................

$2.00 1.00 $1.00

Contribution margin ratio: Contribution margin per unit Sale price per unit

$1.00 $2.00

0.50

Req. 2 Breakeven sales in units

Breakeven sales in dollars

Fixed expenses + Operating income Contribution margin per unit $100,000 + $0 $1.00

100,000 units

Fixed expenses + Operating income Contribution margin ratio

= =

$100,000 + $0 0.50 $200,000

Req. 3 Sales in units

= =

Fixed expenses + Operating income Contribution margin per unit $100,000 + $23,000 $1.00 123,000 packages

(5–10 min.) E7-47B New contribution margin per unit: Sale price....................................………….. Less: Variable expenses.................................…. Contribution margin per unit.................... Sales in units

= = 7-40

$2.00 0.80 $1.20 Fixed expenses + Operating income Contribution margin per unit $125,000 + $23,000 $1.20 123,334 (rounded) packages

Chapter 7

Cost-Volume-Profit Analysis

(continued) E7-47B The company would have to sell 334 more packages of socks (123,334 – 123,000 from E7-42B) to earn $23,000 of operating income. Although the contribution margin per unit increased, at this level of sales it is not enough to make up for the $25,000 increase in fixed costs.

(10–15 min.) E7-48B Req. 1 Contribution margin ratio

Breakeven sales in dollars

Contribution margin per unit Sales price per unit

$7.00 − $2.45 $7.00

0.65

Fixed expenses + Operating income Contribution margin ratio

$7,800 + $0 0.65

$12,000

Req. 2 If franchisees require a monthly operating income of $7,150 Target sales Fixed expenses + Operating income = in dollars Contribution margin ratio =

$7,800 + $7,150 0.65

$23,000

No, the franchising concept is not a good idea. The sales required to earn the target profit ($23,000) are more than the expected sales generated ($21,500).

7-41

Managerial Accounting 6e Solutions Manual

(10– 15 min.) E7-49B Req. 1 Prior to changes, the average restaurant location had the following operating income: Contribution margin per unit (from E7-48B) Average sales volume units………………… Contribution margin………………………….. Less: Fixed expenses………………………. Operating income……………………………...

$ 4.55 × 4,500 $20,475 (7,800) $12,675

Req. 2 After the price cut and advertising fees, the average restaurant location will have the following operating income: New contribution margin per unit ($6.50 sales price – $2.45 variable cost)……………………………………. $ 4.05 × 5,000 $20,250

New sales volume (units)…………. Contribution margin………………... Less: New fixed expenses ($7,800 + $400 advertising fee)…… New operating income……………..

(8,200) $ 12,050

Assuming volume increases according to plan, cutting the sales price and advertising will allow the franchise owners to reach their target profits of $7,150 per month.

(10–15 min.) E7-50B Req. 1 Fixed expenses + Operating income Contribution margin ratio

Breakeven sales in dollars =

$750,000 + $0 0.75

= $1,000,000 Req. 2 Operating Income Projections at Different Sales Levels Sales revenue × Contribution margin ratio Contribution margin Less: Fixed expenses Operating income (loss)

$ 550,000 0.75 412,500 750,000 $(337,500)

$1,050,000 0.75 787,500 750,000 $ 37,500

Req. 3 Yes, the income projections at the two different sales levels make sense given the breakeven sales level ($1,000,000) computed in Req. 1. Req. 2 shows that if the company’s revenue is only $550,000 (short of the revenue required to break even), the company incurs a loss. On the other hand, if revenue is $1,050,000 (higher than the revenue required to break even), the company earns a profit.

7-42

Chapter 7

Cost-Volume-Profit Analysis

(15 min.) E7-51B Req. 1 =

Fixed expenses + operating income Contribution margin ratio

$750,000 + $37,500 0.45

$1,750,000

Sales in dollars

Fixed expenses + operating income Contribution margin ratio

$1,050,000

Fixed expenses + $37,500 0.45

$472,500

Fixed expenses + $37,500

$435,000

Fixed expenses

Sales in dollars

Req. 2

Fixed expenses can only be $435,000 to maintain the prior profit level of $37,500 per month. Therefore, the company will have to save at least $315,000 per month in fixed costs ($750,000 − $435,000) by moving operations overseas if it plans to maintain its prior profit level.

(15–20 min.) E7-52B Req. 1 (Fixed expenses + Operating income) / CM per unit = Breakeven in units ($270,000 + $0) / ($3,000 – $540 - $210) = 120 units (Fixed expenses + Operating income) / CM ratio = Breakeven in sales dollars CM ratio = ($3,000 – $540 – $210) / $3,000 = 0.75 ($270,000 + $0) / 0.75 = $360,000 Req. 2 Total CM = ($3,000 – $540 – $210 ) × 330 = $742,500 Projected operating income = $742,500 – $270,000 = $472,500 Req. 3 New fixed expenses = $270,000 + $30,000 = $300,000 New CM = ($3,000 – [$540 – $150] – $210) = $2,400 (Fixed expenses + Operating income) / CM per unit = Breakeven in units ($300,000 + $0) / $2,400) = 125 units (Fixed expenses + Operating income) / CM ratio = Breakeven in sales dollars CM ratio = $2,400 / $3,000 = 0.80 ($300,000 + $0) / 0.80 = $375,000 Req. 4 Total CM ($3,000 – [$540 – $150] – $210) × 330 = $792,000 Projected operating income = $792,000 – $300,000 = $492,000

7-43

Managerial Accounting 6e Solutions Manual

(continued) E7-52B Req. 5 Operating income for Req. 4 is more than the operating income for Req. 2; therefore, the company should implement the software control system. In addition, the new control system would reduce waste and contribute to the company’s sustainability objective. The company should take into account not only the financial measures, such as operating income, breakeven point, and operating leverage, but also the sustainability impact of the decision. Student answers may vary.

(5–10 min.) E7-53B Use the shortcut contribution margin formula to determine the company’s current level of fixed expenses: Sales needed to break even

Fixed expenses Contribution margin ratio

$250,000

Fixed expenses 0.40

$250,000 × 0.40

Fixed expenses

$100,000

Fixed expenses

After buying the equipment, the company’s fixed expenses will be $130,000 ($100,000 + $30,000 increase). Calculate breakeven (in sales) at the new level of fixed expenses: Sales needed to break even

Fixed expenses Contribution margin ratio

$130,000 0.40

$325,000

The company will now have to generate $325,000 of sales revenue to break even.

7-44

Chapter 7

Cost-Volume-Profit Analysis

(5–10 min.) E7-54B Req. 1 Variable costs: Concession fees Fixed costs: Ground service fees, parking permit fees, electrical service fee, admission fee, employee wages Req. 2 Variable fee: Concession fees [20% × sales ($4,000/day × 12 days)] Fixed fee: Ground service fees [$20 × linear feet (15’ × 10’)] Parking permit fees [$60 × # of permits (4)] 100-amp electrical service Fair admission fee—1 employee included ($30 × 3 employees) Total fixed fee Total fee

($9,600 variable + $3,780 fixed)

$9,600 $3,000 $ 240 $ 450 $ 90 $3,780 $13,380

Req. 3 Sales needed to break even

Fixed expenses Contribution margin ratio

Sales needed to break even

$11,580* 0.25** *$3,780 fixed fee + $7,800 employee wages ** 1.00 – 0.75 = 0.25

Breakeven sales

$46,320

Req. 4 Budgeted Sales (12 days × $4,000) Less: Breakeven Sales

$48,000 $46,320

Margin of Safety in Dollars

$1,680

Margin of Safety in Dollars

$1,680

Divided by Budgeted Sales Dollars Margin of Safety %

$48,000 3.5%

7-45

Managerial Accounting 6e Solutions Manual

(5–10 min.) E7-55B Sales price per unit……………….. Contribution margin ratio………... Contribution margin per unit…….

$15.00 × 0.60 $ 9.00

Find the number of scarves needed to break even on (or pay for) the extra entrance fee cost of $90 (= $900 × 10% increase): Fixed expenses Breakeven in units = Contribution margin per unit =

$90 $9.00

10 scarves

Alternatively: Breakeven in sales revenue =

Fixed expenses Contribution margin ratio $90 0.60

= $150 in sales revenue Dividing $150 in sales revenue by the price per scarf ($15) yields 10 scarves. The owner will have to sell an additional 10 scarves next year to cover the increase in entrance fees.

7-46

Chapter 7

Cost-Volume-Profit Analysis

(15–20 min.) E7-56B

Sales price per unit Less Variable cost per unit Contribution margin per unit Multiply by: Sales mix in units Contribution margin

Weighted-Average Contribution Margin per Unit Twig $17.00 3.50 $13.50 × 4 $54.00

Weighted-average contribution margin per unit ($85 / 5 units)

Oak $42.00 11.00 $31.00 × 1 $31.00

Total

5 $85.00 $17.00

Sales in total units: =

Fixed expenses + Operating income Weighted-average contribution margin per unit

$255 + $0 $17

15 units

Breakeven sales of twig stands (15 × 4/5)……………… Breakeven sales of oak stands (15 × 1/5).………………

12 units 3 units

By charging her husband part of the craft fair entrance fees, the wife’s fixed costs will decrease. Therefore, the wife will need to sell fewer scarves to break even after her husband decided to share her craft booths.

7-47

Managerial Accounting 6e Solutions Manual

(15–20 min.) E7-57B

Sales price per unit Less: Variable cost per unit Contribution margin per unit Multiply by: Sales mix in units Contribution margin

Weighted-Average Contribution Margin per Unit Standard $45 25 $20 × 3 $60

Weighted-average contribution margin

Deluxe $55 35 $20 × 2 $40

Total

5 $100 $ 20

Sales in total units to break even: Fixed expenses + Operating income = Weighted-average contribution margin per unit = =

$19,000 + $0 $20 950 units

Breakeven sales of standard units (950 × 3/5)……………… Breakeven sales of deluxe units (950 × 2/5).………………..

570 units 380 units

Sales in total units to achieve target operating income: Fixed expenses + Operating income = Weighted-average contribution margin per unit = =

$19,000 + 13,000 $20 1,600 units

Target sales of standard units (1,600 × 3/5)........…………… Target sales of deluxe units (1,600 × 2/5)............….............

7-48

960 units 640 units

Chapter 7

Cost-Volume-Profit Analysis

(15 min.) E7-58B Req. 1 The company’s operating income can be computed as follows: Sales revenue……………………………………. Less: Variable expenses……………………… Contribution margin……………………………. Less: Fixed expenses………($2,500,000 – $1,612,000) Operating income………………………………..

$6,200,000 1,612,000 4,588,000 888,000 $3,700,000

Req. 2 Contribution margin ratio

$4,588,000 $6,200,000

74%

Req. 3 Breakeven in sales dollars

$888,000 74%

$1,200,000

The company will have to generate $1,200,000 in sales in order to break even. Req. 4 If the company embarks on this advertising campaign, sales revenue and variable costs will rise by 16%, which will cause the contribution margin to increase by 16%. However, fixed costs will rise by $190,000 dollars due to the advertising campaign. The change in operating income can be computed as follows: Current contribution margin Percentage increase Increase in contribution margin Less: Increase in fixed costs of advertising campaign Increase in operating income

$4,588,000 × 16% 734,080 190,000 $544,080

7-49

Managerial Accounting 6e Solutions Manual

(15 min.) E7-59B Req. 1 Contribution margin ratio

Breakeven sales in dollars

1.00 − 0.70

0.30

Fixed expenses + Operating income Contribution margin ratio

$12,000 + $0 0.30

= = Target sales in dollars

$40,000 Fixed expenses + Operating income Contribution margin ratio

$12,000 + $15,000 0.30

$27,000 0.30

Margin of safety

$90,000

$90,000 − $40,000

$50,000

Req. 2 Margin of safety as a percentage of target sales

$50,000 $90,000

0.56 or 56% (rounded) of target sales

Req. 3 Target sales……………………... Contribution margin ratio…….. Contribution margin…………… Less: Fixed expenses……….. Operating income……………….

$90,000 × 0.30 $27,000 12,000 $15,000

Operating leverage factor

Contribution margin Operating income

$27,000 $15,000

1.80

Req. 4 If volume decreases 8%, operating income will decrease 14.40% (operating leverage factor of 1.80 multiplied by 8%). 7-50

Chapter 7

Cost-Volume-Profit Analysis

(10 min.) E7-60B First, find the contribution margin: Sales……………………………… Contribution margin ratio…….. Contribution margin……………

$50,000 × 0.20 $ 10,000

Then, work backward to find operating income: Operating leverage factor

Contribution margin Operating income

1.25

$10,000 Operating income

Operating income

$10,000 1.25

Operating income

$8,000

Finally, finish the income statement to find the fixed expenses: Contribution margin…….. $10,000 Less: Fixed expenses…. Unknown Operating income……….. $ 8,000 Therefore, fixed expenses must be $2,000.

(10–15 min.) E7-61B Req. 1 Selling price Less: Variable costs ($8 + $3 + $2) CM per unit

$25 13 $12

Lease costs under option A: Fixed costs Variable costs (none) Total costs under option A

$ 4,500 0 $ 4,500

Lease costs under option B: Fixed costs Total variable costs (20% × $25 × 400) Total costs under option B

$ 1,500 2,000 $3,500

The more attractive lease option is option B because it results in the lowest total lease costs. Req. 2 To solve the question, you need to set the costs of option A equal to the costs of option B: $4,500 = $1,500 + (20% × $25 × CANDLES) Then solve for CANDLES: CANDLES = 600 Req. 3 The lease option that is more attractive for the company if the company plans to sell 800 candles a month is option A, the fixed lease payment, because the sales volume is more than the indifference point. Lease costs under option A: $4,500 Lease costs under option B: $1,500 + (20% × $25 × 800) = $5,500 .

7-51

Managerial Accounting 6e Solutions Manual

(20–25 min.) E7-62B Req. 1 Breakeven in units

Fixed expenses Contribution margin per unit

$600 $30*

20 tubs

*Selling price

$62

Less: variable cost per unit

$32

CM per unit

$30

Req. 2 2a. Sales in units to reach desired profit

Fixed expenses + Operating Income Contribution margin per unit

$600 + $900 $30

$1,500 $30

50 tubs

target units × selling price per unit

50 units × $62/each

$3,100

2b. Sales in dollars to reach desired profit

2c. Condensed Income Statement

7-52

Sales (50 × $62)

$3,100

Less: variable expenses (50 × $32)

$1,600

Contribution margin

$1,500

Less: fixed expenses

$600

Operating income

$900

Chapter 7

Cost-Volume-Profit Analysis

(continued) E7-62B Req. 3 Margin of safety in dollars: Sales at target level Sales at B/E level: ($600 / 30) × $62

$3,100

Margin of safety in dollars

$1,860

$1,240

Margin of safety in units: Sales at target level: Sales at B/E level: ($600 / 30)

Margin of safety in units

Margin of safety in %: Margin of safety in dollars:

$1,860

Sales at target level:

$3,100

$1,860/ $3,100

60.0%

(20–25 min.) E7-63B Req. 1 Total

Per Unit

Sales

$115,000

$50

100%

Less: Variable expenses

57,500

50%

Contribution margin

$57,500

$25

50%

Less: Fixed expenses

11,500

Operating income

$46,000

1a) Total contribution margin is $57,500 ($46,000 + $11,500). 1b) Total variable expenses are $57,500 ($115,000 – $57,500). 1c) Units sold = Total sales / sales price = $115,000 / $50 = 2,300 units 1d) Per unit variable expense is $25 ($57,500 / 2,300). 1e) Per unit contribution margin is $25 ($50 – $25).

7-53

Managerial Accounting 6e Solutions Manual

(continued) E7-63B Req. 2 2a. Breakeven in units

Fixed expenses Contribution margin per unit

= =

$11,500 $25

460 units

2b. Breakeven sales in dollars

Fixed expenses + Operating income Contribution margin ratio

= =

$11,500 + 0 0.50 (from Req. 1) $23,000

Req. 3 3a. Sales in units to reach desired profit

Fixed expenses + Operating Income Contribution margin per unit

$11,500 + $58,000 $25

$69,500 $25

2,780 units

3b. Actual sales units

2,300

Less: Breakeven sales units

460

Margin of safety in units

1,840

3c. Actual sales

$115,000

Less: Breakeven sales

$23,000

Margin of safety in dollars

$92,000

3d. Margin of safety in dollars

$92,000

Divided by actual sales dollars Margin of safety %

7-54

$115,000 80.0%

Chapter 7

Cost-Volume-Profit Analysis

(20–25 min.) E7-64B 1.

Sales price per unit....................................... Less: Variable cost per unit ($7.50 + $5 + $3.30 + $2.20)................................... Contribution margin per unit............................. Contribution margin ratio

$25.00 $18.00 $ 7.00

$7.00 $25.00

0.28

28%

Sales revenue (100,000 × $25.00)………… Less: Variable expenses (100,000 × $18.00) Contribution margin……………….………..

$ 2,500,000 (1,800,000) $ 700,000

Sales volume (units)………………………… Unit contribution margin…………………… Contribution margin………………………… Less: Fixed expenses ($241,600 + $357,600)……………………… Operating income……………………………

130,000 × $7.00 $910,000 (599,200) $310,800

Sales revenue………………………………… Contribution margin ratio………………….. Contribution margin………………………… Less: Fixed expenses ($241,600 + $357,600)……………………… Operating income……………………………

$4,500,000 × 28% $1,260,000 (599,200) $ 660,800

B/E sales in units

$599,200 $7.00

B/E sales in dollars

$599,200 28%

$599,200 + $259,700 $7.00

85,600 units $2,140,000

122,700 units

7-55

Managerial Accounting 6e Solutions Manual

(continued) E7-64B 6.

Original contribution margin per unit.................. Less: Increase in direct labor cost per unit ($5.00 × 10%).......................................................... New contribution margin per unit………………...

$7.00 $0.50 $6.50

Original fixed expenses……………………………. Plus: Increase in fixed expenses………………. New fixed expenses…………………………………

$599,200 23,500 $622,700

New breakeven in units 7.

$622,700 $6.50

Contribution margin (from part 1)………………... Less: Fixed expenses…………………………….. Operating income……………………………………

$700,000 (599,200) $100,800

Operating leverage factor

Increase in volume…………………….. × Operating leverage factor………….. Increase in operating income……………………

Margin of safety

$700,000 $100,800

= = Margin of safety as a percentage

Sales price…………….. Less: Variable cost………….. Contribution margin…. Multiply by: Sales mix………………. Contribution margin….

256 GB $25 18 $ 7 × 4 $28

Sales − Sales at breakeven $2,500,000 − $2,140,000 (from part 1) (from part 4) $360,000 360,000 2,500,000

0.14 = (rounded)

512 GB $50 28 $22 ×1 $22

Smaller 256 GB: 85,890 × 4/5………………… Larger 512 GB: 85,890 × 1/5….………………

$241,600 + $357,600 + $259,700 $10.00

14%

Total

__5 $50

Weighted-average contribution margin per unit Sales in units

6.94 (rounded)

7% 6.94 48.6% (rounded) =

10.

95,800 units

$10.00 =

85,890 units

68,712 units 17,178 units

The target profit volume is lower than before (Req. 5) because now the company is selling a product with a much higher unit contribution margin.

7-56

Chapter 7

Cost-Volume-Profit Analysis

(20 min.) E7-65B Req. 1 Profit calculation and Data table in Excel:

a. b. c. d.

The company needs to sell 500 graphics cards in a month to break even if the selling price remains at $60. Yes, the company can reach its target profit goal if it sells between 850 and 900 graphics cards and the selling price remains at $60 per graphics card. The company needs to sell between 550 and 600 graphics cards to reach its monthly target profit if it increases the selling price to $70 per graphics card. The company’s monthly profit would be $10,350 if it increases the selling price to $85 and sells 450 graphics cards.

7-57

Managerial Accounting 6e Solutions Manual

(continued) E7-65B Req. 2 Profit calculation and Data table in Excel with decreased variable cost and increased monthly fixed expenses:

a. b. c. d.

7-58

The company needs to sell 350 graphics cards in a month to break even if the selling price remains at $60. Yes, the company can reach its target profit goal if it sells 600 graphics cards and the selling price remains at $60 per graphics card. The company needs to sell between 350 and 400 graphics cards to reach its monthly target profit if it increases the selling price to $75 per graphics card. The company’s monthly profit would be $19,200 if it increases the selling price to $90 and sells 500 graphics cards.

Chapter 7

Cost-Volume-Profit Analysis

(20 min.) E7-66B Req. 1 Profit calculation in Excel:

Req. 2 Data table in Excel:

Req. 3 a. b. c. d. e.

Claire needs to sell 600 snow cones in a month to break even if the selling price remains at $5.00 per snow cone. Claire needs to sell 450 snow cones to break even if she increases the selling price to $6.00 per snow cone. Claire’s monthly profit would be $750 if she keeps the selling price at $5.00 and sells 850 snow cones. Claire needs to sell 650 snow cones to reach her monthly target profit if she increases the selling price to $6.00 per snow cone. Claire’s monthly profit would be $1,600 if she increases the selling price to $6.25 and sells 800 snow cones.

7-59

Managerial Accounting 6e Solutions Manual

Problems (Group A) (30–45 min.) P7-67A Req. 1 Cost-Volume-Profit Analysis Companies Q, R, S, T

Target sales Less: Variable expenses Less: Fixed expenses Operating income Units sold

Q $680,000 170,000 360,000 $150,000 81,600

Contribution margin per unit

Contribution margin ratio

6.25

COMPANY R $445,000 178,000 159,000 $ 108,000 106,800 $

0.75

2.50 0.60

Computations (top to bottom for each company) Q:

Sales − Variable expenses − Operating income = Fixed expenses $680,000 − $170,000 − $150,000 = $360,000 Sales − Variable expenses = Contribution margin; Contribution margin / Unit contribution margin = Units sold $680,000 − $170,000 = $510,000; $510,000 / $6.25 = 81,600 units Contribution margin / Sales = Contribution margin ratio $510,000 / $680,000 = 0.75

Sales × Contribution margin ratio = Contribution margin; Sales − Contribution margin = Variable expenses ($445,000 × 0.60) = $267,000; $445,000 − $267,000 = $178,000 Sales − Variable expenses − Fixed expenses = Operating income $445,000 − $178,000 − $159,000 = $108,000 Contribution margin / Units sold = Contribution margin per unit $267,000 / 106,800 = $2.50

Units sold × Unit contribution margin = Contribution margin; Sales − Contribution margin = Variable expenses 12,500 × $8.96 = $112,000; $224,000 − $112,000 = $112,000 Sales − Variable expenses − Fixed expenses = Operating income $224,000 − $112,000 − $93,000 = $19,000 Contribution margin / Sales = Contribution margin ratio $112,000 / $224,000 = 0.50

7-60

S $224,000 112,000 93,000 $ 19,000 12,500 $

8.96 0.50

T $900,000 270,000 497,000 $133,000 18,000 $

35.00 0.70

Chapter 7

Cost-Volume-Profit Analysis

(continued) P7-67A T:

Units sold × Unit contribution margin = Contribution margin; Contribution margin + Variable expenses = Sales 18,000 × $35 = $630,000; $630,000 + $270,000 = $900,000 Sales − Variable expenses − Operating income = Fixed expenses $900,000 − $270,000 − $133,000 = $497,000 Contribution margin / Sales = Contribution margin ratio $630,000 / $900,000 = 0.70

Req. 2 Breakeven sales: Q

B/E

$360,000 0.75

$480,000

B/E

$159,000 0.60

$265,000

B/E

$93,000 0.50

$186,000 Lowest breakeven point

B/E

$497,000 0.70

$710,000

Company S’s low breakeven point is primarily due to its low fixed expenses.

(30–45 min.) P7-68A Req. 1 Revenue per show: 1,400 tickets × $55 / ticket........................……………

$77,000

Variable expenses per show: Programs: 1,400 guests × $8 / guest....................… Cast: 45 cast members × $310 / cast member......... Total variable expenses per show.......................…..

$ 11,200 13,950 $25,150

7-61

Managerial Accounting 6e Solutions Manual

(continued) P7-68A Req. 2

Sales revenue

−

Variable expenses

−

Fixed expenses

Operating income

Revenue per show

Number of shows

−

Variable exp. Per show

Number of shows

−

Fixed expenses

Operating income

$77,000

Number of shows

−

$25,150

Number of shows

−

$829,600

($77,000 – $25,150) × Number of shows = $829,600 $51,850 × Number of shows = Number of shows = Breakeven number of shows =

$829,600 $829,600 $51,850 16 shows

Req. 3 Contribution margin

$77,000 − $25,150

$51,850

Target number of shows

Fixed expenses + Target operating income Contribution margin per unit $829,600 + $6,533,100 $51,850 $7,362,700 $51,850 142 shows

This profit goal is unrealistic because the show currently performs 125 times a year. Req. 4 Wicked Contribution Margin Income Statement For the Year Ended December 31 Sales revenue (125 × $77,000) Less: Variable expenses (125 × $25,150) Contribution margin Less: Fixed expenses Operating income

7-62

$9,625,000 3,143,750 6,481,250 829,600 $5,651,650

Chapter 7

Cost-Volume-Profit Analysis

(30–45 min.) P7-69A Req. 1 −

Sales revenue Sale price × per unit

Units sold

−

Variable expenses Variable cost per unit

Units sold

($12.00 × Units sold) – ($4.00 × Units sold) ($12.000 − $4.00) × Units sold $8.00 × Units sold

−

Fixed expenses

Operating income

−

Fixed expenses

Operating income

−

$1,095,000

= $0 = $1,095,000 = $1,095,000

Units sold =

$1,095,000 $8.00

Breakeven sales in units = 136,875 cartons Req. 2 Contribution margin = $12.00 − $4.00 = $8.00 Contribution margin ratio = $8.00 / $12.00 = 0.67 (rounded) Fixed expenses + Target operating income Contribution margin ratio

Target sales in dollars =

$1,095,000 + $312,000 0.67 $1,407,000 0.67

= $2,100,000 Req. 3 Spirit Calendars Contribution Margin Income Statement Month Ended June 30 Sales revenue (450,000 × $12.00) Less variable expenses: Cost of goods sold (450,000 × $4.00 × 0.73) Operating expenses (450,000 × $4.00 × 0.27) Contribution margin Less: Fixed expenses Operating income

$5,400,000 $1,314,000 486,000

1,800,000 3,600,000 1,095,000 $2,505,000

7-63

Managerial Accounting 6e Solutions Manual

(continued) P7-69A Req. 4 Margin of safety

Sales – Sales at breakeven

Margin of safety

$5,400,000 – (136,875 cartons × $12.00 per carton)

Margin of safety

$5,400,000 − $1,642,500

Margin of safety

$3,757,500

Operating leverage factor =

Contribution margin Operating income

Operating leverage factor =

$3,600,000 $2,505,000

Operating leverage factor = 1.437 (rounded) Req. 5 If volume increases 10%, then operating income will increase 14.37% (operating leverage factor of 1.437 multiplied by 10%). Proof: Original volume (cartons)…..…………………… 450,000 Add: Increase in volume (10% × 450,000)… 45,000 New volume (cartons)………………………... 495,000 Multiplied by: Unit contribution margin……… $8.00 New total contribution margin……………… $3,960,000 Less: Fixed expenses………………………. (1,095,000) New operating income………………………. $2,865,000 vs. Operating income before change in volume…………………………………….. 2,505,000 Increase in operating income………………. $ 360,000 Percentage change ($360,000 / $2,505,000)

14.37% (rounded)

(30–45 min.) P7-70A Req. 1 Contribution margin ratio = 0.80 (computed as 1- 0.10 – 0.05 – 0.02 – 0.03) Monthly fixed expenses = $12,000 (computed as $2,300 + $300 + $250 + $660 + $690 + $7,800) Breakeven sales in dollars =

Fixed expenses + Operating income Contribution margin ratio $12,000 + $0 0.80

= $15,000 Breakeven sales in units = (trades)

$15,000 $500

= 30 trades

7-64

Chapter 7

Cost-Volume-Profit Analysis

(continued) P7-70A Req. 2 Target operating income

Sales revenue − Variable expenses − Fixed expenses =

Sales revenue − 0.20 Sales revenue − $12,000 = $3,200 0.80 Sales revenue = $15,200 $15,200 0.80

Sales revenue =

Sales revenue = $19,000

Req. 3 Sales revenue line

Fixed expense line line

Dollars (Thousands)

Monthly income is earned

Units (Trades)

Req. 4 Breakeven sales in dollars (from Req. 1)

$15,000

Breakeven sales in units (trades)

$15,000 $375

40 trades

The decrease in the average trade revenue increases the breakeven point from 30 trades to 40 trades.

7-65

Managerial Accounting 6e Solutions Manual

(25–35 min.) P7-71A Req. 1 Casual Seating Company Contribution Margin Income Statement Sales revenue (2,000 × $85.00) Less variable expenses:

$170,000

Cost of goods sold (2,000 × $60.00) Operating expenses – sales commissions (2,000 × $4.00)

$120,000 8,000

Contribution margin Less: Fixed expenses Operating income

128,000 42,000 10,000 $32,000

Req.2 a. Casual Seating Company Contribution Margin Income Statement Sales revenue (2,300* × $85.00) Less variable expenses:

$195,500

Cost of goods sold (2,300 × $60.00) Operating expenses – sales commissions (2,300 × $8.50**) Contribution margin Less: Fixed expenses Operating income

$138,000 19,550

157,550 37,950 10,000 $27,950

*2,000 × 1.15 = 2,300 ** $85.00 × 10% = $8.50 Therefore, the change in operating income from implementing these changes would be ($4,050) [$27,950 – $32,000] (from Req. 1). b. Casual Seating Company Contribution Margin Income Statement Sales revenue (2,200* × $85.00) Less variable expenses:

$187,000

Cost of goods sold (2,200 × $60.00) Operating expenses – sales commissions (2,200 × $4.00) Contribution margin Less: Fixed expenses Operating income

$132,000 8,800

140,800 46,200 15,000** $31,200

*2,000 × 1.10 = 2,200 ** $10,000 + $5,000 = $15,000 Therefore, the change in operating income from implementing these changes would be ($800) [$31,200 – $32,000] (from Req. 1).

7-66

Chapter 7

Cost-Volume-Profit Analysis

(continued) P7-71A c. Casual Seating Company Contribution Margin Income Statement Sales revenue (1,500* × $100.00) Less variable expenses:

$150,000

Cost of goods sold (1,500 × $60.00) Operating expenses – sales commissions (1,500 × $4.00)

$90,000 6,000

Contribution margin Less: Fixed expenses Operating income

96,000 54,000 10,000 $44,000

*2,000 × 0.75 = 1,500 Therefore, the change in operating income from implementing these changes would be $12,000 [$44,000 – $32,000] (from Req. 1). d. Casual Seating Company Contribution Margin Income Statement Sales revenue (2,300* × $90.00) Less variable expenses:

$207,000

Cost of goods sold (2,300 × $72.00) Operating expenses – sales commissions (2,300 × $4.00) Contribution margin Less: Fixed expenses Operating income

$165,600 9,200

174,800 32,200 13,000** $19,200

*2,000 × 1.15 = 2,300 ** $10,000 + $3,000 = $13,000 Therefore, the change in operating income from implementing these changes would be ($12,800) [$19,200 – $32,000] (from Req. 1).

7-67

Managerial Accounting 6e Solutions Manual

(25–35 min.) P7-72A Req. 1

Sales price per unit Less: Variable expense per unit Contribution margin per unit Multiply by: Sales mix in units Contribution margin per unit

Morgantown Coffee Weighted-Average Contribution Margin per Unit Small $2.00 1.00 $1.00 × 3 $3.00

Large $4.00 2.00 $2.00 × 1 $2.00

Total

4 $5.00

Weighted-average contribution margin per unit ($5.00 / 4 units) Breakeven sales in total units: Fixed expenses + Operating income Weighted-average contribution margin per unit

$1.25

$22,500 + $0 $1.25

Breakeven sales of small coffees (18,000 × ¾)........ Breakeven sales of large coffees (18,000 × ¼)........

18,000 units

13,500 units 4,500 units

Proof: Morgantown Coffee Contribution Margin Income Statement Month Ended October 31 Sales revenue [(13,500 × $2) + (4,500 × $4)] Less: Variable expenses [(13,500 × $1.00) + (4,500 × $2.00)]

22,500 22,500 22,500 $ 0

Contribution margin Less: Fixed expenses Operating income Req. 2 Margin of safety

Actual sales − Breakeven sales

Margin of safety

$95,000 − $45,000*

$50,000

*Breakeven sales from proof in Req. 1.

7-68

$45,000

Chapter 7

Cost-Volume-Profit Analysis

(continued) P7-72A Req. 3 Operating leverage factor =

Contribution Margin Operating income

= $47,500 $25,000 = 1.90 A 13% increase in volume will lead to 24.7% increase in operating income (13% multiplied by the operating leverage factor of 1.90). Therefore, the new operating income will be $31,175 ($25,000 old operating income × 1.247). Proof: Morgantown Coffee Effect on Operating Income of 13% Increase in Sales Volume Increase in sales revenue ($95,000 × 0.13) Increase in variable expenses ($47,500 × 0.13)

Increase in contribution margin Change in fixed expenses Operating income before sales increase Operating income after sales increase

$12,350 6,175

6,175 0 25,000 $31,175

Alternatively, Morgantown Coffee Effect on Operating Income of 13% Increase in Sales Volume Sales revenue ($95,000 × 1.13)

$107,350

Variable expenses ($47,500 × 1.13)

53,675

Contribution margin

53,675

Fixed expenses

22,500

Operating income

$ 31,175

7-69

Managerial Accounting 6e Solutions Manual

Problems (Group B) (30–45 min.) P7-73B Req. 1 Cost-Volume-Profit Analysis Companies Q, R, S, T

Target sales Less: Variable expenses Less: Fixed expenses Operating income Units sold

Q $757,500 242,400 340,000 $ 175,100 85,000

Contribution margin per unit

Contribution margin ratio

6.06

COMPANY R $445,000 178,000 159,000 $ 108,000 106,800 $

0.68

2.50 0.60

Computations (top to bottom for each company) Q:

Sales − Variable expenses − Operating income = Fixed expenses $757,500 − $242,400 − $175,100 = $340,000 Sales − Variable expenses = Contribution margin; Contribution margin / Unit contribution margin = Units sold $757,500 − $242,400 = $515,100; $515,100 / $6.06 =85,000 units Contribution margin / Sales = Contribution margin ratio $515,100 / $757,500 = 0.68

Units sold × Unit contribution margin = Contribution margin; Sales − Contribution margin = Variable expenses 15,625 × $8.32 = $130,000; $162,500 − $130,000 = $32,500 Sales − Variable expenses − Fixed expenses = Operating income $162,500 − $32,500 − $81,000 = $49,000 Contribution margin / Sales = Contribution margin ratio $130,000 / $162,500 = 0.80

7-70

S $162,500 32,500 81,000 $ 49,000 15,625 $

8.32 0.80

T $1,000,000 360,000 488,000 $152,000 20,000 $

32.00 0.64

Chapter 7

Cost-Volume-Profit Analysis

(continued) P7-73B T:

Units sold × Unit contribution margin = Contribution margin; Contribution margin + Variable expenses = Sales 20,000 × $32.00 = $640,000; $640,000 + $360,000 = $1,000,000 Sales − Variable expenses − Operating income = Fixed expenses $1,000,000 − $360,000 − $152,000 = $488,000 Contribution margin / Sales = Contribution margin ratio $640,000 / $1,000,000 = 0.64

Req. 2 Breakeven sales: Q:

B/E

$340,000 0.68

$500,000

B/E

$159,000 0.60

$265,000

B/E

$81,000 0.80

$101,250 Lowest breakeven point

B/E

$488,000 0.64

$762,500

Company S’s low breakeven point is primarily due to its low fixed expenses.

(30–45 min.) P7-74B Req. 1 Revenue per show: 1,400 tickets × $50 / ticket........................…………

$70,000

Variable expenses per show: Programs: 1,400 guests × $8 / guest....................… Cast: 40 cast members × $340 / cast member......... Total variable expenses per show.......................…..

$ 11,200 13,600 $24,800

7-71

Managerial Accounting 6e Solutions Manual

(continued) P7-74B Req. 2 Sales revenue −

Variable expenses

−

Fixed expenses

Operating income

Revenue per show

Number of shows

−

Variable exp. per show

Number of shows

−

Fixed expenses

Operating income

$70,000

Number of shows

−

$24,800

Number of shows

−

$1,582,000

($70,000 – $24,800) × Number of shows =

$1,582,000

$45,200 × Number of shows =

$1,582,000

Number of shows =

$1,582,000 $45,200

Breakeven number of shows =

35 shows

Req. 3 Contribution margin

$70,000 − $24,800

$45,200

Target number of shows

Fixed expenses + Target operating income Contribution margin per unit $1,582,000 + $4,836,400 $45,200 $6,418,400 $45,200 142 shows

This profit goal is unrealistic because there are only 100 shows in a year. Req. 4 Grease Contribution Margin Income Statement For the Year Ended December 31 Sales (100 × $70,000) Less: Variable expenses (100 × $24,800) Contribution margin Less: Fixed expenses Operating income

7-72

$7,000,000 2,480,000 4,520,000 1,582,000 $2,938,000

Chapter 7

Cost-Volume-Profit Analysis

(30–45 min.) P7-75B Req. 1 Sales revenue − Sale price × per unit

Units sold

−

Variable expenses Variable cost per unit

Units sold

($16.50 × Units sold) − ($6.50 × Units sold) ($16.50 − $6.50) × Units sold $10.00 × Units sold

−

Fixed expenses

Operating income

−

Fixed expenses

Operating income

−

$1,095,000

= = =

$0 $1,095,000 $1,095,000

$1,095,000 $10.00

Units sold

Breakeven sales in units = 109,500 cartons Req. 2 Contribution margin = $16.50 − $6.50 = $10.00 Contribution margin ratio = $10.00 / $16.50 = 0.61 (rounded) Fixed expenses + Target operating income Contribution margin ratio

Target sales in dollars =

$1,095,000 + $308,000 0.61 $1,403,000 0.61

= $2,300,000 Req. 3 Whoosh Calendars Contribution Margin Income Statement Month Ended June 30 Sales revenue (450,000 × $16.50) Less variable expenses: Cost of goods sold (450,000 × $6.50 × 0.68) Operating expenses (450,000 × $6.50 × 0.32) Contribution margin Less: Fixed expenses Operating income

$7,425,000 $1,989,000 936,000

2,925,000 4,500,000 1,095,000 $3,405,000

7-73

Managerial Accounting 6e Solutions Manual

(continued) P7-75B Req. 4 Margin of safety

Sales − Sales at breakeven

Margin of safety

$7,425,000 − (109,500 cartons × $16.50 per carton)

Margin of safety

$7,425,000 − $1,806,750

Margin of safety

$5,618,250

Operating leverage factor =

Contribution margin Operating income

Operating leverage factor =

$4,500,000 $3,405,000

Operating leverage factor = 1.322 (rounded)

Req. 5 If volume increases 16%, then operating income will increase 21.15% (operating leverage factor of 1.322 multiplied by 16%). Proof: Original volume (cartons)…..…………………... 450,000 Add: Increase in volume (16% × 450,000)… 72,000 New volume (cartons)………………………... 522,000 Multiplied by: Unit contribution margin……… $10.00 New total contribution margin……………… $5,220,000 Less: Fixed expenses………………………. (1,095,000) New operating income………………………. $4,125,000 vs. Operating income before change in volume…………………………………….. 3,405,000 Increase in operating income………………. $ 720,000 Percentage change ($720,000 / $3,405,000)

7-74

21.15% (rounded)

Chapter 7

Cost-Volume-Profit Analysis

(30–45 min.) P7-76B Req. 1 Contribution margin ratio = 0.68 (computed as 1.00 − 0.16 − 0.07 −0.03 − 0.06) Monthly fixed expenses = $7,000 (computed as $2,100 + $260 + $280 + $600 + $640 + $3,120) Fixed expenses + Operating income Contribution margin ratio

Breakeven sales in dollars =

$7,000 + $0 0.68

= $10,294 (rounded) Breakeven sales in units = (trades)

$10,294 $500

= 21 trades (rounded) Req. 2 Sales revenue − Variable expenses − Fixed expenses =

Target operating income

Sales revenue − 0.32 Sales revenue − $7,000 = $3,500 0.68 Sales revenue = $10,500 Sales revenue =

$10,500 0.68

Sales revenue = $15,441 (rounded)

7-75

Managerial Accounting 6e Solutions Manual

(continued) P7-76B Req. 3

Monthly income is earned

Dollars (Thousands)

Sales revenue line

Fixed expense line line

Units (Trades)

Req. 4 Breakeven sales in dollars (from Req. 1)

$10,294

Breakeven sales in units (trades)

$10,294 $400

26 trades

The decrease in the average trade revenue increases the breakeven point from 20 to 26 trades.

7-76

Chapter 7

Cost-Volume-Profit Analysis

(25–35 min.) P7-77B Req. 1 Comfy Seating Company Contribution Margin Income Statement Sales revenue (3,500 × $100.00) Less variable expenses:

$350,000

Cost of goods sold (3,500 × $60.00) Operating expenses – sales commissions (3,500 × $4.00)

$210,000 14,000

Contribution margin Less: Fixed expenses Operating income

224,000 126,000 6,000 $120,000

Req.2 a. Comfy Seating Company Contribution Margin Income Statement Sales revenue (4,025* × $100.00) Less variable expenses:

$402,500

Cost of goods sold (4,025 × $60.00) Operating expenses – sales commissions (4,025 × $10.00**) Contribution margin Less: Fixed expenses Operating income

$241,500 40,250

281,750 120,750 6,000 $114,750

*3,500 × 1.15 = 4,025 ** $100.00 × 10% = $10.00 Therefore, the change in operating income from implementing these changes would be ($5,250) [$114,750 – $120,000] (from Req. 1). b. Comfy Seating Company Contribution Margin Income Statement Sales revenue (3,850* × $100.00) Less variable expenses:

$385,000

Cost of goods sold (3,850 × $60.00) Operating expenses – sales commissions (3,850 × $4.00) Contribution margin Less: Fixed expenses Operating income

$231,000 15,400

246,400 138,600 11,000** $127,600

*3,500 × 1.10 = 3,850 ** $6,000 + $5,000 = $11,000 Therefore, the change in operating income from implementing these changes would be $7,600 [$127,600 – $120,000] (from Req. 1).

7-77

Managerial Accounting 6e Solutions Manual

(continued) P7-77B c. Comfy Seating Company Contribution Margin Income Statement Sales revenue (2,625* × $120.00) Less variable expenses:

$315,000

Cost of goods sold (2,625 × $60.00) Operating expenses – sales commissions (2,625 × $4.00)

$157,500 10,500

Contribution margin Less: Fixed expenses Operating income

168,000 147,000 6,000 $141,000

*3,500 × 0.75 = 2,625 Therefore, the change in operating income from implementing these changes would be $21,000 [$141,000 – $120,000] (from Req. 1). d. Casual Seating Company Contribution Margin Income Statement Sales revenue (4,025* × $105.00) Less variable expenses:

$422,625

Cost of goods sold (4,025 × $72.00) Operating expenses – sales commissions (4,025 × $4.00) Contribution margin Less: Fixed expenses Operating income

$289,800 16,100

305,900 116,725 9,000** $107,725

*3,500 × 1.15 = 4,025 ** $6,000 + $3,000 = $9,000 Therefore, the change in operating income from implementing these changes would be ($12,275) [$107,725 – $120,000] (from Req. 1).

7-78

Chapter 7

Cost-Volume-Profit Analysis

(25–35 min.) P7-78B Req. 1

Sale price per unit Less: Variable expense per unit Contribution margin per unit Multiply by: Sales mix in units Contribution margin per unit

Liberty Coffee Weighted-Average Contribution Margin per Unit Small $3.00 1.50 $1.50 × 3 $4.50

Large $5.00 2.50 $2.50 × 1 $2.50

Total

4 $7.00

Weighted-average contribution margin per unit ($5.00 / 4 units) Breakeven sales in total units: Fixed expenses + operating income = Weighted-average contribution margin per unit

$42,000 + $0 $1.75

$1.75

24,000 units

Breakeven sales of small coffees (24,000 × ¾)........ Breakeven sales of large coffees (24,000 × ¼)........

18,000 units 6,000 units

Proof: Liberty Coffee Contribution Margin Income Statement Month Ended July 31 Sales revenue [(18,000 × $3) + (6,000 × $5)] Less: Variable expenses [(18,000 × $1.50) + (6,000 × $2.50)] Contribution margin Less: Fixed expenses Operating income

$84,000 42,000 42,000 42,000 $ 0

Req. 2 Margin of safety

Actual sales − breakeven sales

Margin of safety

$144,000 − $84,000*

$60,000

*Breakeven sales from proof in Req. 1. Req. 3 Operating leverage factor: = Contribution margin Operating income = $72,000 $30,000 = 2.4 A 12% increase in volume will lead to 28.8% increase in operating income (12% multiplied by the operating leverage factor of 2.4). Therefore, the new operating income will be $38,640 ($30,000 old operating income × 1.288).

7-79

Managerial Accounting 6e Solutions Manual

(continued) P7-78B Proof: Liberty Coffee Effect on Operating Income of 12% Increase in Sales Volume Increase in sales revenue ($144,000 × 0.12) Increase in variable expenses ($72,000 × 0.12) Increase in contribution margin Change in fixed expenses Operating income before sales increase Operating income after sales increase

$17,280 8,640 8,640 0 30,000 $38,640

Alternatively, Liberty Coffee Effect on Operating Income of 12% Increase in Sales Volume Sales revenue ($144,000 × 1.12)

$161,280

Variable expenses ($72,000 × 1.12)

80,640

Contribution margin

80,640

Fixed expenses

42,000

Operating income

$ 38,640

7-80

Chapter 7

Cost-Volume-Profit Analysis

Serial Case C7-79 1.

Actual costs incurred with respect to hotel room occupancy enables a manager to make better pricing and marketing decisions and to monitor expenses. Variable costs to consider are labor, cleaning supplies and amenities, laundry expense, utilities, and reservation fees. Fixed costs are normally not affected by changes in hotel room occupancy. Examples of fixed costs are outsourced services contracted for fixed amount in a year like security services, fixed internet and telephone plans, advertising, payroll, depreciation on building and equipment, and music entertainment.

At breakeven volume: Profit = (Unit contribution margin × Volume) – Fixed cost = 0 Contribution margin per room = Price – Room nights variable cost = $124 – $20 = $104 Roman Tower breakeven room nights = Fixed cost / Room CM = $ 4,800,000 / $ 104 = 46,154 room nights Margin of safety in units = (Sales room nights – Breakeven room nights) Sales volume (room nights) = 567 room × 0.920 × 365 nights = 190,399 room nights / year Margin of safety in units = 190,399 – 46,154 = 144,245 If the Las Vegas hotel occupancy rate is used: Sales volume (room nights) = 567 room × 0.880 × 365 nights = 182,120 room nights / year Margin of safety in units = (182,120 – 46,154) = 135,966

Contribution margin per room = Price – Room night variable cost = $149 – $27 = $122 Julius Tower breakeven room nights = Fixed cost / Room CM = $5,000,000 / $122 = 40,984 room nights Margin of safety in units = (Sales room nights – Breakeven room nights) Sales volume (room nights) = 587 room × 0.920 × 365 nights = 197,115 room nights / year Margin of safety in units = (197,115 – 40,984) = 156,131 If the Las Vegas hotel occupancy rate is used: Sales volume (room nights) = 587 room × 0.880 × 365 nights = 188,544 room nights / year Margin of safety in units = (188,544 – 40,984) = 147,560 Because the breakeven room nights is based on Caesars’ prices and cost information, using Caesars’ occupancy rate is more appropriate in calculating margin of safety, although the difference in this case is not considerable.

7-81

Managerial Accounting 6e Solutions Manual

Discussion & Analysis Questions A7-80 1.

Define breakeven point. Why is the breakeven point important to managers? The breakeven point is the sales level at which operating income is zero; total revenues equal total expenses. The breakeven point is important to managers because they know the volume that needs to be sold in order to cover costs. Anything below that point results in a loss; anything above the point results in a profit.

Describe four different ways cost-volume-profit analysis could be useful to management. C-V-P is useful to managers because it helps them determine • • • •

the breakeven point; the volume needed to reach target profit; how changes in costs, sales price, and volume affect the company’s profit; and the firm’s risk level.

The purchasing manager for Rockwell Hall Bags has been able to purchase the material for its signature handbags for $9 less per bag than in the prior year. Keeping everything else the same, what effect would this reduction in material cost have on the breakeven point for Rockwell Hall Bags? Now assume that the sales manager decides to reduce the selling price of each handbag by $9. What would the net effect of both of these changes be on the breakeven point in units for Rockwell Hall Bags? A decrease in the material costs, and keeping everything else the same, would lower the variable expenses for each handbag, which would increase the contribution margin per bag. This would, in turn, lower the breakeven point. If the manager reduces the selling price by $9 along with the $9 decrease in variable costs, the contribution margin would stay the same and so would the breakeven point.

Describe three ways that cost-volume-profit concepts could be used by a service organization. CVP can be used by a service organization to help them determine • • •

the breakeven point; the volume needed to reach target profit; and how changes in costs, sales price, and volume affect the company’s profit.

“Breakeven analysis isn’t very useful to a company because companies need to do more than break even to survive in the long run.” Explain why you agree or disagree with this statement. It’s true that companies need to do more than break even to survive in the long run, but breakeven analysis allows the manager to see the level that must be reached to cover costs. This becomes the starting point for determining target profits and analyzing how changes in selling prices, costs, and volume will affect profits.

What conditions must be met for cost-volume-profit analysis to be accurate? The following conditions must be met for CVP analysis to be accurate: • • • •

7-82

Managers can classify each cost (or the components of mixed costs) as either variable or fixed. These costs are linear throughout the relevant range of volume. Revenues are linear throughout the relevant range of volume. Inventory levels will not change. The sales mix of products will not change. Sales mix is the combination of products that make up total sales. If profits differ across products, changes in sales mix will affect CVP analysis.

Chapter 7 7.

Cost-Volume-Profit Analysis

Why is it necessary to calculate a weighted-average contribution margin ratio for a multiproduct company when calculating the breakeven point for that company? Why can’t all of the products’ contribution margin ratios just be added together and averaged? A company that sells more than one product must calculate each product’s contribution margin. It then uses the weighted average of all products, which is each product’s contribution margin times the relative number of units sold. Because the sales volume for each unit is different and its contribution margin is different, the ratio must be weighted to reflect its volume in conjunction with the other units sold.

Is the contribution margin ratio of a grocery store likely to be higher or lower than that of a plastics manufacturer? Explain the difference in cost structure between a grocery store and a plastics manufacturer. How does the cost structure difference impact operating risk? The contribution margin ratio of a grocery store is more likely to be lower than that of a manufacturer because a grocery store would most likely have higher variable costs where the manufacturer would have higher fixed costs due to the plant and equipment needed to make a product. Operating risk is less for a company with fewer fixed costs to cover because they are at less risk of incurring a loss should sales decline.

Alston Jewelry had sales revenues last year of $2.4 million, while its breakeven point (in dollars) was $2.2 million. What was Alston Jewelry’s margin of safety in dollars? What does the term margin of safety mean? What can you discern about Alston Jewelry from its margin of safety? Alston’s margin of safety is the difference between sales and breakeven point, so it would be $200,000 ($2.4 million – $2.2 million). This means that Alston could suffer a drop in sales of $200,000 without incurring a loss.

10. Rondell Pharmacy is considering switching to the use of robots to fill prescriptions that consist of oral solids or medications in pill form. The robots will assist the human pharmacists and will reduce the number of human pharmacy workers needed. This change is expected to reduce the number of prescription filling errors, to reduce the customer’s wait time, and to reduce the total overall costs. How does the use of the robots affect Rondell Pharmacy’s cost structure? Explain the impact of this switch to robotics on Rondell Pharmacy’s operating risk. Using robotics would likely decrease the pharmacy’s variable costs (fewer human labor hours, fewer errors, etc.) and increase the fixed costs (depreciation and maintenance of the robots). This would result in a higher contribution margin (less labor cost) for the pharmacy and a higher breakeven point due to the higher fixed costs (robots). The pharmacy’s risk will be higher than before due to the higher level of fixed costs. 11. Suppose a company can replace the packing material it currently uses with a biodegradable packing material. The company believes this move to biodegradable packing materials will be well received by the general public. However, the biodegradable packing materials are more expensive than the current packing materials, and the contribution margin ratios of the related products will drop. What are the arguments for the company to use the biodegradable packing materials? What are the arguments for the company to not use the biodegradable materials? What do you think the company should do? Student answers will vary. 12. How can CVP techniques be used in supporting a company’s sustainability efforts? Conversely, how might CVP be a barrier to sustainability efforts? CVP analysis is often used by managers to determine how sustainability initiatives will impact the company’s operating income. Sustainability initiatives often result in both cost savings and additional costs. These costs and cost savings may be fixed or variable in nature. Managers use CVP analysis to determine how these initiatives will impact the volume needed to achieve the company’s operating income goals. CVP techniques can be used to quantify the environmental savings of a sustainable initiative. However, as mentioned above, CVP analysis will also uncover the costs associated with sustainable initiatives. These added costs may overshadow the environmental savings.

7-83

Managerial Accounting 6e Solutions Manual

Application & Analysis A7-81 Select one product that you could make yourself. Examples of possible products could be cookies, birdhouses, jewelry, or custom t-shirts. Assume that you have decided to start a small business producing and selling this product. You will be applying the concepts of cost-volume-profit analysis to this potential venture. Note: This is a sample solution. Student answers will vary.

CVP for a Product Basic Discussion Questions 1. Describe your product. What market are you targeting this product for? What price will you sell your product for? Make projections of your sales in units over each of the upcoming five years. I make beaded necklaces for women who are interested in unique, yet affordable accessories to their wardrobes. The necklaces will sell for an average of $100 each. Sales Projections 2020 150

2021 175

2022 200

2023 225

2024 250

2. Make a detailed list of all of the materials needed to make your product. Include quantities needed of each material. Also include the cost of the material on a per-unit basis. Materials per Necklace Pendants Beads Silver findings Wire Clasp TOTAL

1 25 10 30 inches 1

$15 $6 $3 $2 $1 $27

3. Make a list of all of the equipment you will need to make your product. Estimate the cost of each piece of equipment that you will need. Equipment Tools Storage boxes for materials Beading boards Miscellaneous supplies TOTAL

$100 $75 $50 $50 $275

4. Make a list of all other expenses that would be needed to create your product. Examples of other expenses would be rent, utilities, and insurance. Estimate the cost of each of these expenses per year. Rent Utilities Insurance TOTAL

7-84

$1,800 $120 $50 $1,970

Chapter 7 5.

Cost-Volume-Profit Analysis

Now classify all of the expenses you have listed as being either fixed or variable. For mixed expenses, separate the expense into the fixed component and the variable component. Rent Utilities Insurance

Fixed Fixed Fixed

6. Calculate how many units of your product you will need to sell to break even in each of the five years you have projected. Fixed expenses / Unit contribution margin = Unit breakeven point $1,850 / ($100 – $27) = 26 necklaces 7. Calculate the margin of safety in units for each of the five years in your projection. Margin of Safety = Projected Sales – Breakeven Sales 2020 2021 2022 150 – 26 = 124 175 – 26 = 149 200 – 26 = 174 $15,000 – $2,600 $17,500 – $2,600 $20,000 – $2,600 $12,400 $14,900 $17,400

2023 225 – 26 = 199 $22,500 – $2,600 $19,900

2024 250 – 26 = 224 $25,000 – $2,600 $22,400

8. Now decide how much you would like to make in before-tax operating income (target profit) in each of the upcoming five years. Calculate how many units you would need to sell in each of the upcoming years to meet these target profit levels. Fixed expenses + Target profit / Unit CM = Yearly sales volume $1,850 + $12,000 / ($100 – $27) = 190 necklaces 9. How realistic is your potential venture? Do you think you would be able to break even in each of the projected five years? How risky is your venture (use the margin of safety to help answer this question). Do you think your target profits are achievable? The venture looks realistic. The breakeven point is only 26 necklaces, which means I would need to sell on average less than three necklaces a month. The margin of safety is promising as long as the projected sales can be made. The target profits appear achievable but will require implementing a solid marketing plan. Student answers will vary.

7-85

Managerial Accounting 6e Solutions Manual

(30 min.) A7-82 Ethics Mini-Case 1. a.

The ethical issues in this situation are as follows: Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” In his initial report, Collin Hoffman had an inaccuracy. It was a mistake, but ignoring the mistake is a breach of this principle. Confidentiality: “Keep information confidential except when disclosure is authorized or legally required.” Collin Hoffman’s disclosure of the internal report to Meghan Peyton, an employee of a competing company, is neither authorized nor legally required. As a result, this is a clear ethical violation. Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” Ignoring errors in reports that affect real business decisions could discredit the profession. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” It is reasonable to expect that the undisclosed error, if disclosed, would affect the understanding of the report. Thus, by not reporting this inaccuracy, Collin Hoffman is violating this ethical principle. Collin Hoffman’s responsibilities as a management accountant are to be honest, fair, objective, and responsible. He should seek to correct the mistake he had made by reporting it to his immediate supervisor. He is also responsible for maintaining confidential information, so he should not disclose confidential information to his friend, however much he may trust her. John Wallace is responsible for reviewing the reports that are given to him before signing off on them, especially in the case of interns or junior employees. It is not sufficient that a report looks professional; he has a duty to also verify that it is accurate. Meghan Peyton is responsible for making ethical decisions. Because she is employed by a competing company, she should not look at Collin Hoffman’s report becausse it could result in unethical behavior. She should encourage Collin to take his concerns to his supervisor. She may give him general advice but should not examine anything which is confidential.

By omitting the fixed monthly sales staff salaries from the report, breakeven sales are reported as lower than they actually are. This error would certainly influence the decision about proceeding with the new proposal because it would make the proposal look favorable and more profitable than it actually is.

First, Collin should report the mistake with his immediate supervisor. If he has concerns about his employment with the firm after this mistake, he should take these concerns to the HR department to get an objective third party who is not involved in this incident.

7-86

Chapter 7

Cost-Volume-Profit Analysis

(20–25 min.) A7-83 Real Life Mini-Case 1.

Is the cost of down a fixed cost or a variable cost for a jacket manufacturer such as Lands’ End? Down is a variable cost to jacket manufacturers because more down is required for each additional unit (jacket) produced.

If the cost of down increases, what happens to the breakeven point for a down-filled jacket product line at Lands’ End? If the cost of down increases, the breakeven point will also increase because the contribution margin will decrease.

If down increases by a certain percentage, will the selling price of a down-filled jacket need to change by that same percentage to maintain the same profit margin? Explain. No. Again, down is only one component of the jacket. The other materials in the jacket will help to lessen the impact of the percentage increase in the cost of down (assuming those other materials remain at a constant cost). Therefore, the selling price will not have to be increased by 400 percent to cope with the 400 percent increase in the cost of down.

Let’s look at a hypothetical example now. Assume that a Lands’ End down jacket selling for $150 contains one pound of goose down. Assume that the cost per pound of down was $10 ten years ago and is $50 now. Lands’ End has $250,000 of fixed costs related to the down jacket line and its other variable manufacturing costs (other direct materials, direct labor, and manufacturing overhead) total $60 per jacket. Assume that Lands’ End does not increase the selling price of the down jacket over the five-year period. Calculate the breakeven number of jackets both in (a) ten years ago; and (b) now. a: $250,000 / [$150 – ($60 + $10)] = 3,125 jackets b: $250,000 / [$150 – ($60 + $50)] = 6,250 jackets

Assume now the same set of facts as in Question 4 but that Lands’ End raises the selling price of each jacket by $25 next year. How does the breakeven volume of jackets change next year? (Assume that the cost of goose down remains the same.) $250,000 / [$175 – ($60 + $50)] = 3,847 jackets (rounded). The breakeven point decreases by 2,403 (6,250 – 3,847) with the $25 price increase.

7-87

Chapter 8 Relevant Costs for Short-Term Decisions Quick Check Answers QC8-1. a QC8-2. c QC8-3. c

QC8-4. a QC8-5. a QC8-6. d

QC8-7. d QC8-8. c QC8-9. c

QC8-10. d QC8-11. b QC8-12. b

Short Exercises (5 min.) S8-1 a. b. c. d. e.

The trade-in value of the old printer is relevant. Paper costs are irrelevant because these costs will be the same with either the old printer or the new printer. The difference between the cost of the toner cartridges is relevant. The price of the new printer is relevant. The price you paid for the old printer is irrelevant because it is a past (sunk) cost that cannot be changed, regardless of your decision.

(10 min.) S8-2 Req. 1 The company should emphasize a cost-plus approach to pricing because it has been able to differentiate its ski resort from others in the area. Because of its favorable reputation, managers will have some control over pricing. Of course, they still need to consider whether the cost-plus price is within the range customers are willing to pay. Req. 2 Using a cost-plus pricing approach, the cost-plus price would be calculated as follows: Fixed costs Plus: Total variable costs (750,000 × $10 per person) Total costs Plus: Desired profit ($100 million × 15%) Target revenue Divided by number of skiers and snowboarders Cost-plus price per lift ticket

$33,750,000 7,500,000 $41,250,000 15,000,000 $56,250,000 ÷ 750,000 $ 75

The price is $10 ($75–$65) above competing ski resorts in the area. Given the company’s reputation, it may be able to charge $75 a day without affecting volume.

8-1

Managerial Accounting 6e Solutions Manual

(10–15 min.) S8-3 Req. 1 If the company is a price-taker, projected income is as follows: Revenue at market price (750,000 × $65)……………….. Less: Total costs……………………………………………………. Operating income…………………………………………… vs. Desired operating income ($100 million × 15%)…... Expected profit shortfall……………………………........ a

$48,750,000 (41,250,000)a $ 7,500,000 $15,000,000 $ 7,500,000

Previous problem

As a percentage of assets, the company’s projected profit is 7.50% ($7,500,000/$100,000,000). Investors will not be happy with this profit level because the expected return on assets is less than the desired return on assets. Stock prices may decline as a result. Req. 2 If the company is able to reduce its fixed costs to $30 million, its new target variable cost per skier/snowboarder is as follows: TOTAL Revenue at market price ($65 × 750,000) $48,750,000 Less: Desired profit ($100 million × 15%) (15,000,000) Target total cost $33,750,000 Less: Reduced level of fixed costs (30,000,000) Target total variable costs $ 3,750,000 Divided by number of skiers and snowboarders ÷750,000 Target variable cost per skiers and snowboarders $ 5.00 This target variable cost is approximately 50% of the current variable cost of $10.00. The company may have a difficult time achieving this target because it is so much lower than the current variable cost.

(5–10 min.) S8-4 Costs per unit: Direct materials $320,000 / 100,000 units =

$3.20

Direct labor $40,000 / 100,000 units =

$0.40

Variable manufacturing overhead $85,000 / 100,000 units = $0.85 Special Order: Revenue Less: Direct materials [($3.20 – 0.50) x 10,000] Direct labor ($0.40 × 10,000) Variable MOH ($0.85 × 10,000) Contribution margin

TOTAL $50,000 $27,000 $ 4,000 $8,500 $10,500

Operating income will increase by $10,500 if the company accepts the special order.

8-2

Chapter 8

Relevant Costs for Short-Term Decisions

(5 min.) S8-5

Shilling Manufacturing Incremental Analysis of Special Sales Order Expected revenue from special order (20,000 filters × $1.55) Less expected expenses associated with the order: Variable manufacturing costs (20,000 filters × $1.30) Fixed manufacturing cost (Special equipment)

$ 31,000 $26,000 8,000

Total expected expenses associated with order Expected decrease in operating income

(34,000) $ (3,000)

The company should not accept the special sales order because it will reduce operating income.

(5–10 min.) S8-6 The Men’s and Women’s Departments are earning income. While the Accessories Department appears to be losing money, this department has a positive contribution margin. The Accessories Department is contributing $11,000 toward covering fixed costs. Devine Fashions intends to remain in the same building whether or not it drops any of the departments. Consequently, the fixed costs will remain the same whether or not the company eliminates a department. These fixed costs are therefore irrelevant in the decision whether to eliminate a department. In sum, Devine Fashions should keep all the departments.

(10 min.) S8-7 Expected decrease in revenues……………. Expected decrease in expenses: Variable expenses………………………….. Fixed expenses…………………………… Total expenses……………………………… Expected increase in operating income……

$101,000 $90,000 26,000 116,000 $ 15,000

Decision: Devine Fashions should drop the Accessories Department.

8-3

Managerial Accounting 6e Solutions Manual

(10 min.) S8-8 Expected revenues……………................. Expected expenses: Variable expenses……………………… Fixed expenses ($7,100 × 4)…………… Total expenses…………………………

$84,000 $47,000 28,400 75,400

Expected operating income from shoe department………………………………

$8,600

Compare this potential profit with the contribution margins from the other departments: Department (sales − variable costs) Men ‘s ($105,000 − $58,000)…………………. Women’s ($52,000 − $28,000)……………... Accessories ($101,000 − $90,000)………...

Contribution margin $47,000 $24,000 $11,000

The company should not consider replacing the Accessories Department with a Shoe Department because even though the Shoe Department has a higher contribution margin than the Accessories Department, the Shoe Department will incur an additional $28,400 in fixed costs. The contribution margin of the Shoes Department is $37,000 = $84,000 − $47,000. However, direct costs of $28,400 reduce the contribution margin to $8,600.

8-4

Chapter 8

Relevant Costs for Short-Term Decisions

(15 min.) S8-9 Req. 1 Storage Solutions production is constrained by the machine hours available for producing the bins. Storage Solutions needs to determine its most profitable product mix by considering each size bin’s contribution margin per machine hour: Regular Large Sales price per unit $ 8.10 $10.50 Less: Variable cost per unit (3.50) (4.20) Contribution margin per unit $ 4.60 $ 6.30 × Units per machine hour × 15 × 10 Contribution margin per machine hour $69.00 $63.00 Decision: Storage Solutions should emphasize the production of regular bins because the contribution margin per machine hour is higher. Req. 2 Storage Solutions should make as many regular size bins as possible: Machine hours available……………………………… Number of regular bins per machine hour………..... Maximum production of regular size bins…………...

3,000 × 15 45,000

Storage Solutions should spend all 3,000 machine hours making regular size bins, resulting in 45,000 regular size bins and 0 machine hours making large size bins. Req. 3 Given this product mix, Storage Solution’s operating income for the period is projected to be as follows: Number of regular size bins…………………… 45,000 Contribution margin per regular size bin (see Req. 1)……… × $4.60 Total contribution margin……………………… $ 207,000* Less: Fixed expenses…………………………… (110,000) Operating income………………………………… $ 97,000 *Total contribution margin can also be found by multiplying 3,000 hours by the regular size bin contribution margin per hour of $69.00 (3,000 hours × $69.00/ hour = $207,000).

(15 min.) S8-10 Req. 1 Storage Solutions should emphasize the production of regular size bins because they are more profitable than the large size bins. Storage Solutions should make as many regular bins as it can sell and then use the remaining machine hours to produce large bins: Number of machine hours available……………………….. Number of regular bins demanded…………………………. Divided by number of regular bins produced per hour…. Number of hours used to produce regular bins………….. Number of hours still available……………………………… Multiplied by number of large bins produced per hour… Number of large bins to produce……………………………

3,000 hours 36,000 ÷ 15 2,400 hours 600 hours × 10 6,000

Storage Solutions should produce 36,000 regular size bins and 6,000 large size bins.

8-5

Managerial Accounting 6e Solutions Manual

(continued) S8-10 Req. 2 Given this product mix, Storage Solutions’ operating income will be as follows: Regular 36,000 × $4.60 $165,600*

Number of bins Contribution margin per bin Total contribution margin Less: Fixed expenses Operating income

Large 6,000 × $6.30 $37,800**

Total

$203,400 (110,000) $93,400

*Regular bin contribution margin can also be found by multiplying 2,400 hours by the regular size bin contribution margin per hour of $69.00 (2,400 hours × $69.00/ hour = $165,600). **Large bin contribution margin can also be found by multiplying 600 hours by the large size bin contribution margin per hour of $63.00 (600 hours × $63.00/ hour = $37,800). Req. 3 Operating income is less than it was when Storage Solutions was producing its optimal product mix because the company had to produce fewer regular size bins to match demand for these bins. The company had to give up some of the regular bin contribution margin per machine hour in order to produce large bins.

(10 min.) S8-11 Req. 1 The absorption unit cost of making the bread is $2.49 per loaf: Direct material……………………………….. Direct labor…………………………………… Variable overhead…………………………… Variable cost per unit……………………. Plus: Fixed overhead per unit………………. Full (absorption) cost per unit……………….

$0.54 0.71 0.20 $1.45 1.04 $2.49

Req. 2 Decision: The company should bake the bread in-house because the variable cost of making each loaf is less than the cost of outsourcing each loaf. Req. 3 The company should consider the following qualitative factors before making a final decision: Will the local bakery meet its delivery time requirements? If labor and oven time were not devoted to bread making, could another more profitable product be made in its place? How does the quality and freshness of the local bakery bread compare to the bread baked in-house?

8-6

Chapter 8

Relevant Costs for Short-Term Decisions

(5–10 min.) S8-12 The book value of Myer Food’s trucks is irrelevant because it will be the same whether the fleet management is performed by Myer’s staff or by Fleet Management Services. Also, Mila Giles’ salary is irrelevant because she will continue at Myer Food whether or not she outsources the fleet management function. As shown next, the relevant items are the software lease costs, the annual maintenance of the trucks, the salaries of Myer Food’s five other fleet management employees, and Fleet Management’s annual fee: Myer Food Outsourcing Decision Analysis Retain InHouse $ 9,000 166,000

Annual leasing fee for software Annual maintenance of trucks Total annual salaries of five other fleet management employees Fleet Management Services’ annual fee Total cost

160,000 – $335,000

Outsource to Fleet Management Services $ – – – – 280,000 $280,000

Difference $ 9,000 166,000 160,000 (280,000)

Cost savings from outsourcing

$ 55,000

Operating income for Myer Food will increase by $55,000 by outsourcing the fleet-management function.

(5–10 min.) S8-13 The $75,175 inventoriable cost (book value) of the inventory is a sunk cost that will be the same whether the remote entry keys are sold as is or processed further. Consequently, the book value of the inventory is not relevant to the company’s decision. Mast Truck Accessories Sell or Process Further Analysis Scrap (Sell As Is) $4,000 – $4,000

Expected revenues Less: Extra cost to process further Net benefit to operating income

Process Further $31,000 (30,000) $ 1,000

Difference $27,000 (30,000) $ (3,000)

The company should sell as scrap because processing further will decrease operating income by $3,000 more than scrapping the inventory.

8-7

Managerial Accounting 6e Solutions Manual

(5–10 min.) S8-14 Sell as Cocoa Powder $15,000 0 $15,000

Revenue Less: Additional processing costs Net benefit to operating income

Sell as Chocolate Syrup $101,000 (67,000) $ 34,000

Sell as Boxed Assorted Chocolates $196,000 (175,000) $ 21,000

The company president made the wrong decision. First, the cost of processing the cocoa beans is irrelevant because it will be incurred no matter which of the three products is sold. Second, in addition to the revenues, the additional costs of transforming the cocoa powder into other products needs to be considered. The largest increase in operating income comes from the chocolate syrup option.

(5–10 min.) S8-15 1.

Seth is the controller for a small manufacturer. He mentions to a close friend that his company is going to start offshoring production to decrease labor costs.

Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Tiffany is a management accountant at a large electronics firm. She is instructed to prepare an analysis of the performance of an underperforming company division. Since Tiffany is afraid that many employees could lose their jobs if that division appears to be underperforming, Tiffany underestimates the amount of expenses generated by that division. Tiffany hopes that the division is not discontinued.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.

Adam Advertising Agency is looking at whether to continue to do its own payroll in-house or to outsource it to a payroll firm (a classic “make-or-buy” decision). Rosa, an accountant at Adam, does not tell management that the payroll firm bidding on the work is owned and managed by her mother.

Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

Danthea, a CPA and a CMA, makes a YouTube video bragging about loopholes she has found to avoid taxes. These loopholes are questionable at best.

Integrity—Abstain from engaging in or supporting any activity that might discredit the profession.

Brendan does not know how to categorize fixed costs as unavoidable or avoidable so he guesses on the categorization of each fixed cost.

Competence—Perform professional duties in accordance with relevant laws, regulations, and technical standards.

8-8

Chapter 8

Relevant Costs for Short-Term Decisions

(20 min.) S8-16 1.

What Excel function would be useful for obtaining the most recent variable cost from the job cost records for each of the models in the special order? VLOOKUP function

What would you enter in each of the following fields in the dialogue box for the formula needed in Cell F2 in the SpecialOrder worksheet to obtain the most recent contribution margin per pack for the model in Row 2? Make the cell references in the Table array field absolute references. a. b. c. d.

Lookup value: A2 Table array: JobCostRecords$C$2$E$446 Col index num: 3 Range lookup: FALSE

What formula would you enter in Cell G2 in the SpecialOrder worksheet to calculate the contribution margin per pack for the model in Row 2? =D2-F2

What formula would you enter in Cell H2 in the SpecialOrder worksheet to calculate the total contribution margin for the model in Row 2? =C2*G2

How could you copy the formulas in Cells G2 and H2 down to the remaining rows in the SpecialOrder worksheet? Double click the fill handle to copy the formulas.

What formula would you enter in Cell H12 in the SpecialOrder worksheet to calculate the total contribution margin for the special order? =SUM(H2:H11)

Should the company accept this special order? If the total of the contribution margin column is positive, the special order should be accepted. Otherwise, the special order should be rejected.

8-9

Managerial Accounting 6e Solutions Manual

(20 min.) S8-17

What Excel function would be useful for obtaining the description from the Descriptions worksheet for each of the models listed in the SpecialOrder worksheet and for obtaining the most recent variable cost from the job cost records for each of the models in the special order? VLOOKUP

What would you enter in each of the following fields in the dialogue box for the formula needed in Cell B2 in the SpecialOrder worksheet to fill in the description for the model in Row 2? The cell references in the Table array field should be absolute references. a. b. c. d.

What would you enter in each of the following fields in the dialogue box for the formula needed in Cell F2 in the SpecialOrder worksheet to obtain the most recent variable cost per bag for the model in Row 2? The cell references in the Table array field should be absolute references. a. b. c. d.

Lookup value: A2 Table array: Descriptions!$A$2:$B$18 Col index num: 2 Range lookup: FALSE

Lookup value: A2 Table array: JobCostRecords!$C$2:$E$409 Col index num: 3 Range lookup: FALSE

What formula would you enter in Cell G2 in the SpecialOrder worksheet to calculate the contribution margin per pack for the model in Row 2? =D2-F2

What formula would you enter in Cell H2 in the SpecialOrder worksheet to calculate the total contribution margin for the model in Row 2? =C2*G2

How could you copy the formulas in Cells G2 and H2 down to the remaining rows in the SpecialOrder worksheet? Double click the fill handle to copy the formulas.

What formula would you enter in Cell H12 in the SpecialOrder worksheet to calculate the total contribution margin for the special order? =SUM (H2:H11)

Should the company accept this special order? Yes. If the total of the Total contribution margin column is positive, the special order should be accepted. Otherwise, the special order should be rejected.

8-10

Chapter 8

Relevant Costs for Short-Term Decisions

Exercises (Group A) (5–10 min.) E8-18A Item

Relevant

Book value of old machine

Added profits from the increase in production resulting from the new

Not Relevant X

machine c.

Interest expense on new machine

Trade-in value of old machine

Maintenance cost of new machine

Variable selling costs

Installation cost of old machine

Fixed selling costs

Sales tax paid on old machine

Cost of the new machine

Installation cost of new machine

Cost of the old machine

Accumulated depreciation on old machine

Maintenance cost of old machine

Cost per pound of food to be processed

X X

8-11

Managerial Accounting 6e Solutions Manual

(10–15 min.) E8-19A Req. 1 Bid price Less scrap value Net cost of recycling

(000s omitted) $ 43,100 $ 41,500 $ 1,600

Versus: Cost to sink

700

Net difference in favor of sinking

900

Financially, it is $900,000 more advantageous to sink the ship rather than recycle it. Req. 2 From a sustainability standpoint, the decommissioned aircraft carrier should be dismantled and recycled. The following qualitative factors should be considered in this analysis: 1. Jobs are created in a geographic region with record-high unemployment rates. 2. Materials are recycled and used for a different purpose. 3. Toxins are not released into the ocean. Req. 3 A taxpayer would most likely prefer to dismantle and recycle the aircraft carrier because this option creates jobs and does not release toxins into the ocean, avoiding costly decontamination cost.

8-12

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-20A Req. 1 Variable costs ($6.00 x 10,000,000) Fixed costs Total costs Divide by # of units Cost per unit

$ 60,000,000 $ 15,000,000 $ 75,000,000 ÷ 10,000,000 $ 7.50

Req. 2 Revenue at market price ($8.00 x 10,000,000) Less desired profits ($40,000,000 x 15%) Target total costs Total current costs (see Req. 1) Shortfall in target profits

$ 80,000,000 $ 6,000,000 $ 74,000,000 $ 75,000,000 $ 1,000,000

No, the company will not reach the profit goals, it will have a $1,000,000 shortfall. Req. 3 Total target cost (see Req. 2) Less fixed costs ($15,000,000 − $300,000) Total target variable costs Divide by # of units Cost per unit

$ 74,000,000 $ 14,700,000 $ 59,300,000 ÷ 10,000,000 $ 5.93

Req. 4 Total variable costs ($6.00 x 10,500,000) Fixed costs [$14,700,000 (see Req. 3) + $2,000,000] Total costs Plus mark up ($40,000,000 x 15%) Cost plus total revenue Divide by # of units Cost per unit

$ 63,000,000 $ 16,700,000 $ 79,700,000 $ 6,000,000 $ 85,700,000 ÷ 10,500,000 $ 8.16

8-13

Managerial Accounting 6e Solutions Manual

(10-15 min) E8-21A Req. 1 Dominic will need to emphasize a target-costing approach to pricing. Because the tract homes are not unique and face stiff competition, Dominic will not have much control over pricing. Req. 2 Market price of similar homes………………... Less: Target profit ($183,000* × 14%)………. Target cost……………………………………….. vs. Actual current variable cost……………… Overage (shortfall)………………………………………….. *$52,000 + $122,000 + $6,000 + $3,000

$202,000 (25,620) $176,380 183,000 $ (6,620)

Given the current market price and Dominic’s current variable costs, it will not be able to achieve its target profit. Its profit will fall short by about $6,620 per home sold. Req. 3 Dominic calculates the cost-plus price as follows: Current variable cost……………………………... Plus: variable cost of kitchen and bathroom upgrades………………………………………… Total variable costs………………………………. Plus: Desired profit (14% × $203,000)………………… Cost-plus price……………………………………..

$183,000 20,000 $203,000 28,420 $231,420

The new cost-plus price, with bath and kitchen upgrades, is actually lower than the expected market price of an upgraded house. If Dominic can sell the upgraded homes for $237,000, as expected, it will earn more than its target profit. Dominic should upgrade the bathrooms and kitchens so that it has more control over pricing.

(10–15 min.) E8-22A Req. 1 Perreth Industries Incremental Analysis of Special Sales Order Revenue from special order: Sale of 10,000 units × $25.00 each Less expenses associated with the order: Variable manufacturing cost: 10,000 units × $30.00 each Increase (decrease) in operating income from the order Perreth should reject the special order because operating income will decrease by $50,000. Req. 2 Perreth Industries Incremental Analysis of Special Sales Order Revenue from special order: Sale of 10,000 units × $40.00 each Less expenses associated with the order: Variable manufacturing cost: 10,000 units × $30.00 each Additional fixed costs Increase (decrease) in operating income from the order Perreth should accept the special order because operating income will increase by $85,000.

8-14

$ 250,000 (300,000) $ (50,000)

$ 400,000 (300,000) (15,000) $ 85,000

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-23A Req. 1 Collectibles & More Incremental Analysis of Special Sales Order Revenue from special order: Sale of 53,000 packs × $0.32 each Less expenses associated with the order: Variable manufacturing cost: 53,000 packs × $0.27 each ($0.11 + $0.06 + $0.10) Increase in operating income from the order

$ 16,960 (14,310) $ 2,650

Decision: Accept the special sales order. Req. 2 Collectibles & More Incremental Analysis of Special Sales Order Revenue from special order (Sale of 53,000 packs × $0.32 each) Less variable expenses associated with the order: Variable manufacturing cost: (53,000 × $0.27) Contribution margin Less: Additional fixed manufacturing costs associated with order Decrease in operating income from order

$ 16,960 (14,310) 2,650 (5,100) $ (2,450)

Decision: Reject the special sales order.

8-15

Managerial Accounting 6e Solutions Manual

(20–25 min.) E8-24A Req. 1 Jasper McKnight Incremental Analysis of Special Sales Order Revenue from special order (17,000 × $63) Less: variable expenses associated with order (17,000 × $60)* Contribution margin

$1,071,000 (1,020,000) $51,000

Less: Additional fixed costs associated with order

Increase in operating income from special order

$ 51,000

*Incremental expenses of special order, per pair of sunglasses: Direct materials……………………………………. Direct labor…………………………………………. Variable manufacturing overhead……………… Total incremental expense……………………….

$40 12 8 $60

Variable marketing expenses are irrelevant because no variable marketing expenses are incurred for the special sales order. Fixed manufacturing expenses are irrelevant because no extra fixed expenses are incurred for the special sales order—the plant has enough idle capacity to produce the 17,000 extra pairs of sunglasses for Arizona Glasses’ special order. In addition to determining the special order's effect on operating profits, Jasper McKnight’s managers should also consider the following: •

Will Jasper McKnight’s other customers find out about the lower sale price Jasper McKnight’s offered to Arizona Glasses? If so, will these other customers demand lower sale prices?

•

How will Jasper McKnight’s competitors react? Will they retaliate by cutting their prices and starting a price war?

•

Will lowering the sale price tarnish Jasper McKnight’s image as a high-quality brand?

Req. 2 When deciding whether to accept a special order, we should compare the extra revenues we will receive against the extra costs that will be incurred to fill the order. Costs that we will incur whether or not we fill the order are irrelevant to our decision. This is why comparing the $63 price Arizona Glasses offered us with our $88 total cost of making the sunglasses is misleading. What is relevant are the extra revenues and extra costs we will incur to fill the special order. If we accept Arizona Glasses special order, we will incur only $60 extra cost per pair of sunglasses: Direct materials………………………………… Direct labor……………………………………… Variable manufacturing overhead…………... Total additional costs………………………….

8-16

$40 12 8 $60

Chapter 8

Relevant Costs for Short-Term Decisions

(10 min.) E8-25A Req. 1 Vermont Flooring Analysis of Dropping the Laminate Flooring Product Line Expected decrease in revenues—Dropping Laminate Flooring Expected decrease in expenses —Dropping Laminate Flooring Expected decrease in operating income

$128,000 82,000 $ (46,000)

Decision: Do not drop laminate flooring. It is incorrect to conclude that dropping laminate flooring would add $28,000 to operating income. If the company drops the laminate flooring product line, it will still incur the $74,000 of fixed expenses allocated to laminate flooring. Req. 2 Vermont Flooring Analysis of Dropping the Laminate Flooring Product Line Expected decrease in revenues Expected decrease in expenses: Variable expenses $82,000 Fixed expenses 32,000 Expected decrease in total expenses Expected decrease in operating income

$128,000

114,000 $ (14,000)

Decision: Do not drop laminate flooring because, assuming $32,000 of fixed expenses attributable to the laminate flooring product line can be avoided, the product’s incremental revenues will still exceed its incremental costs.

Req. 3 Vermont Flooring Analysis of Dropping the Laminate Flooring Product Line Expected decrease in laminate flooring revenue Expected decrease in laminate flooring expenses: Variable expenses $82,000 Fixed expenses 74,000

$128,000

Expected increase in operating income Lost contribution margin on wood flooring (10% × $150,000)

156,000 28,000 (15,000)

Net expected increase in operating income

$ 13,000

Decision: Consider dropping laminate flooring because, assuming that all $74,000 of fixed costs assigned to the laminate flooring product line can be avoided but that wood flooring production and sales would decline 10%, the product’s incremental revenues are now less than its incremental costs.

8-17

Managerial Accounting 6e Solutions Manual

(10–15 min.) E8-26A First, we need to separate the fixed and variable costs: Cost of goods sold: $6,500,000 × 40% = $2,600,000 fixed manufacturing costs $6,500,000 × 60% = $3,900,000 variable manufacturing costs Operating expenses: $1,500,000 × 30% = $ 450,000 of fixed operating costs $1,500,000 × 70% = $ 1,050,000 of variable operating costs Expected decrease in revenue Expected decrease in expenses: Variable expenses ($3,900,000 + $1,050,000) Avoidable fixed expenses Expected decrease in total expenses Expected increase (decrease) in operating income

$5,200,000 4,950,000 $750,000 5,700,000 $500,000

If Smithers Company drops the organic dried fruit product line, it will gain $500,000 of income. Therefore, Smithers Company should drop this product line.

8-18

Chapter 8

Relevant Costs for Short-Term Decisions

(15 min.) E8-27A TreadFast Product Mix Analysis Sale price per unit Less: Variable costs per unit Contribution margin per unit Units produced with equivalent number of machine hours Contribution margin for equivalent number of machine hours a b

Deluxe $1,000 699a 301 × 1 $ 301

Regular $540 409b 131 × 2 $262

($340 + $82 + $152 + $125) ($80 + $194 + $76 + $59)

This is a product mix decision. TreadFast should produce the product with the highest contribution margin per unit of the constraint. Two times as much overhead cost is allocated to each Deluxe model as to each Regular model. Thus, it takes two times as many machine hours to produce a Deluxe model. For each unit of the Deluxe model produced (contributing $301 to operating income), TreadFast can produce two units of the Regular model (contributing $262 to operating income). Therefore, TreadFast should produce only the Deluxe model (if it has unlimited demand for the Deluxe model).

8-19

Managerial Accounting 6e Solutions Manual

(15–20 min.) E8-28A Req. 1 The constraining factor is linear feet of shelf space. Larry’s should stock the drink with the highest contribution margin per linear foot of shelf space. Larry’s Beach Hut Product Mix Analysis Cola Bottled water Orange juice 12 oz. Cans 20 oz. Bottles 20 oz. Bottles Sale price per unit $1.40 $1.75 $2.10 Less: Variable cost per unit 0.20 0.45 0.75 Contribution margin per unit 1.20 1.30 1.35 Units per linear foot of shelf space × 5 × 3 × 3 Contribution margin per linear foot of shelf $6.00 $3.90 $4.05 Cola 12-oz. cans has the highest contribution margin per linear foot of shelf space. To maximize profits, the company should devote all its shelf space to cola 12-oz. cans. Contribution margin per linear foot of shelf space (cola) Multiply by: Linear feet of shelf space available Contribution margin

$6.00 110 $ 660

Req. 2 If Larry’s cannot devote more than 60 linear feet to any individual product, then Larry’s should stock its shelves as follows: • 60 linear feet with product having the highest CM: 12-oz. cans of cola (60 × 5 = 300 cans) •

20 linear feet with product having the lowest CM: 20-oz. bottles of bottled water (20 × 3 = 60 bottles)

•

Remaining 30 linear feet (110 − 60 − 20) with product having the middle CM: 20-oz. bottles of orange juice (30 × 3 = 90 bottles)

The following quantities of each product will be available for sale each day: Units for sale 300 cans 60 bottles 90 bottles

Cola in 12-oz. cans Bottled water in 20-oz. bottles Orange juice in 20-oz. bottles Req. 3

Cola $6.00 × 60 $ 360

Contribution margin per linear foot × linear feet Contribution margin Total contribution margin $560 (rounded)

8-20

Bottled water $3.90 × 20 $ 78

Orange juice $4.05 × 30 $ 122

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-29A Req. 1 Shaw Enterprises Outsourcing Decision Analysis

Direct materials per unit Direct labor per unit Variable MOH per unit Total cost per unit X number of units Total relevant cost Less additional contribution margin Total cost Cost savings from outsourcing

Retain In-House $ 5.00 6.00 1.75 $12.75 × 100,000 1,275,000 —

Outsource $ – – – $12.80 × 100,000 1,280,000 30,000

1,275,000

1,250,000

Difference $ 5.00 6.00 1.75 0.05 × 100,000 5,000 30,000 $ 25,000

Operating income for Shaw Enterprises will increase by $25,000 by outsourcing the component and making the new product. Req. 2 Total relevant cost to make (see Req. 1) Plus opportunity cost Total Divided by number of units Price per unit

$1,275,000 30,000 $1,305,000 ÷ 100,000 $ 13.05

$13.05 per unit is the maximum price Shaw Enterprises would be willing to pay if it outsources the component.

8-21

Managerial Accounting 6e Solutions Manual

(10–15 min.) E8-30A Req. 1 InteliSystems Incremental Analysis for Outsourcing Decision Make Unit Variable cost per unit: Direct materials Direct labor Variable overhead Purchase price from outsider Variable cost per unit

$ 8.00a 1.50b 1.00c — $10.50

Buy Unit

Difference

— — — 8.50 $8.50

$ 8.00 1.50 1.00 (8.50) $ 2.00

$560,000 / 70,000 = $8.00/unit $105,000 / 70,000 = $1.50/unit c $70,000 / 70,000 = $1.00/unit b

Decision: Buy the optical switch because the cost per unit to make the switch is greater than the variable cost per unit to buy the switch. Req. 2 Make switches $ 10.50 75,000 $ 787,500 455,000 $1,242,500

Variable cost per unit (from part 1) Multiply by: Units needed Total variable costs Plus: Fixed costs Total relevant costs

Buy switches $ 8.50 75,000 637,500 350,000* $987,500

*($455,000 − $105,000 avoidable) Decision: Buy the optical switch because the total relevant costs to make the switches are greater than the total relevant costs to buy the switches. Req. 3 Cost of making switches Variable costs + fixed costs ($10.50 × 75,000) + $455,000

= = =

Cost of outsourcing switches Variable costs + fixed costs (x) × (75,000) + $350,000

$787,500 + $455,000

75,000x + $350,000

$892,500

75,000x

$11.90

* Where x = outsourcing cost per switch The most InteliSystems would be willing to pay to outsource is $11.90 per unit. InteliSystems would be indifferent between outsourcing and making the switches if the outsourcing cost was $11.90 per switch. Therefore, InteliSystems will only be willing to outsource if the outsourcing cost is less than $11.90 per switch.

8-22

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-31A InteliSystems Best Use of Facilities Analysis

Variable unit cost of obtaining the optical switches Multiply by: Number of optical switches

Make $ 10.50a × 79,000

Buy and Use Facilities for Other Product $ 8.50 × 79,000

Total variable cost of obtaining 79,000 optical switches Expected profit contribution from the other product Expected net cost of obtaining 79,000 optical switches

$829,500 — $829,500

$671,500 (140,000) $ 531,500

Cost calculated in E8-28A

Decision: Outsource the optical switches and use the facilities to manufacture other product.

(10–15 min.) E8-32A The variable cost per switch is $0.80. The avoidable fixed cost per switch is $0.24 ($103,200/430,000). Hamilton would be indifferent between outsourcing and making the Model A20 boxes if the outsourcing price was $1.04 ($0.80 + 0.24) per A20 box. Therefore, Hamilton will only be willing to pay up to $1.04 per Model A20 box if outsourcing.

(10 min.) E8-33A The $850 spent processing milk into yogurt is irrelevant because it will be incurred no matter which way Werner Natural Dairy decides to sell its yogurt. Werner needs to analyze the additional costs and benefits (sales revenue) associated with the two possible sales strategies: Sell as gallon-size Sell as individual containers portions Sales revenue per unit $ 8.00 $ 0.56 Less: Additional processing costs per unit— packaging (0.16) (0.07) Less: Additional processing costs per unit—adding fruit (0.00) (0.10) Net benefit per unit $ 7.84 $ 0.39 Multiply by: Number of units produced per batch × 540 × 11,520 Net benefit per batch $4,234 $ 4,493 Based on this analysis, it is more profitable to sell fruited yogurt as individual portions as long as there is demand for the individual portions.

8-23

Managerial Accounting 6e Solutions Manual

(20 min.) E8-34A 1. Use the VLOOKUP function in Cells F2 through F11 in the SpecialOrder worksheet to look up the most recent variable cost for each item in the JobCostRecords worksheet.

2. Enter the formula to calculate contribution margin per pack in Cells G2 through G11 in the SpecialOrder worksheet.

3. Calculate the total contribution margin from the special order in Cell H12 in the SpecialOrder worksheet.

Should the company accept this special order? Explain your answer. Yes, the company should accept this special order. If the total of the contribution margin column is positive, the special order should be accepted. Otherwise, the special order should be rejected.

8-24

Chapter 8

Relevant Costs for Short-Term Decisions

(20 min.) E8-35A 1. Use the VLOOKUP function in Cells B2 through B11 in the SpecialOrder worksheet to look up the description for each special order item in the Descriptions worksheet. 2. Use the VLOOKUP function in Cells F2 through F11 in the SpecialOrder worksheet to look up the most recent variable cost for each item in the JobCostRecords worksheet. 3. Enter the formula to calculate contribution margin per pack in Cells G2 through G11 in the SpecialOrder worksheet. 4. Calculate the total contribution margin from the special order in Cell H12 in the SpecialOrder worksheet.

8-25

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (5–10 min.) E8-36B Item

Relevant

Not Relevant

Cost per pound of vegetables

Maintenance cost of new machine

Variable selling costs

Book value of old machine

Interest expense on new machine

Installation cost of old machine

Interest expense on old machine

Cost of the new machine

Sales value of old machine

Repairs and maintenance costs of old machine

Fixed selling costs

Cost of the old machine

Accumulated depreciation on old machine

Added profits from increase in production resulting from the new machine Installation costs of new machine

*Considered as future repairs and maintenance costs of the old machine.

8-26

X X

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-37B Req. 1

(000s omitted)

Bid price Less scrap value Net cost of recycling

$ $ $

43,600 42,500 1,100

Versus: Cost to sink

200

Net difference in favor of sinking

900

Financially, it is $900,000 more advantageous to sink the ship rather than recycle it. Req. 2 From a sustainability standpoint, the decommissioned aircraft carrier should be dismantled and recycled. The following qualitative factors should be considered into this analysis. 1. Jobs are created in a geographic region with record-high unemployment rates. 2. Materials are recycled and used for a different purpose. 3. Toxins are not released into the ocean. Req. 3 A taxpayer would prefer to dismantle and recycle the aircraft carrier because this option creates jobs and does not release toxins into the ocean, avoiding costly decontamination cost.

8-27

Managerial Accounting 6e Solutions Manual

(10–15 min.) E8-38B Req. 1 Variable costs ($5.50 × 10,000,000) Fixed costs Total costs Divide by # of units Cost per unit

$ 55,000,000 $ 20,000,000 $ 75,000,000 ÷ 10,000,000 $ 7.50

Req. 2 Revenue at market price ($8.00 × 10,000,000) Less desired profits ($42,000,000 × 20%) Target total costs Total current costs (see Req. 1) Shortfall in target profits

$ 80,000,000 $ 8,400,000 $ 71,600,000 $ 75,000,000 $ 3,400,000

No, the company will fall short of its profit goals by $3,400,000. Req. 3 Total target cost (see Req. 2) Less fixed costs ($20,000,000 – $500,000) Total target variable costs Divide by # of units Cost per unit

$ 71,600,000 $ 19,500,000 $ 52,100,000 ÷ 10,000,000 $ 5.21

Req. 4 Total variable costs ($5.50 × 12,000,000) Fixed costs [$19,500,000 (see Req. 3) + $4,500,000] Total costs Plus mark up ($42,000,000 × 20%) Cost plus total revenue Divide by # of units Cost per unit

$ 66,000,000 $ 24,000,000 $ 90,000,000 $ 8,400,000 $ 98,400,000 ÷ 12,000,000 $ 8.20

8-28

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-39B Req. 1 Gunter will need to emphasize a target-costing approach to pricing. Because the tract homes are not unique and face stiff competition, Gunter will not have much control over pricing. Req. 2 Variable cost per home: $50,000 + $120,000 + $9,000 + $3,000 = $182,000 Market price of similar homes………………... Less: Target profit ($182,000 × 14%)………. Target cost……………………………………….. vs. Actual current variable cost……………… Shortfall…………………………………………..

$203,000 (25,480) $177,520 182,000 $ (4,480)

Given the current market price and Gunter’s current variable costs, he will not be able to achieve his target profit. His profit will fall short by $4,480 per home sale. Req. 3 Gunter calculates his cost-plus price as follows: Current variable cost (see Req. 2)……………………………... Plus: variable cost of kitchen and bathroom upgrades………………………………………… Total variable costs………………………………. Plus: Desired profit (14% × $196,000)……………… Cost-plus price……………………………………..

$182,000 14,000 $196,000 27,440 $223,440

The new cost-plus price, with bath and kitchen upgrades, is actually lower than the expected market price of an upgraded house. If Gunter can sell the upgraded homes for $227,500, as expected, he will earn more than his target profit. Gunter should upgrade the bathrooms and kitchens so that he has more control over pricing.

8-29

Managerial Accounting 6e Solutions Manual

(10–15 min.) E8-40B Req. 1 Windham Industries Incremental Analysis of Special Sales Order Revenue from special order: Sale of 8,000 units × $38.00 each Less expenses associated with the order: Variable manufacturing cost: 8,000 units × $40.00 each Increase (decrease) in operating income from the order

$ 304,000 (320,000) $ (16,000)

Windham should reject the special order because operating income will decrease by $16,000. Req. 2 Windham Industries Incremental Analysis of Special Sales Order Revenue from special order: Sale of 8,000 units × $50.00 each Less expenses associated with the order: Variable manufacturing cost: 8,000 units × $40.00 each Additional fixed costs Increase (decrease) in operating income from the order

$ 400,000 (320,000) (35,000) $ 45,000

Windham should accept the special order because operating income will increase by $45,000.

(10–15 min.) E8-41B Req. 1 International Cards Incremental Analysis of Special Sales Order Revenue from special order: Sale of 56,000 packs × $0.43 each Less expenses associated with the order: Variable manufacturing cost 56,000 packs × $0.33 each* Increase in operating income from the order

$ 24,080 (18,480) $ 5,600

*Variable costs = $0.33 = $0.13 + $0.08 + $0.12 Decision: Accept the special sales order. Req. 2 International Cards Incremental Analysis of Special Sales Order Revenue from special order (Sale of 56,000 packs × $0.43 each) Less variable expenses associated with the order: Variable manufacturing cost: (56,000 × $0.33)* Contribution margin Less: Additional fixed costs associated with order Increase in operating income from the order *Calculated in Req.1 Decision: Accept the special sales order. 8-30

$ 24,080 18,480 5,600 ( 5,000) $ 600

Chapter 8

Relevant Costs for Short-Term Decisions

(20–25 min.) E8-42B Req. 1 Gentry Miller Incremental Analysis of Special Sales Order Revenue from special order (21,000 × $74) Less: Variable expenses associated with order (21,000 × $65)* Contribution margin

$1,554,000 (1,365,000) $189,000

Less: Additional fixed costs associated with order

Increase in operating income from special order

$ 189,000

$43 13 9 $65

In addition to determining the special order's effect on operating profits, Gentry Miller’s managers should also consider the following: • • •

How will Gentry Miller’s competitors react? Will they retaliate by cutting their prices and starting a price war? Will Gentry Miller’s other customers find out about the lower sale price Gentry Miller offered to Oregon Opticians? If so, will these other customers demand lower sale prices? Will lowering the sale price tarnish Gentry Miller’s image as a high-quality brand?

Req. 2 When deciding whether to accept a special order, we should compare the extra revenues we will receive against the extra costs we will incur to fill the order. Costs that will be incurrred whether or not we fill the order are irrelevant to our decision. This is why comparing the $74 price Oregon Opticians offered us with our $84 total cost of making the sunglasses is misleading.

8-31

Managerial Accounting 6e Solutions Manual

(10 min.) E8-43B Req. 1 Maine Flooring Analysis of Discontinuing the Laminate Flooring Product Line Expected decrease in revenues—Discontinuing laminate flooring Expected decrease in expenses—Discontinuing laminate flooring Expected decrease in operating income

$120,000 80,000 $ (40,000)

Decision: Do not discontinue laminate flooring. It is incorrect to conclude that discontinuing laminate flooring would add $24,000 to operating income. If the company discontinues the laminate flooring product line, it will still incur the $64,000 ($49,000 + $15,000) of fixed expenses allocated to laminate flooring. Req. 2 Maine Flooring Analysis of Discontinuing the Laminate Flooring Product Line Expected decrease in revenues Expected decrease in expenses: Variable expenses $80,000 Fixed expenses 27,000 Expected decrease in total expenses Expected decrease in operating income if laminate flooring product line dropped

$120,000

107,000 $ (13,000)

Decision: Do not discontinue the laminate flooring line because, assuming $27,000 of fixed expenses attributable to the laminate flooring product line can be avoided, the product’s incremental revenues will still exceed its incremental costs. Req. 3 Maine Flooring Analysis of Discontinuing the Laminate Flooring Product Line Expected decrease in laminate flooring revenue Expected decrease in laminate flooring expenses: Variable expenses $80,000 Fixed expenses 64,000 Expected increase in operating income Lost contribution margin on wood flooring (10% × $149,000) Net expected increase in operating income

$120,000

144,000 24,000 (14,900)* $ 9,100

Decision: Consider discontinuing laminate flooring because, assuming that all $64,000 of fixed costs assigned to the laminate flooring product line can be avoided but that wood flooring production and sales would decline 10%, the product’s incremental revenues are now less than its incremental costs.

8-32

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-44B First, we need to separate the fixed and variable costs: Cost of goods sold: $6,250,000 × 40% = $2,500,000 fixed manufacturing costs $6,250,000 × 60% = $3,750,000 variable manufacturing costs Operating expenses: $1,550,000 × 30% = $ 465,000 of fixed operating costs $1,550,000 × 70% = $ 1,085,000 of variable operating costs Expected decrease in revenue Expected decrease in expenses: Variable expenses ($3,750,000 + $1,085,000) Avoidable fixed expenses Expected decrease in total expenses Expected increase (decrease) in operating income

$5,250,000 4,835,000 $725,000 5,560,000 $310,000

If Eagle drops the soy cereal product line, it will gain $310,000 of income. Therefore, Eagle should drop this product line.

(15 min.) E8-45B ExcerTreads Product Mix Analysis Sale price per unit Less: Variable costs per unit Contribution margin per unit Units produced with equivalent number of machine hours Contribution margin for equivalent number of machine hours a b

Deluxe $1,020 689a 331 × 1 $ 331

Regular $580 449b 131 × 2 $262

($320 + $88 + $168 + $113) ($110 + $186 + $84 + $69)

This is a product mix decision. ExcerTreads should produce the product with the highest contribution margin per unit of the constraint. (Fixed costs are irrelevant because they will be the same, in total, whichever product ExcerTreads produces.) ExcerTreads’ constraint is machine hours. Two times as much overhead cost is allocated to each Deluxe model as to each Regular model. Thus, it takes two times as many machine hours to produce a Deluxe model. For each unit of the Deluxe model produced (contributing $331 to operating income), ExcerTreads can produce two units of the Regular model (contributing $262 to operating income). Therefore, ExcerTreads should produce only the Deluxe model (if it has unlimited demand for the Deluxe model).

8-33

Managerial Accounting 6e Solutions Manual

(15–20 min.) E8-46B Req. 1 The constraining factor is linear feet of shelf space. Max’s should stock the drink with the maximum contribution margin. Max’s Beach Hut Product Mix Analysis Diet cola Bottled water Grape juice 12 oz. Cans 20 oz. Bottles 20 oz. Bottles Sale price per unit $1.60 $1.80 $2.25 Less: Variable cost per unit 0.15 0.30 0.70 Contribution margin per unit 1.45 1.50 1.55 Units per linear foot of shelf space × 5 × 4 × 4 Contribution margin per linear foot of shelf space $7.25 $6.00 $6.20 Diet cola in 12-oz. cans has the highest contribution margin per linear foot of shelf space. To maximize profits, Max’s should devote all its shelf space to diet cola in 12-oz. cans. The maximum contribution margin that Max could generate each day from refrigerated drinks is: Contribution margin per linear foot of shelf space (diet cola) Multiply by: Linear feet of shelf space available Contribution margin

$7.25 120 $870

Req. 2 If Max’s cannot devote more than 75 linear feet to any individual product, then Max’s should stock its shelves as follows: • • •

75 linear feet with product having the highest CM: Diet cola in 12 oz. cans 15 linear feet with product having the lowest CM: Bottled water Remaining 30 linear feet with product having the second highest CM: Grape juice

The following quantities of each product will be available for sale each day: Diet cola in 12-oz. cans (75 × 5) Bottled water in 20-oz. bottles (15 × 4) Grape juice in 20-oz. bottles (30 × 4)

Units for sale 375 cans 60 bottles 120 bottles

Req. 3 Diet cola $7.25 × 75 $ 544

Contribution margin per linear foot × linear feet Contribution margin

Bottled water $6.00 × 15 $ 90

Max will generate a total contribution margin of $820 (rounded) from refrigerated drinks each day.

8-34

Grape juice $6.20 × 30 $ 186

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-47B Req. 1 McCall Enterprises Outsourcing Decision Analysis Retain InHouse $ 5.50 6.50 2.00 $14.00 × 100,000 1,400,000 _________

Direct materials per unit Direct labor per unit Variable MOH per unit Total cost per unit × number of units Total relevant cost Less additional contribution margin Total cost Cost savings from outsourcing

1,400,000

Outsource

Difference

– – – $14.10 × 100,000 1,410,000 30,000

$ 5.50 6.50 2.00 0.10 × 100,000 10,000 30,000

1,380,000

_______ $ 20,000

Operating income for McCall Enterprises will increase by $20,000 by outsourcing the component and making the new product. Req. 2 Total relevant cost to make (see Req. 1) Plus opportunity cost Total Divided by number of units Price per unit

$1,400,000 30,000 $1,430,000 ÷ 100,000 $ 14.30

The maximum price McCall Enterprises would be willing to pay is $14.30 per unit if it outsources the component.

8-35

Managerial Accounting 6e Solutions Manual

(10–15 min.) E8-48B Req. 1 TechSystems Incremental Analysis for Outsourcing Decision Make Unit Variable cost per unit: Direct materials Direct labor Variable overhead Purchase price from outsider Variable cost per unit

$ 11.00a 2.00b 3.00c — $16.00

Buy Unit

Difference

— — — 18.50 $18.50

$ 11.00 2.00 3.00 (18.50) $(2.50)

$781,000 / 71,000 = $11.00/unit $142,000 / 71,000 = $2.00/unit c $213,000 / 71,000 = $3.00/unit b

Decision: Make the optical switch because the variable cost per unit to make the switch is less than the variable cost per unit to buy the switch. Req. 2 Make switches $ 16.00 76,000 $1,216,000 390,500 $1,606,500

Variable cost per unit (from Req. 1) Multiply by: Units needed Total variable costs Plus: Fixed costs Total relevant costs

Buy switches $ 18.50 76,000 1,406,000 295,500* $1,701,500

*($390,500 − $95,000 avoidable) Decision: Make the optical switch because the total relevant costs to make the switches are less than the total relevant costs to buy the switches. Req. 3 Cost of making switches Variable costs + fixed costs ($16.00 × 76,000) + $390,500

= = =

Cost of outsourcing switches Variable costs + fixed costs (x) × (76,000) + $295,500

$1,216,000 + $390,500

76,000x + $295,500

$1,311,000

76,000x

$17.25

* Where x = outsourcing cost per switch The most TechSystems would be willing to pay to outsource is $17.25 per unit. TechSystems would be indifferent between outsourcing and making the switches if the outsourcing cost was $17.25 per switch. Therefore, TechSystems will only be willing to outsource if the outsourcing cost is less than $17.25 per switch.

8-36

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) E8-49B TechSystems Best Use of Facilities Analysis

Variable unit cost of obtaining the optical switches Multiply by: Number of optical switches

Make $ 16.00a × 78,000

Buy and Use Facilities for Other Product $ 18.50 × 78,000

Total variable cost of obtaining 80,000 optical switches Expected profit contribution from Expected net cost of obtaining 80,000 optical switches

$1,248,000 — $1,248,000

$1,443,000 (220,000) $ 1,223,000

Calculated in E8-44B

Decision: Outsource the optical switches and use the facilities to manufacture the other product.

(5–10 min.) E8-50B The variable cost per switch is $0.74. The avoidable fixed cost per switch is $0.18 ($72,000 / 400,000). Henderson would be indifferent between outsourcing and making the Model A20 boxes if the outsourcing price was $0.92 ($0.74 + $0.18) per Model A20 box. Therefore, Henderson will only be willing to pay up to $.092 per Model A20 box if outsourcing.

(10 min.) E8-51B The $830 spent processing milk into yogurt is irrelevant because it will be incurred no matter which way OrganicPlus decides to sell its yogurt. OrganicPlus needs to analyze the additional costs and benefits (sales revenue) associated with the two possible sales strategies: Sell as gallon-size Sell as individual containers portions Sales revenue per unit $ 6.00 $ 0.40 Less: Additional processing costs per unit—packaging (0.10) (0.07) Less: Additional processing costs per unit—adding fruit (0.00) (0.12) Net benefit per unit $ 5.90 $ 0.21 Multiply by: Number of units produced per batch × 750 × 16,000 Net benefit per batch $4,425 $ 3,360 Based on this analysis, it is more profitable to sell plain yogurt in bulk gallon containers. As long as the demand continues for bulk gallon containers, OrganicPlus would be better off making and selling them.

8-37

Managerial Accounting 6e Solutions Manual

(20 min.) E8-52B 1. Use the VLOOKUP function in Cells F2 through F11 in the SpecialOrder worksheet to look up the most recent variable cost for each item in the JobCostRecords worksheet.

2. Enter the formula to calculate contribution margin per pack in Cells G2 through G11 in the SpecialOrder worksheet. 3. Calculate the total contribution margin from the special order in Cell H12 in the SpecialOrder worksheet.

8-38

Chapter 8

Relevant Costs for Short-Term Decisions

(20 min.) E8-53B 1. Use the VLOOKUP function in Cells B2 through B11 in the SpecialOrder worksheet to look up the description for each special order item in the Descriptions worksheet. 2. Use the VLOOKUP function in Cells F2 through F11 in the SpecialOrder worksheet to look up the most recent variable cost for each item in the JobCostRecords worksheet. 3. Enter the formula to calculate contribution margin per pack in Cells G2 through G11 in the SpecialOrder worksheet. 4. Calculate the total contribution margin from the special order in Cell H12 in the SpecialOrder worksheet.

8-39

Managerial Accounting 6e Solutions Manual

Problems (Group A) (15–20 min.) P8-54A Req. 1 Flora Gardening’s target full cost is: Revenue at current market price (490,000 units × $3.70 per unit)…………………………….. Less: Desired profit ($5.25 million × 12%)…………. Target full cost………………………………………...

$1,813,000 630,000 $1,183,000

Req. 2 Flora Gardening’s current costs are: Current variable cost (490,000 × $1.20)……………. Current fixed costs………………………………….. Total full cost………………………………………….

$ 588,000 668,500 $1,256,500

Flora Gardening’s current full cost of $1,256,500 is higher than its target full cost. Flora Gardening will not meet the owner’s profit expectations. Req. 3 Target full cost (from Req. 1) ………….................. Less: Reduced level of variable costs (490,000 × $1.05)……….………………………...... New target fixed costs……………………………….

$1,183,000 (514,500) $ 668,500

The new target fixed cost is the same as actual fixed costs. By reducing variable costs to $1.05 per unit, Flora Gardening will be able to achieve its target profit without having to take any other cost-cutting measures. Req. 4 Current fixed costs………………………………….. Plus: Additional fixed costs of advertising…… Plus: Total variable costs (490,000 × $1.05)….. Total full costs……………………………………….. Plus: Desired profit ($5.25 million × 12%)………… Desired revenue……………………………………... Divided by: Number of units………………………. Cost-plus price per unit…………………………….

$ 668,500 53,900 514,500 $1,236,900 630,000 $1,866,900 ÷ 490,000 $ 3.81

Garden centers may be willing to pay the cost-plus price if the marketing campaign is effective. Otherwise, Flora Gardening may be considered a generic nursery.

8-40

Chapter 8

Relevant Costs for Short-Term Decisions

(15–20 min.) P8-55A Req. 1 Coastal Safety Incremental Analysis of Special Sales Order Revenues from special order (4,600 vests × $7 each) Less expenses associated with order: variable manufacturing expenses (4,600 vests × $5 each*) Increase in operating income from special order

$ 32,200 (23,000) $ 9,200

*Variable manufacturing expense per unit = $160,000 / 32,000 = $5 per vest. Decision: Accept the special sales order. Req. 2 In addition to determining the special order’s effect on operating profits, the company’s managers also should consider the following: • Will Coastal Safety’s customers find out about the lower sale price Coastal Safety accepted from Dazzle Cruiselines? • Will lowering the sale price tarnish Coastal Safety’s image as a quality brand? • How will Coastal Safety’s competitors react? Will they retaliate by cutting their prices and starting a price war?

8-41

Managerial Accounting 6e Solutions Manual

(20–25 min.) P8-56A Req. 1 Security Alliance Incremental Analysis of Discontinuing a Product Line Expected decrease in revenues— Dropping industrial systems sales Expected decrease in expenses: Variable expenses: Cost of goods sold Marketing and administrative expenses Fixed expenses: Cost of goods sold Marketing and administrative expenses Expected decrease in total expenses Expected decrease in operating income

$310,000

$32,000 63,000 80,000 11,000 186,000 $124,000

Decision: Do not discontinue industrial systems. Req. 2 Security Alliance Total Analysis of Discontinuing a Product Line Decrease If Totals with Totals without Industrial Systems Industrial Systems Industrial Systems Is Discontinuedc Sales revenue Less variable expenses: Cost of goods sold Marketing and administrative expenses Total variable expenses Contribution margin Less fixed expenses: Cost of goods sold Marketing and administrative expenses Total fixed expenses Operating income (loss)

$690,000

$380,000

$310,000

78,000 132,000 210,000 480,000

46,000 69,000 115,000 265,000

32,000 63,000 95,000 215,000

346,000 60,000 406,000 $ 74,000

266,000a 49,000b 315,000 $ (50,000)

80,000 11,000 91,000 $124,000

$346,000 − $80,000 $ 60,000 − $11,000 c This difference column is not required but is presented as a teaching aid. b

The operating income difference calculated on the total analysis of discontinuing a product line equals the expected decrease in operating income if Security Alliance discontinues the industrial systems line as shown in Req. 1. This demonstrates that the incremental analysis approach in Req. 1 does yield the same results as the longer approach in Req. 2 that compares total operating income under the two alternatives.

8-42

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) P8-57A Req. 1 The constraining factor is machine hours of production capacity. Req. 2 Agee Products Product Mix Analysis

Contribution margin per unit Multiply by: Units produced each hour Contribution margin per machine hour Multiply by: Available Capacity—Number of machine hours Total contribution margin at full capacity

Product Deluxe Toothbrush Standard Toothbrush $73 $27 × 28 ×$ 56 $ 2,044 $ 1,512 × 4,700 × 4,700 $9,606,800 $7,106,400

Decision: Emphasize the Deluxe electric toothbrushes.

8-43

Managerial Accounting 6e Solutions Manual

(20–30 min.) P8-58A Req. 1 Mountain Sports Outsourcing Analysis Make Bindings Total cost: Direct materials Direct labor Variable overhead Fixed overhead Purchase price from outsider (1,850 × $14) Transportation (1,850 × $1.00) Logo (1,850 x $0.70) Total cost of bindings a

Buy Bindings

Difference

$18,500 2,900 1,285 7,100

− − − $ 5,100a

$18,500 2,900 1,285 2,000

– – – $29,785

25,900 1,850 1,295 $34,145

(25,900) (1,850) (1,295) $ (4,360)

$7,100 − $2,000 = $5,100

Decision: Make the bindings. Req. 2 Mountain Sports Best Use of Facilities Analysis Buy

Direct materials Direct labor Variable overhead Fixed overhead Purchase price from outsider (1,850 × $14) Transportation (1,850 × $1.00) Logo (1,850 × $0.70) Expected profit from other products Expected net cost of obtaining 30,125 bindings a

$7,100 − $2,000

Decision: Continue to make the bindings.

8-44

Make $18,500 2,900 1,285 7,100 – – – $29,785

Leave Facilities Make Another Idle Product – – – – – – $ 5,100a $ 7,100 25,900 25,900 1,850 1,850 1,295 1,295 – (2,800) $34,145

$33,345

Chapter 8

Relevant Costs for Short-Term Decisions

(20–25 min.) P8-59A Req. 1 The $240,000 spent to refine the acetone is a sunk cost that does not differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is irrelevant to the sell-or-process-further decision. Req. 2 Noble Chemical Sell As Is or Process Further Analysis Sell As Is Expected revenue from selling 71,000 gallons of acetone at $2.30 per gallon Expected revenue from selling 59,000 gallons of lacquer thinner at $3.20 per gallon Less: Additional costs of $1.21 per gallon of processing further ($0.85 + $0.24 + $0.12) (59,000 gallons × $1.21) Total net revenue Difference in net revenue

Process Further

$163,300 $188,800

_______ $163,300

(71,390) $117,410

$ 45,890

Decision: Sell acetone as is.

8-45

Managerial Accounting 6e Solutions Manual

Problems (Group B) (15–20 min.) P8-60B Plant Galore’s target full cost is: Revenue at current market price (575,000 units × $3.80 per unit)…………………………….. Less: Desired profit ($5.8 million × 11%)…………. Target full cost………………………………………...

$2,185,000 638,000 $1,547,000

Req. 2 Plant Galore’s current costs are: Current variable cost (575,000 × $1.55)……………. Current fixed costs………………………………….. Total full cost………………………………………….

$ 891,250 742,000 $1,633,250

Plant Galore’s current full cost of $1,633,250 is higher than its target full cost. Plant Galore will not meet the owners’ profit expectations. Req. 3 Target full cost (from Req. 1) ………….................. Less: Reduced level of variable costs (575,000 × $1.40)……….………………………...... New target fixed costs……………………………….

$1,547,000 (805,000) $ 742,000

The new target fixed cost is the same as actual fixed costs. By reducing variable costs to $1.40 per unit, Plant Galore will be able to achieve its target profit without having to take any other cost-cutting measures. Req. 4 Current fixed costs………………………………….. Plus: Additional fixed costs of advertising…… Plus: Total variable costs (575,000 × $1.40)….. Total full costs……………………………………….. Plus: Desired profit ($5.8 million × 11%)………… Desired revenue……………………………………... Divided by: Number of units………………………. Cost-plus price per unit…………………………….

$ 742,000 57,500 805,000 $1,604,500 638,000 $2,242,500 ÷ 575,000 $ 3.90

Garden centers may be willing to pay the cost-plus price if the marketing campaign is effective. Otherwise, Plant Galore may be considered a generic nursery.

8-46

Chapter 8

Relevant Costs for Short-Term Decisions

(15–20 min.) P8-61B Req. 1 Summer Fun Incremental Analysis of Special Sales Order Revenues from special order (4,600 vests × $6 each) Less expenses associated with order: variable manufacturing expenses (4,600 vests × $3 each*) Increase in operating income from special order

$ 27,600 (13,800) $ 13,800

*Variable manufacturing expense per unit = $99,000 / 33,000 = $3 per vest. Decision: Accept the special sales order. Req. 2 In addition to the effect of the special sale on operating income, Summer Fun should consider the following: • Will lowering the sale price tarnish Summer Fun’s image as a quality brand? • Will the company’s other customers find out about the lower sale price it accepted from Sparkle Cruiselines? If so, will these other customers demand lower sale prices? • How will the company’s competitors react? Will they retaliate by cutting their prices and starting a price war?

8-47

Managerial Accounting 6e Solutions Manual

(20–25 min.) P8-62B Req. 1 Security First Incremental Analysis of Discontinuing a Product Line Expected decrease in revenues— Dropping industrial systems sales Expected decrease in expenses: Variable expenses: Cost of goods sold Marketing and administrative expenses Fixed expenses: Cost of goods sold Marketing and administrative expenses Expected decrease in total expenses Expected decrease in operating income

$350,000

$40,000 64,000 77,000 11,000 192,000 $(158,000)

Decision: Do not drop industrial systems. Req. 2 Security First Total Analysis of Discontinuing a Product Line Decrease If Totals with Totals without Industrial Systems Industrial Systems Industrial Systems Is Discontinuedc Sales revenue Less Variable expenses: Cost of goods sold Marketing and administrative expenses Total variable expenses Contribution margin Less Fixed expenses: Cost of goods sold Marketing and administrative expenses Total fixed expenses Operating income (loss)

$730,000

$380,000

$350,000

80,000 134,000 214,000 516,000

40,000 70,000 110,000 270,000

40,000 64,000 104,000 246,000

339,000 58,000 397,000 $ 119,000

262,000a 47,000b 309,000 $ (39,000)

77,000 11,000 88,000 $ 158,000

$339,000 − $77,000 $58,000 − $11,000 c This difference column is not required but is presented as a teaching aid. b

The operating income difference calculated on the total analysis of discontinuing a product line equals the expected decrease in operating income if Security First discontinues the industrial systems line as shown in Req. 1. This demonstrates that the incremental analysis approach in Req. 1 does yield the same results as the longer approach in Req. 2 that compares total operating income under the two alternatives.

8-48

Chapter 8

Relevant Costs for Short-Term Decisions

(10–15 min.) P8-63B Req. 1 Brann’s constraint is machine hours. Req. 2 Brann Products Product Mix Analysis

Contribution margin per unit Multiply by: Units produced each hour Contribution margin per machine hour Multiply by: Available capacity—number of machine hours Total contribution margin at full capacity

Product Deluxe Toothbrush Standard Toothbrush $73 $34 × 25 × 65 $ 1,825 $ 2,210 × 4,000 × 4,000 $7,300,000 $8,840,000

Decision: Emphasize the standard electric toothbrushes.

8-49

Managerial Accounting 6e Solutions Manual

(20–30 min.) P8-64B Req. 1 Snowy Mountain Outsourcing Analysis Make Bindings Total cost: Direct materials Direct labor Variable overhead Fixed overhead Purchase price from outsider (19,000 × $15) Transportation (19,000 × $2.00) Logo (19,000 × $0.50) Total cost of 19,000 bindings a

Buy Bindings

Difference

$22,000 81,000 44,000 81,000

− − − $ 79,100a

$22,000 81,000 44,000 1,900

– – – $228,000

285,000 38,000 9,500 $411,600

(285,000) (38,000) (9,500) $ (183,600)

$81,000 − $1,900 = $79,100

Decision: Make the bindings. Req. 2 Snowy Mountain Best Use of Facilities Analysis

Direct materials Direct labor Variable overhead Fixed overhead Purchase price from outsider (19,000 × $15) Transportation (19,000 × $2.00) Logo (19,000 × $0.50) Expected profit from other products Expected net cost of obtaining 19,000 bindings a

$81,000 − $1,900

Decision: Continue to make the bindings.

8-50

Make $22,000 81,000 44,000 81,000

Buy Leave Facilities Make Another Idle Product – – – – – – $ 79,100a $ 81,000

– – –

285,000 38,000 9,500 –

285,000 38,000 9,500 (3,100)

$228,000

$411,600

$410,400

Chapter 8

Relevant Costs for Short-Term Decisions

(20–25 min.) P8-65B Req. 1 The $245,000 spent to refine the acetone is a sunk cost that does not differ between the alternatives of selling as is or processing further. Consequently, this $245,000 sunk cost is irrelevant to the sell-or-process-further decision. Req. 2 Lacerna Chemical Sell As Is or Process Further Analysis Sell As Is Expected revenue from selling 70,000 gallons of acetone at $1.90 per gallon Expected revenue from selling 65,000 gallons of lacquer thinner at $3.30 per gallon Less: Additional costs of $1.00 per gallon of processing further ($0.65 + $0.22 + $0.13) (65,000 gallons × $1.00) Total net revenue Difference in net revenue

Process Further

$133,000 $214,500

_______ $133,000

(65,000) $149,500 $16,500

Decision: Process further into lacquer thinner.

8-51

Managerial Accounting 6e Solutions Manual

Serial Case C8-66 Req. 1 All numbers are in millions. Casinos Revenue Direct Expenses Segment Margin

2018 $ 4,247 $ 2,393 $ 1,854

2017 $ 2,168 $ 1,213 $ 955

2016 $ 1,608 $ 890 $ 718

Food and Beverage Revenue Direct Expenses Segment Margin

2018 $ 1,574 $ 1,106 $ 468

2017 $ 982 $ 693 $ 289

2016 $ 822 $ 572 $ 250

Rooms

2018

2017

2016

Revenue Direct Expenses Segment Margin

$ 1,519 $ 480 $ 1,039

$ 1,074 $ 360 $ 714

$ 950 $ 318 $ 632

Req. 2 Because the segment margins for all three segments are positive, Caesars should not discontinue any of the three segments. Positive segment margin shows the excess of segment revenue over its direct costs. Req. 3 The expenses likely to be included in “Miscellaneous Expenses” are advertising expenses, car and truck expenses, training expenses, tax preparation fees, licenses and regulatory fees, and maintenance expenses. Segment margin is calculated from the revenues and expenses that are directly traceable to a segment. It is generally not a good idea to include an allocation of corporate overhead in the segment margin calculation because it obscures the operating results of the segment.

8-52

Chapter 8

Relevant Costs for Short-Term Decisions

Discussion & Analysis A8-67 1.

A beverage company is considering whether to discontinue its line of grape soda. What factors will affect the company’s decision? What is a qualitative factor? Which of the factors you listed are qualitative? • • • • •

Will fixed costs continue to exist if the product is discontinued? Does the product provide a positive contribution margin? Are there any direct fixed costs that can be avoided if the product is discontinued? Will dropping the product affect sales of other products? What could be done with the freed capacity?

Qualitative factors are those that require using judgment, whereas quantitative factors are those that can be measured. The last two factors listed are qualitative. 2.

What factors would be relevant to a restaurant that is considering whether to make its own dinner rolls or to purchase dinner rolls from a local bakery? • • •

How do the variable costs of making the rolls compare to the bakery cost? Can any fixed costs be avoided if the rolls are outsourced? What could be done with the freed capacity if the rolls are outsourced?

How would outsourcing change a company’s cost structure? How might this change in cost structure help or harm a company’s competitive position? Outsourcing could lead to reduction of fixed costs associated with manufacturing facilities if the company decides to divest the plant and equipment. It can harm a company’s competitive position because they have lost control over quality and other production/distribution factors.

What is an opportunity cost? List possible opportunity costs associated with a make-or-buy decision. An opportunity cost is the benefit forgone by not choosing an alternative course of action. If a company decides to make instead of buy, they have given up the opportunity to do something else with the facilities. If the company decides to buy instead of make, they have given up the opportunity to control quality.

What undesirable result can arise from allocating common fixed costs to product lines? Allocating common fixed costs to product lines distorts the actual cost of the products because those costs will continue to exist even if a product line is dropped. The amount of common fixed costs that had been allocated to the dropped product line would simply be shifted to the remaining product lines.

Why could a manager be justified in ignoring fixed costs when making a decision about a special order? When would fixed costs be relevant when making a decision about a special order? A manager can be justified in ignoring fixed costs when making a decision about a special order only when the fixed costs will not change between taking the special order and not taking it. Fixed costs are relevant when making a decision about a special order if the order requires additional fixed costs.

8-53

Managerial Accounting 6e Solutions Manual 7.

What is the difference between segment margin and contribution margin? When would each be used? Contribution margin is the difference between revenue and variable costs. Segment margin is the difference between the segment’s contribution margin and its traceable fixed costs. It does not include the common fixed costs of the company. Contribution margin can be used if the fixed costs do not change among the alternatives. If the fixed costs change, then segment margin should be used.

Do joint costs affect a sell or process further decision? Why or why not? Joint costs do not affect a sell or process further decision because they are sunk costs.

How can “make-or-buy” concepts be applied to decisions at a service organization? What types of “make-orbuy” decisions might a service organization face? The components that comprise the service an organization has can be analyzed to determine if it could be outsourced. An organization may have a call center as part of the service it provides to customers. A company could determine, using make-or-buy concepts, whether it would be advantageous to outsource the center or keep it in house.

10. Oscar Company builds outdoor furniture using a variety of woods and plastics. What is a constraint? List at least four possible constraints at Oscar Company. A constraint is a factor that restricts production or sale of a product. • Availability of raw materials • Size of production facility • Number of factory workers • Capacity of machinery 11. Do a web search on the terms “carbon offset” and “carbon footprint.” What is a carbon footprint? What is a carbon offset? Why would carbon offsets be of interest to a company? What are some companies that offer (sell) carbon offsets? A carbon offset is a reduction in the carbon dioxide emitted by one entity that offsets the carbon dioxide emitted by another. A carbon footprint is a term for the total amount of greenhouse gases that are attributable to a specific activity or entity. Carbon offsets allow a company that reduces its carbon footprint to profit by selling this reduction to another company that is unable to reduce its carbon footprint. Many exchanges around the world deal in carbon offsets. Student answers will vary.

8-54

Chapter 8

Relevant Costs for Short-Term Decisions

12. A computer manufacturer is considering outsourcing its technical support call center to India. Its current technical support call center is located in Dellroy, Ohio. The current call center is one of the top employers in Dellroy and employs about 10% of the townspeople in Dellroy. The town has experienced high unemployment rates in the past two decades and oftentimes the call center employees are the sole breadwinners in their households. If the technical support call center were to be moved to India, the company would be able to pay about 50% less per hour than they currently pay in Dellroy, Ohio. From a triple bottom line perspective (people, planet, and profit), what factors are relevant to the company’s decision to outsource its technical support call center? Be sure to discuss both quantitative and qualitative factors. While outsourcing often provides cost savings, many qualitative factors must be considered. When a company outsources, it gives up control, including control over the quality of service. Rather, it must rely on the supplier to provide the service at an agreed-upon level of quality. Often, one or more employees are needed just to manage the relationship with the outsourcing company to make sure that everything runs smoothly. In addition, outsourcing often results in laying off employees. In addition, companies will want to investigate thoroughly and monitor the labor practices and working conditions of contract offshoring to make sure laborers are treated fairly and work in a safe environment. While overseas labor is often cheap and readily available, the exploitation of any people, in any country, is not an acceptable business practice.

8-55

Managerial Accounting 6e Solutions Manual

Application & Analysis A8-68 Outsourcing Decision at a Real Company Basic Discussion Questions 1.

Describe the company that is making the decision to outsource. What area of the business is the company either looking to outsource or did it already outsource? Toshiba is a world leader in technology. They manufacture advanced electronic and electrical products. In a September 6, 2009, article from the New York Times, Toshiba is considering outsourcing production of some of its system chips.

Why did the company decide to outsource (or is considering outsourcing)? They are considering outsourcing to cut costs.

List the revenues and costs that might be impacted by this outsourcing decision. The article will not list many, if any, of these revenues and costs; you should make reasonable guesses about what revenues and/or costs would be associated with the business operation being outsourced. The costs impacted by this outsourcing decision would be production costs of raw materials, direct labor, and overhead. The article states that the outsourcing would be for the chips they need that exceed its capacity.

List the qualitative factors that could influence the company’s decision whether to outsource this business operation or not. Again, you need to make reasonable guesses about the qualitative factors that might influence the company’s decision to outsource or not to outsource. The qualitative factors of control over quality, supply, and delivery could influence Toshiba’s decision whether to outsource this production or make it themselves. Student responses will vary.

8-56

Chapter 8

Relevant Costs for Short-Term Decisions

A8-69 Ethics Mini-Case 1.

The ethical issues in this situation are as follows: Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” By not distinguishing between the unavoidable and avoidable fixed costs, and including the unavoidable fixed costs, Sean is not providing accurate or clear information. A proper analysis of the costs could make outsourcing the less favorable position. Integrity: “Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of potential conflicts.” By using his mother-in-law for the quote, he has created a conflict of interest. By not disclosing that conflict, he has violated this principle. Credibility: “Communicate information fairly and objectively.” By including avoidable and unavoidable fixed costs in the calculation of the cost of making the dough, the outsourcing option looks more favorable. Sean also does not disclose a conflict of interest, so Sean is not disclosing information fairly or objectively.

Sean’s responsibility is to report information with honesty, fairness, and objectivity. He should disclose the conflict of interest, get more than one quote, and accurately report all the associated costs.

Some other factors should also be considered when outsourcing the dough. These factors include quality control, which is essential because the biscuits help drive the business; if quality drops off, whatever cost savings they got from outsourcing the biscuits will be negated by the loss of revenue. Student answers will vary.

A8-70 Real Life Mini-Case 1.

For each of the disposal options for day-old pastries, answer the following questions: a. What revenue (if any) would be generated by this option? b. What cost reductions could Starbucks realize from this option? c. What costs would Starbucks incur for this option? d. What qualitative factors would Starbucks need to consider before choosing this option? e. What are the advantages associated with this option? What are the disadvantages associated with this option? Discard in trash. a. No revenue to be gained b. No cost reductions c. Perhaps an increase in trash disposal costs d. Is it ethically acceptable to just throw away perfectly good food? e. Advantages: Quick and easy, no cost and no profit. Disadvantages: Lots of waste. Donate the day-old pastries to local homeless shelters and other charitable organizations. a. No revenue generated b. No cost reductions c. Cost of transporting pastries to the charity d. It is an ethical thing to do to donate to charities. This could also be good for marketing. e. Advantages: Starbucks is being philanthropic at a fairly low cost to itself with little or no waste. Disadvantage: There is a cost to it.

8-57

Managerial Accounting 6e Solutions Manual Sell the day-old pastries in its retail stores for 50% off. a. If the pastries sell, it will generate half of what Starbucks would have normally sold them for. b. No cost reductions c. They must be prepared and transported to the retail store. d. The likelihood that they sell on the second day at 50% is still not great. Therefore, some may be wasted. e. Advantages: More revenue coming in. Disadvantages: Increased expense and possibility of waste. Process the day-old pastries into succinic acid and sell the succinic acid to manufacturers or labs. a. Revenue of unknown amount will be generated when sold. b. No cost reductions c. Starbucks would incur the cost of taking the food and converting it to succinic acid. The cost is unknown. d. Starbucks would have no waste realized from the day-old pastries. e. Advantages: Only option that virtually guarantees no waste. Disadvantages: May cost more than the revenues that succinic acid brings in. 2.

For each of the disposal options for coffee grounds, answer the following questions: a. What revenue (if any) would be generated by this option? b. What cost reductions could Starbucks realize from this option? c. What costs would Starbucks incur for this option? d. What qualitative factors would Starbucks need to consider before choosing this option? e. What are the advantages associated with this option? What are the disadvantages associated with this option? Discard in trash. a. No revenue to be gained b. No cost reductions c. Perhaps an increase in trash disposal d. Is it ethically okay to just throw away something that might be useful to someone else? e. Advantages: Quick and easy, no cost and no profit. Disadvantages: Lots of waste. Give coffee grounds to customers through a program called Grounds for Your Garden. Plants such as roses, azaleas, and evergreens can be fertilized with coffee grounds. a. Maybe a bit of revenue, if the grounds are sold as fertilizer. Otherwise, this is probably philanthropic. b. No cost reductions c. Starbucks would incur the cost of organizing the coffee grounds, packaging, and distributing them to the organization. d. It would be a nice thing to put the coffee grounds to use helping plants to grow. e. Advantages: Philanthropic. Disadvantages: Increased costs. Sell coffee grounds to commercial composters. a. Increased revenue b. No cost reductions c. Starbucks would have to organize and send grounds to composters. d. It is environmentally friendly. e. Advantages: Environmentally friendly and it will add revenue. Disadvantages: Increased costs. Process the food waste into succinic acid and sell the succinic acid to manufacturers or labs. a. Starbucks will create revenue when it sells the acid; the amount of this revenue is unknown. b. No cost reductions c. Starbucks would incur the cost of taking the food and converting it to succinic acid. Again, the amount of the cost is unknown. d. Starbucks would have no waste realized from the coffee grounds. e. Advantages: Increase in revenues and no waste. Disadvantages: May cost more than the revenues that succinic acid brings in.

8-58

Chapter 8 3.

Relevant Costs for Short-Term Decisions

For both day-old pastries and coffee grounds, are there any options that are particularly attractive in your viewpoint? Are there any options that would not be acceptable in your viewpoint? The philanthropic ideas are particularly attractive because people may enjoy seeing businesses give back to the community and the environment. However, from a business standpoint, anything that will increase profits and reduce waste to a minimum is a good option. I believe that from both the standpoint of environment and profitability the only option that is absolutely not acceptable is to throw away these products. This is because there are many advantages to be had if Starbucks would do other things with them. Student answers will vary.

8-59

Chapter 9 The Master Budget Quick Check Answers QC9-1. d QC9-2. d QC9-3. b

QC9-4. c QC9-5. a QC9-6. d

QC9-7. c QC9-8. a QC9-9. d

QC9-10. b QC9-11. c QC9-12. c

Short Exercises (5–10 min.) S9-1 Prepare the components of the master budget in the following order: Sales budget Production budget Direct materials budget

Operating budgets

Budgeted income statement Cash payments budget Combined cash budget Budgeted balance sheet

Financial budgets

The sales budget is the first budget to be developed; the rest of the budgets are based on it. Using the sales budget, managers can then develop the production budget. The production budget will determine the amount of direct materials the firm needs to purchase. The DM, DL, and MOH budgets are combined with the operating expenses budget to form the budgeted income statement. These are the operating budgets. The financial budgets deal with cash flows and the budgeted balance sheet. The cash receipts and cash payments budgets are combined, resulting in the combined cash budget. Combining elements of the combined cash budget and the budgeted income statement, the company will develop its budgeted balance sheet.

9-1

Managerial Accounting 6e Solutions Manual

(5 min.) S9-2 1. 2. 3.

4. 5.

When implementing zero-based budgeting, managers begin with a budget of zero and must justify every dollar they put in the budget. This budgeting approach is very time-consuming and labor intensive. Gross profit is a company’s sales revenue minus its cost of goods sold. It’s also the amount remaining to cover all operating expenses. Companies often use last year’s budget as a starting point for the current year’s budget that may result in year after year increases. Using zero-based budgeting forces the justification of every dollar. Therefore the company will pay close attention to all revenue and expenses such as cost of goods sold and operating expenses. Zero-based budgeting could help to better manage cash flow because all expenses must be justified instead of just basing them on the previous period’s budget. Student answers will vary. The advantages of zero-based budgeting are that it may prevent perpetual increases to expenses and help keep expenses in check. The disadvantages to zero-based budgeting are that it is very time-consuming and labor intensive. Because the brand has been performing well, employees may be resistent to such a time-consuming and labor-intensive process and become frustrated and lose motivation, especially if they do not understand that even though the brand has performing well, it is important to prevent perpetual increases in budgeted expenses from time to time. As an employee, I might be demotivated because of the extra work involved with zero-based budgeting. Student answers will vary.

(5 min.) S9-3 a. b. c. d. e. f. g. h. i. j. k. l.

Safety stock slack operating budgets production budget Participative budgeting Rolling budget variance Master budget zero-based budgeting financial budgets Strategic planning Budget committees

(5 min.) S9-4 Jefferson Sports Medicine Inc. Service Revenue Budget For the Months of July through September July August September Number of exams performed (basic) 220 235 105 Multiply by: Price per exam $ 60 $ 60 $ 60 Service revenue (basic) $ 13,200 $ 14,100 $ 6,300

Quarter 560 $ 60 $ 33,600

Number of exams performed (extended) Multiply by: Price per exam Service revenue (extended)

190 $ 135 $ 25,650

200 $ 135 $ 27,000

110 $ 135 $ 14,850

500 $ 135 $ 67,500

Total service revenue

$38,850

$41,100

$21,150

$101,100

9-2

Chapter 9

The Master Budget

(5 min.) S9-5 Nichols Cycles Production Budget

Unit sales Plus: Desired ending inventory (10% of next month’s unit sales) Total needed Less: Beginning inventory Number of units to produce

For the Months of April through June April May 1,000 1,170

June 1,360

Quarter 3,530

117

136

125

1,117 (100) 1,017

1,306 (117) 1,189

1,485 (136) 1,349

3,655 (100) 3,555

(5 min.) S9-6 Breadmaster Direct Materials Budget For the Months of July through September July August September 1,540 1,820 1,660

Units to be produced Multiply by: Pounds of flour needed per unit Quantity (lbs.) needed for production Plus: Desired end inventory of DM (20% of the amount needed for next month’s production) Total quantity (lbs.) needed Less: Beginning inventory of DM Quantity (lbs.) to purchase Multiply by: Cost per pound Total cost of DM purchases

Quarter 5,020

× 0.50

770

910

830

2,510

182

166

146

952 (154) 798 × $2.00 $1,596

1,076 (182) 894 × $2.00 $1,788

976 (166) 810 × $2.00 $1,620

2,656 (154) 2,502 × $2.00 $5,004

(5 min.) S9-7 Whistler Manufacturing Direct Labor Budget For the Months of January through March January February Units to be produced 560 630 Multiply by: Direct labor hours per unit × 6.0 × 6.0 Total hours required 3,360 3,780 Multiply by: Direct labor cost per hour × $19 × $19 Total direct labor cost $63,840 $71,820

March 860 × 6.0 5,160 × $19 $98,040

Quarter 2,050 × 6.0 12,300 × $19 $233,700

The hours required in January are 3,360. The hours required in February are 3,780. The hours required in March are 5,160. .

9-3

Managerial Accounting 6e Solutions Manual

(5 min.) S9-8 Monocle Corporation Manufacturing Overhead Budget For the Months of April through June April DL hours (from DL budget)

May

June

Quarter

490

730

600

1,820

× $1.70

Total variable MOH

833

1,241

1,020

3,094

Plus: Fixed MOH

3,800

11,400

Total MOH

$4,633

$5,041

$4,820

$14,494

Multiply by: Variable MOH rate

(5 min.) S9-9 Wellfleet Corporation Operating Expenses Budget For the Months of July through September July Sales Units (from Sales Budget) Variable Operating Expenses ($3 per Unit Sold)

August

September

Quarter

1,220

1,480

1,740

4,440

3,660

4,440

5,220

13,320

Salaries

5,700

17,100

Office Rent

3,800

11,400

Depreciation

2,900

8,700

Total Fixed Operating Expenses

12,400

37,200

Total Operating Expenses

$16,060

$16,840

$17,620

$50,520

Fixed Operating Expenses:

9-4

Chapter 9

The Master Budget

(5 min.) S9-10 Oregon Weights Company Budgeted Income Statement For the Month Ended January 31 Sales (1,500 units @ $2,320 each)

$3,480,000

Less: Cost of goods sold (1,500 units @ $1,420 each)

2,130,000

Gross profit

1,350,000

Less: Operating expenses Variable portion (1,500 units @ $1.40 each)

2,100

Fixed portion

7,600

Operating income

1,340,300

Less: Interest expense

3,300

Less: Income tax expense [(1,340,300-3,300) × 0.40]

534,800

Net income

$ 802,200

(5 min.) S9-11 Kessler Service Cash Collections Budget For the Months of January through March January Cash sales (30% of sales)

February

March

Quarter

$4,560

$3,960

$4,320

12,840

25% month of sale

2,660

2,310

2,520

7,490

50% month after

3,920

5,320

4,620

13,860

20% two months after

2,310

1,568

2,128

6,006

$13,450

$13,158

$13,588

$40,196

Collections on credit sales:

Total cash collections

Note: The 5% of credit sales that are never collected are not included in the cash collections budget; no cash is ever collected for those sales.

9-5

Managerial Accounting 6e Solutions Manual

(5 min.) S9-12 Finley Corporation Cash Payments Budget Cash payments for DM: Last month's purchases (50%)

$39,000

This month's purchases (50%)

44,000

Cash payments for DL

35,000

Cash payments for MOH

42,500

Cash payments for operating expenses (49,000 – 2,700 – 1,700)

44,600

Cash payment for taxes

8,600

Total cash payments

$213,700

(5–10 min.) S9-13 SaveCo Services, Inc. Cash Budget Month Ended May 31 Beginning cash balance Plus: Cash collections from customers Total cash available Less: Total cash payments Ending cash balance before financing Minimum cash balance desired Amount to borrow

$ 8,600 548,480 557,080 (563,420) (6,340) (7,500) $ (13,840)

SaveCo needs to borrow $13,840 by the end of May.

(5 min.) S9-14 Transaction fee = ($0.45 × number of transactions) + (1.5% × sales made with credit and debit cards) = ($0.45 × 90,000) + (1.5% × $1,000,000) = $40,500 + $15,000 = $55,500

9-6

Chapter 9

The Master Budget

(15 min.) S9-15 Req. 1 Quinn Company Sales Budget January $ 160.00 × 4,600 $736,000

Sales price per phone Multiply by: Number of phones Total sales

February $ 190.00 × 4,000 $760,000

Total

$1,496,000

Req. 2 Quinn Company Cost of Goods Sold, Inventory, and Purchases Budget January Cost of goods sold (0.50 × sales from sales budget) $ 368,000 Plus: Desired ending inventory ($15,000 + 0.60 × Cost of goods sold for next month) 243,000 Total inventory required 611,000 Less: Beginning inventory (235,800) Amount of inventory to purchase $ 375,200

February $ 380,000

317,400 697,400 (243,000) $ 454,400

(5–10 min.) S9-16 1.

Ryan, an accountant for Black Hat Company, builds some slack into the budget for the Human Resources (HR) department so that the targets are easier to achieve. Ryan is dating the manager of the HR department.

Integrity—Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

Daniel knows that the laws concerning credit and debit card fees have changed in the past year but does not know what the changes are specifically. He does not investigate before preparing the cash budget.

Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

When out with friends, Maureen complains loudly about the budgeting process at her company. She feels the budgeting process is overly precise. She illustrates her point with specific numbers from the budget.

Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Mackenzie is the controller for Shady Hollow Parks. When she prepares the budgets for the upcoming year for upper management, she realizes that her department has higher costs than any other department. She aggregates the numbers with some other departments so that it is not obvious that her department is overspending. Carly is caught on video as she brags about illegally downloading software that she feels is overpriced. The video is uploaded to YouTube.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

Integrity—Abstain from engaging in or supporting any activity that might discredit the profession.

9-7

Managerial Accounting 6e Solutions Manual

(10 min.) S9-17 1.

In this data set, what field is the predictor variable (x)? What field is the outcome variable (y)? The predictor variable is media mentions, and the outcome variable is the sales volume of frozen yogurt quarts.

What function(s) did the owner use to prepare the analysis in Excel? The owner used FORECAST.LINEAR, SLOPE, INTERCEPT, and RSQ functions.

What steps would be involved in preparing the analysis in Excel? a. Start with a data set with the predictor variable (x) in the column to the left of the outcome variable (y). b. Go to an area of the worksheet where you would like to display forecasted values, and then type the values for which you would like predictions. Select the first cell where you would like to see the forecast. c. On the ribbon, choose the Formulas tab, then More Functions, and then Statistical. An alphabetized list of available statistical functions will appear. Scroll down the list until you get to FORECAST.LINEAR. Click on it. d. The FORESCAST.LINEAR dialog box will open. Cell addresses are needed for three pieces of information. You may either type in the cell addresses or select them with your cursor. First, input the cell address for the x-value for which you want the prediction. Second, input the range of cells that contains the data about the y-variable. Finally input the range of cells that contains the data about the x variable. Make these cell references absolute by adding dollar signs to the addresses so that you can copy the FORECAST. LINEAR function to the other cells where you want predictions. Finally, click OK. e. Drag and drop the fill handle to copy the function to the cells below. f. To find the slope, intercept, and R-squared value: First, select the cell where you want to see the answer. g. Next, choose the Formulas tab on the ribbon, then More Functions, and then Statistical. An alphabetized list of available statistical functions will appear. Click on SLOPE, INTERCEPT, or RSQ depending on which function you want. h. A dialog box will open, requesting the range of cells for the data about y and x. Input the information either by typing or selecting the cells with your cursor. Then click OK. The resulting slope, intercept, or Rsquared value will be returned in the destination cell.

Does it appear that the number of media mentions will be a good predictor of sales? How do you know? It appears that media mentions will be a good predictor of sales because as media mentions increase, so does volume.

How many quarts of frozen yogurt could Freezy’s expect to sell if there were 625 mentions of Freezy’s frozen yogurt in news and social media in a given week? Freezy’s could expect to sell 817 quarts of frozen yogurt if there were 625 mentions in news and social media in a given week. See Cell F8 in the screenshot in the exercise.

What cell(s) would you change in the Excel worksheet to predict quarts sold if there were 700 mentions in news and social media in a given week? You could enter 700 in Cells E7, E8, or E9 to predict quarts sold for a new volume.

9-8

Chapter 9

The Master Budget

(10 min.) S9-18 1.

In this data set, what field is the predictor variable (x)? What field is the outcome variable (y)? In this data set, the predictor variable is number of free samples distributed and the outcome variable is new product unit sales.

Explain the steps you would take to create the following items in the analysis by the Kelley controller: a. The scatterplot with trendline 1. Start with a data set with the predictor variable (x) in the column to the left of the outcome variable (y). Select both the x and y columns of data with your cursor. 2. Choose the Insert tab on the Excel ribbon. Then click the scatter icon from the group of available charts. You’ll see the scatterplot on the worksheet. 3. To add the trendline (regression line), point your cursor at any data point on the scatterplot and right click your cursor. From the menu that opens choose add trendline The Format Trendline task pane will appear on the right side of your screen. Leave the default option: Linear. Toward the bottom of the task pane, you will see a Forecast Forward and Backward section. Type in the number of units of x you would like to extend the trendline forward past the highest x value in the data set. b. The results from the FORECAST.LINEAR function 1. Go to an area of the worksheet where you would like to display forecasted values, and then type the values for which you would like predictions. Select the first cell where you would like to see the forecast. 2. On the ribbon, choose the Formulas tab, then More Functions, and then Statistical. An alphabetized list of available statistical functions will appear. Scroll down the list until you get to FORECAST.LINEAR. Click on it. 3. The FORECAST.LINEAR dialog box will open. Cell addresses are needed for three pieces of information. You may either type in the cell addresses or select them with your cursor. First, input the cell address for the x-value for which you want the prediction. Second, input the range of cells that contains the data about the y-variable. Finally input the range of cells that contains the data about the x variable. Make these cell references absolute by adding dollar signs to the addresses so that you can copy the FORECAST. LINEAR function to the other cells where you want predictions. Finally, click OK. 4. Drag and drop the fill handle to copy the function to the cells below.

Does it appear that the number of free samples distributed will be a good predictor of sales of new products? What are two ways that you can tell? Yes, it does appear that the number of free samples distributed would be a good predictor of sales of new products for two reasons. First, the R-squared (RSQ) is 0.928 which is high. Second, the data points appear to be in a linear pattern as we would expect when there is a relationship.

How many units of a new product could Kelley expect to sell if it distributed 9,500 free samples of that new product? Kelley could expect to sell 6,050 units if it distributed 9,500 free samples. See Cell F17.

What cell(s) would you change in the Excel worksheet to predict how many units of new product would be sold if there were 10,100 free samples distributed? Cells E16, E17, or E18 could be changed to predict how many units of a new product would be sold.

9-9

Managerial Accounting 6e Solutions Manual

Exercises (Group A) (15 min.) E9-19A Req. 1 Direct materials budget before any changes For quarters 1 through 4 Number of soda pop bottles to be produced Multiply by: Kilograms of PET per bottle (original) Quantity of PET needed for production (kg) Plus: Desired ending inventory of PET Total quantity (kg) needed Less: Beginning inventory of PET Quantity of PET (kg) to purchase Multiply by: Cost per kilogram Total cost of PET purchases

Quarter 1 2,000,000 0.004 8,000 1,040 9,040 (800) 8,240 3.00 $ 24,720

Quarter 2 2,600,000 0.004 10,400 920 11,320 (1,040) 10,280 3.00 $ 30,840

Quarter 3 2,300,000 0.004 9,200 1,240 10,440 (920) 9,520 $ 3.00 $28,560

Quarter 4 3,100,000 0.004 12,400 1,760 14,160 (1,240) 12,920 $ 3.00 $38,760

Year 10,000,000 0.004 40,000 1,760 41,760 (800) 40,960 $ 3.00 $122,880

Req. 2 Direct materials budget after reducing PET content of each bottle For quarters 1 through 4 Number of soda pop bottles to be produced Multiply by: Kilograms of PET per bottle (after reduction for redesign) Quantity of PET needed for production (kg) Plus: Desired ending inventory of PET Total quantity (kg) needed Less: Beginning inventory of PET Quantity of PET (kg) to purchase Multiply by: Cost per kilogram Total cost of PET purchases

9-10

Quarter 1 2,000,000 0.003

Quarter 2 2,600,000 0.003

Quarter 3 2,300,000 0.003

Quarter 4 3,100,000 0.003

Year 10,000,000 0.003

6,000 780 6,780 (800) 5,980 $ 3.30 $ 19,734

7,800 690 8,490 (780) 7,710 $ 3.30 $ 25,443

6,900 930 7,830 (690) 7,140 $ 3.30 $ 23,562

9,300 1,760 11,060 (930) 10,130 3.30 $33,429

30,000 1,760 31,760 (800) 30,960 $ 3.30 $102,168

Chapter 9

The Master Budget

(continued) E9-19A Req. 3 Savings from reducing PET content of each bottle (difference in Req. 2 – Req. 1 total cost of DM purchases) Total savings for the year Cost of retrofitting the molds Net savings (cost) of retrofitting—first year Savings each year AFTER the first year

Quarter 1 $4,986

Quarter 2 $5,397

Quarter 3 $4,998

Quarter 4 $5,331

Year $20,712

$20,712 $22,112 $(1,400) $20,712

The company should make the change (retrofitting); even though the first year results in a net outflow, later years will realize savings.

9-11

Managerial Accounting 6e Solutions Manual

(5 min.) E9-20A Johnston Bookstore Sales Budget For the Upcoming Year Q1

Year

Books: Unit sales

1,570

800

1,790

670

4,830

Unit price

× $85

$133,450

$68,000

$152,150

$56,950

$410,550

Unit sales

200

190

240

180

810

Unit price

× $18

School supplies revenue

$3,600

$3,420

$4,320

$3,240

$14,580

Unit sales

580

330

880

540

2,330

Unit price

× $29

$16,820

$9,570

$25,520

$15,660

$67,570

Unit sales

690

540

890

440

2,560

Unit price

× $6

$4,140

$3,240

$5,340

$2,640

$15,360

$158,010

$84,230

$187,330

$78,490

$508,060

Book revenue School supplies:

Apparel:

Apparel revenue Miscellaneous:

Miscellaneous revenue Total sales revenue

9-12

Chapter 9

The Master Budget

(10–20 min.) E9-21A Spring Garden Preschool Budgeted Service Revenue For Year Ended XXXX Monthly tuition revenue: Two-day program Three-day program Four-day program Five-day program Total monthly tuition Months of operations Total tuition revenue Registration fee revenue

78 kids × $125 44 kids × $150 56 kids × $165 20 kids × $180

$ 9,750 6,600 9,240 3,600 $29,190 × 8 months $233,520 23,760

198 kids × $120 (198 kids × 50%) × $2 × 15 times per month × 8 months

Lunch bunch revenue

23,760

Total revenue

281,040

Note: Students may show yearly tuition by age group rather than finding monthly tuition and then multiplying it by the eight months of operations. Nonetheless, total tuition revenue for the year should be the same as that shown.

(5 min.) E9-22A Hoffman Foods Production Budget For the Upcoming Year Quarter 1

Quarter 2

Quarter 3

Quarter 4

Year

Unit sales (from sales budget)

152,500

181,500

213,000

160,500

707,500

Plus: Desired end inventory

54,450

63,900

48,150

66,900

Total needed

206,950

245,400

261,150

227,400

774,400

Less: Beginning inventory

(45,750)*

(54,450)

(63,900)

(48,150)

(45,750)

Units to produce

161,200

190,950

197,250

179,250

728,650

*$152,500 x 30%

9-13

Managerial Accounting 6e Solutions Manual

(5 min.) E9-23A Sacco Industries Direct Materials Budget For the Months of January through March January

February

March

Quarter

Units to be produced (from production budget)

5,600

4,800

4,200

14,600

Multiply by: Quantity of DM needed per unit

×3

Quantity needed for production

16,800

14,400

12,600

43,800

Plus: Desired end inventory of DM

3,600

3,150

3,000

Total quantity needed

20,400

17,550

15,600

46,800

Less: Beginning inventory of DM

(4,200)*

(3,600)

(3,150)

(4,200)

Quantity to purchase

16,200

13,950

12,450

42,600

Multiply by: Cost per chip

× $2.00

Total cost of DM purchases

$32,400

$27,900

$24,900

$85,200

*16,800 × 25%

(5 min.) E9-24A Req. 1 Osborne Manufacturing Production Budget For the Months of January through March January

February

March

Quarter

3,400

3,800

3,300

10,500

950

825

1,225

Total needed

4,350

4,625

4,525

11,725

Less: Beginning inventory

(850)

(950)

(825)

(850)

Units to produce

3,500

3,675

3,700

10,875

Unit sales Plus: Desired end inventory (25% of next month’s unit sales)

9-14

Chapter 9

The Master Budget

(continued) E9-24A Req. 2 Osborne Manufacturing Direct Materials Budget For the Months of January through March January

February

March

Quarter

3,500

3,675

3,700

10,875

×3

Quantity (lbs.) needed for production

10,500

11,025

11,100

32,625

Plus: Desired end inventory of DM (20% of the amount needed for next month’s production)

2,205

2,220

2,895

Total quantity (lbs.) needed

12,705

13,245

13,995

35,520

Less: Beginning inventory of DM

(2,100)*

(2,205)

(2,220)

(2,100)

Quantity (lbs.) to purchase

10,605

11,040

11,775

33,420

Multiply by: Cost per pound

× $0.20

Total cost of DM purchases

$2,121

$2,208

$2,355

$6,684

Units to be produced (from production budget) Multiply by: Quantity (lbs.) of DM needed per unit

*10,500 × 20%

9-15

Managerial Accounting 6e Solutions Manual

(5 min.) E9-25A Dominion Industries Direct Labor Budget For the Upcoming Year Economy

Standard

Premium

Total

Cutting department Units to be produced (from production budget)

510

700

860

Multiply by: Direct labor hours per unit

× 1.2

× 1.3

× 1.4

Total cutting hours required

612

910

1,204

Multiply by: Direct labor cost per hour

× $10

Budgeted DL cost (cutting department)

$6,120

$9,100

$12,040

Units to be produced (from production budget)

510

700

860

Multiply by: Direct labor hours per unit

× 2.8

× 2.2

× 2.1

Total assembly hours required

1,428

1,540

1,806

Multiply by: Direct labor cost per hour

× $12

Budgeted DL cost (assembly department)

$17,136

$18,480

$21,672

$57,288

Total budgeted DL cost (entire company)

$23,256

$27,580

$33,712

$84,548

$27,260

Assembly department

9-16

Chapter 9

The Master Budget

(15 min.) E9-26A The Stenback Company Manufacturing Overhead Budget For the Upcoming Year Projected sales (from sales budget)

48,000

Variable MOH costs: Indirect materials

$ 43,200

Supplies

33,600

Indirect labor

19,200

Plant utilities

4,800

Repairs and maintenance

24,000

Total variable MOH

$ 124,800

Fixed MOH costs: Indirect labor

$ 64,000

Plant utilities

34,000

Repairs and maintenance

10,000

Depreciation on plant and equipment

45,000

Insurance on plant and equipment

20,000

Plant supervision

68,000

Total fixed MOH Total MOH

$ 241,000 $ 365,800

9-17

Managerial Accounting 6e Solutions Manual

(20–30 min.) E9-27A Req. 1 Evansville Preschool Monthly Operating Expenses Budget Teachers’ salary: Two-day program Three-day program Four-day program Five-day program Director salary Total salary expense Payroll tax expense Lease expense Fixed operating expenses Variable operating expenses Total monthly operating expenses

9 teachers × $428 per month 4 teachers × $657 per month 5 teachers × $856 per month 4 teachers × $1,075 per month

$16,560 × 7.65%

$13 × 190 kids

$3,852 2,628 4,280 4,300 1,500 $16,560 1,267 4,050 890 2,470 $25,237

Req. 2 Evansville Preschool Budgeted Income Statement For Year Ended XXXX Tuition, registration fees, and lunch bunch revenue Less: Operating expenses ($25,237* × 8 months) Operating income a

$ 241,300 (201,896) $ 39,404

from Req. 1

Req. 3 From the budgeted income statement, Evansville learns that it has projected operating income for the year. Because Evansville is a not-for-profit preschool, it is not in business to generate income for its owners. Rather, Evansville may be able to further its organizational goals with the projected income. For example, it may decide to use the income for any of the following purposes: • Invest in additional (or better) classroom equipment • Invest in additional (or better) playground equipment • Improve the current program (more crafts, books, better curriculum, special guest visitors, special programs, field trips, etc.) • Offer scholarships for those children whose families have difficulty paying the tuition • Reduce tuition rates Student answers may vary.

9-18

Chapter 9

The Master Budget

(5 min.) E9-28A Delta Labs Budgeted Income Statement For the Quarter Ended March 31 Sales (unit sales x sale price) Less: COGS (unit sales x unit cost) Gross profit Less: Operating expenses Operating income Less: Income tax expenses (30% of operating income) Net income

January a $252,000 d 117,600 134,400 59,000

February b $220,500 e 102,900 117,600 57,000

March c $256,500 f 119,700 136,800 58,000

Quarter $729,000 340,200 388,800 174,000

75,400

60,600

78,800

214,800

22,620

18,180

23,640

64,440

$52,780

$42,420

$55,160

$150,360

January (5,600) ($45) February (4,900) ($45) c March (5,700) ($45) d January (5,600) ($21) e February (4,900) ($21) f March (5,700) ($21) b

9-19

Managerial Accounting 6e Solutions Manual

(15 min.) E9-29A Suffield Motors Budgeted Income Statement

Sales Less: Cost of goods sold Gross profit Less: Operating expenses Operating Income

$ $ $

Quarter 1 4,708,000 1,883,200 2,824,800 1,647,800 1,177,000

$ $ $

For the Upcoming Year Quarter 2 Quarter 3 4,802,160 $ 4,994,246 1,920,864 1,997,698 2,881,296 $ 2,996,548 1,680,756 1,248,562 1,200,540 $ 1,747,986

Calculations:

Given in exercise Base sales % increase quarter 1 % increase quarter 2 % increase quarter 3 % increase quarter 4

% operating expenses in qtr. 1 % operating expenses in qtr. 2 % operating expenses in qtr. 3 % operating expenses in qtr. 4

9-20

7% 2% 4% 3%

Given in exercise 35% 35% 25% 20%

$ of amount of increase (% × Total sales prior period) $ $ $ $

308,000 94,160 192,086 149,827

Sales in quarter $ 4,708,000 $ 4,802,160 $ 4,994,246 $ 5,144,073

$ $ $ $ $

Total sales 4,400,000 4,708,000 4,802,160 4,994,246 5,144,073

Operating expenses $ 1,647,800 $ 1,680,756 $ 1,248,562 $ 1,028,815

$ $ $

Quarter 4 5,144,073 2,057,629 3,086,444 1,028,815 2,057,629

$ $ $

Year 19,648,479 7,859,391 11,789,088 5,605,933 6,183,155

Chapter 9

The Master Budget

(5 min.) E9-30A Holiday Corporation Cash Collections Budget For the Months of January through March January Cash sales (40%)

February

March

Quarter

$58,000

$50,000

$72,000

180,000

25% of credit sales made in current month

21,750

18,750

27,000

67,500

50% of credit sales made one month ago

34,500

43,500

37,500

115,500

16% of credit sales made two months ago

11,040

13,920

33,600

$150,420

$396,600

Collections on credit sales (60%):

Total cash collections

8,640

$122,890

$123,290

145,000 × 60% × 25% 125,000 × 60% × 25% c 180,000 × 60% × 25% d 115,000 × 60% × 50% e 145,000 × 60% × 50% f 125,000 × 60% × 50% g 90,000 × 60% × 16% h 115,000 × 60% × 16% I 145,000 × 60% × 16% b

9-21

Managerial Accounting 6e Solutions Manual

(5 min.) E9-31A The Robbins Company Cash Payments Budget For the Months of April through June April

May

June

Quarter

Current month purchases (45%)

$59,400

$54,900

$66,150

$180,450

Prior month’s purchases (55%)

64,900

72,600

67,100

204,600

60,000

70,000

85,000

215,000

48,000

62,000

83,000

193,000

63,200

76,200

73,200

212,600

Cash payment for new server

7,000

Cash payment for taxes

14,000

$295,500

$342,700

$388,450

$1,026,650

Cash payments for DM:

Cash payments for DL Cash payments for MOH a Cash payments for operating expenses

Total cash payments

Depreciation is a non-cash expense and is not included in the MOH cash payments (i.e., April $60,000DL × 140% = $84,000 – $36,000 depreciation = $48,000 cash payments for MOH paid in April). b

Depreciation and bad debt expense are non-cash expenses and are not included in the operating expenses cash payments (i.e., March operating expense paid in April $74,000 – $8,000 depreciation – $2,800 bad debt expense = $63,200 cash payment for operating expenses in the month of April).

(5 min.) E9-32A Bentfield Health Center Combined Cash Budget For the Months of July through September Beginning balance of cash Plus: Cash collections Total cash available Less: Cash payments End cash balance before financing Financing: Borrowings Repayments Interest payments End cash balance

9-22

July $31,000 91,000 122,000 (142,000) (20,000)

August $25,000 151,000 176,000 (103,000) 73,000

September $27,100 124,000 151,100 (133,000) 18,100

Quarter $31,000 366,000 397,000 (378,000) 19,000

45,000 0 0 $25,000

0 (45,000) (900) $27,100

6,900 0 0 $25,000

51,900 (45,000) (900) $25,000

Chapter 9

The Master Budget

(20–30 min.) E9-33A Req. 1 Sales Budget

Cash sales (20%) Credit sales (80%) Total sales

October $180,800 723,200 $904,000

Augustine Reeds Sales Budget November $192,800 771,200 $964,000

December $ 209,000 836,000 $1,045,000

January $187,200 748,800 $936,000

Req. 2 Cash Collections Budget Augustine Reeds Budgeted Cash Collections from Customers Cash sales (20% of current month total sales) Collection of credit sales: 30% of current month credit sales 60% of prior month credit sales 8% of credit sales two months ago Total collection of credit sales Total cash collections

December $209,000

January $187,200

250,800 a 462,720 c 57,856 e 771,376 $980,376

224,640 b 501,600 d 61,696 f 787,936 $975,136

December credit sales: $836,000 × 0.30 November credit sales: $771,200 × 0.60 c October credit sales: $723,200 × 0.08 d January credit sales: $748,800 × 0.30 e December credit sales: $836,000 × 0.60 f November credit sales: $771,200 × 0.08 b

9-23

Managerial Accounting 6e Solutions Manual

(25–30 min.) E9-34A Luda Corporation Budgeted Balance Sheet March 31 ASSETS Current assets: Casha Accounts receivable Inventory Plant assets: Furniture and fixtures Accumulated depreciation ($29,860 + $400) Total assets

$ 4,000 3,075 18,265 34,600 (30,260)

$25,340

4,340 $29,680

LIABILITIES Current liabilities: Accounts payable Total liabilities

$ 1,700 $ 1,700

OWNERS' EQUITY Owners’ equityb Total liabilities and owners' equity Computations: a Cash: Beginning balance Receipts Payments for inventory Payments of February 28 liabilities… Payments for other expenses Ending balance

9-24

27,980 $29,680

Owners' equity: Beginning balance Sales revenue Cost of goods sold (0.40 × $12,300) Depreciation expense… Other expenses Ending balance

$11,600 14,700 (4,600) (8,700) (9,000) $ 4,000

$30,000 12,300 (4,920) (400) (9,000) $27,980

Chapter 9

The Master Budget

(20 min.) E9-35A Rockwall Adventures Cash Budget February and March February Beginning cash balance

March

$ 16,900

$ 21,000

90,400

80,000

2,000

107,300

103,000

Purchases of inventory

$ 50,700

$ 41,400

Operating expenses

47,700

36,500

Total cash payments

98,400

77,900

(1) Ending cash balance before financing

8,900

25,100

Less: Minimum cash balance desired

(21,000)

Cash excess (deficiency)

(12,100)

4,100

Cash collections Cash from sale of plant assets Total cash available Less cash payments:

Financing of cash deficiency: Plus: New borrowing (at end of month)

$ 12,100

Less: Debt repayments (at end of month)

(4,039)

Less: Interest payments

(61)

(2) Total effects of financing

12,100

(4,100)

Ending cash balance (1) + (2)

$ 21,000

The amounts in the February budget can be computed in a straightforward fashion. The ending cash balance in February is the beginning cash balance in March.

9-25

Managerial Accounting 6e Solutions Manual

(15–20 min.) E9-36A Req. 1 $500,000 total sales × 20% = $100,000 sales revenue paid in cash Req. 2 $500,000 total sales / $40 average customer bill = 12,500 transactions Req. 3 12,500 total transactions × 70% = 8,750 transactions × $40 average bill = $350,000 Alternatively, $500,000 total sales × 70% = $350,000 Req. 4 12,500 total transactions × 70% = 8,750 Req. 5 $0.50 per credit card transaction × 8,750 credit card transactions = $4,375 2% of amount charged × $350,000 total credit card transactions = $7,000 $4,375 + $7,000 = $11,375 total credit card transaction fees Req. 6 12,500 total transactions × 10% = 1,250 transactions × $40 average bill = $50,000 Alternatively, $500,000 total sales × 10% = $50,000 Req. 7 12,500 total transactions × 10% = 1,250 Req. 8 $0.22 per credit card transaction × 1,250 debit card transactions = $275 1% of amount charged × $50,000 total debit card transactions = $500 $275 + $500 = $775 total debit card transaction fees Req. 9 Sales paid with credit cards Plus sales paid with debit cards Less credit card transaction fees Less debit card transaction fees Total cash deposited from credit & debit cards

$350,000 (from Req. 3) $ 50,000 (from Req. 6) ($11,375) (from Req. 5) ($ 775) (from Req. 8) $387,850

Req. 10 Total cash deposited from credit & debit cards Plus sales revenue paid in cash Total cash deposited in bank from cash, credit, & debit cards

9-26

$387,850 (from Req. 9) $100,000 (from Req. 1) $487,850

Chapter 9

The Master Budget

(20–30 min.) E9-37A Req. 1 Sales Budget

Sales

Kent Corner Shoppe Sales Budget November $280,000*

December $364,000**

$56,000 224,000 $280,000

$72,800 291,200 $364,000

Cash sales (20%) Credit sales (80%) Total sales

* October sales $250,000 × 1.12 = $280,000 ** November sales $280,000 × 1.30 = $364,000 Req. 2 Kent Corner Shoppe Cost of Goods Sold, Inventory, and Purchases Budget

November Cost of goods sold: (0.75 × $280,000) (0.75 × $364,000)

December

$ 210,000 $ 273,000

Plus: Desired ending inventory [$15,000 + (0.15 × $273,000)] [$15,000 + (0.15 × 0.75 × $250,000)] Total inventory required Less: Beginning inventory Amount of inventory to purchase

55,950 _______ 265,950 (46,500)* $ 219,450

43,125 316,125 (55,950) $ 260,175

*[$15,000 + (0.15 × 210,000)] = $46,500 Req. 3 Kent Corner Shoppe Operating Expense Budget

Wage expense Utilities Expense Property Tax Expense Property & Liability Insuranse Expense Depreciation Expense Credit/Debit card fees expense (224,000 × 2% ; 291,200 × 2%

November $9,200 1,000 2,000 500 6,500 4,480 ______ $23,680

Total Operating Expenses .

December $9,200 1,500 2,000 500 6,500 5,824 ______ $25,524 9-27

Managerial Accounting 6e Solutions Manual

(continued) E9-37A Req. 4 Kent Corner Shoppe Budgeted Income Statement

Sales Revenue (Req. 1) Less: Cost of Goods Sold (Req. 2) Gross Profit Less Operating Expenses (Req. 3) Operating Income

November $280,000 210,000 70,000 23,680 46,320

December $364,000 273,000 91,000 25,524 65,476

(15–20 min.) E9-38A Ace Electronics Cost of Goods Sold, Inventory, and Purchases Budget Nine Months Ended September 30 QUARTER ENDED March 31 June 30 Cost of goods sold: (0.70 × $125,000) (0.70 × $175,000) (0.70 × $150,000) Plus: Desired ending inventory [$20,000 + (0.15 × $122,500)] [$20,000 + (0.15 × $105,000)] [$20,000 + (0.15 × 0.70 × $225,000)] Total inventory required Less: Beginning inventory Amount of inventory to purchase

9-28

Sept. 30

NINE-MONTH TOTAL

$ 105,000

$315,000

$ 87,500 $ 122,500

38,375 35,750 125,875 (33,125) $ 92,750

158,250 (38,375) $ 119,875

43,625 148,625 (35,750) $ 112,875

Chapter 9

The Master Budget

(20 min.) E9-39A 1. Use the FORECAST.LINEAR function to predict new product sales at the levels of 300, 350, and 400 media mentions.

2. Does it appear that the number of media mentions will be a good predictor of sales of frozen yogurt? How can you tell? Yes, it appears that the number of media mentions will be a good predictor of sales of frozen yogurt. The FORECAST.LINEAR function shows that number of media mentions increases the number of sales. 3. How many quarts of frozen yogurt could Olly’s expect to sell if there were 425 mentions of Olly’s frozen yogurt in news and social media in a given week? Olly’s could expect to sell 675 quarts of frozen yogurt if there were 425 media mentions in a given week. =FORECAST(D5,$C$2:$C$53,$B$2:$B$53)

(20 min.) E9-40A 1. Create a scatterplot with a linear trendline. Use a Forward Forecast of 100 units.

9-29

Managerial Accounting 6e Solutions Manual

(continued) E9-40A 3. Use the FORECAST.LINEAR function to predict new product sales at the levels of 9,000, 9,500, and 10,000 free samples. Does it appear that the number of free samples distributed will be a good predictor of sales of new products? How can you tell?

Yes, it appears that the number of free samples distributed will be a good predictor of sales of new products because as free samples increase, so do new product sales. 4. How many units of a new product could Corbin expect to sell if it distributes 9,000 free samples of that new product? Corbin could expect to sell 6,029 units of a new product if it distributes 9,000 free samples. 5. How many units of a new product could Corbin expect to sell if it distributes 10,700 free samples of that new product? Corbin could expect to sell 7,214 units of a new product if it distributes 10,700 free samples. =FORECAST(E6,$C$2:$C$61,$B$2:$B$61)

9-30

Chapter 9

The Master Budget

Exercises (Group B) (10–15 min.) E9-41B Req. 1 Direct materials budget before any changes For quarters 1 through 4 Number of soda pop bottles to be produced Multiply by: Kilograms of PET per bottle (original) Quantity of PET needed for production (kg) Plus: Desired ending inventory of PET Total quantity (kg) needed Less: Beginning inventory of PET Quantity of PET (kg) to purchase Multiply by: Cost per kilogram Total cost of PET purchases

Quarter 1 2,300,000 0.008 18,400 4,000 22,400 (3,680) 18,720 2.00 $ 37,440

Quarter 2 2,500,000 0.008 20,000 4,320 24,320 (4,000) 20,320 2.00 $ 40,640

Quarter 3 2,700,000 0.008 21,600 3,840 25,440 (4,320) 21,120 $ 2.00 $ 42,240

$ $

Quarter 4 2,400,000 0.008 19,200 4,380 23,580 (3,840) 19,740 2.00 39,480

Year 9,900,000 0.008 79,200 4,380 83,580 (3,680) 79,900 $ 2.00 $ 159,800

Req. 2 Direct materials budget after reducing PET content of each bottle For quarters 1 through 4 Quarter 1 2,300,000 0.006

Quarter 2 2,500,000 0.006

Quarter 3 2,700,000 0.006

Quarter 4 2,400,000 0.006

Year 9,900,000 0.006

15,000 3,240 18,240 (3,000) 15,240 2.30

16,200 2,880 19,080 (3,240) 15,840 2.30

14,400 4,380 18,780 (2,880) 15,900 2.30

59,400 4,380 63,780 (3,680) 60,100 2.30

35,052

36,432

36,570

138,230

Number of soda pop bottles to be produced Multiply by: Kilograms of PET per bottle (after reduction for redesign) Quantity of PET needed for production (kg) Plus: Desired ending inventory of PET Total quantity (kg) needed Less: Beginning inventory of PET Quantity of PET (kg) to purchase Multiply by: Cost per kilogram

13,800 3,000 16,800 (3,680) 13,120 2.30

Total cost of PET purchases

30,176

9-31

Managerial Accounting 6e Solutions Manual

(continued) E9-41B Req. 3 Savings from reducing PET content of each bottle

Quarter 1 $ 7,264

Total savings for the year Cost of retrofitting the molds Net savings (cost) of retrofitting— first year

$ $ $

21,570 21,470 100

Savings each year AFTER the first year

21,570

9-32

Quarter 2 $ 5,588

Quarter 3 $ 5,808

Quarter 4 $ 2,910

Year 21,570

Chapter 9

The Master Budget

(10 min.) E9-42B Hartford Bookstore Sales Budget For the Upcoming Year Q1

Year

Books: Unit sales

1,570

860

1,750

660

4,840

Unit price

× $89

$139,730

$76,540

$155,750

$58,740

$430,760

Unit sales

250

110

280

160

800

Unit price

× $18

School supplies revenue

$4,500

$1,980

$5,040

$2,880

$14,400

Unit sales

560

370

800

590

2,320

Unit price

× $22

$12,320

$8,140

$17,600

$12,980

$51,040

Unit sales

690

590

870

410

2,560

Unit price

× $3

$2,070

$1,770

$2,610

$1,230

$7,680

$158,620

$88,430

$181,000

$75,830

$503,880

Book revenue School supplies:

Apparel:

Apparel revenue Miscellaneous:

Miscellaneous revenue Total sales revenue

9-33

Managerial Accounting 6e Solutions Manual

(10–20 min.) E9-43B Danville Preschool Budgeted Service Revenue For Year Ended XXXX Monthly tuition revenue: Two-day program Three-day program Four-day program Five-day program Total monthly tuition Months of operations Total tuition revenue Registration fee revenue Lunch bunch revenue

82 kids × $140 50 kids × $160 52 kids × $185 18 kids × $200

$11,480 8,000 9,620 3,600 $32,700 × 8 months $261,600 21,210

202 kids × $105 (202 kids × 50%) × $2 × 10 times per month × 8 months

16,160

Total revenue

$298,970

(10–15 min.) E9-44B Gable Foods Production Budget For the Upcoming Year Quarter 1

Quarter 2

Quarter 3

Quarter 4

Year

Unit sales (from sales budget)

152,500

182,500

214,000

165,000

714,000

Plus: Desired end inventory

45,625

53,500

41,250

55,500

Total needed

198,125

236,000

255,250

220,500

769,500

Less: Beginning inventory

(38,125)

(45,625)

(53,500)

(41,250)

(38,125)

Units to produce

160,000

190,375

201,750

179,250

731,375

9-34

Chapter 9

The Master Budget

(5 min.) E9-45B Moe Industries Direct Materials Budget For the Months of January through March January

February

March

Quarter

Units to be produced (from production budget)

5,200

4,800

4,100

14,100

Multiply by: Quantity of DM needed per unit

×4

Quantity needed for production

20,800

19,200

16,400

56,400

Plus: Desired end inventory of DM

5,760

4,920

5,640

Total quantity needed

26,560

24,120

22,040

62,040

Less: Beginning inventory of DM

(6,240)

(5,760)

(4,920)

(6,240)

Quantity to purchase

20,320

18,360

17,120

55,800

Multiply by: Cost per unit

× $3.00

Total cost of DM purchases

$60,960

$55,080

$51,360

$167,400

9-35

Managerial Accounting 6e Solutions Manual

(5 min.) E9-46B Req. 1 Edsel Manufacturing Production Budget For the Months of January through March January

February

March

Quarter

3,500

3,400

3,600

10,500

340

360

400

Total needed

3,840

3,760

4,000

10,900

Less: Beginning inventory

(350)

(340)

(360)

(350)

Units to produce

3,490

3,420

3,640

10,550

Unit sales Plus: Desired end inventory (10% of next month’s unit sales)

Req. 2 Edsel Manufacturing Direct Materials Budget For the Months of January through March January Units to be produced (from production budget)

March

Quarter

3,490

3,420

3,640

10,550

×2

Quantity (lbs.) needed for production

6,980

6,840

7,280

21,100

Desired end inventory of DM (20% of the amount needed for next month’s production)

1,368

1,456

1,608

Total quantity (lbs.) needed

8,348

8,296

8,888

22,708

Less: Beginning inventory of DM

(1,396)

(1,368)

(1,456)

(1,396)

Quantity (lbs.) to purchase

6,952

6,928

7,432

21,312

Multiply by: Cost per pound

× $0.25

Total cost of DM purchases

$1,738

$1,732

$1,858

$5,328

Multiply by: Quantity (lbs.) of DM needed per unit

9-36

February

Chapter 9

The Master Budget

(15 min.) E9-47B George Industries Direct Labor Budget For the Upcoming Year Standard

Deluxe

Premium

Total

Cutting department Units to be produced (from production budget)

520

730

890

Multiply by: Direct labor hours per unit

× 1.5

× 1.8

× 1.9

Total cutting hours required

780

1,314

1,691

Multiply by: Direct labor cost per hour

× $8

Budgeted DL cost (cutting department)

$6,240

$10,512

$13,528

Units to be produced (from production budget)

520

730

890

Multiply by: Direct labor hours per unit

× 2.5

× 2.9

× 2.0

Total assembly hours required

1,300

2,117

1,780

Multiply by: Direct labor cost per hour

× $10

Budgeted DL cost (assembly department)

$13,000

$21,170

$17,800

$51,970

Total budgeted DL cost (entire company)

$19,240

$31,682

$31,328

$82,250

$30,280

Assembly department

9-37

Managerial Accounting 6e Solutions Manual

(5 min.) E9-48B The Grant Company Manufacturing Overhead Budget For the Upcoming Year Projected sales (from sales budget) Variable MOH costs:

49,000

Indirect materials ($1.30 per unit)

$ 63,700

Supplies ($1.00 per unit)

49,000

Indirect labor ($0.80 per unit)

39,200

Plant utilities ($0.30 per unit)

14,700

Repairs and maintenance ($0.30 per unit)

14,700

Total variable MOH

$ 181,300

Fixed MOH costs: Indirect labor

66,000

Plant utilities

34,000

Repairs and maintenance

13,000

Depreciation on plant and equipment

41,000

Insurance on plant and equipment

29,000

Plant supervision

65,000

Total fixed MOH

$ 248,000

Total MOH

9-38

$ 429,300

Chapter 9

The Master Budget

(20–30 min.) E9-49B Req. 1 Maple Ridge Preschool Monthly Operating Expenses Budget Teachers’ salary: Two-day program Three-day program Four-day program Five-day program Director salary Total salary expense Payroll tax expense Lease expense Fixed operating expenses Variable operating expenses Total monthly operating expenses

8 teachers × $440 per month 4 teachers × $663 per month 5 teachers × $860 per month 3 teachers × $1,060 per month

$15,102 × 7.65%

165 × 10

$3,520 2,652 4,300 3,180 1,450 $15,102 1,155 4,060 920 1,650 $22,887

Req. 2 Maple Ridge Preschool Budgeted Income Statement For Year Ended XXXX Tuition, registration fees, and lunch bunch revenue Less: Operating expenses ($22,887a × 8 months) Operating income a

$ 230,600 (183,096) $ 47,504

from Req. 1

Req. 3 From the budgeted income statement, Maple Ridge learns that it has projected operating income for the year. Because Maple Ridge is a not-for-profit preschool, it is not in business to generate income for its owners. Rather, Maple Ridge may be able to further its organizational goals with the projected income. For example, it may decide to use the income for any of the following purposes: • Invest in additional (or better) classroom equipment • Invest in additional (or better) playground equipment • Improve the current program (more crafts, books, better curriculum, special guest visitors, special programs, field trips, etc.) • Offer scholarships for those children whose families have difficulty paying the tuition • Reduce tuition rates Student answers may vary.

9-39

Managerial Accounting 6e Solutions Manual

(5 min.) E9-50B Barrett Labs Budgeted Income Statement For the Quarter Ended March 31 Sales (unit sales × sale price) Less: COGS (unit sales x unit cost) Gross profit Less: Operating expenses Operating income Less: Income tax expense (30% of operating income) Net income

January $280,800a 135,000d 145,800 61,000

February $234,000b 112,500e 121,500 54,000

March $286,000c 137,500f 148,500 64,000

Quarter $800,800 385,000 415,800 179,000

84,800

67,500

84,500

236,800

25,440 $59,360

20,250 $47,250

25,350 $59,150

71,040 $165,760

January (5,400) ($52) February (4,500) ($52) c March (5,500) ($52) d January (5,400) ($25) e February (4,500) ($25) f March (5,500) ($25) b

9-40

Chapter 9

The Master Budget

(5 min.) E9-51B City Motors Budgeted Income Statement For the Upcoming Year

Sales Less: Cost of goods sold Gross profit Less: Operating expenses Operating income

$ $ $

Quarter 1 4,120,000 2,266,000 1,854,000 824,000 1,030,000

$ $ $

Quarter 2 4,408,400 2,424,620 1,983,780 881,680 1,102,100

Quarter 3 4,672,904 2,570,097 $ 2,102,807 1,635,516 $ 467,291 $

Quarter 4 4,906,549 2,698,602 $ 2,207,947 1,226,637 $ 981,310 $

$ $ $

Year 18,107,853 9,959,319 8,148,534 4,567,833 3,580,701

Calculations:

Given in exercise Base sales % increase qtr. 1 % increase qtr. 2 % increase qtr. 3 % increase qtr. 4

% operating expenses in qtr. 1 % operating expenses in qtr. 2 % operating expenses in qtr. 3 % operating expenses in qtr. 4

3% 7% 6% 5%

Given in exercise 20% 20% 35% 25%

$ of amount of increase (% x total sales prior period) $ $ $ $

120,000 288,400 264,504 233,645

Sales in quarter $ 4,120,000 $ 4,408,400 $ 4,672,904 $ 4,906,549

$ $ $ $ $

Total sales 4,000,000 4,120,000 4,408,400 4,672,904 4,906,549

$ $ $ $

Operating expenses 824,000 881,680 1,635,516 1,226,637

9-41

Managerial Accounting 6e Solutions Manual

(5 min.) E9-52B Raber Corporation Cash Collections Budget For the Months of January through March January Cash sales (40%)

February

March

Quarter

$68,000

$50,000

$74,000

192,000

25% of credit sales made in current month

25,500a

18,750b

27,750c

72,000

50% of credit sales made one month ago

36,000d

51,000e

37,500f

124,500

18% of credit sales made two months ago

9,180g

12,960h

18,360i

40,500

$138,680

$132,710

$157,610

$429,000

Collections on credit sales (60%):

Total cash collections a

170,000 × 60% × 25% 125,000 × 60% × 25% c 185,000 × 60% × 25% d 120,000 × 60% × 50% e 170,000 × 60% × 50% f 125,000 × 60% × 50% g 85,000 × 60% × 18% h 120,000 × 60% × 18% i 170,000 × 60% × 18% b

9-42

Chapter 9

The Master Budget

(5 min.) E9-53B DeWitt Corporation Cash Payments Budget For the Months of April through June April

May

June

Quarter

Current month purchases (55%)

$75,350

$66,550

$80,300

$222,200

Prior month’s purchases (45%)

50,400

61,650

54,450

166,500

Cash payments for DL

58,000

68,000

83,000

209,000

Cash payments for MOHa

58,800

74,800

98,800

232,400

Cash payments for operating expensesb

59,600

70,600

68,600

198,800

Cash payment for new server

6,000

Cash payment for taxes

14,000

$302,150

$347,600

$399,150

$1,048,900

Cash payments for DM:

Total cash payments a

Depreciation is a non-cash expense and is not included in the MOH cash payments. Depreciation and bad debt expense are non-cash expenses and are not included in the operating expenses cash payments. b

(5 min.) E9-54B Corrigan Health Center Combined Cash Budget For the Months of July through September Beginning balance of cash Plus: Cash collections Total cash available Less: Cash payments End cash balance before financing Financing: Borrowings Repayments Interest payments End cash balance a

July $31,000 99,000 130,000 (145,000) (15,000)

August $24,000 156,000 180,000 (101,000) 79,000

September $39,220 120,000 159,220 (137,000) 22,220

Quarter $31,000 375,000 406,000 (383,000) 23,000

39,000 0 0 $24,000

0 (39,000) (780)a $39,220

1,780 0 0 $24,000

40,780 (39,000) (780) $24,000

39,000 × 2% = $780

9-43

Managerial Accounting 6e Solutions Manual

(20–30 min.) E9-55B Req. 1 Sales Budget

Cash sales (30%) Credit sales (70%) Total sales

October $271,200 632,800 $904,000

Alexander Reeds Sales Budget November $288,000 672,000 $960,000

December $ 318,000 742,000 $1,060,000

January $279,000 651,000 $930,000

Req. 2 Cash Collections Budget Alexander Reeds Budgeted Cash Collections from Customers December Cash sales (30% of current month total sales) Collection of credit sales: 20% of current month credit sales 65% of prior month credit sales 10% of credit sales two months ago Total collection of credit sales Total cash collections a

December credit sales: $742,000 × 0.20 November credit sales: $672,000 × 0.65 c October credit sales: $632,800 × 0.10 d January credit sales: $651,000 × 0.20 e December credit sales: $742,000 × 0.65 f November credit sales: $672,000 × 0.10 b

9-44

January

$318,000

$279,000

148,400a 436,800b 63,280c 648,480 $966,480

130,200d 482,300e 67,200f 679,700 $958,700

Chapter 9

The Master Budget

(25–30 min.) E9-56B Boswell Corporation Budgeted Balance Sheet March 31 ASSETS Current assets: Casha Accounts receivable (0.25 × $12,500) Inventory Plant assets: Furniture and fixtures Accumulated depreciation ($29,850 + $800) Total assets

$ 3,700 3,125 16,375 34,300 (30,650)

$23,200

3,650 $26,850

LIABILITIES Current liabilities: Accounts payable Total liabilities

$ 1,900 $ 1,900

OWNERS' EQUITY Owners' equityb Total liabilities and owners' equity

24,950 $26,850

Computations: a

Cash: Beginning balance ................................................ Receipts ................................................................ Payments for inventory ........................................ Payments of February 28 liabilities… Payments for other expenses ............................... Ending balance .....................................................

$11,200 14,200 (4,500) (8,200) (9,000) $ 3,700

Owners' equity: Beginning balance ..................... . Sales revenue ............................ . Cost of goods sold (0.70 × $12,500).................... . Depreciation expense… Other expenses ......................... . Ending balance.......................... .

$31,000 12,500 (8,750) (800) (9,000) $24,950

9-45

Managerial Accounting 6e Solutions Manual

(20 min.) E9-57B Whitewater Adventures Cash Budget February and March February

March

Beginning cash balance

$ 16,800

$ 20,000

Plus: Cash collections

90,000

80,200

2,400

106,800

102,600

Purchases of inventory

$ 50,900

$ 41,200

Operating expenses

47,600

38,100

Total cash payments

98,500

79,300

(1) Ending cash balance before financing

8,300

23,300

Minimum cash balance desired

(20,000)

Cash excess (deficiency)

(11,700)

3,300

Plus: Cash from sale of plant assets Total cash available Less: Cash payments:

Financing: Plus: New borrowings (at end of month)

$ 11,700

Less: Debt repayments (at end of month)

3,232

Less: Interest payments

(2) Total effects of financing

11,700

(3,300)

Ending cash balance (1) + (2)

$ 20,000

9-46

Chapter 9

The Master Budget

(15–20 min.) E9-58B Req. 1 $400,000 total sales × 15% = $60,000 sales revenue paid in cash Req. 2 $400,000 total sales / $50 average customer bill = 8,000 transactions Req. 3 8,000 total transactions × 75% = 6,000 transactions × $50 average bill = $300,000 Alternatively, $400,000 total sales × 75% = $300,000 Req. 4 8,000 total transactions × 75% = 6,000 Req. 5 $0.50 per credit card transaction × 6,000 credit card transactions = $3,000 2% of amount charged × $300,000 total credit card transactions = $6,000 $3,000 + $6,000 = $9,000 total credit card transaction fees Req. 6 8,000 total transactions × 10% = 800 transactions × $50 average bill = $40,000 Alternatively, $400,000 total sales × 10% = $40,000 Req. 7 8,000 total transactions × 10% = 800 Req. 8 $0.20 per credit card transaction × 800 debit card transactions = $160 1% of amount charged × $40,000 total debit card transactions = $400 $160 + $400 = $560 total debit card transaction fees Req. 9 Sales paid with credit cards Plus sales paid with debit cards Less credit card transaction fees Less debit card transaction fees Total cash deposited from credit & debit cards

$300,000 (from Req. 3) $ 40,000 (from Req. 6) ($ 9,000) (from Req. 5) ($ 560) (from Req. 8) $330,440

Req. 10 Total cash deposited from credit & debit cards Plus sales revenue paid in cash Total cash deposited in bank from cash, credit, & debit cards

$330,400 (from Req. 9) $ 60,000 (from Req. 1) $390,440

9-47

Managerial Accounting 6e Solutions Manual

(20–30 min.) E9-59B Req. 1 Sales Budget

Sales

Case Corner Shoppe Sales Budget November $240,000*

December $264,000**

$60,000 180,000 $240,000

$66,000 198,000 $264,000

Cash Sales (25%) Credit Sales (75%) Total Sales

* October Sales $200,000 × 1.20 = $240,000 ** November Sales $240,000 × 1.10 = $264,000 Req. 2 Case Corner Shoppe Cost of Goods Sold, Inventory, and Purchases Budget

November Cost of goods sold: (0.60 × $240,000) (0.60 × $264,000)

December

$ 144,000 $ 158,400

Plus: Desired ending inventory [$5,000 + (0.15 × $158,400)] [$5,000 + (0.15 × 0.60 × $200,000)] Total inventory required Less: Beginning inventory Amount of inventory to purchase

28,760 172,760 (26,600)* $ 146,160

23,000 181,400 (28,760) $ 152,640

November $8,700 1,600 2,000 1,000 6,500

December $8,700 2,200 2,000 1,000 6,500

3,600 ______ $23,400

3,960 _______ $24,360

*[$5,000 + (0.15 × 144,000)] = $26,600 Req. 3 Case Corner Shoppe Operating Expense Budget

Wage Expense Utilities Expense Property Tax Expense Property & Liability Insuranse Expense Depreciation Expense Credit/Debit Card Fees Expense (180,000 × 2% ; 198,000 × 2% Total Operating Expenses 9-48

Chapter 9

The Master Budget

(continued) E9-59B Req. 4 Case Corner Shoppe Budgeted Income Statement

Sales Revenue (Req. 1) Less: Cost of Goods Sold (Req. 2) Gross Profit Less: Operating Expenses (Req. 3) Operating Income

November $240,000 144,000 96,000 23,400 72,600

December $264,000 158,400 105,600 24,360 81,240

(15–20 min.) E9-60B Scott Electronics Cost of Goods Sold, Inventory, and Purchases Budget Nine Months Ended September 30 QUARTER ENDED March 31 June 30 Sept.30 Cost of goods sold: (0.70 × $125,000) (0.70 × $175,000) (0.70 × $150,000) Plus: Desired ending inventory [$10,000 + (0.15 × $122,500)] [$10,000 + (0.15 × $105,000)] [$10,000 + (0.15 × 0.70 × $245,000)] Total inventory required Less: Beginning inventory Amount of inventory to purchase

NINE-MONTH TOTAL

$ 87,500 $ 122,500 $ 105,000

$315,000

28,375 25,750 115,875 (23,125) $ 92,750

148,250 (28,375) $ 119,875

35,725 140,725 (25,750) $ 114,975

9-49

Managerial Accounting 6e Solutions Manual

(20 min.) E9-61B 1. Use the FORECAST.LINEAR function to predict new product sales at the levels of 425, 450, and 475 media mentions.

2. Does it appear that the number of media mentions will be a good predictor of sales of frozen yogurt? How can you tell? Yes, it appears that the number of media mentions will be a good predictor of sales of frozen yogurt. The FORECAST.LINEAR function shows that number of media mentions increases the number of sales. 3. How many quarts of frozen yogurt could Jubilee’s expect to sell if there were 460 mentions of Jubilee’s frozen yogurt in news and social media in a given week? Jubilee’s could expect to sell 717 quarts of frozen yogurt if there were 460 media mentions in a given week. =FORECAST(D5,$C$2:$C$53,$B$2:$B$53)

9-50

Chapter 9

The Master Budget

(20 min.) E9-62B 1. Create a scatterplot with a linear trendline. Use a Forward Forecast of 100 units.

2. Does the scatterplot indicate that the distribution of free samples can help to predict unit sales of new products? How can you tell? Yes, the scatterplot does indicate that the distribution of free samples can help to predict unit sales of new products. The scatterplot indicates that as free samples are distributed, sales of new products increase. 3. Use the FORECAST.LINEAR function to predict new product sales at the levels of 9,000, 9,500, and 10,000 free samples. Does it appear that the number of free samples distributed will be a good predictor of sales of new products? How can you tell?

Yes, it appears that the number of free samples distributed will be a good predictor of sales of new products because as free samples increase so do new product sales. 4. How many units of a new product could Ivy expect to sell if it distributes 10,000 free samples of that new product? Ivy could expect to sell 6,364 units of a new product if it distributes 10,000 free samples. 5. How many units of a new product could Ivy expect to sell if it distributes 10,300 free samples of that new product? Ivy could expect to sell 6,543 units of a new product if it distributes 10,300 free samples. =FORECAST(E6,$C$2:$C$61,$B$2:$B$61)

9-51

Managerial Accounting 6e Solutions Manual

Problems (Group A) (60 min.) P9-63A Req. 1 Cash Collections Budget January $24,000 $49,000a $73,000

Cash sales (30%) Credit sales (70%) Total cash collections

February $27,600 $56,000b $83,600

March $29,700 $64,400c $94,100

Quarter $81,300 $169,400 $250,700

March 9,900 2,425 12,325 (2,475) 9,850

Quarter 27,100 2,425 29,525 (2,000) 27,525

December credit sales: $70,000 × 70% = $49,000 January credit sales: $80,000 x 70% = $56,000 c February credit sales: $92,000 × 70% = $64,400 b

Req. 2 Production Budget January 8,000 2,300 10,300 (2,000) 8,300

Unit sales* Plus: Desired ending inventory Total needed Less: Beginning inventory Units to produce

February 9,200 2,475 11,675 (2,300) 9,375

*Hint: Unit sales = sales in dollars ÷ selling price per unit Req. 3 Direct Materials Budget Units to be produced Multiply by: Quantity of DM needed per unit Quantity of DM needed for production Plus: Desired ending inventory of DM Total quantity of DM needed Less: Beginning inventory of DM Quantity of DM to purchase Multiply by: Cost per pound Total cost of DM purchases

January 8,300 ×2 16,600 1,875 18,475 (1,660) 16,815 × $2.00 $33,630

February 9,375 ×2 18,750 1,970 20,720 (1,875) 18,845 × $2.00 $37,690

March 9,850 ×2 19,700 1,880 21,580 (1,970) 19,610 × $2.00 $39,220

Quarter 27,525 ×2 55,050 1,880 56,930 (1,660) 55,270 × $2.00 $110,540

Req. 4 Cash Payments for Direct Material Purchases Budget January December purchases (from AP) January purchases February purchases March purchases Total payments

9-52

February

March

$42,400 $6,726 ______ $49,126

Quarter $42,400

$26,904 $7,538 ______ $34,442

$30,152 $7,844 $37,996

$33,630 $37,690 $7,844 $121,564

Chapter 9

The Master Budget

(continued) P9-63A Req. 5 Cash Payments for Direct Labor Budget January $996

Direct labor

February $1,125

March $1,182

Quarter $3,303

Req. 6 Cash Payments for Manufacturing Overhead Budget January Variable manufacturing overhead costs Rent (fixed) Other MOH (fixed) Total disbursements

February

March

Quarter

$9,960

$11,250

$11,820

$33,030

$5,000 $3,000 $17,960

$5,000 $3,000 $19,250

$5,000 $3,000 $19,820

$15,000 $9,000 $57,030

Req. 7 Cash Payments for Operating Expenses Budget Variable operating expenses Fixed operating expenses Total payments for operating expenses

January $8,000* $1,000 $9,000

February $9,200* $1,000 $10,200

March $9,900* $1,000 $10,900

Quarter $27,100 $3,000 $30,100

*Hint: Units sold × variable operating expenses per unit sold ($1.00) Req. 8 Combined Cash Budget January $4,500 73,000 77,500

February $4,418 83,600 88,018

March $4,001 94,100 98,101

Quarter $4,500 250,700 255,200

49,126 996 17,960 9,000 — 5,000 82,082

34,442 1,125 19,250 10,200 10,000 12,000 87,017

37,996 1,182 19,820 10,900 16,000 85,898

121,564 3,303 57,030 30,100 10,000 33,000 254,997

Ending cash before financing

(4,582)

1,001

12,203

203

Financing: Borrowings Repayments Interest payments Total financing Cash balance, ending

9,000 — — 9,000 $4,418

3,000 — — 3,000 $4,001

— (7,000) (330) (7,330) $4,873

12,000 (7,000) (330) 4,670 $4,873

Cash balance, beginning Plus: Cash collections (Req. 1) Total cash available Less cash payments: DM purchases (Req. 4) Direct labor (Req. 5) MOH costs (Req. 6) Operating expenses (Req. 7) Tax payment Equipment purchases Total cash payments

9-53

Managerial Accounting 6e Solutions Manual

(continued) P9-63A Req. 9 Budgeted Manufacturing Cost per Unit Direct materials cost per unit Direct labor cost per unit Variable manufacturing costs per unit Fixed manufacturing overhead per unit Cost of manufacturing each unit

$4.00 0.12 1.20 $0.80 $6.12

Req. 10 Martin Manufacturing Budgeted Income Statement For the Quarter Ended March 31 Sales Less: Cost of goods sold Gross profit Less: Operating expenses Less: Depreciation expense Operating income Less: Interest expense Less: Income tax expense @ 30% Net income

$271,000 (165,852) 105,148 (30,100) (4,600) $70,448 (330) (21,035) $49,083

(60–75 min.) P9-64A Req. 1

9-54

Chapter 9

The Master Budget

(continued) P9-64A

9-55

Managerial Accounting 6e Solutions Manual

(continued) P9-64A Req. 2 Based on financial considerations only, Olson should continue making cotton placemats and should not purchase the new loom. With this alternative, she will have more cash and a higher net income. Furthermore, her annual cash flow will be significantly higher in each of the next four years because she avoids having to pay off the bank loan for the loom.

Interest in Year 2 Interest in Year 3 Interest in Year 4 Interest in Year 5 Average interest per year

$144 $108 $ 72 $ 36 $ 90

Req. 3 Cash flow may be relatively unimportant to Olson. She may be a frustrated artist who will sacrifice cash to create more intricate patterns with the new loom. She may also prefer working with linen rather than with cotton. Finally, she may wish to teach her craft to relatives or friends. She may believe that the new loom will provide a better teaching platform. Students’ responses to Req. 2 and Req. 3 will vary.

(30 min.) P9-65A Req. 1 Sales Budget

Unit Sales × Selling Price Total Sales

Birdfeeders Unlimited Sales Budget January February 80,000 90,000 $15.00 $15.00 $1,200,000 $1,350,000

March 95,000 $15.00 $1,425,000

Quarter 265,000 $15.00 $3,975,000

Cash Sales (20%) Credit Sales (80%) Total Sales

$240,000 960,000 $1,200,000

$285,000 1,140,000 $1,425,000

$795,000 3,180,000 $3,975,000

9-56

$270,000 1,080,000 $1,350,000

Chapter 9

The Master Budget

(continued) P9-65A Req. 2 Birdfeeders Unlimited Production Budget For the Months of January through March January February 80,000 90,000

Unit sales Plus: Desired end inventory (20% of next month’s unit sales) Total needed Less: Beginning inventory Units to produce

March 95,000

Quarter 265,000

18,000

19,000

21,000

98,000 (16,000) 82,000

109,000 (18,000) 91,000

116,000 (19,000) 97,000

286,000 (16,000) 270,000

February 91,000 × 1.5 136,500 14,550 151,050 (13,650) 137,400 × $4.00 $549,600

March 97,000 × 1.5 145,500 12,000 157,500 (14,550) 142,950 × $4.00 $571,800

Quarter 270,000 × 1.5 405,000 12,000 417,000 (12,300) 404,700 × $4.00 $1,618,800

Req. 3 Direct Materials Budget Units to be produced Multiply by: Quantity of DM needed per unit Quantity of DM needed for production Plus: Desired ending inventory of DM Total quantity of DM needed Less: Beginning inventory of DM Quantity of DM to purchase Multiply by: Cost per pound Total cost of DM purchases

January 82,000 × 1.5 123,000 13,650 136,650 (12,300) 124,350 × $4.00 $497,400

Req. 4 Birdfeeders Unlimited Cash Collections Budget For the Months of January through March January February Cash sales (20% of sales) $240,000 $270,000 Collections on credit sales (80% of sales): 80% one month after sale 748,800 768,000 10% two months after 102,000 93,600 6% three months after 66,240 61,200 Total cash collections $1,157,040 $1,192,800

March $285,000

Quarter $795,000

864,000 96,000 56,160 $1,301,160

2,380,800 291,600 183,600 $3,651,000

Note: 4% of credit sales is never collected

9-57

Managerial Accounting 6e Solutions Manual

(continued) P9-65A Req. 5 Cash Payments for Direct Material Purchases Budget January February March 45% of current month purchases 55% of prior month purchases Total cash payments

Quarter

$223,830

$247,320

$257,310

$728,460

$302,500

$273,570

$302,280

$878,350

$526,330

$520,890

$559,590

$1,606,810

(30 min.) P9-66A Hilton Fashions Schedule of Cost of Goods Sold May and June May Beginning inventory

June

21,800

22,232

Plus: Purchases

27,000

28,080

Cost of goods available for sale Less: Ending inventory Cost of goods sold

48,800 (22,232) 26,568

50,312 (22,000) 28,312

Hilton Fashions Budgeted Income Statements May and June May Sales revenue

Less: Cost of goods sold Gross profit Less operating expenses: Salaries and comm. expense Rent expense Depreciation expense Insurance expense Operating income Less: Income tax expense Net income (loss)

9-58

June 54,000

26,568 27,432 $

5,700 3,200 500 300

28,312 27,848 $

9,700 17,732 3,546 14,186

56,160

5,808 3,200 500 300

9,808 18,040 3,608 14,432

Chapter 9

The Master Budget

(30 min.) P9-67A Req. 1 a. Budgeted cash collections: Cash Collections Budget January

February

Total

Cash sales (65%)

$40,300

$45,500

85,800

Credit sales

19,460

22,260

41,720

Total cash collections

$59,760

$67,760

127,520

b. Budgeted cash payments for purchases: Cash Payments for Direct Material Purchases Budget January

February

December purchases

$14,700

January purchases

9,600

14,700

February purchases Total cash payments for direct material purchases

Total

$24,300

$14,400

24,000

10,400

$24,800

49,100

c. Budgeted cash payments for operating expenses: Cash Payments for Operating Expenses Budget January

February

Total

Variable cash operating expenses: Sales commissions: Dec.

$2,160

Sales commissions: Jan.

2,480

Sales commissions: Feb. Total variable cash operating expenses

4,640

2,160 $2,480

4,960

2,800

5,280

9,920

Fixed cash operating expenses: Sales salaries: Dec.

4,000

Sales salaries: Jan.

4,500

Sales salaries: Feb. Rent expense

3,500

Tax expense

12,500

4,000 4,500

9,000

5,250

3,500

7,000 12,500

Total fixed cash operating expenses

24,500

13,250

37,750

Total cash payments for operating expenses

$29,140

$18,530

47,670

9-59

Managerial Accounting 6e Solutions Manual

(continued) P9-67A Req. 2 Combined Cash Budget January

February

Total

Cash balance, beginning

$22,000

$28,320

22,000

Add: Cash collections (1a)

59,760

67,760

127,520

Total cash available

81,760

96,080

149,520

Direct material purchases (1b)

24,300

24,800

49,100

Operating expenses (1c)

29,140

18,530

47,670

Total cash payments

53,440

43,330

96,770

Ending cash balance

$28,320

$52,750

52,750

Less: Cash payments

(50–60 min.) P9-68A Req. 1 Hugo Medical Supply Budgeted Balance Sheet April 30 ASSETS Current assets: Cash* Accounts receivable Inventory** Total current assets

$52,380 13,500 22,200

Plant assets: Equipment Accumulated depreciation Total assets

$95,000 (42,000)

$ 88,080

53,000 $141,080

LIABILITIES Current liabilities: Accounts payable Accrued expenses payable Total liabilities

$18,150 9,230 $ 27,380

OWNERS’ EQUITY Owners’ equity* Total liabilities and owners’ equity __________

9-60

113,700 $141,080

Chapter 9

The Master Budget

(continued) P9-68A Computations: *Cash: Beginning balance…….. Cash sales

**Inventory: Beginning balance .......................... Purchases

$ 40,300

$ 29,200

63,000

47,000

Collections

Cost of goods sold 42,600

Payments of March 31 liabilities……………… Cash purchases………... Payments for April (credit) purchases

Purchase of equipment Operating expenses Ending balance…………

Ending balance ....................................

(54,000) $ 22,200

(17,300) (10,700)

(18,150) (42,400) (4,970) $ 52,380

***Owner’s equity, beginning balance……… Add: Revenues

$92,600 90,000

Less: Expenses Owner’s equity, ending balance

(68,900) $113,700

Req. 2 Hugo Medical Supply Combined Cash Budget Month Ended April 30 Beginning cash balance Plus: Cash collections from customers Total cash available Less cash payments: Purchases Operating expenses Acquisition of equipment Total cash payments

$ 40,300 105,600 145,900 $ 46,150 4,970 42,400 93,520

Ending cash balance

$ 52,380

Req. 3 The amount of cash available for equipment purchases in April, before financing, if the minimum desired ending cash balance is $14,000 (and disregarding the $42,400 initially budgeted for equipment purchases) is $80,780.

9-61

Managerial Accounting 6e Solutions Manual

(continued) P9-68A Req. 4 4a. Hugo Medical Supply Budgeted Balance Sheet April 30 ASSETS Current assets: Cash* Accounts receivable Inventory** Total current assets

$ 26,880 9,000 40,200

Plant assets: Equipment Accumulated depreciation Total assets

$ 95,000 (42,000)

$ 76,080

53,000 $129,080

LIABILITIES Current liabilities: Accounts payable Accrued expenses payable Total liabilities

$ 18,150 9,230 $ 27,380

OWNERS’ EQUITY Owners’ equity*** Total liabilities and owners’ equity *See computations on next page.

9-62

101,700 $129,080

Chapter 9

The Master Budget

(continued) P9-68A (4a. continued) Computations: *Cash: Beginning balance ................................ Cash sales

$ 40,300

**Inventory: Beginning balance…. Purchases

42,000 Collections

Purchase of equipment Operating expenses Ending balance ........................................

47,000 Cost of goods sold

38,100 Payments of March 31 liabilities .......................................... Cash purchases ..................................... Payments for April (credit) purchases

$ 29,200

Ending balance……...

(36,000) $ 40,200

(17,300) (10,700)

(18,150) (42,400) (4,970) $ 26,880

*** Owner’s equity: Beginning balance……… Add: Revenues

$92,600 60,000

Less: Expenses Ending Balance

( 50,900) $101,700

4b. The company will not have to borrow cash in April if sales revenue is $60,000. The company’s cash balance is $1,880 higher than the minimum balance of $25,000.

(10–20 min) P9-69A Because gross profit is 30% of sales revenue, the cost of goods sold must be 70% of sales revenue: Sales revenue………. 100% Cost of goods sold... 70% Gross profit…………. 30% College Logos Cost of Goods Sold, Inventory, and Purchases Budget For Months of October and November October Cost of goods sold $1,561,000 Plus: Desired ending inventory 684,480 Total inventory required 2,245,480 Less: Beginning inventory (669,150) Amount of inventory to purchase $1,576,330

November $1,663,200 699,600 $2,362,800 (684,480) $1,678,320

9-63

Managerial Accounting 6e Solutions Manual

(45–60 min) P9-70A Req. 1 Sales Budget

Sales

November $402,500

December $483,000

$120,750 281,750 $402,500

$144,900 338,100 $483,000

Cash sales (30%) Credit sales (70%) Total sales Req. 2

Cost of Goods Sold, Inventory, and Purchases Budget November Cost of goods sold: (0.75 × $402,500) (0.75 × $483,000)

December

$ 301,875 $ 362,250

Plus: Desired ending inventory [$10,000 + (0.20 × $362,250)] [$10,000 + (0.20 × 0.75 × $350,000)] Total inventory required Less: Beginning inventory Amount of inventory to purchase

82,450 384,325 (70,375) $ 313,950

62,500 424,750 (82,450) $ 342,300

Req. 3 Operating Expense Budget

Wage Expense Utilities Expense Property Tax Expense Property & Liability Insuranse Expense Depreciation Expense Credit/Debit Card Fees Expense (281,750 × 2% ; 338,100 × 2% Total Operating Expenses

9-64

November $8,000 1,200 2,000 1,000 12,000

December $8,000 2,000 2,000 1,000 12,000

5,635

6,762

$29,835

$31,762

Chapter 9

The Master Budget

(continued) P9-70A Req. 4 Budgeted Income Statement November $402,500 301,875 100,625 29,835 $70,790

Sales Revenue (Req. 1) Less: Cost of Goods Sold (Req. 2) Gross Profit Less Operating Expenses (Req. 3) Operating Income

December $483,000 362,250 120,750 31,762 $88,988

Req. 5 Cash Collections November $120,750 $276,115 $396,865

Cash sales Credit sales net of fee Total collections

December $144,900 $331,338 $476,238

Req. 6 Cash Payments for Operating Expenses Budget Purchases of Inventory, 30 Day Lag Payments for Wages Payments for Utilities Payments for Property Taxes Payment of Cash Dividends Total Payments for Operating Expenses

November $270,375 8,000 1,200 _______ $279,575

December $313,950 8,000 1,200 12,000 275,000 $610,150

Req. 7 Combined Cash Budget Beginning cash balance Plus: Cash collections Less: Cash payments Ending balance before financing Plus: New borrowings Less: Repayments Less: Interest payments Ending cash balance

November $20,000 396,865 (279,575) 137,290 0 0 0 $137,290

December $137,290 476,268 (610,150) 3,378 16,622 0 0 $20,000

9-65

Managerial Accounting 6e Solutions Manual

Problems (Group B) (60 min.) P9-71B Req. 1 Cash Collections January $24,030 $53,200a $77,230

Cash sales (30%) Credit sales (70%) Total cash collections

February $26,730 $56,070b $82,800

March $24,840 $62,370c $87,210

Quarter $75,600 $171,640 $247,240

December credit sales: $76,000 × 70% January credit sales: $80,100 × 70% c February credit sales: $89,100 × 70% b

Req. 2 Production Budget January 8,900 990 9,890 (890) 9,000

Unit sales* Plus: Desired ending inventory Total needed Less: Beginning inventory Number of units to produce

February 9,900 920 10,820 (990) 9,830

March 9,200 950 10,150 (920) 9,230

Quarter 28,000 950 28,950 (890) 28,060

February 9,830 ×2 19,660 3,692 23,352 (3,932) 19,420 × $1.50 $29,130

March 9,230 ×2 18,460 3,764 22,224 (3,692) 18,532 × $1.50 $27,798

Quarter 28,060 ×2 56,120 3,764 59,884 (3,600) 56,284 × $1.50 $84,426

9-66

January 9,000 ×2 18,000 3,932 21,932 (3,600) 18,332 × $1.50 $27,498

Chapter 9

The Master Budget

(continued) P9-71B Req. 4 Cash Payments for Direct Material Purchases Budget January December purchases (From AP) January purchases February purchases March purchases Total payments

February

March

Quarter

$43,000

$5,500

$21,998 $5,826 ______ $27,824

______ $48,500

$27,498 $29,130 $5,560 105,188

23,304 $5,560 $28,864

Req. 5 Cash Payments for Direct Labor Budget Direct labor

January $3,510

February $3,834

March $3,600

Quarter $10,944

Req. 6 Cash Payments for Manufacturing Overhead Costs January Variable manufacturing overhead costs Rent (fixed) Other MOH (fixed) Total disbursements

February

March

Quarter

$12,600

$13,762

$12,922

$39,284

$6,500 $2,900 $22,000

$6,500 $2,900 $23,162

$6,500 $2,900 $22,322

$19,500 8,700 $67,484

Req. 7 Cash Payments for Operating Expenses Variable operating expenses Fixed operating expenses Total cash payments for operating expenses

January $10,680* $1,400 $12,080

February $11,880* $1,400 $13,280

March $11,040 $1,400 $12,440

Quarter $33,600 $4,200 $37,800

*Hint: Units sold × variable operating expenses per unit sold ($1.20)

9-67

Managerial Accounting 6e Solutions Manual

(continued) P9-71B Req. 8 Combined Cash Budget Cash balance, beginning Plus: Cash collections (Req. 1) Total cash available Less cash payments: DM purchases (Req. 4) Direct labor costs (Req. 5) MOH costs (Req. 6) Operating expenses (Req. 7) Tax payment Equipment purchases Total cash payments Ending cash before financing Financing: Borrowings Repayments Interest Total financing Cash balance, ending

January $4,460 77,230 81,690

February $4,800 82,800 87,600

March $5,100 87,210 92,310

Quarter $4,460 247,240 251,700

48,500 3,510 22,000 12,080 — 5,800 91,890 (10,200)

27,824 3,834 23,162 13,280 10,800 11,600 90,500 (2,900)

28,864 3,600 22,322 12,440 — 15,800 83,026 9,284

105,188 10,944 67,484 37,800 10,800 33,200 265,416 (13,716)

15,000 — — 15,000 $4,800

8,000 — — 8,000 $5,100

— (4,000) (610) (4,610) $4,674

23,000 (4,000) (610) 18,390 $4,674

Req. 9 Budgeted Manufacturing Cost per Unit Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead costs per unit Fixed MOH costs per unit Budgeted cost of manufacturing one unit

$3.00 0.39 1.40 0.70 $5.49

Req. 10 Conrad Manufacturing Budgeted Income Statement For the Quarter Ended March 31 Sales Less: Cost of goods sold Gross profit Less: Operating expenses Less: Depreciation expense Operating income Less: Interest expense Less: Income tax expense @ 30% Net income

9-68

$252,000 (153,720) 98,280 (37,800) (4,900) 55,580 (610) (16,491) $38,479

Chapter 9

The Master Budget

(60–75 min.) P9-72B Req. 1

9-69

Managerial Accounting 6e Solutions Manual

(continued) P9-72B

Req. 2 Based on financial considerations only, Denton should continue making cotton placemats and should not purchase the new loom. With this alternatice, she will have more cash and a higher net income. Furthermore, her annual cash flow will be significantly higher in each of the next four years because she avoids having to pay off the bank loan for the loom.

Interest in Year 2 Interest in Year 3 Interest in Year 4 Interest in Year 5 Average interest per year

$ 72 $ 54 $ 36 $ 18 $ 40

Req. 3 Cash flow may be relatively unimportant to Denton. She may be a frustrated artist who will sacrifice cash to create more intricate patterns with the new loom. She may also prefer working with linen rather than with cotton. Finally, she may wish to teach her craft to relatives or friends. She may believe that the new loom will provide a better teaching platform. Students’ responses to Req. 2 and Req. 3 will vary. 9-70

Chapter 9

The Master Budget

(30 min.) P9-73B Req. 1 Sales Budget

Unit Sales × Selling Price Total Sales

January 95,000 $20.00 $1,900,000

Birdhouses Inc. Sales Budget February 105,000 $20.00 $2,100,000

Cash Sales (25%) Credit Sales (75%) Total Sales

$475,000 1,425,000 $1,900,000

$525,000 1,575,000 $2,100,000

March 110,000 $20.00 $2,200,000

Quarter 310,000 $20.00 $6,200,000

$550,000 1,650,000 $2,200,000

$1,550,000 4,650,000 $6,200,000

Req. 2 Birdhouses Inc. Production Budget For the Months of January through March January

February

March

Quarter

Unit sales

95,000

105,000

110,000

310,000

Plus: Desired end inventory (15% of next month’s unit sales)

10,500

11,000

12,500

Total needed

105,500

116,000

122,500

322,500

Less: Beginning inventory

(9,500)

(10,500)

(11,000)

(9,500)

Units to produce

96,000

105,500

111,500

313,000

March 111,500 × 2.00 223,000 36,300 259,300 (33,450) 225,850 × $5.00 $1,129,250

Quarter 313,000 × 2.00 626,000 36,300 662,300 (28,800) 633,500 × $5.00 $3,167,500

January 96,000 × 2.00 192,000 31,650 223,650 (28,800) 194,850 × $5.00 $974,250

February 105,500 × 2.00 211,000 33,450 244,450 (31,650) 212,800 × $5.00 $1,064,000

9-71

Managerial Accounting 6e Solutions Manual

(continued) P9-73B Req. 4 Birdhouses Inc. Cash Collections Budget For the Months of January through March January

Feb.

March

Quarter

$475,000

$525,000

$550,000

$1,550,000

1,023,750

1,068,750

1,181,250

3,273,750

15% two months after

189,000

204,750

213,750

607,500

8% three months after

86,400

100,800

109,200

296,400

$1,774,150

$1,899,300

$2,054,200

$5,727,650

Cash sales (25% of sales) Collections on credit sales (75% of sales): 75% one month after sale

Total cash collections Note: 2% of credit sales is never collected. Req. 5

Cash Payments for Direct Material Purchases Budget January 60% of current month purchases 40% of prior month purchases Total cash payments

9-72

February

March

Quarter

$584,550

$638,400

$677,550

$1,900,500

$400,400

$389,700

$425,600

$1,215,700

$984,950

$1,028,100

$1,103,150

$3,116,200

Chapter 9

The Master Budget

(30 min.) P9-74B Chelsey Fashions Schedule of Cost of Goods Sold May and June May Beginning inventory

June 12,850

12,927

Plus: Purchases

19,250

19,635

Cost of goods available for sale Less: Ending inventory Cost of goods sold

32,100 (12,927) 19,173

32,562 (13,500) 19,062

Chelsey Fashions Budgeted Income Statements May and June May Sales revenue Less: Cost of goods sold Gross profit Less operating expenses: Salaries and comm. expense Rent expense Depreciation expense Insurance expense Operating income Less: Income tax expense Net income (loss)

June $

38,500

19,173 19,327 $

6,850 2,800 700 400

19,062 20,208 $

10,750 8,577 1,715 6,862

39,270

6,927 2,800 700 400

10,827 9,381 1,876 7,505

9-73

Managerial Accounting 6e Solutions Manual

(30 min.) P9-75B Req. 1 a. Budgeted cash collections: Cash Collections Budget January

February

Total

Cash sales (70%)

$42,000

$47,600

$89,600

Credit sales

16,380

18,240

34,620

Total cash collections

$58,380

$65,840

$124,220

b. Budgeted cash payments for purchases: Cash Payments for Direct Material Purchases Budget January

February

December purchases

$13,800

January purchases

8,200

$13,800

February purchases Total cash payments for direct material purchases

Total

$22,000

$12,300

20,500

10,400

$22,700

$44,700

c. Budgeted cash payments for operating expenses: Cash Payments for Operating Expenses Budget January

February

Total

Variable cash operating expenses: Sales commissions: Dec.

$4,050

Sales commissions: Jan.

4,500

Sales commissions: Feb. Total variable cash operating expenses

8,550

$4,050 4,500

9,000

5,100

9,600

18,150

Fixed cash operating expenses: Sales salaries: Dec.

3,500

Sales salaries: Jan.

4,000

Sales salaries: Feb.

9-74

Rent expense

2,900

Tax expense

13,000

3,500 4,000

8,000

4,750

2,900

5,800 13,000

Total fixed cash operating expenses

23,400

11,650

35,050

Total cash payments for operating expenses

$31,950

$21,250

$53,200

Chapter 9

The Master Budget

(continued) P9-75B Req. 2 Combined Cash Budget January

February

Total

Cash balance, beginning

$24,000

$28,430

24,000

Add: Cash collections (1a)

58,380

65,840

124,220

Total cash available

82,380

94,270

148,220

Direct material purchases (1b)

22,000

22,700

44,700

Operating expenses (1c)

31,950

21,250

53,200

Total cash payments

53,950

43,950

97,900

Ending cash balance

$28,430

$50,320

50,320

Less: Cash payments

(50–60 min.) P9-76B Req. 1 Fairview Medical Supply Budgeted Balance Sheet April 30 ASSETS Current assets: Cash* Accounts receivable Inventory** Total current assets

$54,330 13,650 22,100

Plant assets: Equipment Accumulated depreciation Total assets

$95,400 (41,600)

$ 90,080

53,800 $143,880

LIABILITIES Current liabilities: Accounts payable Accrued expenses payable Total liabilities

$18,400 9,380 $ 27,780

OWNERS’ EQUITY Owners’ equity*** Total liabilities and owners’ equity

116,100 $143,880

9-75

Managerial Accounting 6e Solutions Manual

(continued) P9-76B (Req. 1 continued) Computations: *Cash: Beginning balance…….. Cash sales

$ 40,100

**Inventory: Beginning balance .......................... Purchases

63,700 Collections

$ 29,800 46,900

Cost of goods sold 42,850

Payments of March 31 liabilities……………… Cash purchases………... Payments for April (credit) purchases

Ending balance ................................

(54,600) $ 22,100

(17,100) (10,100)

(18,400) (42,700)

Purchase of equipment Operating expenses

(4,020) $ 54,330

Ending balance………… *** Owner’s Equity: Beginning balance……… Add: Revenues

$93,600 91,000

Less: Expenses Ending balance

( 68,500) $116,100

Req. 2 Fairvew Medical Supply Combined Cash Budget Month Ended April 30 Beginning cash balance Plus: Cash collections from customers Total cash available Less cash payments: Inventory purchases Operating expenses Equipment purchases Total cash payments Ending cash balance

$40,100 106,550 $146,650 45,600 4,020 42,700 92,320 $54,330

Req. 3 The amount of cash available for equipment purchases in April, before financing, if the minimum desired ending cash balance is $19,000 (and disregarding the $42,700 initially budgeted for equipment purchases) is $78,030.

9-76

Chapter 9

The Master Budget

(continued) P9-76B Req. 4 4a. Fairview Medical Supply Budgeted Balance Sheet April 30 ASSETS Current assets: Cash* Accounts receivable Inventory** Total current assets

$ 28,547 9,100 40,300

Plant assets: Equipment Accumulated depreciation Total assets

$ 95,400 (41,600)

$ 77,947

53,800 $131,747

LIABILITIES Current liabilities: Accounts payable Accrued expenses payable Total liabilities

$ 18,400 9,380 $ 27,780

OWNERS’ EQUITY Owners’ equity*** Total liabilities and owners’ equity Computations: *Cash: Beginning balance ................................ Cash sales

103,967 $131,747

$ 40,100

**Inventory: Beginning balance…. Purchases

42,467 Collections

$ 29,800 46,900

Cost of goods sold 38,300

Payments of March 31 liabilities .......................................... Cash purchases ..................................... Payments for April (credit) purchases

Ending balance……...

(36,400) $ 40,300

(17,100) (10,100)

(18,400) (42,700)

Purchase of equipment Operating expenses Ending balance ........................................

(4,020) $ 28,547

9-77

Managerial Accounting 6e Solutions Manual

(continued) P9-76B *** Owner’s equity: Beginning balance……… Add: Revenues

$93,600 60,667

Less: Expenses Ending balance

( 50,300) $103,967

4b. The company will not have to borrow cash in April if sales revenue is $60,667. The company’s cash balance is $8,547 higher than the minimum balance of $20,000.

(10–20 min) P9-77B Because gross profit is 30% of sales revenue, the cost of goods sold must be 70% of sales revenue: Sales revenue………. Cost of goods sold... Gross profit………….

100% 60% 40%

Carlton Logos Cost of Goods Sold, Inventory, and Purchases Budget For Months of October and November October Cost of goods sold (60% of current month sales) Plus: Desired ending inventory Total inventory required Less: Beginning inventory Amount of inventory to purchase

9-78

$1,320,000 700,240 2,020,240 (679,000) $1,341,240

November $1,426,200 715,000 $2,141,200 (700,240) $1,440,960

Chapter 9

The Master Budget

(45–60 min) P9-78B Req. 1 Sales Budget

Sales

November $330,000

December $396,000

$82,500 247,500 $330,000

$99,000 297,000 $396,000

Cash Sales (25%) Credit Sales (75%) Total Sales Req. 2

Cost of Goods Sold, Purchases, and Inventory Budget November Cost of goods sold: (0.75 × $330,000) (0.75 × $396,000)

December

$ 247,500 $ 297,000

Plus: Desired ending inventory [$5,000 + (0.20 × $297,000)] [$5,000 + (0.20 × 0.75 × $300,000)] Total inventory required Less: Beginning inventory Amount of inventory to purchase

64,400 311,900 (54,500) $ 257,400

50,000 347,000 (64,400) $ 282,600

Req. 3 Operating Expense Budget

Wage Expense Utilities Expense Property Tax Expense Property & Liability Insurance Expense Depreciation Expense Credit/Debit Card Fees Expense (247,500 x 2% ; 297,000 x 2%)

November $9,000 1,200 2,000 1,000 12,000

December $9,000 2,000 2,000 1,000 12,000

4,950

5,940

$30,150

$31,940

November $330,000 247,500 82,500 30,150 $52,350

December $396,000 297,000 99,000 31,940 $67,060

Total Operating Expenses Req. 4 Budgeted Income Statement

Sales Revenue (Req. 1) Less: Cost of Goods Sold (Req. 2) Gross Profit Less: Operating Expenses (Req. 3) Operating Income

9-79

Managerial Accounting 6e Solutions Manual

(continued) P9-78B Req. 5 Cash Collections November $82,500 $242,550 $325,050

Cash sales Credit sales net of fee Total collections

December $99,000 $291,060 $390,060

Req. 6 Cash Payments for Operating Expenses Budget November $229,500 9,000 1,200

Purchases of Inventory, 30 Day Lag Payments for Wages Payments for Utilities Payments for Property Taxes Payment of Cash Dividends Total Payments for Operating Expenses

_______ $239,700

December $257,400 9,000 1,200 12,000 225,000 $504,600

November $10,000 325,050 (239,700) 95,350 0 0 _____0 $95,350

December $95,350 390,060 (504,600) (19,190) 29,190 0 _____0 $10,000

9-80

Chapter 9

The Master Budget

Serial Case C9-79 Req. 1 Budgeted hotel room nights in 2020 = number of hotel rooms × occupancy rate × number of nights per year = 587 × 0.912 × 366 = 195,936 room nights Req. 2 Budgeted net revenue = budgeted hotel room nights × average hotel room rate per night = 195,936 room nights × $ 149 = $ 29,194,464 Req. 3 Budgeted variable costs = budgeted hotel room nights × variable cost per room night = 195,936 × $ 27 = $ 5,290,272 Req. 4 Total cost = budgeted variable cost + budgeted fixed cost = $ 5,290,272 + $ 2,390,000 = $ 7,680,272 Total expenses as a percentage of net revenue = $ 7,680,272 / $ 29,194,464 = 26% Because budgeted expenses are 26% of Julius Tower net revenue, the new tower will be generating a healthy amount of income for Caesars Palace Las Vegas. Net income = revenues $29,194,464 – expenses $7,680,272 = net income $21,514,192

Discussion & Analysis A9-80 1.

“The sales budget is the most important budget.” Do you agree or disagree? Explain your answer. The sales budget is the starting point of the operating budgets because it affects most other components of the master budget. However, I disagree that it is the “most important budget.” All components of the master budget are important.

List at least four reasons why a company would use budgeting. • Planning • Coordination • Communication • Benchmarking

Describe the difference between an operating budget and a capital expenditures budget. The operating budgets are the budgets needed to run the daily operations of a company, whereas the capital expenditures budget shows the company’s intentions to invest in new property, plant, or equipment (capital investments).

9-81

Managerial Accounting 6e Solutions Manual 4.

Describe the process for developing a budget. The first step in developing a budget is to create long-term strategic goals. From there, the company designs key strategies for attaining these goals in a shorter term, yearly budget. From this budget, the company prepares detailed monthly budgets for the year.

Compare and contrast “participative budgeting” with “top-down” budgeting. The end result of budgeting is the same no matter which approach is used. In a “top-down” approach, top management determines the budget, whereas “participative budgeting” involves the participation of many levels of management. Typically, a participative budget is more beneficial because the lower level managers are closer to the action and have a more detailed knowledge for creating realistic budgets. Also managers are more likely to accept, and be motivated by, the budgets they helped to created. A “top-down” budget has the advantage of taking less time because fewer people are involved in the process. This budgeting process also reduces the amount of slack that can be intentionally built into a participative budget.

What is a budget committee? What is the budget committee’s role in the budgeting process? The budget committee is a cross-functional team that has the “final say” on the budget. The committee reviews submitted budgets, removes unwarranted slack, revises, and approves the final budget.

What are operating budgets? List at least four operating budgets. The operating budgets are the budgets needed to run the daily operations of a company. • Sales • Production • Direct materials • Direct labor

What are financial budgets? List at least three financial budgets. The financial budgets project the collection and payment of cash and forecast the balance sheet. • Capital expenditure budget • Cash budget • Budgeted balance sheet

Managers may build slack into their budgets so that their target numbers are easier to attain. What might be some drawbacks to building slack into the budget? Student answers will vary.

10. How does the master budget for a service company differ from a master budget for a manufacturing company? Which (if any) operating budgets differ and how specifically do they differ? Which (if any) financial budgets differ and how specifically do they differ? A service company has no merchandise inventory, so its operating budgets include only the sales, operating expenses, and budgeted income statement. The financial budgets are the same for both service companies and manufacturers.

9-82

Chapter 9

The Master Budget

11. Give an example of a sustainable practice that would affect a company’s budget. How might this sustainable practice, if adopted, impact the company’s budget in both the short-term and in the long-term? The adoption of long-term goals will affect most, if not all, of the company’ shorter term budgets. The operating expense budget should reflect additional resources devoted to the project. Once developed, the practice will impact the direct materials budget. The operating expense budget should also include additional resources for marketing the project, which should in turn create additional sales to be included in the sales budget. The capital expenditures budget will reflect plans to purchase new equipment. The company’s MOH budget will in turn be affected by depreciation of the new equipment, as well as the reduction of waste, and the use of alternative forms of energy. All of these measures will impact the cash budget, as well as the company’s projected income statement and balance sheet. Student answers will vary but should outline the impact on each of the budgets. 12. Why might a company want to state environmental goals for increased sustainability in its budgets? Explain. First, if a goal is stated, a company is more likely to work toward that goal. Secondly, increased transparency is being demanded by stakeholders (i.e., regulators, community members, stockholders). Student answers will vary.

9-83

Managerial Accounting 6e Solutions Manual

Application & Analysis A9-81 Budgeting for a Single Product Basic Discussion Questions 1. Describe your product. What is your cost of this product? What size (quantity) will you purchase? At what price will you sell your repackaged product? Make projections of your sales in units in each of the upcoming three months. The product is 16.9 oz. bottled drinking water. The cost is $3.59 plus California Redemption Value $1.75 for a total of $5.34 for 36 bottles of water. I plan to sell individual bottles for $2.00 each. Month September October November # of bottles 1,400 1,170 900 2.

Estimate how many hours you will spend in each of the upcoming three months doing the purchasing, repackaging, and selling. Select a reasonable wage rate for yourself. What will your total labor costs be in each of the upcoming three months? Month # of hours

September 78

October 81

November 75

October 1,170 $2,340

November 900 $1,800

Prepare a sales budget for each of the upcoming three months. Sales Budget Month # of bottles Sales price $2.00

Prepare the direct material budgets for the upcoming three months, assuming that you need to keep 10% of the direct materials needed for next month’s sales on hand at the end of each month (this requirement is why you needed to estimate unit sales for four months).

Month Sales in bottles +Desired end. inv. -Beginning inv. Purchases of inv. Case price $5.34 * December sales 900 bottles 5.

Direct Materials Budget September October 1,400 1,170 117 90 ( 0) ( 117) 1,517 1,143 43 cases—$229.62 32 cases—$170.88

November 900 90* ( 90)* 900 25 cases—$133.50

Prepare a direct labor budget (for your labor) for each of the upcoming three months.

Month # of hours Hourly wage $10

9-84

September 1,400 $2,800

Direct Labor Budget September October 78 81 $780 $810

November 75 $750

Chapter 9 6.

Think about any other expenses you are likely to have (i.e., booth rental at a flea market or a vendor license). Prepare the operating expenses budget for each of the upcoming three months. Operating Expenses Budget September October $260 $270 38 40 26 27 $324 $337

Month Space rental Gasoline Ice Total 7.

The Master Budget

November $250 37 25 $312

Prepare a budgeted income statement that reflects the budgets you prepared, including the sales budget, direct materials budget, direct labor budget, and the operating expenses budget. This budgeted income statement should include one column for each of the three months in the quarter and it should also include a total column that represents the totals of the three months. What is your projected profit by month and for the quarter?

Month Revenue COGS* Gross margin Op expenses Net income

Income Statement For the Three Months Ended November 30th September October November $2,800 $2,340 $1,800 1,010 981 884 1,790 1,359 916 324 337 312 $1,466 $1,022 $604

Total $6,940 2,875 4,065 973 $3,092

*Direct materials + direct labor Student responses will vary.

A9-82 Ethics Mini-Case 1.

a. The ethical issues are as follows: Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” If he inflates the budgeted amounts for labor and supplies, he will be providing inaccurate and unclear information. Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” By deliberately misreporting the budgeted amounts, Yang would potentially discredit the profession. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” By inflating the numbers, Yang is not providing all of the relevant information that could influence users’ understanding of the report. b. His responsibilities as a management accountant are to report the budget objectively and accurately; he has a responsibility to report the accurate information.

The answer would not be different depending on the ownership of the corporation because reporting accurate information is still a requirement of management accountants.

The corporation as a whole could be harmed, which would potentially also harm the shareholders or owners. By building slack into their budget, they are removing money from the pool available to all the other stores, which could also hurt the employees in the other locations.

In this situation, he should report the information accurately. He should also discuss with the HR branch about being pressured into misreporting the information.

Student answers will vary.

9-85

Managerial Accounting 6e Solutions Manual

A9-83 Real Life Mini-Case 1.

Budgeting for a movie can be challenging. Frequently, budget items change as the movie production progresses. If budgeting for a movie is difficult, why prepare a movie budget? Budgeting is important for movies because it is useful to know what kind of level of resources that the film has at its disposal. Knowing the amount of resources will determine the general quality of actors, directors, and other factors.

What reasons can a movie director have for misrepresenting the overall budget for a particular movie? Is misrepresenting a movie budget unethical? Do you think that misrepresenting a movie’s total budgeted expenditures to the public harms anyone? Why or why not? A movie director may misrepresent the overall budget for a movie for a variety of reasons. The director could inflate the budget to make it look like the film will be extremely high quality; this high budget will pique the public interest, and more people will go and see the film. Therefore, the director will become better known, and the demand for the director’s work will be greater. On the other hand, a director might deflate the budget to make it look like that director can make good movies cheaper than the competition, thereby increasing the attractiveness of that particular director to movie producers. Yes, misrepresenting a movie budget is unethical because it is not accurately showing the quality of the work that was put into the film. Therefore, one way or another someone will get credit or take the blame for something that that person did not actually do. Yes, misrepresenting a movie budget harms the other moviemakers and the paying public. It harms other moviemakers because it creates competition that is unjustified. It harms the public because they expect a film of x quality based on the budget, and they might be disappointed that the movie quality did not accurately reflect the total budget.

“If a Hollywood movie’s box office number exceeds its production budget, then that movie makes a profit.” From reading the information given in the case, do you agree with this statement? Why or why not? No, this statement is not correct. If expenses are frequently misrepresented, there may have been far more expenses than actually stated in the budget. Therefore, the movie may not have been profitable after all.

Sometimes actors, directors, and producers are asked to take a lower salary up front and instead receive a percentage of the film’s overall gross profits (from box office receipts, DVD sales, and similar revenue streams). Why might the film company propose this arrangement? Why might the actors, directors, and producers accept this agreement? Would this type of arrangement (lower salary up front with a percentage of the film’s gross profits later) make the budgeting process easier or more challenging? Why? The film company might propose this arrangement because the parties involved would then be motivated to produce their best work in the film and create a quality movie. They would also risk less money on the movie being a flop. The parties involved might accept this agreement if they know that they can make a great movie that everyone will love. Therefore their compensation could be much higher than it might have been had it been a one-time lump sum. To accurately reflect the processes involved with a flexible compensation model, the budgeting process would become more difficult. This is because one would have to estimate the amount of compensation that would come from the future benefits, which is not easy to estimate. Student answers will vary.

9-86

Chapter 10 Performance Evaluation Quick Check Answers QC10-1. b QC10-2. d QC10-3. c

QC10-4. b QC10-5. d QC10-6. c

QC10-7. b QC10-8. a QC10-9. d

QC10-10. c QC10-11. c QC10-12. b

Short Exercises (5 min.) S10-1 a. b. c. d. e. f. g. h. i.

a revenue center a cost center; a responsibility center a profit center an investment center a profit center an investment center a cost center a profit center lower

(5 min.) S10-2 a. b. c. d. e. f. g. h.

Investment Cost Profit Cost Profit Profit Revenue Profit

10-1

Managerial Accounting 6e Solutions Manual

(5–10 min.) S10-3 a. b. c. d. e. f. g.

Decentralized Centralized Centralized Decentralized Decentralized Decentralized Decentralized

(5–10 min.) S10-4 Profit center

Managers of various corporate-owned Grand Hyatt locations

Cost center

Manager of the complimentary breakfast buffet at the Hyatt Place in Richmond, Virginia

Investment center

Manager (CEO) of the Hyatt Hotels Corporation

Cost center

Manager of the Housekeeping Department for the Columbus Hyatt Regency Hotel

Investment center

Manager of the Hyatt Place corporate division

Revenue center

Manager of Hyatt Hotel’s central reservation office

(10 min.) S10-5 Southwest Division – Sales Revenue for Hosta Restaurants For the month ending June 30 Product

Actual Sales

Budgeted Sales

Variance

Variance %

Food

144,300

148,000

$3,700 U

2.5% U

Dessert

16,100

17,500

$1,400 U

8.0% U

Bar

52,250

55,000

$2,750 U

5.0% U

Catering

39,480

42,000

$2,520 U

6.0% U

10-2

Chapter 10

Performance Evaluation

(10 min.) S10-6 Sales margin

Capital turnover

ROI

Functional ingredients

28.0%

1.70

47.60%

Consumer markets

6.0%

2.00

12.00%

Performance materials

25.0%

1.25

31.25%

Functional ingredients Sales margin $6,188 / $22,100 = 28.0% Capital turnover $22,100 / $13,000 = 1.70 ROI 28.0% × 1.70 = 47.60% Consumer markets Sales margin $1,290 / $21,500 = 6.0% Capital turnover $21,500 / $10,750 = 2.0 ROI 6.0% × 2.0 = 12.0% Performance markets Sales margin $4,375 / $17,500 = 25.0% Capital turnover $17,500 / $14,000 = 1.25 ROI 25.0% × 1.25 = 31.25%

(10 min.) S10-7 Req. 1

Snow Sports Non-Snow Sports

Operating Income $ 1,044,000 $ 1,584,000

÷ ÷ ÷

Total Assets $ 4,500,000 $ 6,400,000

= = =

ROI 23.2 % 24.8 %

Req. 2 The Non-Snow Sports division will most likely receive those funds because it has a higher ROI. Req. 3 There is not enough information to explain why one ROI is greater. Management could gain more insight by using the expanded ROI formula.

10-3

Managerial Accounting 6e Solutions Manual

(10–15 min.) S10-8 Req. 1 Snow Sports $1,044,000 ÷$5,800,000 18%

Operating income ÷ Sales Sales margin

Non-snow Sports $1,584,000 ÷$8,800,000 18%

Based on the divisions’ sales margins, we know that the sales margin was not the reason the divisions had different ROIs. Req. 2 Snow Sports $5,800,000 ÷$4,500,000 1.29

Sales ÷ Total assets Capital turnover

Non-snow Sports $8,800,000 ÷$6,400,000 1.38

Based on the divisions’ capital turnover rates, we know that the capital turnover rate was the reason that the divisions had different ROIs. Req. 3 Snow Sports 18% ×1.29 23.2%

Sales margin × Capital turnover (from part 1) ROI (from S10-7)

Non-snow Sports 18% ×1.38 24.8%

Do your answers agree with the basic ROI? Yes.

(5–10 min.) S10-9 Snow Sports RI

= $1,044,000 − ($4,500,000 × 16%) = $324,000

Non-Snow Sports RI

= $1,584,000 − ($6,400,000 × 16%) = $560,000

Both divisions have positive residual income. This means that the divisions are earning income at a rate that exceeds management’s minimum expectations. This result is consistent with the ROI calculations.

(5 min.) S10-10 Req. 1 Sakti3 is the selling division, and Dyson is the buying division. Req. 2 Direct materials, indirect materials, direct labor, indirect labor, variable overhead, fixed overhead, Student answers will vary, especially depending on level of detail they provide. Req. 3 Student answers will vary, but cost must be at least the variable cost and may be full absorption cost and even an additional profit markup.

10-4

Chapter 10

Performance Evaluation

(5 min.) S10-11 Lowest—Variable cost of $8 Highest—Market price of $17 The Electrical Division would not transfer the component for less than its variable cost ($8) or it would be losing money on each transfer. The Lawn Mower Division would not pay more than the price that it can buy the component on the market for, or $17.

(10–15 min.) S10-12 1.

The master budget indicates that the company planned to sell four pools in April.

The actual results indicate that the company sold five pools in April.

The flexible budget for performance reports is always based on the actual output for the month. This is done so that managers can compare apples to apples, meaning they can compare actual revenues and expenses to those they would expect to achieve given the same volume. Therefore, the company’s flexible budget is based on five pools.

The budgeted sales price is $21,600 per pool.

The budgeted variable cost is $10,400 per pool.

As the name suggests, the flexible budget variance is the difference between the flexible budget and the actual results. Because both the actual results and the flexible budget are based on the same volume of output, this variance highlights unexpected revenues and expenses that are caused by factors other than volume.

The volume variance is the difference between the master budget and the flexible budget. As the name suggests, this variance arises only because the number of units actually sold differs from the volume originally planned for in the master budget.

See completed Performance Report below. Sunshine Pools Income Statement Performance Report For the Year Ended April 30

Actual results at actual prices Output units Sales revenue

Operating expenses: Variable expenses Fixed expenses Total operating expenses

Flexible budget variance

Flexible budget for actual number of output units

Volume variance

108,000

$ 21,600

$ 86,400

Master budget

102,000

$ 6,000

50,000

2,000

52,000

10,400

41,600

24,000

4,100

28,100

74,000

$ 6,100

80,100

$ 10,400

$ 69,700

10-5

Managerial Accounting 6e Solutions Manual

(10–15 min.) S10-13 New England Fudge Company Flexible Budget Performance Report For the Year Ended December 31 Flexible Budget Variance

Actual 13,200 Batches Sales Revenue ($26 per Batch)

Volume Variance

Flexible Budget 13,200 Batches

1,200 F

Master Budget 12,000 Batches

$ 338,200

5,000 U

$ 343,200

$ 31,200 F

$312,000

$ 24,500

1,900 F

26,400

$ 2,400 U

$24,000

Less Variable Expenses: Sales Expense ($2 per Batch Sold) Shipping Expense ($5 per Batch Sold)

65,500

500 F

66,000

6,000 U

60,000

248,200

2,600 U

250,800

22,800 F

228,000

Salaries

12,200

1,400 U

10,800

Office Rent

3,500

$ 232,500

$ 4,000 U

$ 236,500

$ 22,800 F

$213,700

Contribution Margin Less Fixed Expenses:

Operating Income

(10–15 min.) S10-14 a. b. c. d. e. f. g. h. i. j. k. l.

Learning and growth perspective Financial perspective Financial perspective Learning and growth perspective Internal business perspective Customer perspective Internal business perspective Internal business perspective (post-sales service) Customer perspective Internal business perspective Internal business perspective OR customer perspective Learning and growth perspective

(10 min.) S10-15 a. b. c. d. e. f. g. h.

direct fixed expenses Sales margin Key performance indicators (KPI) master budget variance goal congruence profit center common fixed expenses flexible budget

10-6

Chapter 10

Performance Evaluation

(continued) S10-15 i. j. k. l. m. n. o. p. q. r.

flexible budget variance Return on investment (ROI) favorable variance revenue center volume variance Capital turnover unfavorable variance Management by exception cost center investment center

(10 min.) S10-16 1.

In casual conversation with friends on a Friday night, Peter talks about how transfer prices are set at the company where he is an accountant. As part of that conversation, he shares the variable costs of the company’s main product. Jake, the controller who oversees transfer policies at Nealy Industries, does not inform management that his sister is the principal partner in a consulting firm that is bidding on work at Nealy Industries. In the year-end report to the board of directors, Connor, the controller, prepares the performance report. The board will base the annual bonuses on this report. Connor designs the report so that the favorable Key Performance Indicators (KPIs) are displayed prominently, while the KPIs that are unfavorable are either not included or are buried deep in the later pages of the report so that they are unlikely to be seen. Each month, Kate, a corporate controller, prepares segment reports for all of the divisions of her company. In these reports, she includes every general ledger account. As a result, the report for each division is several pages long and no one except Kate and her staff can interpret the reports. In the past six years since he graduated with an accounting degree, Phil has not attended any continuing education seminars. A major part of Phil’s job involves preparing performance reports. He has figured that he knows enough to do his job because he has not forgotten any relevant information from his college degree program.

Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Competence—Provide decision support information and recommendations that are accurate, clear, concise, and timely.

Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

10-7

Managerial Accounting 6e Solutions Manual

(10 min.) S10-17 1.

2. 3.

4. 5.

What formula would be entered in Cell D3 to calculate the difference between the ACTUAL total in Cell B3 and the BUDGET total in Cell C3? =B3-C3 How would the formula in Question #1 be modified to make the result in Cell D3 an absolute value? =ABS (B3-C3) What steps would be performed in Cell E3 to display an “F” if the variance in Cell D3 is favorable and a “U” if the variance is unfavorable? Select Cell E3. Click on the Formulas tab on the Ribbon, then click the drop-down arrow below Logical and select IF. Type B3>=C3 in the Logical Test field, Type F in the Value if True field, and Type U in the Value if False field. How could the contents of Cells D3 and E3 be copied to the remaining rows containing revenues? Drag and drop or double-click the fill handle to copy the function to the remaining revenue accounts. How do the steps for calculating the “F” or “U” for expenses differ from the steps for “F” or “U” for revenues? Expense accounts go in the opposite direction as revenue accounts. So, the Value if True field would be U and the Value if False field would be F. Do not include = in the logic test because any variance of zero should be labeled F.

(10 min.) S10-18 1.

What formula would be entered in Cell D3 to calculate the difference between the ACTUAL total in Cell B3 and the BUDGET total in Cell C3? =B3-C3 2. How would the formula in Question #1 be modified to make the result in Cell D3 an absolute value? =ABS (B3-C3) 3. What steps would be performed in Cell E3 to display an “F” if the variance in Cell D3 is favorable and a “U” if the variance is unfavorable? Select Cell E3. Click on the Formulas tab on the Ribbon, then click the drop-down arrow below Logical and select IF. Type B3>=C3 in the Logical Test field, Type F in the Value if True field, and Type U in the Value if False field. 4. How could the contents of Cells D3 and E3 be copied to the remaining rows containing revenues? Drag and drop or double-click the fill handle to copy the function to the remaining revenue accounts. 5. How would the steps for calculating the “F” or “U” for expenses differ from the steps for “F” or “U” for revenues? Expense accounts go in the opposite direction as revenue accounts, so the Value if True field would be U and the Value if False field would be F. Do not include = in the logic test because any variance of zero should be labeled F. 6. Specify the formula that would be entered in each of the following cells: a. Cell B9 to calculate ACTUAL total sales revenue =SUM (B3:B8) b. Cell C9 to calculate BUDGET total sales revenue =SUM (C3:C8) c. Cell D9 to calculate VARIANCE for total sales revenue =ABS (B9-C9) d. Cell B23 to calculate ACTUAL operating income =B9-B22 e. Cell C23 to calculate BUDGET operating incomes =C9-C22 f. Cell D23 to calculate the VARIANCE for operating income =ABS (B23-C23) 7. What steps would be performed in Cell E23 to display an “F” if the variance in Cell D23 is favorable and a “U” if the variance is unfavorable? Select Cell E23. Click on the Formulas tab on the Ribbon, then click the drop-down arrow below Logical and select IF. Type B23>=C23 in the Logical Test field, Type F in the Value if True field, and Type U in the Value if False field.

10-8

Chapter 10

Performance Evaluation

Exercises (Group A) (5–10 min.) E10-19A a. b. c. d. e. f. g. h. i. j. k.

Profit Cost Revenue Cost Profit Investment Investment Cost Revenue Profit Investment

(10–15 min.) E10-20A Req. 1

Water Sports Subunit Direct Materials Direct Labor

Actual $ 16,095 15,240

Budget $15,000 16,000

Budget Variance (U or F) $1,095 U 760 F

29,200 16,395

25,000 15,000

4,200 U 1,395 U

16.80% U 9.30% U

24,000 6,285 $107,215

24,000 7,500 $102,500

0F 1,215 F $4,715 U

0% F 16.20% F 4.60% U

Indirect Labor Utilities Depreciation Repairs and Maintenance Total

% Variance (U or F) 7.30% U 4.75% F

Req. 2 This subunit must be a cost center. Req. 3 Repairs and maintenance, and indirect labor Req. 4 No, favorable variances should be investigated to make sure they are not hurting the business in the long run.

10-9

Managerial Accounting 6e Solutions Manual

(15 min.) E10-21A Performance Report Drizzdale Industries – Pharmaceutical Segment For the Fiscal Year Ending December 31 (all data is in millions) Actual

Budgeted

Variance

Variance %

773,500

$ 92,820F

12.00% F

$143,325

136,500

6,825U

5.00% U

162,162 $560,833

163,800

1,638F

1.00% F

473,200

$ 87,633F

18.52% F

$866,320

Variable Cost of Goods Sold Variable Operating Expenses

Sales Less Variable Expenses:

Contribution Margin Less Direct Fixed Expenses: Fixed Manufacturing Overhead

$96,300 $

90,000

6,300U

7.00% U

Fixed Operating Expenses

17,280

16,000

1,280U

8.00% U

Segment Margin

447,253

367,200

$ 80,053F

21.80% F

Less: Common Fixed Expenses

14,140

14,000

140U

1.00%U

$433,113

353,200

$ 79,913F

22.63% F

Operating Income

(10–15 min.) E10-22A Req. 1 Residential $ 68,000 ÷$200,000 34%

Operating income ÷ Total assets Return on investment

Professional $153,300 ÷$365,000 42%

Each division’s ROI is very high; however, the Professional Division has an even higher ROI than the Residential Division. Req. 2 Residential $ 68,000 ÷$850,000 8%

Operating income ÷ Sales Sales margin

Professional $153,300 ÷$1,095,000 14%

The Professional Division is earning about $0.14 on each dollar of sales whereas the Residential Division is only earning about $0.08 on each dollar of sales. The Professional Division’s higher sales margin helps to account for its higher ROI. Req. 3 Residential $850,000 ÷$200,000 4.25

Sales ÷ Total assets Capital turnover

10-10

Professional $1,095,000 ÷$ 365,000 3.00

Chapter 10

Performance Evaluation

(continued) E10-22A

The Professional Division is generating $3.00 of sales for every dollar of assets invested in the division. The Residential Division is generating $4.25 of sales for every dollar of assets invested. The Residential Division is even more efficient. Req. 4 Residential 8% ×4.25 34%

Sales margin × Capital turnover ROI

Professional 14% ×3.00 42%

Does your answer for the residential ROI agree with the basic ROI? Yes. Does your answer for the professional ROI agree with the basic ROI? Yes. What can you conclude? Even though the Residential Division’s efficiency (as measured by the capital turnover) is higher than that of the Professional Division, the Professional Division’s profitability (as measured by the sales margin) is so much higher that it causes the Professional Division’s ROI to be much higher than the Residential Division’s. Req. 5 Residential RI Professional RI

= $68,000 – ($200,000 × 25%) = $18,000 = $153,300 – ($365,000 × 25%) = $62,050

Both divisions are exceeding management’s expectations.

(10–15 min.) E10-23A

Georgeville, Inc. $117,000

Bayside Company $820,000

Blue Hat Industries $520,000

Operating income (OI)

$35,100

$164,000

$41,600

Total assets (TA)

$90,000

$200,000

$208,000

Sales margin (SM)

30%

20%

Capital turnover (CT)

1.30

4.10

2.50

Return on investment (ROI)

39%

82%

20%

Target rate of return

21%

18%

Residual income (RI)

$27,000

$122,000

$4,160

Sales (S)

10-11

Managerial Accounting 6e Solutions Manual

(10 min.) E10-24A Req. 1 Sales Margin

Capital Turnover

ROI

= =

$9,000 ÷ $36,000 25% = =

$36,000 ÷ $15,000 2.40 times

$9,000 ÷ $15,000 60%

Req. 2 RI

$9,000 – (14% × $15,000) = $6,900

(10–15 min.) E10-25A Req. 1 The original return on investment (ROI) for Montgomery Ceramics is 17.5%. [($63,000 ÷ $360,000)]. Req. 2 If this investment opportunity were undertaken, the ROI would be 16% [($63,000 + $9,000) ÷ ($360,000 + $90,000)]. If the manager of this division is evaluated based on ROI, she would not want to make this investment. Investing in the new project would decrease the division’s ROI. Req. 3 The ROI of the investment opportunity is 10% [$9,000 ÷ $90,000]. From the standpoint of Watson Corporation, this investment is desirable. The ROI of the investment opportunity exceeds Watson’s required rate of return. Req. 4 The residual income (RI) for Montgomery Ceramics if this investment opportunity were to be undertaken is $31,500 ($63,000 + $9,000) − [($360,000 + $90,000) × 9%]. If the manager of this division is evaluated based on RI, she would want to make this investment. The positive RI indicates that the division is earning more than management’s expectations. Req. 5 The RI of the investment opportunity is $900 [$9,000 – ($90,000 × 9%)]. From the standpoint of Watson Corporation this investment is desirable. The RI of the investment opportunity is positive, meaning the investment opportunity would earn more than management’s target required return. Req. 6 Of the two performance measurement methods, ROI and RI, RI is more likely to promote goal congruence. The RI of the investment alone is positive, meaning the investment will increase the division’s RI by that amount. This would motivate both the division manager and the company management to make the investment. The arrival at the same conclusion by both the manager and company management indicates goal congruence.

10-12

Chapter 10

Performance Evaluation

(10 min.) E10-26A Req. 1 Lowest—Variable cost of $27 ($22 + $5); Highest—Market price of $45 Req. 2 If Graham Motors has a cost-plus transfer price policy of full absorption cost plus 30%, the transfer price would be $39. Req. 3 Market price; $45

(15–20 min.) E10-27A Req. 1 $165,000 / 55,000 = $3.00 sales price per unit Req. 2 $88,000 / 55,000 = $1.60 variable cost per unit Req. 3 $68,000 budgeted fixed cost Req. 4 Note: See Master Budget Variance Column in Flexible Budget Performance Report in Req. 5. Req. 5 The Happy Balloon Company Flexible Budget Performance Report For the Month Ended August 31 (Req. 5b) Flexible Budget Variance

Flexible Budget

Volume Variance

60,000

5,000 F

55,000

5,000 F

$ 185,000

$ 5,000 F

$ 180,000

$ 15,000 F

$ 165,000

$20,000 F

Less: Variable Expenses

99,500

3,500 U

96,000

8,000 U

88,000

11,500 U

Contribution margin

85,500

1,500 F

84,000

7,000 F

77,000

8,500 F

Actual Volume

Sales Revenue

(Req. 5a) Master Budget

Master Budget Variance

Less: Fixed Expenses

69,000

1,000 U

68,000

1,000 U

Operating Income

$ 16,500

$ 500 F

$ 16,000

$7,000 F

$ 9,000

$7,500 F

10-13

Managerial Accounting 6e Solutions Manual

(continued) E10-27A

Req. 6 a.

$7,000

$3,500

Selling units at a higher price than budgeted

$0; the flexible budget uses the master budget amount for fixed expenses because fixed expenses are assumed to be the same (fixed) at any level of activity.

(15–20 min.) E10-28A Main Street Muffins Flexible Budget Performance Report – Sales and Operating Expenses For the Year Ended December 31

Actual

Flexible Budget Variance

Flexible Budget

Volume Variance

Master Budget

9,500 Cases

400 F

9,100 Cases

255,200

$ 8,200 F

$ 247,000

10,400 F

Packaging Expense ($1 per Case Sold)

10,600

1,100 U

9,500

400 U

9,100

Shipping Expense ($2 per Case Sold)

19,500

500 U

19,000

800 U

18,200

Sales Commissions (5% of Sales Price)

12,760

410 U

12,350

520 U

11,830

212,340

6,190 F

$ 206,150

8,680 F

197,470

Salaries

7,300

800 U

6,500

Office Rent

3,900

Depreciation

2,500

Insurance Expense

1,600

200 F

1,800

Office Supplies Expense

1,600

700 U

900

195,440

Sales Revenue ($26 per Case)

236,600

Less Variable Expenses:

Contribution Margin Less Fixed Expenses:

Operating Income

10-14

$ 4,890 F

$ 190,550

$ 8,680 F

$ 181,870

Chapter 10

Performance Evaluation

(15–20 min.) E10-29A Newton Industries Flexible Budget Performance Report For the Month Ended April 30

Actual

Flexible Budget Variance

Flexible Budget

Volume Variance

Master Budget

Output Units

28,000

3,800 U

31,800

Sales Revenue

$ 251,000

$ 6,000 F

$245,000

$33,250 U

$278,250

Less: Variable Expenses

201,500

26,500 U

175,000

23,750 F

198,750

Contribution margin

49,500

20,500 U

70,000

9,500 U

79,500

Fixed Expenses:

15,000

9,000 F

24,000

Operating Income

$34,500

$11,500 U

$46,000

$9,500 U

$55,500

10-15

Managerial Accounting 6e Solutions Manual

(15–20 min.) E10-30A Dakota Corporation Balanced Scorecard Report For Quarter Ended December 31 Perspective

Objective

KPI

Goal

Actual

Goal Achieved?

Increase return on investment

Return on investment

20%

24%

√

Increase sales of core product line

Sales revenue growth

2,150,000

2,050,000

Increase customer retention

Number of repeat customers

100,000

104,000

Increase number of customers

Number of customers

135,000

120,000

Financial

Customer √

Internal business process Improve post-sales service

Average repair time (# of days)

1.3

1.0

√

Improve production efficiency

Number of units produced per hour

7.2

7.3

√

Improve employee morale

Employee satisfaction survey (1–5, with 1 as most satisfied)

1.5

1.1

√

Increase number of employees with access to customer relationship database

Percentage of employees with access to customer relationship database

78%

80%

√

Learning and growth

(15–20 min.) E10-31A a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r.

Learning and growth Customer Internal business Financial Customer Customer Community Learning and growth Internal business Internal business Learning and growth Internal business Customer Internal business Community Financial Community Financial

10-16

Chapter 10

Performance Evaluation

(20 min.) E10-32A 1. 2.

Using the Excel file provided in MyLab Accounting, complete the VARIANCE column. Use the absolute reference function so that the variance displays as a positive number. In that same Excel worksheet, complete “F or U” column using the IF function. If the variance in a given row is favorable, an “F” should display in the variance’s row in Column E. If the variance is unfavorable, a “U” should display in the variance’s row in Column E.

10-17

Managerial Accounting 6e Solutions Manual

(continued) E10-32A Formulas in each cell should be:

Which revenue variances are favorable? In-house dining Customer pick-up Uber Eats Event catering Online ordering Non-Cajun Foods

Which expense variances are favorable? Kitchen wages Credit/debit card fees Insurance Internet, phone Electricity Depreciation Interest Accounting License for truck

10-18

Chapter 10

Performance Evaluation

(continued) E10-32A 5.

If the company has a policy that all variances greater than $2,000 should be evaluated, which variances should be investigated? Variances greater than $2,000 are highlighted in yellow.

(20 min.) E10-33A 1. 2. 3.

Using the Excel file provided in MyLab Accounting, calculate total sales revenue, total expenses, and operating income in the ACTUAL and BUDGET columns. Next, complete the VARIANCE column. Use the absolute reference function so that the variance displays as a positive number. Complete “F or U” column using the IF function. If the variance in a given row is favorable, an “F” should display in the variance’s row in Column E. If the variance is unfavorable, a “U” should display in the variance’s row in Column E.

10-19

Managerial Accounting 6e Solutions Manual

(continued) E10-33A Formulas in each cell should be :

Which revenue variances are favorable? Admissions Food service Parking Exclusive events Performances

10-20

Chapter 10

Performance Evaluation

(continued) E10-33A 5.

Which expense variances are favorable? Park employee wages Server wages Leases Credit/debit card fees Insurance Electricity Depreciation Disposal Security Management salaries Permits Licenses Professional fees

Is the operating income variance favorable or unfavorable? Unfavorable

If the company has a policy that all variances greater than $100,000 should be evaluated, which variances should be investigated? Variances greater than $100,000 are highlighted in yellow.

10-21

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (5–10 min.) E10-34B a. b. c. d. e. f. g. h. i. j. k.

Investment Profit Investment Revenue Investment Cost Revenue Cost Profit Cost Profit

(10–15 min.) E10-35B Req. 1

Actual $ 12,930

Budget $12,000

Budget Variance (U or F) $930 U

Direct Labor

13,265

14,000

735 F

5.25% F

Indirect Labor

23,380

20,000

3,380 U

16.90% U

Utilities

16,455

15,000

1,455 U

9.70% U

Depreciation

30,250

Repairs and Maintenance

4,205

5,000

795 F

15.90% F

$100,485

$96,250

$4,235 U

4.40% U

Water Sports—Subunit Direct Materials

Total

% Variance (U or F) 7.75% U

Req. 2 This subunit is a cost center. Req. 3 Indirect labor Repairs and maintenance Req. 4 No, favorable variances should be investigated to make sure they are not hurting the business in the long run.

10-22

Chapter 10

Performance Evaluation

(15 min.) E10-36B Performance Report Campbell Industries—Pharmaceutical Segment For the Fiscal Year Ending December 31 (all data is in millions)

Actual Sales

Budgeted

Variance

Variance %

824,320

736,000

$ 88,320F

12.00% F

Variable Cost of Goods Sold

185,840

184,000

$ 1,840U

1.00%U

Variable Operating Expenses

229,632

239,200

$ 9,568F

4.00%F

Contribution Margin

408,848

312,800

$ 96,048F

30.71%F

Fixed Manufacturing Overhead

102,600

95,000

$ 7,600U

8.00%U

Fixed Operating Expenses:

16,960

16,000

960U

6.00%U

Segment Margin

289,288

201,800

$ 87,488F

43.35%F

Less: Common Fixed Expenses

17,340

17,000

340U

2.00%U

Operating Income

271,948

184,800

$ 87,148F

47.16%F

Less Variable Expenses:

Less Direct Fixed Expenses:

10-23

Managerial Accounting 6e Solutions Manual

(10–15 min.) E10-37B Req. 1 Residential $ 63,550 ÷$205,000 31%

Operating income ÷ Total assets Return on investment

Professional $165,000 ÷$375,000 44%

Each division’s ROI is very high; however, the Professional Division has an even higher ROI (44%) than the Residential Division. Req. 2 Residential $ 63,550 ÷$635,500 10%

Operating income ÷ Sales Sales margin

Professional $165,000 ÷$1,031,250 16%

The Professional Division is earning about $0.16 on each dollar of sales whereas the Residential Division is only earning about $0.10 on each dollar of sales. The Professional Division’s higher sales margin helps to account for its higher ROI. Req. 3 Residential $635,500 ÷$205,000 3.10 times

Sales ÷ Total assets Capital turnover

Professional $1,031,250 ÷$ 375,000 2.75 times

The Professional Division is generating $2.75 of sales for every dollar of assets invested in the division. The Residential Division is generating $3.10 of sales for every dollar of assets invested. The Residential Division is even more efficient. Req. 4 Residential 10% ×3.10 31%

Sales margin × Capital turnover ROI

Professional 16% ×2.75 44%

Residential RI Professional RI

= Operating income – Minimum acceptable income = Operating income – (Target rate of return × Total assets) = $63,550 – ($205,000 × 25%) = $12,300 = $165,000 – ($375,000 × 25%) = $71,250

Both divisions are exceeding management’s expectations. 10-24

Chapter 10

Performance Evaluation

(10 min.) E10-38B Columbus, Inc.

Kemp Company

Sargent Industries

Sales (S)

$105,000

$790,000

$525,000

Operating income (OI)

$37,800

$110,600

$78,750

Total assets (TA)

$84,000

$197,500

$187,500

Sales margin (SM)

36%

14%

15%

Capital turnover (CT)

1.25

4.00

2.80

Return on investment (ROI)

45%

56%

42%

Target rate of return

12%

21%

20%

Residual income (RI)

$27,720

$69,125

$41,250

(10 min.) E10-39B Req. 1 Sales margin = Operating income ÷ Sales Sales margin

$8,060 ÷ $31,000

26%

Capital turnover = Sales ÷ Total assets Capital turnover

$31,000 ÷ $15,500

2.00 times

ROI = Operating income ÷ Total assets ROI

$8,060 ÷ $15,500

52%

Req. 2 RI = Operating income – (Target Rate of Return × Total Assets) RI

$8,060 – (16% x $15,500) = $5,580

10-25

Managerial Accounting 6e Solutions Manual

(10–15 min.) E10-40B Req. 1 The original return on investment (ROI) for the Jackson Ceramics division before the additional investment is 20.0% [($82,000 ÷ $410,000)]. Req. 2 If this investment opportunity were undertaken, the ROI would be 18.0% [($82,000 + $21,320) ÷ ($410,000 + $164,000)]. If the manager of this division is evaluated based on ROI, she would not want to make this investment. Investing in the new project would decrease the division’s ROI. Req. 3 The ROI of the investment opportunity is 13% [$21,320 ÷ $164,000]. From the standpoint of Dunlap Corporation, this investment is desirable. The ROI of the investment opportunity is more than Dunlap’s required rate of return. Req. 4 The residual income (RI) for Jackson Ceramics if this investment opportunity were to be undertaken is $45,920 ($82,000 + $21,320) − [($410,000 + $164,000) × 10%]. If the manager of this division is evaluated based on RI, she would want to make this investment. The positive RI indicates that the division is earning more than management’s expectations. Req. 5 The RI of the investment opportunity is $4,920 [$21,320 – ($164,000 × 10%)]. From the standpoint of Dunlap Corporation this investment is desirable. The RI of the investment opportunity is positive, meaning the investment opportunity would earn more than management’s target required return. Req. 6 Of the two performance measurement methods, ROI and RI, RI is more likely to promote goal congruence. The RI of the investment alone is positive, meaning the investment will increase the division’s RI by that amount. This would motivate both the division manager and the company management to make the investment. The arrival at the same conclusion by both the manager and company management indicates goal congruence.

(10 min.) E10-41B Req. 1 Lowest—Variable cost of $33 ($29 + $4) Highest—Market price of $70 Req. 2 If Howard Motors has a cost-plus transfer price policy of full absorption cost plus 20%, the transfer price would be $42. Req. 3 Market price; $70

10-26

Chapter 10

Performance Evaluation

(15–20 min.) E10-42B Req. 1 $248,000 / 62,000 = $4.00 sales price per unit Req. 2 $148,800 / 62,000 = $2.40 variable cost per unit Req. 3 $70,000 budgeted fixed cost Req. 4 Note: See Master Budget Variance Column in Flexible Budget Performance Report in Req. 5. Req. 5 The Celebration Balloon Company Flexible Budget Performance Report For the Month Ended August 31 (Req. 5b) Flexible Budget Variance

Flexible Budget

Volume Variance

70,000

8,000 F

62,000

8,000 F

$ 295,000

$ 15,000 F

$ 280,000

$ 32,000 F

$ 248,000

$47,000 F

Less: Variable Expenses

175,000

7,000 U

168,000

19,200 U

148,800

26,200 U

Contribution Margin

120,000

8,000 F

112,000

12,800 F

99,200

20,800 F

Fixed Expenses:

72,000

2,000 U

70,000

2,000 U

Operating Income

$ 48,000

$ 6,000 F

$ 42,000

$12,800 F

$ 29,200

$18,800 F

Actual Volume Sales Revenue

(Req. 5a) Master Budget

Master Budget Variance

Req. 6 a.

$12,800

$7,000

Selling units for a higher price than budgeted

$0; the flexible budget uses the master budget amount for fixed expenses because fixed expenses are assumed to be the same (fixed) at any level of activity.

10-27

Managerial Accounting 6e Solutions Manual

(15–20 min.) E10-43B Stone Canyon Muffins Flexible Budget Performance Report For the Year Ended December 31

Actual 9,500 cases Sales Revenue ($27 per Case)

Flexible Budget Variance 0F

Flexible Budget 9,500 cases

Volume Variance 200 F

Master Budget 9,300 cases

$264,100

$7,600 F

$256,500

$5,40 0F

$251,100

Packaging Expense ($4 per Case Sold)

$39,300

$1,300 U

$38,000

$800 U

$37,200

Shipping Expense ($2 per Case Sold)

$21,800

$2,800 U

$19,000

$400 U

$18,600

Sales Commissions (1% of Sales Price)

$2,641

$76 U

$2,565

$54 U

$2,511

$200,359

$3,424 F

$196,935

$4,146 F

$192,789

Salaries

$8,500

$1,500 U

$7,000

$0 F

$7,000

Office Rent

$3,800

$0 F

$3,800

$0 F

$3,800

Depreciation

$2,600

$0 F

$2,600

$0 F

$2,600

Insurance Expense

$2,300

$200 F

$2,500

$0 F

$2,500

Office Supplies Expense

$1,300

$700 U

$600

$0 F

$600

$181,859

$1,424 F

$180,435

$4,146 F

$176,289

Less Variable Expenses:

Contribution Margin Less Fixed Expenses:

Operating Income

10-28

Chapter 10

Performance Evaluation

(15–20 min.) E10-44B Randall Corporation Flexible Budget Performance Report For the Month Ended November 30 Flexible Budget Flexible Actual Variance Budget

Volume Variance

Master Budget

Output Units

29,000

2,500 U

31,500

Sales Revenue

$ 246,500

$ 5,800 F

$240,700

$20,750U

$261,450

Less: Variable Expenses

202,000

22,200 U

179,800

15,500 F

195,300

Contribution margin

44,500

16,400 U

60,900

5,250 U

66,150

Fixed Expenses

19,500

5,500 F

25,000

Operating Income

$25,000

$10,900 U

$35,900

$5,250 U

$41,150

10-29

Managerial Accounting 6e Solutions Manual

(15–20 min.) E10-45B Royal Corporation Balanced Scorecard Report For Quarter Ended December 31 Perspective

Objective

KPI

Goal

Actual

Goal Achieved?

Financial Increase ROI

ROI

19%

26%

Yes

Increase sales of core product line

Sales revenue growth— core product line

$2,100,000

$2,150,000

Yes

Increase customer retention

Number of repeat customers

101,000

100,000

Increase market share

Market share percentage

17%

20%

Yes

Improve production efficiency

Number of units produced per hour

6.9

7.2

Yes

Develop new core products

Number of new core products

Yes

Improve employee product knowledge

Hours of employee training provided

2,375

2,425

Yes

Improve employee job satisfaction

Employee turnover rate

Customer

Internal business process

Learning and growth

10-30

Chapter 10

Performance Evaluation

(15–20 min.) E10-46B a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r.

Community Internal business Customer Financial Community Internal business Learning and growth Financial Learning and growth Internal business Financial Customer Internal business Customer Customer Community Learning and growth Internal business

10-31

Managerial Accounting 6e Solutions Manual

(20 min.) E10-47B 1. 2.

10-32

Chapter 10

Performance Evaluation

(continued) E10-47B Formulas in each cell should be:

Which revenue variances are favorable? In-house dining Uber Eats Event catering

10-33

Managerial Accounting 6e Solutions Manual

(continued) E10-47B 4.

Which expense variances are favorable? Server wages Manager salary Advertising Supplies Electricity Depreciation Cleaning Menu printing Interest Accounting Office supplies

If the company has a policy that all variances greater than $2,000 should be evaluated, which variances should be investigated? Variances greater than $2,000 are highlighted in yellow.

10-34

Chapter 10

Performance Evaluation

(20 min.) E10-48B 1. 2. 3.

10-35

Managerial Accounting 6e Solutions Manual

(continued) E10-48B Formulas in each cell should be:

Which revenue variances are favorable? Admissions Food service Merchandise Parking Locker rental Vendor commissions Performances

10-36

Chapter 10

Performance Evaluation

(continued) E10-48B 5.

Which expense variances are favorable? Park employee wages Game operations Leases Credit/debit card fees Insurance Electricity Depreciation Disposal Management salaries Printing Permits Licenses

Is the operating income variance favorable or unfavorable? Favorable

If the company has a policy that all variances greater than $100,000 should be evaluated, which variances should be investigated? Variances greater than $100,000 are highlighted in yellow.

10-37

Managerial Accounting 6e Solutions Manual

Problems (Group A) (20–25 min.) P10-49A Req. 1 Outrageous Bubbles, Inc. Flexible Budget Income Statement Month Ended March 31 Flexible Budget per Output Unit

Output Units (Kits) 55,000

60,000

65,000

$3.10

$170,500

$186,000

$201,500

Cost of goods sold

1.25

68,750

75,000

81,250

Sales commissions

0.25

13,750

15,000

16,250

Utilities expense

0.10

5,500

6,000

6,500

82,500

90,000

97,500

Salary expense

30,000

33,000

Depreciation expense

20,000

23,000

Rent expense

15,000

19,000

Utilities expense

7,000

$ 10,500

$ 18,000

$ 15,500

Sales revenue Less variable expenses:

Contribution Margin Less fixed expenses:

Operating income

10-38

Chapter 10

Performance Evaluation

(continued) P10-49A Req. 2

Dollars

220,000

50,000 0

75 5 Volume in Thousands of Bubble Kits

Outrageous Bubbles 250000

Total Costs

200000 150000 100000 50000 0 0

Number of Kits (thousands)

Data points used: Kits 0 20 40 55 58 60 62.5 62.501 65 68 70 75

Total Costs 72000 104000 136000 160000 164800 168000 172000 182001.6 186000 190800 194000 202000

(continued) P10-49A .

10-39

Managerial Accounting 6e Solutions Manual

Req. 3 The advantage of the graph in the previous step is that Outrageous Bubbles’ managers can look at the graph to estimate total expenses at any output level up to 75,000 bubble kits, not just the three levels shown in the columnar format in the first step. The disadvantage of the graph is that looking at the graph provides only an estimate of the budgeted cost.

(15–20 min.) P10-50A Req. 1 Outrageous Bubbles, Inc. Income Statement Performance Report For the Month Ended March 31

Output units (kits) Sales revenue

Actual Results at Actual Prices 60,000

Flexible Budget Variance 0F

Flexible Budget for Actual Number of Output Units 60,000

Volume Variance 5,000F

Master Budget 55,000

$194,000

$8,000F

$186,000

$15,500F

$170,500

Cost of goods sold

75,500

500U

75,000

6,250U

68,750

Sales commissions expense

16,500

1,500U

15,000

1,250U

13,750

Utilities expense

6,000

500U

5,500

Contribution margin

96,000

6,000 F

90,000

7,500 F

82,500

Salary expense

32,200

2,200U

30,000

Depreciation expense

20,000

Rent expense

14,550

450F

15,000

Utilities expense

7,000

$ 22,250

$4,250F

$ 18,000

$ 7,500F

$ 10,500

Variable expenses:

Less fixed expenses:

Operating income

10-40

Chapter 10

Performance Evaluation

(continued) P10-50A Req. 2 The favorable volume variance for operating income is much larger than the favorable flexible budget variance. Most of the difference between master budget operating income and actual operating income resulted from selling 5,000 more bubble kits than expected.

Req. 3 Outrageous Bubbles’ master budget variance for operating income is $11,750 favorable, meaning that its operating income is higher than expected per the master budget. A favorable volume variance for sales reveals profits increased due to more units being sold. A favorable flexible budget variance for sales means the sale price was higher than expected. These variances suggest that the marketing department did a good job, selling more kits than expected and at a higher sales price than expected. The variable expenses have unfavorable volume variances due to the increase in the number of units sold. The variable expenses have unfavorable flexible budget variances due to an increase in the variable cost per unit. The latter suggest the need for better control over costs. Fixed expenses also have one unfavorable flexible budget variance that suggests that fixed expenses need to be better controlled.

(15–20 min.) P10-51A Req. 1

Operating income ÷ Total assets Return on investment

Paint Stores $ 553,000 ÷$1,970,000 28%

Consumer $ 176,000 ÷$2,000,000 8.8%

Paint Stores $ 553,000 ÷$3,950,000 14%

Consumer $ 176,000 ÷$1,100,000 16%

Req. 2

Operating income ÷ Sales Sales margin

The Consumer Division is more profitable on each dollar of sales. Req. 3

Sales ÷ Total assets Capital turnover

Paint Stores $3,950,000 ÷$1,975,000 2.0 times

Consumer $1,100,000 ÷$2,000,000 0.55 times

The Paint Stores Division is more efficient in generating sales with its assets.

10-41

Managerial Accounting 6e Solutions Manual

(continued) P10-51A Req. 4 Paint Stores 14% ×2.0 28%

Sales margin × Capital turnover ROI

Consumer 16% ×0.55 8.8%

The Consumer Division’s profitability on each dollar of sales is higher than the Paint Stores Divisions’ profitability. However, the Paint Stores Division’s efficiency is significantly higher than the Consumer Division’s efficiency. These results cause the Paint Stores Division’s ROI to be higher than the Consumer Division’s ROI. Req. 5 RI

= Operating income − Minimum acceptable income = Operating income − (Target rate of return × Total assets)

Paint Stores RI Consumer RI

= $553,000 − ($1,975,000 × 21%) = $138,250 = $176,000 − ($2,000,000 × 21%) = $(244,000)

Only the Paint Stores Division is meeting management’s target rate of return. The Consumer Division should work on improving its capital turnover rate. Improving the capital turnover rate may help the division achieve positive residual income. Req. 6 Most companies use the average asset balance because the income used in the ROI calculation is earned over the course of the entire year. Management must also decide whether it wishes to use the gross book value of assets or the net book value of assets. The net book value is often used because the figure is easily pulled straight from the balance sheet. However, ROI using that value will artificially rise over time due to depreciation. Management also considers whether to include nonproductive assets in the total assets figures. Req. 7 Risk level of the division’s business Interest rates on company debt Investors’ expectations Competitors’ rate of return Return being earned by other divisions General economic conditions

Req. 8 RI does a better job of goal congruence.

Req. 9 Investment centers are responsible for both generating profit and efficiently managing the division’s assets. Budget versus actual performance reports are insufficient because they do not measure how efficiently the division uses its assets. 10-42

Chapter 10

Performance Evaluation

(15–20 min.) P10-52A Req. 1 (Millions of dollars) Home furnishings

Net Revenue

Operating Profit

Total Assets

$10,750

$2,795

$5,000

9,500

1,995

7,600

12,100

1,210

11,000

2,000

660

1,000

Net Revenue

Sales Margin

$2,795

$10,750

26.00%

1,995

9,500

21.00%

1,210

12,100

10.00%

660

2,000

33.00%

Office furniture Store displays Health-care furnishings

Req. 2 (Millions of dollars) Home furnishings

Operating Profit

Office furniture Store displays Health-care furnishings

The store displays division of Jubilee Co. has a much lower sales margin than the other divisions. Store displays is only earning $0.10 on every $1 of sales, whereas the other divisions range from $0.21 to $0.33 on every dollar of sales. Health-care furnishings has the highest sales margin.

Req. 3 (Millions of dollars) Home furnishings

Net Revenue

Total Assets

Capital Turnover

$10,750

$5,000

2.15

9,500

7,600

1.25

12,100

11,000

1.1

2,000

1,000

2.0

Office furniture Store displays Health-care furnishings

The divisions have very different capital turnover rates. This means that the divisions vary greatly in their ability to generate sales revenue from their assets. Home furnishings has the highest capital turnover, while store displays has the lowest capital turnover.

10-43

Managerial Accounting 6e Solutions Manual

(continued) P10-52A Req. 4 (Millions of dollars) Home furnishings

Operating Profit

Total Assets

ROI

$2,795

$5,000

55.90%

1,995

7,600

26.25%

1,210

11,000

11.00%

660

1,000

66.00%

Office furniture Store displays Health-care furnishings

Home furnishings and health-care furnishings have the highest ROI. Both divisions had the highest sales margins, which factors into why they have the highest ROI. Store displays had the lowest ROI, in part driven by the fact that it had the lowest sales margin of the four divisions.

Req. 5 Financial reporting is for the benefit of external users, not internal management. Therefore, not all company information is disclosed in the financial statements. Residual income (RI) calculations involve management’s target rate of return. Because this information is not presented, residual income cannot be calculated by an external user without making an assumption about the rate.

(15–20 min.) P10-53A Req. 1 The highest acceptable transfer price for the divisions is $30, the market price. Req. 2 Variable manufacturing cost $28

Direct materials

Direct labor

Variable manufacturing overhead

$12

Assuming the transfer price is negotiated between the divisions, the lowest acceptable transfer price would be the total variable manufacturing cost, $28. (Note: The assumption is made here that the variable selling expenses are only incurred for external sales and not for in-house sales.) Req. 3 The manager of the small components division would prefer the $30 transfer price. The manager of the computer division would prefer the $28 transfer price. Req. 4 Full absorption cost

Variable manufacturing cost

Fixed manufacturing overhead

Decrease in fixed manufacturing overhead

$32

$28

If the company’s policy requires that all in-house transfers must be priced at total manufacturing cost plus 9%, the transfer price would be $34.88 [$32 + ($32 × 9%)].

10-44

Chapter 10

Performance Evaluation

(continued) P10-53A Req. 5 If the company requires all in-house transfers must be priced at total variable manufacturing cost plus 18%, the transfer price would be $33.04 [$28 + ($28 × 18%)]. Req. 6 Transfer price

(

Full absorption cost

Variable selling expense

)

105%

$41.73

(

$32 [see Req. 4]

)

107%

If the company does incur the variable selling expenses on internal transfers and it sets transfer prices at 107% of the sum of full absorption cost and the variable selling expenses, the transfer price would be $41.73.

(15–20 min.) P10-54A Req. 1 Teams—Subunit X

Actual

Budgeted Variance Percentage*

Variance (U or F) Sales

$546,000

$500,000

$46,000

9.20%

Less: Variable expenses

388,500

375,000

13,500

3.60%

Contribution margin

157,500

125,000

32,500

26%

Less: Direct fixed expenses

52,050

50,000

2,050

4.10%

Segment margin income

105,450

75,000

30,450

40.6%

Less: Common fixed expenses (allocated)

38,500

25,000

13,500

54.0%

Operating income

$66,950

$50,000

$16,950

33.9%

*variance ÷ budgeted sales or expense Req. 2 This performance report includes both revenue and cost data; therefore, this subunit must be a profit center. Req. 3 Common fixed expenses

10-45

Managerial Accounting 6e Solutions Manual

(continued) P10-54A Req. 4 Managers should investigate favorable as well as unfavorable variances. Favorable variances may be due to bookkeeping or budgeting errors. Management needs to evaluate large favorable as well as unfavorable variances to determine the root cause of the variance. Req. 5 Yes, the variances could be due to higher than expected sales volume. Req. 6 Management will not place much weight on the variable expenses variance because it does not exceed 16%. In addition, they may not place much weight on the common fixed expenses because this is not a direct cost of the subunit. Req. 7 This performance report addresses the financial perspective of the balanced scorecard. Financial performance measures tend to be lag indicators. They typically measure the results of past decisions. Req. 8 Customer perspective—customer satisfaction ratings Internal business perspective—number of new products developed Learning and growth perspective—hours spent training employees Each one of these performance measures is a lead indicator that tends to project future performance. The performance indicators listed above are often better at projecting future performance than past financial data.

10-46

Chapter 10

Performance Evaluation

Problems (Group B) (20–25 min.) P10-55B Req. 1 Popping Bubbles, Inc. Flexible Budget Income Statement For the Month Ended October 31 Flexible Budget per Output Unit

Output Units (Kits) 65,000

70,000

75,000

$2.90

$188,500

$203,000

$217,500

Cost of goods sold

1.20

78,000

84,000

90,000

Sales commissions

0.20

13,000

14,000

15,000

Utilities expense

0.20

13,000

14,000

15,000

84,500

91,000

97,500

Salary expense

33,000

36,300

Depreciation expense

18,000

20,700

Rent expense

11,000

18,000

Utilities expense

5,000

$ 17,500

$ 24,000

$ 17,500

Sales revenue Less Variable expenses:

Contribution margin Less Fixed expenses:

Operating income

10-47

Managerial Accounting 6e Solutions Manual

(continued) P10-55B Req. 2

Dollars

220,000

50,000 85

Volume in Thousands of Bubble Kits

Popping Bubbles 250000

Total Costs

200000 150000 100000 50000 0

Number of Kits (thousands)

10-48

Chapter 10

Performance Evaluation

(continued) P10-55B Data points used: Kits 0 20 40 65 70 72.5 72.501 75 80 85

Total Costs 67000 99000 131000 171000 179000 183000 196001.6 200000 208000 216000

Req. 3 The advantage of the graph in the previous step is that Popping Bubbles’ managers can look at the graph to estimate total expenses at any output level up to 85,000 bubble kits, not just the three levels shown in the columnar format in the first step. The disadvantage of the graph is that looking at the graph provides only an estimate of the budgeted cost.

10-49

Managerial Accounting 6e Solutions Manual

(15–20 min.) P10-56B Req. 1 Popping Bubbles, Inc. Income Statement Performance Report For the Year Ended October 31

Actual results at actual prices Output units

Flexible budget variance

Flexible budget for actual number of output units

Volume variance

Master budget

70,000

5,000

65,000

211,000

8,000

$203,000

14,500

$188,500

Cost of goods sold

84,500

500

84,000

6,000

78,000

Sales commissions

15,500

1500

14,000

1,000

13,000

Utility expense

14,000

1,000

13,000

Contribution margin

97,000

6,000

91,000

6,500

84,500

Salary expense

35,100

2,100

33,000

Depreciation expense

18,000

Rent expense

10,550

450

11,000

Utility expense

5,000

28,350

4,350

$ 24,000

6,500

$ 17,500

Sales revenue

Less variable expenses:

Less fixed expenses:

Operating income

Req. 2 The favorable volume variance for operating income is larger than the favorable flexible budget variance. Most of the difference between master budget operating income and actual operating income resulted from selling 5,000 more bubble kits than expected.

Req. 3 Popping Bubbles’ master budget variance for operating income is $10,850 favorable, meaning that its operating income is higher than expected per the master budget. A favorable volume variance for sales reveals profits increased due to more units being sold. A favorable flexible budget variance for sales means the sale price was higher than expected. These variances suggest that the marketing department did a good job, selling more kits than expected and at a higher sales price than expected. The variable expenses have unfavorable volume variances due to the increase in the number of units sold. The variable expenses have unfavorable flexible budget variances due to an increase in the variable cost per unit. The latter suggest the need for better control over costs. Fixed expenses also have one unfavorable flexible budget variance, which suggests that fixed expenses need to be better controlled. 10-50

Chapter 10

Performance Evaluation

(15–20 min.) P10-57B Req. 1

Operating income ÷ Total assets Return on investment

Paint Stores $ 465,600 ÷$1,552,000 30.00%

Consumer $ 221,000 ÷$2,600,000 8.5%

Paint Stores $ 465,600 ÷$3,880,000 12.0%

Consumer $ 221,000 ÷$1,300,000 17.0%

Req. 2

Operating income ÷ Sales Sales margin

The consumer division is more profitable on each dollar of sales.

Req. 3 Paint Stores $3,880,000 ÷$1,552,000 2.5 times

Sales ÷ Total assets Capital turnover

Consumer $1,300,000 ÷$2,600,000 0.50 times

The paint stores division is more efficient in generating sales with its assets.

Req. 4 Paint Stores 12.0% ×2.5 30.00%

Sales margin × Capital turnover ROI

Consumer 17.0% ×0.50 8.5%

The consumer division’s profitability on each dollar of sales is higher than the paint stores division’s profitability. However, the paint stores division’s efficiency is significantly higher than the consumer division’s efficiency. These results cause the paint stores division’s ROI to be higher than the consumer division’s ROI.

Req. 5 RI

= Operating income − Minimum acceptable income = Operating income − (Target rate of return × Total assets)

Paint Stores RI Consumer RI

= $465,600 − ($1,552,000 × 21%) = $139,680 = $221,000 − ($2,600,000 × 21%) = $(325,000)

Only the paint stores division is meeting management’s target rate of return. The consumer division should work on improving its capital turnover rate. Improving the capital turnover rate may help the division achieve positive residual income.

10-51

Managerial Accounting 6e Solutions Manual

(continued) P10-57B Req. 6 Most companies use the average asset balance because the income used in the ROI calculation is earned over the course of the entire year. Management must also decide whether they wish to use the gross book value of assets or the net book value of assets. The net book value is often used because it is easily pulled straight from the balance sheet. However, ROI calculated using the net book value of assets might artificially rise over time simply due to depreciation. Management also considers whether to include nonproductive assets in the total assets figure. Req. 7 Risk level of the division’s business Interest rates on company debt Investors’ expectations Competitors’ rate of return Return being earned by other divisions General economic conditions Req. 8 RI does a better job of goal congruence. Req. 9 Investment centers are responsible for both generating profit and efficiently managing the division’s assets. Budget versus actual performance reports are insufficient because they do not measure how efficiently the division uses its assets.

10-52

Chapter 10

Performance Evaluation

(15–20 min.) P10-58B Req. 1 (Millions of dollars) Home furnishings

Net Revenue

Operating Profit

Total Assets

$9,500

$2,565

$7,600

8,500

1,615

5,000

12,500

1,500

15,625

1,500

480

750

Net Revenue

Sales Margin

Office furniture Store displays Health-care furnishings

Req. 2 (Millions of dollars) Home furnishings

Operating Profit $2,565

$9,500

27.00%

1,615

8,500

19.00%

1,500

12,500

12.00%

480

1,500

32.00%

Office furniture Store displays Health-care furnishings

The store displays division of BOGO Co. has a much lower sales margin than the other divisions. They are only earning $0.12 on every $1 of sales, whereas the other divisions range from $0.19 to $0.32 on every dollar of sales. Health-care furnishings has the highest sales margin. Req. 3 (Millions of dollars) Home furnishings

Net Revenue

Total Assets

Capital Turnover

$9,500

$7,600

1.25

8,500

5,000

1.7

12,500

15,625

1,500

750

Office furniture Store displays Health-care furnishings

The divisions have very different capital turnover rates. This means that the divisions vary greatly in their ability to generate sales revenue from their assets. Health-care furnishings has the highest capital turnover, while store displays has the lowest capital turnover.

10-53

Managerial Accounting 6e Solutions Manual

(continued) P10-58B Req. 4 (Millions of dollars) Home furnishings

Operating Profit

Total Assets

ROI

$2,565

$7,600

33.75%

1,615

5,000

32.3%

1,500

15,625

9.6%

480

750

64%

Office furniture Store displays Health-care furnishings

Home furnishings and health-care furnishings have the highest ROI. Both divisions had the highest sales margins, which helps account for their high ROI. Store displays had the lowest ROI, in part driven by the fact that it had the lowest sales margin of the four divisions.

(15–20 minutes) P10-59B Req. 1 The highest acceptable transfer price for the divisions is $30, the market price. Req. 2 Variable manufacturing cost $26

Direct materials

Direct labor

Variable manufacturing overhead

$14

Assuming the transfer price is negotiated between the divisions, the lowest acceptable transfer price would be the total variable manufacturing cost, $26. (Note: The assumption is made here that the variable selling expenses are only incurred for external sales and not for in-house sales.) Req. 3 The manager of the small components division would prefer the $30 transfer price. The manager of the computer division would prefer the $26 transfer price. Req. 4 Full absorption cost

Variable manufacturing cost

Fixed manufacturing overhead

–

Decrease in fixed manufacturing overhead

$32

$26

–

If the company’s policy requires that all in-house transfers must be priced at total manufacturing cost plus 14%, the transfer price would be $36.48 [$32 + ($32 × 14%)].

10-54

Chapter 10

Performance Evaluation

(continued) P10-59B Req. 5 If the company requires all in-house transfers must be priced at total variable manufacturing cost plus 18%, the transfer price would be $30.68 [$26 + ($26 × 18%)]. Req. 6 Transfer price

(

Full absorption cost

Variable selling expense

)

102%

$42.84

(

$32 [Req. 4]

$10

)

102%

If the company does incur the variable selling expenses on internal transfers and it sets transfer prices at 102% of the sum of full absorption cost and the variable selling expenses, the transfer price would be $42.84.

10-55

Managerial Accounting 6e Solutions Manual

(15–20 min.) P10-60B Req. 1 Water Sports – Subunit X

Actual

Sales Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin Income Less: Common fixed expenses (allocated) Operating income

Budgeted

$486,000 260,000 226,000 52,000 174,000

$450,000 250,000 200,000 50,000 150,000

Variance (U or F) $36,000 10,000 26,000 2,000 24,000

35,000 $139,000

25,000 $125,000

10,000 $14,000

Variance Percentage F U F U F

8.0% 4.0% 13.0% 4.0% 16.0%

F U F U F

U F

40.0% 11.2%

U F

*flexible budget variance ÷ flexible budget Req. 2 This performance report includes both revenue and cost data; therefore, this subunit must be a profit center. Req. 3 Common fixed expenses. Req. 4 Managers should investigate favorable as well as unfavorable variances. Favorable variances may be due to bookkeeping or budgeting errors. Management needs to evaluate large favorable as well as unfavorable variances to determine the root cause of the variance. Req. 5 Yes, the variances could be due to higher than expected sales volume. Req. 6 Management will not place much weight on the variable expense variance because it does not exceed 14%. In addition, it may not place much weight on the common fixed expenses because this is not a direct cost of the subunit. Req. 7 This performance report addresses the financial perspective of the balanced scorecard. Financial performance measures tend to be lag indicators. They typically measure the results of past decisions. Req. 8 Customer perspective—customer satisfaction ratings Internal business perspective—number of new products developed Learning and growth perspective—hours spent training employees Each one of these performance measures is a lead indicator that tends to project future performance. The performance indicators listed above are often better than past financial data at projecting future performance.

10-56

Chapter 10

Performance Evaluation

Serial Case C10-61 Req. 1 Caesars Palace Las Vegas wouldn’t be likely to use casino, food and beverage, and rooms as its segments in its internal reporting. Instead, it might be segmented into separate operating divisions based on different towers (Augustus, NOBU Hotel, Julius, Palace, Octavius, and Forum) or property type like limited service, full-service, or luxury. Req. 2 Responsibility centers a. In a cost center, managers are accountable for costs only. Examples of cost centers might include maintenance, housekeeping, and human resource departments. b. In a revenue center, managers are accountable primarily for revenues. Examples include the room reservation department or wedding package sales. c. In a profit center, managers are accountable for both revenues and costs and, therefore, profits. Hotel profit centers typically include rooms, food and beverage, entertainment, and casinos. d. In an investment center, managers are responsible for (1) generating revenues, (2) controlling costs, and (3) efficiently managing the division’s assets. Investment centers are generally large divisions of a business such as six different towers of Caesars Palace. Req. 3 A performance report compares actual revenues and costs against budgeted figures. The difference between actual and budget is known as a variance. The performance reports of cost centers will only include costs incurred within the center and the performance reports of revenue centers will only include the revenues generated by the center. In each report, variances are either favorable or unfavorable. The performance reports of profit and investment centers include both revenues and expenses. These reports often include a line called “segment margin.” A segment margin is the operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the center. Additional investment center performance measures are ROI, sales margin, capital turnover, and residual income.

10-57

Managerial Accounting 6e Solutions Manual

Discussion & Analysis (30–45 min.) A10-62 1.

Describe at least four advantages of decentralization. Also, describe at least two disadvantages to decentralization. Decentralization provides many potential benefits. It frees top management time. By delegating responsibility for daily operations to segment managers, top management can concentrate on long-term strategic planning and higher level decisions that affect the entire company. Decentralization encourages the use of expert knowledge by allowing top management to hire the expertise each business segment needs to excel in its specific operations. Specialized knowledge often helps segment managers make better decisions than the top company managers could make. Segment managers can focus on just one segment of the company, allowing them to maintain close contact with important customers and suppliers. Thus, decentralization often leads to improved customer and supplier relations, which can result in quicker customer response times. Decentralization also provides segment managers with training and experience necessary to become effective top managers. Companies often groom their lower level managers to move up through the company, taking on additional responsibility and gaining more knowledge of the company with each step. Finally, empowering segment managers to make decisions increases managers’ motivation and job satisfaction, which often improves job performance and retention. Decentralization may also cause potential problems. Decentralization may cause a company to duplicate certain costs or assets. Also, decentralized companies often struggle to achieve goal congruence. Segment managers may not fully understand the big picture, or the ultimate goals that upper management is trying to achieve. They may make decisions that are good for their segment but may be detrimental to another segment of the company or the company as a whole.

Compare and contrast a cost center, a revenue center, a profit center, and an investment center. List a specific example of each type of responsibility center. How is the performance of managers evaluated in each type of responsibility center? In a cost center, managers are accountable for costs only. Manufacturing operations, such as the Campbell’s Chicken Noodle Soup manufacturing plant, are cost centers. The plant manager controls costs by ensuring that the entire production process runs efficiently. The plant manager is not responsible for generating revenues because he or she is not involved in selling the product. The plant manager is evaluated on his or her ability to control costs by comparing actual costs to budgeted costs. In a revenue center, managers are accountable primarily for revenues. Many times, revenue centers are sales territories, such as Campbell’s Soups Midwest and Southeast sales regions. Managers of revenue centers may also be responsible for the costs of their own sales operations. Revenue center performance reports compare actual revenues to budgeted revenues. In a profit center, managers are accountable for both revenues and costs and, therefore, profits. For example, at Campbell’s, a manager is responsible for the entire line of Campbell’s ready-to-serve and condensed soup products. This manager is accountable for increasing sales revenue and controlling costs to achieve profit goals for the entire line of soups. Superiors evaluate the manager’s performance by comparing actual revenues, expenses, and profits to the budget. In an investment center, managers are responsible for generating revenues, controlling costs, and efficiently managing the division’s assets. Investment centers are generally large divisions of a corporation. Investment centers are treated almost as if they were stand-alone companies. Division managers generally have broad responsibility, including deciding how to use assets. As a result, managers are held responsible for generating as much profit as they can with those assets.

10-58

Chapter 10 3.

Performance Evaluation

Explain the potential problem that could arise from using ROI as the incentive measure for managers. What are some specific actions a company might take to resolve this potential problem? One serious drawback of ROI is the short-term focus of this measure. Companies usually prepare performance reports and calculate ROI using a time frame of one year or less. If upper management uses a short time frame, division managers have an incentive to take actions that will lead to an immediate increase in these measures, even if such actions may not be in the company’s long-term interest. On the other hand, many potentially positive actions may take longer than one year to generate income at the targeted level. Many product life cycles start slow, even incurring losses in the early stages, before generating profit. As a potential remedy, management can measure financial performance using a longer time horizon, such as three to five years. Extending the time frame gives segment managers the incentive to think long term rather than short term and make decisions that will positively impact the company over the next several years.

Describe at least two specific actions that a company could take to improve its ROI. The ROI formula can be expanded to sales margin multiplied by capital turnover. By improving either of these ratios, the ROI will be improved. The sales margin can be improved by increasing the amount of operating income earned on every dollar of revenue. This can be achieved by cutting costs. Reducing or eliminating nonproductive assets can improve the capital turnover ratio. There are many specifics actions that may be used to achieve these objectives; therefore, student answers will vary.

Define residual income. How is it calculated? Describe the major weakness of residual income. Residual income determines whether operations have created any excess income above and beyond management’s expectations. Residual income is calculated as follows: Operating income – Minimum acceptable income, or Operating income – (Target rate of return x Total assets).

Compare and contrast a master budget and a flexible budget. A master budget is prepared before the beginning of the period. The master budget does not change with the actual volume of production. A flexible budget can be prepared for a different volume that was originally anticipated in the master budget.

Describe two ways managers can use flexible budgets. Student answers will vary.

Define key performance indicator (KPI). What is the relationship between KPIs and a company’s objectives? Select a company of any size with which you are familiar. List at least four examples of specific objectives that a company might have and one potential KPI for each of those specific objectives. A key performance indicator (KPI) is a summary performance measure to assess how well a company is achieving its goals. The KPI is a measurement used by managers to determine if the company is achieving its objectives. Student answers for a specific company will vary.

List and describe the four perspectives found on a balanced scorecard. For each perspective, list at least two examples of KPIs that might be used to measure performance on that perspective. The financial perspective helps managers answer the question, “How do we look to shareholders?” Shareholders are primarily concerned with the company’s profitability. Managers must continually attempt to increase profits through increasing revenue, controlling costs, or increasing productivity. The customer perspective helps managers evaluate the question, “How do customers see us?” Customer satisfaction is a top priority for long-term success. If customers aren’t happy, they won’t come back. Therefore, customer satisfaction is critical for the company to achieve its financial goals. Customers are typically concerned with four product or service attributes: price, quality, sales service, and delivery time. The internal business perspective helps managers address the question, “At what business processes must we excel to satisfy customer and financial objectives?” In other words, a company needs to tend to its internal operations if it is to please customers. And only by pleasing customers will it achieve its financial goals. Answer to that question incorporates three factors: innovation, operations, and post-sales support. The learning and growth perspective helps managers assess the question, “Can we continue to improve and create value?” Much of a .

10-59

Managerial Accounting 6e Solutions Manual company’s success boils down to its people. A company cannot be successful in the other perspectives (financial, customer, internal operations) if it does not have the right people in the right positions, a solid and ethical leadership team, and the information systems that employees need. Therefore, the learning and growth perspective lays the foundation needed for success in the other perspectives. The learning and growth perspective focuses on three factors: employee capabilities, information system capabilities, and the company’s “climate for action.” 10. Contrast lag indicators with lead indicators. Provide an example of each type of indicator. Lag indicators reveal the results of past decisions. Financial performance measures such as ROI or RI are lag indicators because they convey trends based on historical information. Lead indicators are performance measures that predict future performance. 11. Some companies integrate sustainability measures into the traditional four perspectives in their balanced scorecards. Other companies create a new perspective (or two) for sustainability. Which method do you think would result in better supporting sustainability efforts throughout the organization? Explain your viewpoint. Student answers will vary. 12. Find an annual report for a publicly held company (go to the company’s website and look for “Investor Relations” or a similar link.) How many sustainability initiatives can you find in the annual report? What internal balanced scorecard measures do you think they might use to measure progress on each sustainability initiative? (You must use your imagination, because typically most balanced scorecard measures are not publicly disclosed.) Student answers will vary.

A10-63 1.

Locate the company’s annual report as outlined previously. Find the company’s segment information; it should be in the “Notes to Consolidated Financial Statements” or other similarly named section. Look for the word “Segment” in a heading; that is usually the section you need. To create this SAMPLE set of solutions for this question, Starbucks Corporation was used. Student answers will vary, depending upon the company chosen and the year used. Starbucks Corporation has three reportable operating segments: United States, International, and Global CPG (Consumer Products Group).

List the segments as reported in the annual report. Make a table listing each operating segment, its revenues, income, and assets. (in millions) Segment U.S. International Global CPG

Revenues $7,882.0 2,103.4 392.6

Income $528.01 110.0 205.3

Assets $2,362.9 1,272.7 116.0

Use the data you collected in Requirement 2 to calculate each segment’s sales margin. Interpret your results. Sales margin = Operating income/Sales U.S.: $528.01/$7,882.0 = 6.7% International: $110.0/$2,103.4 = 5.2% Global CPG: $205.3/$392.6 = 52.3% The CPG segment has the highest sales margin of the three segments at 52.3%. For every dollar of sales, the U.S. segment earned $0.067 and the International segment earned $0.052.

10-60

Chapter 10 4.

Performance Evaluation

Use the data you collected in Question 2 to calculate each segment’s capital turnover. Interpret your results. Capital turnover = Sales/Total assets U.S.: $7,882.0/$2,362.9 = 3.3 International: $2,103.4/$1,272.7 = 1.7 Global CPG: $392.6/$116.0 = 3.4 The capital turnover for the CPG and U.S. segments are almost the same. The CPG segment generated $3.40 of sales for every $1 of assets and the U.S. generated $3.30. The International segment only generated $1.70 of sales for every $1 of assets. The U.S. and CPG segments use its assets more efficiently than the International segment.

5. Use the data you collected in Requirement 2 to calculate each segment’s ROI. Interpret your results. ROI = Operating income/Total assets U.S.: $528.01/$2,362.9 = 22.3% International: $110.0/$1,272.7 = 8.6% CPG: $205.3/$116.0 = 177.0% The CPG segment has a very high ROI in comparison to the other two segments. This is due to it having the highest sales margin of the three segments. 6. Can you calculate RI using the data presented? Why or why not? RI cannot be calculated for Starbucks because the target rate of return and WACC are not known. 7. The rules for how segments should be presented in the annual report are governed by external financial accounting rules. The information you gathered for the previous requirements would be used by investors and other external stakeholders in their analysis of the company and its stock. Internally, the company most likely has many segments. Based on what you know about the company and its products or services, list at least five potential segments that the company might use for internal reporting. Explain why this way of segmenting the company for internal reporting could be useful to managers. Five potential segments for internal reporting for Starbucks are as follows: 1. Regional territories 2. Product lines 3. Brand lines 4. Customer base 5. Business function Sales managers need information about sales and regional territories. Product development managers need information about product lines. Division managers need information about product lines or brand lines.

10-61

Managerial Accounting 6e Solutions Manual

(30–45 min.) A10-64 Req. 1 The three product segments (sectors) are Automotive, Mobility, and Ford Credit. (Millions of Dollars) Net Sales Operating Income Automotive $148,294 $5,422 Mobility 26 (674) Ford Credit 12,018 2,627

Identifiable Assets $103,573 96 160,594

Req. 2 ROI calculation: (Millions of Dollars) Automotive Mobility Ford Credit

Operating Income $5,422 (674) 2,627

Identifiable Assets $103,573 96 160,594

ROI 5.23% (702.08%) 1.64%

Req. 3 The Automotive Division has a much higher ROI than the Ford Credit Division. The expanded ROI formula may offer some clues as to why this is the case. Sales margin and capital turnover are calculated below: Sales Margin calculation: (Millions of Dollars) Automotive Mobility Ford Credit

Operating Income $5,422 (674) 2,627

Net Sales $148,294 26 12,018

Sales Margin 3.66% (2,592.31%) 21.86%

Net Sales $148,294 26 12,018

Identifiable Assets $103,573 96 160,594

Capital Turnover 1.43 0.27 0.07

Capital Turnover calculation: (Millions of Dollars) Automotive Mobility Ford Credit

The primary reason Automotive has a higher ROI than Ford Credit is that it has a much higher capital turnover. Although Ford Credit has been able to generate almost $0.22 per sales dollar, its capital turnover is only 0.07. Automotive has a sales margin of almost $0.04 per sales dollar, its capital turnover is much higher at 1.43 times which leads to a higher overall ROI. (The Mobility Division has a loss, which is not unexpected given that it is Ford’s self-driving cars division and is not yet commercially viable.) Req. 4 The management team would most likely choose to allocate additional funds to the Automotive Division because of its higher ROI. However, it will probably continue to invest in its Mobility Division with an eye to the future, even though the Mobility Division has a negative ROI for now.

10-62

Chapter 10

Performance Evaluation

A10-65 Ethics Mini-Case 1. a.

The ethical issues in this situation are as follows: Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” Deliberately shifting direct fixed costs to common fixed costs in reports that would affect real business decisions would potentially discredit the profession. “Mitigate actual conflicts of interest.” Sarah James has a conflict of interest because she wants to help the production manager keep his job instead of focusing on her task of preparing accurate information. She is conflicted because she knows the figures she provides may cause the production manager to lose his job. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” It is reasonable to expect that the direct fixed expenses, if disclosed, would affect the understanding of the report. Thus, by shifting these costs to common fixed expenses, Sarah James is violating this ethical principle. Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” If Sarah James were to shift the direct fixed expenses to common fixed expenses, the decision support information and recommendations would not be accurate. Sarah James’ responsibilities as a management accountant are to be honest, fair, and objective. She should report the accurate figures for direct fixed costs even if this would result in her boyfriend, Daniel Whalen, losing his job.

By shifting the small engines division direct fixed costs to common fixed expenses, Costello Company would assume that the division is more efficient than it is in reality. This error would certainly influence the decision about continuing the small engines division because it would make the segment margin look favorable and more profitable than it actually is. 3. No, the corporation as a whole could be harmed by James’ actions, which would potentially also harm the shareholders or owners. By deliberately shifting direct fixed costs to common fixed costs, the corporation would be keeping a non-profitable division open, which would be a drain on the overall company’s profits.

Student answers will vary.

A10-66 Real Life Mini-Case 1.

For each of the five segments, write a brief description of what products and services are included in each segment by using the information in the Segment Information section in the Form 10-K. a. b. c.

d. e.

Beauty: Hair care (conditioner, shampoo, styling aids, treatments); skin and personal care (antiperspirant and deodorant, personal cleansing, skin care) Grooming: Shave care (female blades and razors, male blades and razors, pre- and post-shave products, other shave care); appliances Health care: Personal health care (gastrointestinal, rapid diagnostics, respiratory, vitamins/minerals/supplements, pain relief, other personal health care); oral care (toothbrushes, toothpaste, other oral care) Fabric & home care: Fabric care (laundry additives, fabric enhancers, laundry detergents); home care (air care, dish care, surface care, P&G professional) Baby, feminine, & family care: Baby care (baby wipes, diapers and pants), feminine care (adult incontinence, feminine care), family care (paper towels, tissues, toilet paper)

10-63

Managerial Accounting 6e Solutions Manual 2.

Within Note 2, locate the table that contains Global Segment Results. You will use this table to find Net earnings (loss) and Net sales for each year (2017–2019) and segment. For each of the five segments of P&G, calculate a profitability ratio for each year by using the following formula: Net earnings (loss)  Net sales Profit (loss)/Sales Beauty Grooming Health Care Fabric & Home Care Baby, Feminine, & Family Care

2019 0.2045 0.2467 0.1848 0.1593 0.1535

2018 0.1870 0.2186 0.1633 0.1263 0.1245

2017 0.16745 0.2314 0.1704 0.1309 0.1371

For each of the segments for the years 2017 through 2019, answer the following questions: a. Did Net sales increase, decrease, or remain about the same? b. Did Earnings (loss) increase, decrease, or remain about the same? c. Did the profitability ratio (as calculated in question 2) increase, decrease, or remain about the same? Beauty a. Net sales increased. b. Net earnings increased. c. Profitability ratio increased. Grooming a. Net sales decreased. b. Net earnings decreased from 2017–2018 and then increased from 2018–2019. c. Profitability ratio decreased from 2017–2018 and then increased from 2018–2019. Health Care a. Net sales increased. b. Net earnings increased. c. Profitability ratio decreased from 2017–2018 and then increased from 2018–2019. Fabric & Home Care a. Net sales increased. b. Net earnings decreased from 2017–2018 and then increased from 2018–2019. c. Profitability ratio decreased from 2017–2018 and then increased from 2018–2019. Baby, Feminine, & Family Care a. Net sales decreased. b. Net earnings decreased from 2017–2018 and then increased from 2018–2019. c. Profitability ratio decreased from 2017–2018 and then increased from 2018–2019.

Of the five segments, which two segments appear to be the strongest based on the limited information you can find in the Form 10-K, Item 8, Financial Statements, and Supplementary Data? Support your answer . The Fabric & home care and Baby, feminine, & family care segments had the highest net sales and net earnings. In 2019, Grooming had the highest profitability ratio so one could argue that this segment appears to be the strongest.

Of the five segments, which segment appears to be the weakest based on the limited information you have located in the Form 10-K, Item 8, Financial Statements, and Supplementary Data? Support your answer . The Health care segment had the lowest earnings and next to lowest sales in 2019. In 2018, Baby, feminine & family care had the lowest profitability ratio so one could argue that this segment is the weakest. Student answers will vary.

10-64

Chapter 11 Standard Costs and Variances Quick Check Answers QC11-1. c QC11-2. d QC11-3. b

QC11-4. a QC11-5. c QC11-6. b

QC11-7. c QC11-8. b QC11-9. c

QC11-10. a QC11-11. a QC11-12. d

Short Exercises (5 min.) S11-1 Quantity 5 21 17 28

Sugar per cup Chocolate chips per ounce Butter per ounce Evaporated milk per ounce Standard DM cost per batch

Price $ 0.21 $ 0.10 $ 0.07 $ 0.09

Cost $ 1.05 $ 2.10 $ 1.19 $ 2.52 $ 6.86

(5 min.) S11-2 0.25 hours x $20.50 = $5.13 (rounded) standard direct labor cost per batch

(5 min.) S11-3 The direct materials price variance would have been impacted by the decrease in the cost of the chocolate, and it would have been a favorable price variance. Normally the purchasing supervisor is responsible for the materials price variance, but the facts state that “the company” changed the ingredient. As a result, the person or group responsible for making the change in the ingredient should be responsible.

(5 min.) S11-4 Req. 1 Actual direct material cost per unit ($168,000 / 87,500) Standard direct material cost per unit Difference between actual and standard cost per unit Multiply by: Actual direct material purchased and used Direct material price variance

$ 1.92 $ 1.96 $ 0.04 87,500 $ 3,500 F

Req. 2 Actual direct material purchased and used Standard direct material usage (3,500 x 24) Difference between actual and standard material usage Multiply by: Standard direct material cost per unit Direct material quantity variance

87,500 84,000 3,500 $ 1.96 $ 6,860 U

11-1

Managerial Accounting 6e Solutions Manual

(5 min.) S11-5 Req. 1 Actual direct material cost per unit ($43,500 / 21,750) Standard direct material cost per unit Difference between actual and standard cost per unit Multiply by: Actual direct material purchased Direct material price variance

$ 2.00 $ 1.80 $ 0.20 21,750 $ 4,350 U

Req. 2 Actual direct material used Standard direct material usage (11,000 × 2) Difference between actual and standard material usage Multiply by: Standard direct material cost per unit Direct material quantity variance

21,500 22,000 500 $ 1.80 $ 900 F

(5 min.) S11-6 Req. 1 Actual rate per hour Standard rate per hour Difference between actual and standard rate per hour Multiply by: Actual direct labor hours used Direct labor rate variance

$24.00 $17.00 $ 7.00 310 $ 2,170 U

Req. 2 Actual direct labor hours used Standard total hours (1,600 × 0.3) Difference between actual and standard hours Multiply by: Standard rate per hour Direct labor efficiency variance

310 480 170 $17.00 $ 2,890 F

(5–10 min.) S11-7 Situation 1. Would like to simplify bookkeeping procedures 2. Would like to use operational performance measures and visual management cues 3. Would like to facilitate the budgeting process 4. There has been an increase in automation in the manufacturing process and a corresponding decrease in direct labor 5. Will be implementing lean practices throughout the organization 6. Need timely reports about production results 7. Would like to increase employee motivation levels 8. Want benchmarks by which to judge actual costs

11-2

Use standard costs X

Move away from standard costs X

X X X X X X

Chapter 11

Standard Costs and Variances

(5–10 min.) S11-8 Req. 1 Actual rate per hour Standard rate per hour Difference Multiply by: Actual machine hours used Variable MOH rate variance

$22.00 $24.00 $ 2.00 1,170 hrs. $2,340 F

Req. 2 Actual machine hours used Standard total hours (4,000 × 0.3) Difference Multiply by: Standard rate per hour Variable MOH efficiency variance

1,170 hrs. 1,200 hrs. 30 hrs. $24 $720 F

(5 min.) S11-9 Req. 1 Actual fixed MOH – Budgeted fixed MOH = Fixed overhead budget variance $198,400 – $202,000 = $3,600 F Req. 2 Budgeted fixed MOH – Standard fixed MOH allocated = Fixed overhead volume variance $202,000 – $208,000= $6,000 F

(5–10 min.) S11-10 Req. 1 Total fixed overhead variance: Actual fixed overhead cost Standard fixed overhead allocated to production Total fixed overhead variance

$1,250,000 $1,200,000 $50,000 U

The variance tells managers that the company under allocated fixed manufacturing overhead by this amount. Req. 2 Fixed overhead budget variance: Actual fixed overhead cost Budgeted fixed overhead Fixed overhead budget variance

$1,250,000 $1,270,000 $ 20,000 F

The variance tells managers that the company actually incurred less for fixed manufacturing overhead costs than it would have expected. Req. 3 Fixed overhead volume variance: Budgeted fixed overhead Standard fixed overhead allocation to production Fixed overhead volume variance

$1,270,000 $1,200,000 $70,000 U

Managers can tell from the variance amount that the total fixed overhead variance arose because the company produced fewer flutes than originally expected. It is unfavorable because the company used its plant capacity less efficiently than originally anticipated.

11-3

Managerial Accounting 6e Solutions Manual

(5–10 min.) S11-11 Req. 1 Estimated total variable overhead cost

Estimated total machine hours

Standard variable overhead rate

$3,042,000 (4,212,000 – 1,170,000)

234,000

$13.00

Estimated total fixed overhead cost

Estimated total machine hours

Standard fixed overhead rate

$1,170,000

234,000

$5.00

Req. 2

(5–10 min.) S11-12 Req. 1 Total fixed overhead variance: Actual fixed overhead cost Standard fixed overhead allocated to production Total fixed overhead variance

$2,980,000 $2,941,000 $ 39,000 U

The variance tells managers that the company underallocated manufacturing overhead by $39,000. Req. 2 Fixed overhead budget variance: Actual fixed overhead cost Budgeted fixed overhead Fixed overhead budget variance

$2,980,000 $3,010,000 $ 30,000 F

The variance tells managers that the company actually incurred $30,000 less for fixed manufacturing overhead than it would have expected. Req. 3 Fixed overhead volume variance: Budgeted fixed overhead Standard fixed overhead allocation to production Fixed overhead volume variance

$3,010,000 $2,941,000 $ 69,000 U

This variance tells managers that $69,000 of the total fixed overhead variance arose because the company manufactured less units than anticipated. It is unfavorable because the company used its plant capacity less effectively than originally anticipated. Req. 4 Yes, the two variances add up to the total variance.

11-4

Chapter 11

Standard Costs and Variances

(10 min.) S11-13 Req. 1 Journal Entry Date

Accounts

Debit

Raw Materials Inventory Direct Materials Price Variance Accounts Payable

Credit 10,404 408 10,812

Req. 2 Journal Entry Date

Accounts

Debit

Work in Process Inventory Direct Materials Quantity Variance Raw Materials Inventory

Credit 9,180 153 9,333

Both the direct materials price variance and the direct materials quantity variance are unfavorable. We can tell this because the variance accounts were debited. Also, we can see that the company paid more per pound than the standard cost. It also used more pounds of potatoes than the standard allowed for the actual production volume.

(5–10 min.) S11-14 Req. 1 Journal Entry Date

Accounts Work in Process Inventory ($11.80 × 2,200) Direct Labor Rate Variance Direct Labor Efficiency Variance Wages Payable ($12.20 × 1,500)

Debit

Credit 25,960 600 8,260 18,300

Req. 2 The rate variance is unfavorable. We can tell this in two ways: (1) the company had to pay more per hour than the standard rate, and (2) the variance account is debited. The efficiency variance is favorable. We can tell this in two ways: (1) Workers spent fewer hours than the standard number of hours allowed for the actual production level, and (2) the variance account is credited.

11-5

Managerial Accounting 6e Solutions Manual

(5–10 min.) S11-15 1.

Hayden is the chief accountant at Appleville Industries. Each month, he prepares variance reports that are given to all department managers. The variance reports are frequently late and usually contain a few errors. Bradley has just started to work at Willis Lake Supply. In his first week, he is asked to fill in for a senior accountant who is out of the office for six weeks on maternity leave. He is asked to prepare the standard costing journal entries. Bradley does not know how to do this work, but he decides to guess because he does not want to appear stupid by asking for help. When Amelia prepares variance reports, only favorable variances are listed. Unfavorable variances are only provided if someone specifically asks. Melissa, an accountant at Youngstown Industries, and Brendan, an accountant at Goodtown Manufacturing, exchanged cost and other production data so that they would have benchmarks to use for their company reports. Liam accepts an all-expenses paid trip to Honolulu, Hawaii, from a major supplier.

Competence—Provide decision support information and recommendations that are accurate, clear, concise, and timely.

Competence—Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

(10–15 min.) S11-16 1. 2.

Term Direct labor rate variance

Fixed overhead budget variance Standard cost Variable overhead efficiency variance

Direct materials quantity variance Direct labor efficiency variance Variable overhead rate variance Practical standards Ideal standards

10. Direct materials price variance 11. Fixed overhead volume variance

11-6

3. 4.

5. 6. 7. 8. 9.

k. d.

b. h. g. j.

Definition Tells managers how much of the total variance is due to paying a different hourly wage rate than anticipated Measures the difference between the actual fixed MOH costs incurred and the budgeted fixed MOH costs The budgeted cost for a single unit of product Tells managers how much of the total variable MOH variance is due to using more or less hours of the allocation base than anticipated for the actual volume of output Tells managers how much of the total variance is due to using a different quantity of direct materials than expected Tells managers how much of the total variance is due to using a greater or lesser amount of time being worked than anticipated Also called the variable overhead spending variance Also known as attainable standards Standards based on conditions that do not allow for any waste in the production process Tells managers how much of the total variance is due to paying a different price than expected for direct materials Measures the difference between the budgeted fixed MOH costs and the standard allocated fixed MOH costs

Chapter 11

Standard Costs and Variances

(10 min.) S11-17 1.

What steps would be performed in Cell J2 to designate whether the variance percentage would be classified as High Priority, Investigate, or No Action? Select Cell J2. Click on the Formulas tab on the ribbon, then click the drop-down arrow below Logical and select IFS. Fill in the Logic test and value boxes as follows: Logical test 1 – I2>.15 Value if true1 – High Priority Logical test 2 – I2>=.05 Value if true2 -Investigate Logical test 3 – I2<.05 Value if true3 -No Action

How could the formula in Cell J2 be copied down to the rest of the rows in that column? Double-click (or drag) fill handle to copy function to cells below.

What Excel feature could be used to visually highlight cells in Column J? Conditional Formatting

Describe how the cells in Column J could be visually highlighted to show High Priority, Investigate, and No Action with separate colors automatically (rather than individually applying fill colors.) Select Column J. On the ribbon, select the Home tab, then Conditional Formatting, and then Highlight Cells Rules. From the drop-down list, choose “text that contains...” A new dialog box will open. In the dialog box type in the text you wish Excel to highlight and choose the highlighting color. Then click OK.

(10 min.) S11-18 1.

What steps would be performed in Cell J2 to designate whether the variance percentage would be classified as Urgent, Investigate, or No Action? Select Cell J2. Click on the Formulas tab on the ribbon, then click the drop-down arrow below Logical and select IFS. Fill in the Logic test and value boxes as follows: Logical test 1 – I2>.20 Value if true1 – Urgent Logical test 2 – I2>=.05 Value if true2 -Investigate Logical test 3 – I2<.05 Value if true3 -No Action

How could the formula in Cell J2 be copied down to the rest of the rows in that column? Double-click (or drag) fill handle to copy function to cells below.

What Excel feature was used to visually highlight cells in Column J? Conditional Formatting

Describe how the cells in Column J would have been visually highlighted to show the Urgent, Investigate, and No Action Needed cells with separate colors automatically (rather than individually applying fill colors.) Select Column J. On the ribbon, select the Home tab, then Conditional Formatting, and then Highlight Cells Rules. From the drop-down list, choose “text that contains...” A new dialog box will open. In the dialog box type in the text you wish Excel to highlight and choose the highlighting color. Then click OK.

How could the Excel worksheet be edited to show only those variances that are greater than $10,000? Select Column. On the ribbon, select the Home tab, then click on the drop-down arrow by Sort and Filter, then choose Filter. Click on the filter icon. Choose Number Filters, then choose Greater Than and type in 10000.

11-7

Managerial Accounting 6e Solutions Manual

Exercises (Group A) (10–15 min.) E11-19A Req. 1 Input Direct material (coffee beans) Direct labor Variable MOH Fixed MOH

Quantity Standard 20 pounds × 0.10 hour × 0.20 machine hrs. × 0.20 machine hrs. ×

Price Standard $2.00 per pound 23.00 per hour $30.00 per hour* 6.00 per hour

= = = =

Total

Standard Cost of Input $ 40.00 $ 2.30 $ 6.00 $ 1.20** $ 49.50

*[($3,000,000 / (0.20 × 500,000)] ** Alternatively, ($600,000 / 500,000) Req. 2 The gross profit per 20-lb case of roasted coffee beans is $25.50. Req. 3 The company should reassess standard prices often because the price of coffee beans changes quite frequently. In addition, the company would need to reassess price standards if it finds cheaper suppliers for the ingredients. However, they really won’t need to reassess quantity standards for the direct materials unless they change the recipe. On the other hand, the company should reassess quantity standard for overhead if they decide to change the size of the case or reassess labor standards if the wage rate changes. In addition, the company should reassess standard quantities and standard prices at least once per year.

(10–15 min.) E11-20A Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH Fixed MOH

9.6 lbs. 1 hr. 1 hr. 1 hr.

× × × ×

Price Standard $4.55 per lb. $15.80 per hr. $3.40 per hr. $6 per hr.

= = = =

Standard Cost of Input $43.68 $15.80 $3.40 $6.00

Req. 2 Total

11-8

$ 68.88

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-21A Req. 1 Actual cost per gram = $1,061,760 / 16,800 = $63.20 per gram Req. 2 Actual direct material cost per unit Standard direct material cost per unit Difference between actual and standard cost per unit Multiply by: Actual direct material purchased Direct material price variance

$ $ $

63.20 63.30 0.10 16,800 $ 1,680 F

Req. 3 Actual direct material used Standard quantity of direct material allowed Difference Multiply by: Standard direct material cost per unit Direct material quantity variance

16,300 16,000 300 $ 63.30 $ 18,990 U

Req. 4 Substandard (inferior) materials may have been purchased, resulting in waste during the production process.

(15–20 min.) E11-22A Direct materials information Standard pounds per unit Standard price per pound Actual quantity purchased and used per unit Actual price paid for material Direct materials price variance Direct materials quantity variance Total direct material variance Number of units produced

Medium 15 $1.00 14 $1.80 $1,120 U $100 F $1,020 U 100

Large 18 $1.80 16 $2.10 $1,920 U $1,440 F $480 U 400

11-9

Managerial Accounting 6e Solutions Manual

(10 min.) E11-23A Req. 1 Actual wage rate paid = $66,045 / 3,570 = $18.50 per hour Req. 2 Actual rate per hour Standard rate per hour Difference between actual and standard rate per hour Multiply by: Actual direct labor hours used Direct labor rate variance

$ 18.50 $ 16.50 $ 2.00 3,570 $ 7,140 U

Req. 3 Actual direct labor hours used Standard total hours allowed Difference Multiply by: Standard rate per hour Direct labor efficiency variance

3,570 3,600 30 $16.50 $ 495 F

Req. 4 The unfavorable direct labor rate variance might mean that the company hired better qualified return preparers at a higher pay rate. As a result, the return preparers were able to use fewer hours than the standard allows. This accounts for the favorable efficiency variance.

(10–15 min.) E11-24A Req. 1 (Actual price per unit – Standard price per unit)

Actual quantity of input

Price variance

($0.85 – 1.00)

98,000

$14,700 F

(Actual quantity of input – Standard quantity of input)

Standard price per input unit

Quantity variance

(98,000 – 95,000)

$1.00

$3,000 U

Req. 2 One plausible explanation is that the company bought lower grade potatoes at a cheaper price, which resulted in the favorable price variance. However, because the potatoes were lower grade, some of the potatoes were bad and could not be used in production. As a result, the manufacturing facility had to use more potatoes than standards allow. This accounts for the unfavorable quantity variance. Req. 3 Price variance [2,100 × ($12.45 – $12.15)] = Efficiency variance [$12.15 × (2,100 – 2,000)] =

$630 U $1,215 U

Req. 4 The unfavorable labor rate and efficiency variances could be tied to the material variances. For example, if the material variances were the result of purchasing lower grade potatoes, then the factory would use more labor in sorting the potatoes. As a result, they would have had to pay workers an overtime premium.

11-10

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-25A

(

Actual price per unit – Standard price per unit

)

Actual quantity of input

Price variance / Rate variance

($1.30 – 1.40 )

1,780,000

$178,000 F

($13.00 – 12.00 )

4,900

$4,900 U

Standard price per input unit

Quantity/ efficiency variance

(

Actual quantity of input – Standard quantity of input

)

(1,780,000 – 1,680,000 )

1.40

$140,000 U

(4,900 – 5,040)

12.00

$1,680 F

The favorable direct materials price variance combined with the unfavorable direct material quantity variance suggests that managers may have used lower quality materials that resulted in more waste. The net effect is favorable. The unfavorable direct labor rate variance combined with the favorable direct labor efficiency variance suggests that managers may have used higher paid workers who performed more efficiently. The net effect is unfavorable.

(20–30 min.) E11-26A Journal Entry DATE

ACCOUNTS Raw Materials Inventory (1,780,000 × $1.40)

POST. REF.

DEBIT 2,492,000

Direct Materials Price Variance

178,000

Accounts Payable (1,780,000 × $1.30) Work in Process Inventory (210,000 × 8 × $1.40) Direct Materials Quantity Variance

CREDIT

2,314,000

2,352,000 140,000

Raw Materials Inventory (1,780,000 × $1.40)

2,492,000

Work in Process Inventory (210,000 × 0.024 × $12.00)

60,480

Direct Labor Rate Variance

4,900

Wages Payable (4,900 × $13.00)

63,700

Direct Labor Efficiency Variance

1,680

11-11

Managerial Accounting 6e Solutions Manual

(10–15 min.) E11-27A Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH

240 kg 2 hrs. 2 hrs.

× × ×

Price Standard $4 per kg $20 per hr $40 per hr. ($400,000 / 10,000)

= = =

Standard cost

Standard Cost of Input $960 $40 $80 $1,080

Req. 2 Input Direct materials Direct labor Variable MOH

Standard cost

Standard Cost of Input $672

Quantity Standard

Price Standard

168 kg (240 × 0.70) 1.6 hrs. (2 × 0.8) 1.6 hrs. (2 × 0.8)

$4 per kg

$20 per hr.

$45.00 per hr. [($400,000 × 0 .90)/ 8,000*]

$776

*10,000 original DLH less reduction of 20% Req. 3 Current System Proposed System Cost Savings

$1,080 $ 776 $ 304

$106,400 / $304 = 350 batches Req. 4 The company will recognize cost savings once 350 batches have been produced. Not only will the company reap financial benefits, but it will also be fulfilling sustainable business objectives. The company faces the risk that the projected figures will be incorrect and therefore will not realize the estimated cost savings. Other benefits from making the change are increased sales to environmentally conscious consumers, positive goodwill, etc.

(5–10 min.) E11-28A a. b. c. d. e. f. g.

Standard costing would probably be beneficial because product costs will be entered into the general ledger inventory accounts at standard cost rather than actual cost. Standard costing would probably NOT be beneficial because inventory is trying to be eliminated. Standard costing would probably NOT be beneficial because the company is using real-time operating performance metrics. Standard costing would probably be beneficial because variances would be identified as soon as they occur. Standard costing would probably NOT be beneficial because the robots will likely not have the variance that humans would and they are using automated production processes. Standard costing would probably be beneficial because variances would be identified as soon as they occur. Standard costing would probably NOT be beneficial because changes happen daily.

11-12

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-29A Req. 1 Variable overhead allocated (158,000 × 0.25) × $0.70 Fixed overhead allocated (158,000 × 0.25) × $16.20

$27,650 $639,900

Req. 2 Total actual variable cost = Total actual overhead costs – Total actual fixed overhead costs Total actual variable cost = $682,460 – $636,000 = $46,460 Standard hours allowed (SHA) Variable MOH rate variance (a) Variable MOH efficiency variance (b)

= 158,000 cases × 0.25 DLH = 39,500 DLH = AH × (AR – SR) = 40,400 × (1.15 – $0.70) = $18,180 U = SR × (AH - SHA) = $0.70 × (40,400 – 39,500) = $630 U

(a) This variance tells managers that the company actually incurred more on variable manufacturing overhead than they would have expected given the actual hours used. (b) This variance tells managers that the company used more direct labor hours than anticipated for the actual volume of output. Req. 3 Fixed overhead budget variance (a)

= Actual FOH – Budgeted FOH = $636,000 – $626,000 = $10,000 U

Fixed overhead volume variance (b)

= Budgeted FOH – Standard FOH allocated = $626,000 – $639,900 = $13,900 F

(a) This variance tells us that the company spent more than anticipated on fixed overhead costs. (b) This variance tells managers that the company produced more cases than originally expected.

11-13

Managerial Accounting 6e Solutions Manual

(10–15 min.) E11-30A Req. 1 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased DM price variance

$ 4.00 $ 4.50 $ 0.50 18,510 $9,255 U

Standard direct materials quantity per unit (pounds) Actual units produced Standard direct materials quantity, in pounds

13.00 1,300 16,900

Actual direct materials used in production (pounds) Standard direct materials allowed, in pounds Difference between actual and standard quantity Multiply by: Standard direct materials cost per pound DM quantity variance

17,810 16,900 910 $ 4.00 $ 3,640 U

Req. 2 The direct materials price variance is the responsibility of the purchasing manager. The materials quantity variance is the responsibility of the production manager. Req. 3 The unfavorable price variance shows that more was paid for the raw material than was budgeted. The unfavorable quantity variance shows that more of the raw material was used in production than was budgeted.

11-14

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-31A Req. 1 Actual rate Standard rate Difference Multiply by: Actual direct labor hours DL rate variance

$16.00 $17.00 $1.00 5,850 $5,850 F

Standard hours allowed Actual hours Difference Multiply by: Standard DL Rate DL efficiency variance

5,200 5,850 650 $17.00 $11,050 U

Req. 2 $5,850 F – $11,050 U = $5,200 U Req. 3 The human resources supervisor and the production supervisor are responsible for the direct labor rate variance. The production supervisor is responsible for the labor efficiency variance. Req. 4 A favorable labor rate variance shows that the wage paid was lower than the wage budgeted. However, this could explain the unfavorable labor efficiency variance, which shows that more labor hours were used than was budgeted. Inexperienced workers who accept a lower wage, but work more slowly than experienced workers, would explain these variances.

(10–15 min.) E11-32A Req. 1 Variable MOH rate variance: =AH × (AR – SR) = [5,850 × ($7.20 – $7.00)]

$ 1,170 U

Variable MOH efficiency variance: =SR × (AH – SH) = [$7.00 × (5,850 – 5,200)]

$ 4,550 U

The unfavorable rate variance tells managers that the actual amount of variable MOH was greater than the expected amount given the direct labor hours used. The unfavorable efficiency variance tells managers that the actual direct labor hours used were greater than the standard direct labor hours allowed. Req. 2 Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH = ($49,500 – $50,000)

500 F

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) ($50,000 – $52,000)

$ 2,000 F

The favorable fixed overhead budget variance tells managers that less fixed overhead costs were incurred than were budgeted for. The favorable fixed overhead volume variance tells managers that production volume was greater than anticipated. .

11-15

Managerial Accounting 6e Solutions Manual

(10–15 min.) E11-33A Req. 1 Journal DATE

ACCOUNTS Raw Materials Inventory (18,510 lbs. × $4.00)

POST. REF.

Direct Materials Price Variance

DEBIT 74,040

CREDIT

9,255

Accounts Payable (18,510 lbs. × $4.50)

83,295

To record the purchase of raw materials. Work in Process Inventory ($4.00 × 16,900)

67,600

Direct Materials Quantity Variance

3,640

Raw Materials Inventory ($4.00 × 17,810)

71,240

To record the use of raw materials. Work in Process Inventory [$17.00 × (4 × 1,300)]

88,400

DL Efficiency Variance

11,050

DL Rate Variance

5,850

Wages Payable [$16.00 × (4.5 × 1,300)]

93,600

To record the use of direct labor.

Req. 2 Journal DATE

11-16

ACCOUNTS Variable manufacturing overhead Fixed manufacturing overhead Various accounts To record actual overhead costs incurred.

POST. REF.

DEBIT 42,120 49,500

91,620

Work in process inventory Variable manufacturing overhead ($7.00 × 5,200) Fixed manufacturing overhead ($10.00 × 5,200) To allocate manufacturing overhead.

88,400

Variable overhead rate variance Variable overhead efficiency variance Variable manufacturing overhead To record variable overhead variances and close the Variable MOH account.

1,170 4,550

Fixed manufacturing overhead Fixed overhead budget variance Fixed overhead volume variance To record fixed overhead variances and close the Fixed MOH account.

2,500

CREDIT

36,400 52,000

5,720

500 2,000

Chapter 11

Standard Costs and Variances

(continued) E11-33A Req. 3 Journal DATE

POST. REF.

ACCOUNTS Finished Goods Inventory Work in Process Inventory (67,600 + 88,400 + 88,400) To record completion of 1,300 pots.

DEBIT 244,400

CREDIT 244,400

Cost of Goods Sold Finished Goods Inventory To record cost of 1,300 pots sold.

244,400

Accounts Receivable (1,300 × $500) Sales Revenue To record sales revenue for 1,300 pots.

650,000

244,400

650,000

(15–20 min.) E11-34A Sales revenue Cost of goods sold at standard cost Manufacturing cost variances: Direct materials price variance Direct materials quantity variance Direct labor rate variance Direct labor efficiency variance Variable MOH rate variance Variable MOH efficiency variance Fixed overhead budget variance Fixed overhead volume variance Total manufacturing cost variances COGS at actual cost Gross profit Marketing and administrative expenses Operating income (loss)

$ 650,000 $244,400 $9,255 U $3,640 U $(5,850) F $11,050 U $1,170 U $4,550 U $(500) F $(2,000) F 21,315 U $ 265,715 $ 384,285 $ 78,000 $ 306,285

11-17

Managerial Accounting 6e Solutions Manual

(20 min.) E11-35A Requirements 1. 2. 3.

Using the Excel worksheet provided in MyLab, enter a formula in Cell J2 to display High Priority, Investigate, or No Action based on the Price variance % in Column I and the investigation rules listed in the exercise. Copy the formula in Cell J2 down to the rest of the rows in that column. Use Conditional Formatting in Column J to show cells containing High Priority with Light Red Fill with Dark Red Text and cells containing Investigate with Yellow Fill with Dark Yellow Text. (Do not apply fill colors to individual cells.)

Formula should be =IFS(I2>0.15,"High Priority",I2>=0.05,"Investigate",I2<0.05,"No Action") in cell J2.

(20 min.) E11-36A Requirements 1. 2. 3.

Using the Excel worksheet provided in MyLab, enter a formula in Cell J2 to display Urgent, Investigate, or No Action Needed based on the Price variance % in Column I and the investigation rules listed in the exercise. Copy the formula in Cell J2 down to the rest of the rows in that column. Use Conditional Formatting in Column J to show cells containing High Priority with Light Red Fill with Dark Red Text and cells containing Investigate with Yellow Fill with Dark Yellow Text. (Do not apply fill colors to individual cells.) Use a filter in Column H to show only those variances that are greater than $10,000.

Formula should be =IFS(I2>0.2,"Urgent",I2>=0.05,"Investigate",I2<0.05,"No Action Needed") in cell J2.

11-18

Chapter 11

Standard Costs and Variances

Exercises (Group B) (10–15 min.) E11-37B Req. 1 Input

Quality Standard

Direct material (coffee beans) Direct labor Variable MOH Fixed MOH

25 pounds 0.10 hrs. 0.30 machine hrs. 0.30 machine hrs.

× × × ×

Price Standard $1.50 per pound 24.00 per hour $20.00 per machine hour* $3.00 per machine hour

Total

= = =

Standard Cost of Input $ 37.50 $ 2.40 $ 6.00 **$0.90 $ 46.80

*[($1,500,000 / (0.30 × 250,000)] **($225,000 / 250,000) Req. 2 The gross profit per 25-pound case of roasted coffee beans is $23.20. Req. 3 The company should reassess standard prices often because the price of coffee beans changes quite frequently. In addition, the company would need to reassess price standards if it finds cheaper suppliers for the ingredients. However, they really won’t need to reassess quantity standards for the direct materials unless they change the recipe. On the other hand, the company should reassess the standards for overhead if they decide to change the size of the case or reassess labor standards if the wage rate changes. In addition, the company should reassess standard quantities and standard prices at least once per year.

(10–15 min.) E11-38B Standard cost of one pot: Req. 1 DM (9.2 lbs. × $4.55) DL (1.6 hr. × $16.60) Var MOH (1.6 hr. × $3.60) Fix MOH (1.6 hr. × $6.50) Req. 2 Standard cost

$41.86 $26.56 $5.76 $ 10.40 $84.58

11-19

Managerial Accounting 6e Solutions Manual

(15–20 min.) E11-39B Req. 1 Actual cost per gram = $577,800 / 9,000 = $64.20 per gram Req. 2 Actual direct material cost per unit Standard direct material cost per unit Difference between actual and standard cost per unit Multiply by: Actual direct material purchased Direct material price variance

$ 64.20 $ 64.50 $ 0.30 9,000 $ 2,700 F

Req. 3 Actual direct material used Standard quantity of direct material allowed Difference Multiply by: Standard direct material cost per unit Direct material quantity variance

8,600 8,000 600 $ 64.50 $ 38,700 U

Req. 4 The favorable direct materials price variance might mean that the company purchased a lower quality alloy at a lower price. As a result, the company had to use more alloy than the standard allows. This accounts for the unfavorable quantity (efficiency) variance.

(15–20 min.) E11-40B Direct materials information Standard pounds per unit Standard price per pound Actual quantity purchased and used per unit Actual price paid for material Direct materials price variance Direct materials quantity variance Total direct material variance Number of units produced

11-20

Medium 15 $3.50 14 $4.10 $2,520 U $ 1,050 F $1,470 U 300

Large 17 $3.90 16 $4.70 $7,680 U $2,340 F $5,340 U 600

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-41B Req. 1 Actual wage rate = $26,460 / 1,470 = $18.00 per hour Req. 2 Actual rate per hour Standard rate per hour Difference between actual and standard rate per hour Multiply by: Actual direct labor hours used Direct labor rate variance

$ 18.00 $ 16.50 $ 1.50 1,470 $ 2,205 U

Req. 3 Actual direct labor hours used Standard total hours allowed Difference Multiply by: Standard rate per hour Direct labor efficiency variance

1,470 1,500 30 $ 16.50 $ 495 F

Req. 4 The unfavorable direct labor rate variance might mean that the company hired more qualified return preparers at a higher pay rate. As a result, the return preparers were able to use fewer hours than the standard allows. This accounts for the favorable efficiency variance.

(10–15 min.) E11-42B Req. 1 (

Actual price per unit – Standard price per unit

)

($0.70 – 0.85)

(

Actual quantity of input – Standard quantity of input (98,000 – 94,000)

)

Actual quantity of input

Price variance

98,000

$14,700 F

Standard price per input unit

Quantity variance

$0.85

$3,400 U

Req. 2 One plausible explanation is that the company bought lower grade potatoes at a cheaper price, which resulted in the favorable price variance. However, because the potatoes were lower grade, some of the potatoes were bad and could not be used in production. As a result, the manufacturing facility had to use more potatoes than standards allow. This accounts for the unfavorable efficiency variance. Req. 3 Price variance [1,700 × ($12.20 – $11.95)] = Quantity variance [$11.95 × (1,700 – 1,400)] =

$425 U $3,585 U

11-21

Managerial Accounting 6e Solutions Manual

(15–20 min.) E11-43B

(

Actual price per unit – Standard price per unit

)

Actual quantity of input

Price/ Rate variance

($1.20 – 1.25 )

1,660,000

$83,000 F

($15.50 – 15.00 )

4,400

$2,200 U

Standard price per input unit

Quantity/Efficiency variance

(

Actual quantity of input – Standard quantity of input

)

(1,660,000 – 1,610,000 )

1.25

$62,500 U

(4,400 – 6,210)

15.00

$27,150 F

The favorable direct materials price variance combined with the unfavorable direct materials quantity variance suggests that managers may have used lower quality materials that resulted in more waste (more materials used) than expected. The net effect is favorable. The unfavorable direct labor rate variance combined with the favorable direct labor efficiency variance suggests that managers may have used higher paid workers who performed more efficiently. The net effect is favorable.

(10–15 min.) E11-44B Journal Entry

DATE

ACCOUNTS Raw Materials Inventory (1,660,000 × $1.25)

POST. REF.

DEBIT 2,075,000

Direct Materials Price Variance

83,000

Accounts Payable (1,660,000 × $1.20) Work in Process Inventory (230,000 × 7 × $1.25) Direct Materials Quantity Variance

1,992,000 2,012,500 62,500

Raw Materials Inventory (1,660,000 × $1.25)

11-22

CREDIT

2,075,000

Work in Process Inventory (230,000 × 0.027 hrs. × $15.00)

93,150

Direct Labor Rate Variance

2,200

Direct Labor Efficiency Variance

27,150

Wages Payable (4,400 × $15.50)

68,200

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-45B Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH

300 kg 2 hrs. 2 hrs.

× × ×

Price Standard $5 per kg $20 per hr. $60 per hr. ($600,000 / 10,000)

= = =

Standard cost

Standard Cost of Input $1,500 $40 $120 $1,660

Req. 2 Input Direct materials Direct labor Variable MOH

Standard cost

Standard Cost of Input $1,125

Quantity Standard

Price Standard

225 kg (300 × 0.75) 1.6 hrs. (2 × 0.8) 1.6 hrs. (2 × 0.8)

$5 per kg

$20 per hr.

$32

$71.25 per hr. (($600,000 × 0.95)/ 8,000*)

$114

$1,271

*10,000 original DLH less reduction of 20% Req. 3 Current System Proposed System Cost Savings

$1,660 $1,271 $389

$175,050 / $389 = 450 batches Req. 4 The company will recognize cost savings once 450 batches have been produced. Not only will the company reap financial benefits, but it will also be fulfilling sustainable business objectives. The company faces the risk that the projected figures will be incorrect and therefore will not realize the estimated cost savings.

(10–15 min.) E11-46B a. b. c. d. e. f. g.

Standard costing would probably be beneficial because variances would be identified as soon as they occur. Standard costing would probably be beneficial because variances would be identified as soon as they occur. Standard costing would probably NOT be beneficial because the robots will likely not have the variance that humans would. Standard costing would probably NOT be beneficial because inventory is trying to be eliminated. Standard costing would probably NOT be beneficial because the company is using real-time operating performance metrics. Standard costing would probably be beneficial because product costs will be entered into the general ledger inventory accounts at standard cost rather than actual cost. Standard costing would probably NOT be beneficial because changes happen daily.

11-23

Managerial Accounting 6e Solutions Manual

(10–15 min.) E11-47B Req. 1 Variable overhead allocated (160,000 × 0.25 × $0.85) Fixed overhead allocated (160,000 × 0.25 × $16.60)

$34,000 $664,000

Req. 2 Total actual variable cost = Total actual overhead costs – Total actual fixed overhead costs Total actual variable cost = $681,200 – $632,000 = $49,200 Standard hours allowed (SHA) Variable MOH rate variance (a) Variable MOH efficiency variance (b) a. b.

= 160,0000 cases × 0.25 DLH = 40,000 DLH = AH × (AR – SR) = 41,000 × (1.20 – $0.85) = $14,350 U = SR × (AH – SH) = $0.85 × (41,000 – 40,000) = $850 U

This variance tells managers that the company actually incurred more on variable manufacturing overhead than they would have expected given the actual hours used. This variance tells managers that the company actually used more direct labor hours than expected for the actual volume of output.

Req. 3 Fixed overhead budget variance (a)

= Actual FOH – Budgeted FOH = $632,000 – $626,000 = $6,000 U

Fixed overhead volume variance (b)

= Budgeted FOH – Standard FOH allocated = $626,000 – 664,000 = $38,000 F

a. b.

This variance tells us that the company spent more than anticipated on fixed overhead costs. This variance tells managers the company produced more cases than originally expected.

(10–15 min.) E11-48B Req. 1 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased DM price variance

$ 3.00 $ 3.50 $0.50 17,820 $8,910 U

17,120 16,000 1,120 $ 3.00 $ 3,360 U

11-24

Chapter 11

Standard Costs and Variances

(10–15 min.) E11-49B Req. 1 Actual rate Standard rate Difference Multiply by: Actual direct labor hours Direct labor rate variance

$ 18.00 $ 19.00 $1.00 8,800 $8,800 F

Actual hours Standard hours allowed Difference Multiply by: Standard direct labor rate DL efficiency variance

8,800 8,000 800 $ 19.00 $ 15,200 U

Req. 2 $15,200 U + $8,800 F = $6,400 U Req. 3 The human resources supervisor and the production supervisor are responsible for the direct labor rate variance. The production supervisor is responsible for the labor efficiency variance. Req. 4 The favorable labor rate variance means that the company’s employees earned less per hour than budgeted. The unfavorable labor efficiency variance means that it actually took more direct labor hours than it should have to produce 1,600 pots.

(10–15 min.) E11-50B Req. 1 Variable MOH rate variance: =AH × (AR – SR) = 8,800 (3.20 – 3.00)

$ 1,760 U

Variable MOH efficiency variance: =SR × (AH – SH) = $3 × (8,800 – 8,000)

$ 2,400 U

The unfavorable rate variance tells managers that the actual amount of variable MOH was greater than the expected amount given the direct labor hours used. The unfavorable efficiency variance tells managers that the actual direct labor hours used were greater than the standard direct labor hours allowed. Req. 2 Fixed overhead budget variance Actual fixed MOH – Budgeted fixed MOH ($93,500 – $94,000)

$ 500 F

Fixed overhead volume variance Budgeted fixed MOH – Standard fixed MOH allocated to production (SHA × Std. fixed MOH rate) = $94,000 – $96,000

$ 2,000 F

11-25

Managerial Accounting 6e Solutions Manual

(10–15 min.) E11-51B Req. 1 Journal DATE

POST. REF.

ACCOUNTS Raw Materials Inventory (17,820 × $3.00) Direct Materials Price Variance Accounts Payable (17,820 × $3.50) To record the purchase of raw materials.

DEBIT 53,460 8,910

62,370

Work in Process Inventory ($3.00 × 16,000) Direct Materials Quantity Variance Raw Materials Inventory ($3.00 × 17,120) To record the use of raw materials.

48,000 3,360

Work in Process Inventory ($19.00 × 8,000) DL Efficiency Variance DL Rate Variance Wages Payable ($18.00 × 8,800) To record the use of direct labor.

152,000 15,200

51,360

8,800 158,400

Direct materials: Standard quantity allowed for actual outputs =

(10 lb. / pot) × 1,600 pots

16,000 lbs.

Direct labor: Standard quantity allowed for actual outputs =

(5.0 hrs.) × 1,600 pots

8,000 hrs.

11-26

CREDIT

Chapter 11

Standard Costs and Variances

(continued) P11-51B Req. 2 Journal DATE

ACCOUNTS Variable manufacturing overhead Fixed manufacturing overhead

POST. REF.

DEBIT 28,160

CREDIT

93,500

Various accounts

121,660

To record actual overhead costs incurred. Work in process inventory

120,000

Variable manufacturing overhead ($3.00 × 8,000)

24,000

Fixed manufacturing overhead ($12.00 × 8,000)

96,000

To allocate manufacturing overhead. Variable overhead rate variance

1,760

Variable overhead efficiency variance

2,400

Variable manufacturing overhead

4,160

To record variable overhead variances and close the Variable MOH account. Fixed manufacturing overhead

2,500

Fixed overhead budget variance

500

Fixed overhead volume variance

2,000

To record fixed overhead variances and close the Fixed MOH account.

11-27

Managerial Accounting 6e Solutions Manual

(continued) E11-51B Req. 3 Journal DATE

POST. REF.

ACCOUNTS Finished Goods Inventory Work in Process Inventory (48,000 + 152,000 + 120,000) To record completion of 1,600 pots.

DEBIT 320,000

CREDIT 320,000

Cost of Goods Sold Finished Goods Inventory To record cost of 1,600 pots sold.

320,000

Accounts Receivable (1,600 × $530) Sales Revenue To record sales revenue for 1,600 pots.

848,000

320,000

848,000

(10–15 min.) E11-52B Sales revenue Cost of goods sold at standard cost Manufacturing cost variances: Direct materials price variance Direct materials quantity variance Direct labor rate variance Direct labor efficiency variance Variable MOH rate variance Variable MOH efficiency variance Fixed overhead budget variance Fixed overhead volume variance Total manufacturing cost variances COGS at actual cost Gross profit Marketing and administrative expenses Operating income (loss)

11-28

$ 848,000 $320,000 $8,910 U $3,360 U $(8,800) F $15,200 U $1,760 U $2,400 U $(500) F $(2,000) F 20,330 U $ 340,330 $ 507,670 $ 76,500 $ 431,170

Chapter 11

Standard Costs and Variances

(20 min.) E11-53B Requirements 1. 2. 3.

Formula should be =IFS(I2>0.2,"High Priority",I2>=0.05,"Investigate",I2<0.05,"No Action") in cell J2.

(20 min.) E11-54B Requirements 1. 2. 3.

Formula should be =IFS(I2>0.2,"Urgent",I2>=0.08,"Investigate",I2<0.08,"No Action Needed") in cell J2.

11-29

Managerial Accounting 6e Solutions Manual

Problems (Group A) (15 min.) P11-55A Req. 1 DM

2 yards

$7.00 per yard

$14

Req. 2 $40,560 / 6,240 = $6.50 per yard Req. 3 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased Direct material price variance

Actual direct materials used in production (yards) Standard quantity allowed, in yards Difference Multiply by: Standard price per yard Direct material quantity variance

$ 7.00 $ 6.50 $ 0.50 6,240 $ 3,120 F

5,540 4,800 740 $ 7.00 $ 5,180 U

Req. 4 Standard direct labor cost for one blanket is $9.50 (0.5 hours × $19 per hour). Req. 5 $24,840 / 1,350 = $18.40 per hour Req. 6 Actual rate Standard rate Difference: Multiply by: Actual direct labor hours DL rate variance

$ 18.40 $ 19.00 $0.60 1,350 $810 F

Actual hours Standard hours allowed Difference Multiply by: Standard rate DL efficiency variance

1,350 1,200 150 $ 19.00 $ 2,850 U

Req. 7 The favorable DM price variance and unfavorable DM quantity variance may have been caused by purchasing inferior raw materials. The cheaper materials that are of a lesser quality cause more waste. The favorable DL rate variance and unfavorable DL efficiency variance may have been caused by utilizing a less-skilled workforce. The lower skilled workers command a lower wage, however, do not work as quickly as a more experienced workforce. Student answers may vary.

11-30

Chapter 11

Standard Costs and Variances

(continued) P11-55A Req. 8 One possible cause of all four variances is the initial purchase of inferior raw materials. The inferior DM would create a favorable DM price variance while creating more waste, leading to an unfavorable DM quantity variance. Because a lower skilled workforce was used, the DL rate variance was favorable; however, given a lower quality material and a less-skilled workforce, more labor hours were required, creating an unfavorable DL efficiency variance. Student answers may vary.

(15–20 min.) P11-56A Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH Fixed MOH Standard cost

24 yard 2 hrs. 2 hrs. 2 hrs.

× × × ×

Price Standard $11 per yard $12 per hr. $7 per hr. $8 per hr.

= = = =

Standard Cost of Input $264 $24 $14 $16 $318

Req. 2 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased DM price variance

$ 11.00 $ 10.40 $ 0.60 38,400 $ 23,040 F

Actual direct materials used Standard quantity allowed Difference Multiply by: Standard direct materials cost per yard DM quantity variance

34,900 36,000 1,100 $ 11.00 $ 12,100 F

Standard DL rate per hour Actual DL rate per hour Difference Multiply by: Actual direct labor hours DL rate variance

$ 12.00 $ 12.10 $0.10 2,870 $287 U

Actual direct labor hours Standard direct labor hours allowed Difference Multiply by: Standard direct labor rate per hour DL efficiency variance

2,870 3,000 130 $ 12.00 $ 1,560 F

11-31

Managerial Accounting 6e Solutions Manual

(continued) P11-56A Variable MOH rate variance: =AH × (AR – SR) = 2,870 × ($7.10 – $7.00)

$ 287 U

Variable MOH efficiency variance: =SR × (AH – SHA) = $7 × (2,870 – 3,000)

$ 910 F

Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH ($26,200 – $21,700)

$ 4,500 U

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) ($21,700 – $24,000)

$ 2,300 F

Req. 3 The favorable DM price variance shows that less was paid for the raw material than was budgeted. The favorable DM quantity variance shows that less of the raw material was used in production than was budgeted. An unfavorable DL rate variance shows that the wage paid was higher than the wage budgeted. The favorable DL efficiency variance shows that less labor hours were used than was budgeted. The unfavorable variable MOH rate variance tells managers that the actual variable MOH costs were greater than the expected amount given the direct labor hours used. The favorable variable MOH efficiency variance tells managers that the actual direct labor hours used were less than the standard direct labor hours allowed. The unfavorable fixed MOH budget variance tells managers that more fixed overhead costs were incurred than were budgeted for. The favorable fixed MOH volume variance tells managers that production volume was greater than anticipated. The favorable DL efficiency variance is likely to be related to the unfavorable DL rate variance. It is likely that the company hired more qualified employees at a higher rate. This may have resulted in improved labor efficiency. Student answers may vary.

11-32

Chapter 11

Standard Costs and Variances

(15–20 min.) P11-57A Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH Fixed MOH Standard cost

30 lbs. 2 hrs. 2 hrs. 2 hrs.

Price Standard

× × × ×

$3 per lb. $12 per hr. $2 per hr. $7 per hr.

Req. 2 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased DM price variance

= = = =

Standard Cost of Input $90 $24 $4 $14 $132

$ 3.00 $ 2.90 $ 0.10 3,040 $ 304 F

Actual direct materials used in production (pounds) Standard quantity allowed, in pounds Difference between actual and standard quantity Multiply by: Standard direct materials price per pounds DM quantity variance

3,000 2,400 600 $ 3.00 $ 1,800 U

Actual DL rate Standard DL rate Difference between actual and standard Multiply by: Actual direct labor hours DL rate variance

$ 12.60 $ 12.00 0.60 170 $ 102 U

Actual direct labor hours Standard direct labor hours allowed Difference between actual and standard direct labor hours Multiply by: Standard direct labor rate per hour DL efficiency variance

170 160 10 $ 12.00 $ 120 U

Variable MOH rate variance: =AH × (AR – SR) = 170 × ($2.60 – $2.00)

102 U

11-33

Managerial Accounting 6e Solutions Manual

(continued) P11-57A Variable MOH efficiency variance: = SR × (AH – SHA) = $2.00 × (170 – 160)

$ 20 U

Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH = $2,270 – $1,670

$ 600 U

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) = $1,670 – $1,120

$ 550 U

Req. 3 Management has not done a good job controlling material, labor, and overhead costs. Each of these areas incurred an unfavorable variance during the period. Req. 4 The following are benefits of a standard costing system: Standards are often used as the basis for many components in the master budget. Standard costing systems simplify bookkeeping. Standards create a benchmark by which to judge actual costs. The use of practical, or attainable, standards should increase employee motivation. The company should continue the standard cost system if the benefits outweigh the costs.

11-34

Chapter 11

Standard Costs and Variances

(15–20 min.) P11-58A Req. 1 Standard direct labor rate per hour

–

Favorable labor rate variance

Actual direct labor rate per hour

$12.00

–

0.70

$11.30

Woodsy’s Music Schedule to Compute Actual Direct Labor Hours

Actual 5,600 $ 11.30 $63,280

Direct labor hours Cost per hour Total direct labor cost Flexible budget variance

Flexible Budget for Actual Output 5,300 $ 12.00 $63,600

Flexible Budget Variance

$ 320 F

Req. 2 Price variance

Direct labor rate variance

Actual price per input unit

−

Standard price per input unit

($11.30 per hour − $12.00 per hour)

Actual quantity of input

× 5,600 hours

= $3,920 F Efficiency variance

Actual quantity of input

Direct labor efficiency variance

(5,600 hours − 5,300 hours)

−

Standard quantity of input

Standard price per input unit

× $12.00 per hour

= $3,600 U The favorable direct labor rate variance combined with the unfavorable direct labor efficiency variance suggests that the manager may have used lower paid, less efficient workers. However, due to the overall net effect, it appears there was a reasonable trade-off.

(15–20 min.) P11-59A Req. 1 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity (13,300 × 2.70) DM price variance

$ 4.00 $ 4.20 $ 0.20 35,910 $ 7,182 U

11-35

Managerial Accounting 6e Solutions Manual

(continued) P11-59A Actual direct materials used in production, square foot Standard quantity allowed, square foot Difference between actual and standard quantity Multiply by: Standard direct materials cost per square foot DM quantity variance

35,910 39,900 3,990 $ 4.00 $ 15,960 F

Req. 2 Actual rate Standard direct labor rate per hour Difference Multiply by: Actual direct labor hours DL rate variance

$9.90 $9.60 $0.30 24,400 $ 7,320 U

Actual hours Standard hours allowed Difference between actual and standard direct labor rate Multiply by: Standard DL rate DL efficiency variance

24,400 26,600 2,200 $9.60 $ 21,120 F

Req. 3 Variable MOH rate variance: =AH × (AR – SR) = 24,400 × ($0.85 – $0.66) =

$ 4,636 U

Variable MOH efficiency variance: =SR × (AH – SHA) = $0.66 × (24,400 – 26,600) =

$1,452 F

Req. 4 Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH = $56,902 – $62,900

$ 5,998 F

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) = $62,900 – $61,180

11-36

$ 1,720 U

Chapter 11

Standard Costs and Variances

(continued) P11-59A Req. 5 The superior materials resulted in a favorable DM quantity variance (less materials used), possibly a favorable DL efficiency variance (less direct labor hours used), and possibly a favorable VOH efficiency variance (less direct labor hours used). The sum of the favorable variances exceeds the sum of the unfavorable variances, so the decision appears to be a wise one. Req. 6 Journal DATE

ACCOUNTS Raw Materials Inventory (35,910 × $4.00) Direct Materials Price Variance Accounts Payable (35,910 × $4.20) To record the purchase of raw materials.

POST. REF.

DEBIT 143,640 7,182

150,822

Work in Process Inventory (39,900 × $4.00) Direct Materials Quantity Variance Raw Materials Inventory (35,910 × $4.00) To record the use of raw materials.

159,600

Work in Process Inventory (26,600 × $9.60) Direct Labor Rate Variance Wages Payable (24,400 × $9.90) Direct Labor Efficiency Variance To record incurrence of direct labor.

255,360 7,320

CREDIT

15,960 143,640

241,560 21,120

11-37

Managerial Accounting 6e Solutions Manual

Problems (Group B) (15–30 min.) P11-60B Req. 1 DM

2.0 yards

7.5 per yard

$15

Req. 2 $35,074 / 4,940 = $7.10 per yard Req. 3 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased Direct material price variance

$ 7.50 $ 7.10 $ 0.40 4,940 $ 1,976 F

Actual quantity used Standard quantity allowed Difference Multiply by: Standard price Direct materials quantity variance

4,490 3,800 690 $ 7.50 $ 5,175 U

Req. 4 DL

0.5 yards

$16 per yard

Req. 5 $16,568 / 1,090 = $15.20 per yard Req. 6 Actual rate Standard rate Difference Multiply by: Actual direct labor hours DL rate variance

$15.20 $16.00 $0.80 1,090 $ 872 F

Actual hours Standard hours allowed Difference Multiply by: Standard rate DL efficiency variance

11-38

1,090 950 140 $16.00 $ 2,240 U

Chapter 11

Standard Costs and Variances

(continued) P11-60B Req. 7 The favorable DM price variance and unfavorable DM quantity variance may have been caused by purchasing inferior raw materials. The cheaper materials that are of a lesser quality cause more waste. The favorable DL rate variance and unfavorable DL efficiency variance may have been caused by utilizing a less-skilled workforce. The lower skilled workers command a lower wage, which leads to a favorable direct labor rate variance. However, the less-skilled workers do not work as efficiently as a more experienced workforce. Req. 8 One possible cause of all four variances is the initial purchase of inferior raw materials. This would create a favorable DM price variance while creating more waste leading to an unfavorable DM quantity variance. Because a lower skilled workforce was used, the DL rate variance was favorable; however, given a lower quality material and a less-skilled workforce, more labor hours were required, creating an unfavorable DL efficiency variance. Student answers may vary.

(15–30 min.) P11-61B Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH Fixed MOH Standard cost

18 yards 2 hrs. 2 hrs. 2 hrs.

× × × ×

Price Standard $10 per yard $13 per hr. $5 per hr. $10 per hr.

= = = =

Standard Cost of Input $180 $26 $10 $20 $236

Req. 2 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased DM price variance

$ 10.00 $ 9.40 $ 0.60 35,460 $ 21,276 F

Actual quantity used Standard quantity allowed Difference Multiply by: Standard direct materials cost per yard DM quantity variance

31,300 32,400 1,100 $ 10.00 $ 11,000 F

11-39

Managerial Accounting 6e Solutions Manual

(continued) P11-61B Actual DL rate per hour Standard DL rate per hour Difference Multiply by: Actual DL hours DL rate variance

$13.10 $13.00 $0.10 3,470 $ 347 U

Actual DL hours Standard DL hours allowed Difference Multiply by: Standard DL rate per hour DL efficiency variance

3,470 3,600 130 $13.00 $ 1,690 F

Variable MOH rate variance: = AH × (AR – SR) = 3,470 × ($5.50 – $5.00)

$ 1,735 U

Variable MOH efficiency variance: = SR × (AH – SHA) = $5.00 × (3,470 – 3,600)

$ 650 F

Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH = $39,500 – $34,000

$ 5,500 U

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) = $34,000 – $36,000

$ 2,000 F

Req. 3 The favorable DM price variance shows that less was paid for the raw material than was budgeted. The favorable DM quantity variance shows that less of the raw material was used in production than was budgeted. An unfavorable DL rate variance shows that the wage paid was more than the wage budgeted. The favorable DL efficiency variance shows that less labor hours were used than was budgeted. The unfavorable variable MOH rate variance tells managers that the actual variable MOH costs were greater than expected given the direct labor hours used. The favorable variable MOH efficiency variance tells managers that the actual direct labor hours used were less than the standard direct labor hours allowed. The unfavorable fixed MOH budget variance tells managers that more fixed overhead costs were incurred than were budgeted for. The favorable fixed MOH volume variance tells managers that production volume was greater than anticipated. The favorable DL efficiency variance is likely to be related to the unfavorable DL rate variance. It is likely that the company hired more qualified employees at a higher rate. This may have resulted in improved labor efficiency.

Student answers may vary.

11-40

Chapter 11

Standard Costs and Variances

(15–30 min.) P11-62B Req. 1 Input

Quantity Standard

Direct materials Direct labor Variable MOH Fixed MOH Standard cost

70 lbs. 3 hrs. 3 hrs. 3 hrs.

Price Standard

× × × ×

$4 per lb. $19 per hr. $3 per hr. $6 per hr.

= = = =

Standard Cost of Input $280 $57 $9 $18 $364

Req. 2 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity purchased DM price variance

$ 4.00 $ 3.90 $ 0.10 5,670 $ 567 F

Actual quantity used Standard quantity allowed Difference between actual and standard quantity Multiply by: Standard price DM quantity variance

5,000 4,900 100 $ 4.00 $ 400 U

Actual DL rate Standard DL rate Difference Multiply by: Actual hours DL rate variance

$19.80 $19.00 $0.80 230 $ 184 U

Actual hours Standard hours allowed Difference between actual and standard direct labor hours Multiply by: Standard DL rate DL efficiency variance

230 210 20 $ 19.00 $ 380 U

Variable MOH rate variance: =AH × (AR – SR) = 230 × ($3.20 – $3.00)

46 U

Variable MOH efficiency variance: =SR × (AH – SHA) = $3.00 × (230 – 210)

$ 60 U

Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH = $1,660 – $1,560

$ 100 U

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) = $1,560 – $1,260

$ 300 U

11-41

Managerial Accounting 6e Solutions Manual

(continued) P11-62B Req. 3 Management has not done a good job controlling material, labor, and overhead costs. Each of these areas incurred an unfavorable variance during the period. Req. 4 The following are benefits of a standard costing system: Standards are often used as the basis for many components in the master budget. Standard costing systems simplify bookkeeping. Standards create a benchmark by which to judge actual costs. The use of practical, or attainable, standards should increase employee motivation. The company should continue the standard cost system if the benefits outweigh the costs.

(15–30 min.) P11-63B Req. 1 Standard direct labor rate per hour

–

Favorable labor rate variance

Actual direct labor rate per hour

$11.00

–

0.40

$10.60

Folklore’s Music Schedule to Compute Actual Direct Labor Hours

Actual 6,100 $ 10.60 $64,660

Direct labor hours Cost per hour Total direct labor cost Flexible budget variance

Flexible Budget for Actual Output 5,910 $ 11.00 $65,010

Flexible Budget Variance

$ 350 F

Req. 2 Price variance

Direct labor rate variance

Actual price per input unit

−

Standard price per input unit

($10.60 per hour − $11.00 per hour)

Actual quantity of input

× 6,100 hours

= $2,440 F Efficiency variance

Actual quantity of input

Direct labor efficiency variance

(6,100 hours − 5,910 hours)

−

Standard quantity of input

Standard price per input unit

× $11.00 per hour

= $2,090 U The favorable direct labor rate variance combined with the unfavorable direct labor efficiency variance suggests that the manager may have used lower paid, less efficient workers. However, due to the overall net effect, it appears this was a reasonable trade-off. 11-42

Chapter 11

Standard Costs and Variances

(15–30 min.) P11-64B Req. 1 Standard price per unit Actual price per unit Difference Multiply by: Actual quantity (13,800 × 2.5) DM price variance

$ 3.95 $ 4.10 $ 0.15 34,500 $5,175 U

Actual direct materials used in production, square foot Standard quantity allowed, square foot Difference between actual and standard quantity Multiply by: Standard direct materials cost per square foot DM quantity variance

34,500 41,400 6,900 $ 3.95 $ 27,255 F

Req. 2 Actual rate Standard direct labor rate per hour Difference Multiply by: Actual direct labor hours DL rate variance

9.40 $ 9.20 $0.20 25,400 $ 5,080 U

Actual direct labor hours Standard direct labor hours allowed Difference between actual and standard direct labor hours Multiply by: Standard direct labor rate per hour DL efficiency variance

25,400 27,600 2,200 $ 9.20 $ 20,240 F

Req. 3 Variable MOH rate variance: = AH × (AR – SR) = 25,400 × ($0.75 – $0.60)

$ 3,810 U

Variable MOH efficiency variance: = SR × (AH – SHA) = $0.60 × (25,400 – 27,600)

$ 1,320 F

11-43

Managerial Accounting 6e Solutions Manual

(continued) P11-64B Req. 4 Fixed overhead budget variance: Actual fixed MOH – Budgeted fixed MOH = $59,202 – $63,600

$ 4,398 F

Fixed overhead volume variance: Budgeted fixed MOH – Std. fixed MOH allocated to production (SHA × Std. fixed MOH rate) = $63,600 – $63,480

$ 120 U

Req. 5 The superior materials resulted in a favorable DM quantity variance (less materials used), possibly a favorable DL efficiency variance (less direct labor hours used), and possibly a favorable VOH efficiency variance (less direct labor hours used). The sum of the favorable variances exceeds the sum of the unfavorable variances, so the decision appears to be a wise one. Req. 6 Journal DATE

11-44

ACCOUNTS Raw Materials Inventory (34,500 × $3.95) Direct Materials Price Variance Accounts Payable (34,500 × $4.10) To record the purchase of raw materials.

POST. REF.

DEBIT 136,275 5,175

141,450

Work in Process Inventory (41,400 × $3.95) Direct Materials Quantity Variance Raw Materials Inventory (34,500 × $3.95) To record the use of raw materials.

163,530

Work in Process Inventory (27,600 × $9.20) Direct Labor Rate Variance Direct Labor Efficiency Variance Wages Payable (25,400 × $9.40) To record incurrence of direct labor.

253,920 5,080

CREDIT

27,255 136,275

20,240 238,760

Chapter 11

Standard Costs and Variances

Serial Case C11-65 Req. 1 Labor Rate Variance (LRV) = Actual Hours × (Actual Rate – Standard Rate) = 43,679.10 × ($13.5 – $ 14.5) = $43,679.10 F a. The LRV is favorable because the actual rate per hour is $1 less than the standard rate. This analysis shows management the overall dollar impact of paying an average wage rate that was lower than anticipated. b. Several possibilities exist. For example, perhaps some higher paid employees were sick or on vacation, and lower paid employees filled in during their absence. Perhaps a lower wage was offered to workers during low season months to keep the labor cost down. Req. 2 Labor Efficiency Variance (LEV) = Standard Rate × (Actual Hours – Standard Hours) = $14.5 (43,679.10 – 36,399.25) = $14.5 × 7,279.85 = $105,557.83 U a. This variance is unfavorable because workers used more time than anticipated. At a standard labor rate of $14.5 per hour, an inefficient use of time costs the company an unanticipated $105,557.83. b. Perhaps by using lower skilled, lower paid individuals, the work was performed at a lower speed. It was also possible that some technical issues such as power interruption or lack of some housekeeping tools caused delay in performing the work.

Discussion & Analysis A11-66 1.

Suppose a company is implementing lean accounting throughout the organization. Why might standard costing NOT be beneficial for that company? Lean companies strive for continual improvement. That means that current standards are not “good enough.” Rather than focusing on whether or not production has met current standards, lean producers focus on finding new ways to decrease waste, increase efficiency, and increase quality. They concentrate on looking forward rather than looking at the past. The lack of timeliness associated with standard costing would not be beneficial to a lean company.

What advantages might be experienced by a company if it adopts ideal standards for its direct material standards and direct labor standards? What advantages are there to using practical standards? As an employee, which would you prefer and why? Does your answer change if you are the manager in charge of production? Why or why not? Ideal standards are standards based on perfect or ideal conditions. These types of standards, which are also known as perfection standards, do not allow for any poor quality raw materials, waste in the production process, machine breakdown, or other inefficiencies. This type of standard is best suited for companies that strive for perfection. Practical (or attainable) standards are based on currently attainable conditions. Practical standards include allowances for normal amounts of waste and inefficiency. Many managers believe that practical standards make the best cost benchmarks and provide the most employee motivation because they can be attained with a reasonable amount of effort. As an employee, one would prefer practical standards. As a production manager, one would prefer ideal standards. Student responses will vary.

Select a product with which you are familiar. Describe what type of standards (direct material and direct labor) might be in effect for that product wherever it is produced. For each of these standards, discuss how those

11-45

Managerial Accounting 6e Solutions Manual standards may become outdated. How frequently would you think the company would need to evaluate each of the standards? Student answers will vary. 4.

Service organizations also use standards. Describe what types of standards might be in effect at each of the following types of organizations: • Hospitals • Law firms • Accounting firms • Auto repair shops • Fast food restaurants Student answers will vary.

What does the direct materials price variance measure? Who is generally responsible for the direct materials price variance? Describe two situations that could result in a favorable materials price variance. Describe two situations that could result in an unfavorable materials price variance. The direct materials price variance measures the difference in prices (actual price per unit minus standard price per unit) of materials multiplied by the actual quantity of materials. The purchasing department is generally responsible for the direct materials price variance. An unfavorable price variance could be the result of paying extra shipping charges for rush orders or increased prices from a supplier.

What does the direct materials quantity variance measure? Who is generally responsible for the direct materials quantity variance? Describe two situations that could result in a favorable direct materials quantity variance. Describe two situations that could result in an unfavorable direct materials quantity variance. The direct materials quantity variance measures whether the company meets its quantity standards. The quantity variance is the difference in quantities (actual quantity used minus the standard quantity allowed for the actual number of outputs) multiplied by the standard price per unit. The production supervisor is generally responsible for the direct materials quantity variance. A favorable direct material quantity variance could be the result of using higher than standard quality materials or more highly skilled workers were able to minimize standard waste. An unfavorable direct materials quantity variance could be the result of lower quality materials or equipment failure in the plant.

7. What does the direct labor rate variance measure? Who is generally responsible for the direct labor rate variance? Describe two situations that could result in a favorable direct labor rate variance. Describe two situations that could result in an unfavorable direct labor rate variance. The direct labor rate variance measures the difference in rates (actual rate per hour minus standard rate per hour) multiplied by the actual quantity of hours. Human Resources or the Personnel Department is generally responsible for the direct labor rate variance. A favorable direct labor rate variance could be the result of using lower skilled workers or a decrease in fringe benefit costs. An unfavorable direct labor rate variance could be the result of hiring highly skilled workers or an increase in employer related payroll taxes. 8.

What does the direct labor efficiency variance measure? Who is generally responsible for the direct labor efficiency variance? Describe two situations that could result in a favorable labor efficiency variance. Describe two situations that could result in an unfavorable labor efficiency variance. The direct labor efficiency variance measures whether the company meets its quantity standards. The efficiency variance is the difference in quantities (actual hours used minus the standard hours allowed for the actual number of outputs) multiplied by the standard rate per hour. The production department is generally responsible for the direct labor efficiency variance. A favorable labor efficiency variance could be the result of higher skilled workers or higher quality materials used. An unfavorable labor efficiency variance could be the result of lower quality materials used or lower skilled workers.

11-46

Chapter 11

Standard Costs and Variances

Describe at least four ways a company could use standard costing and variance analysis. • • • •

Standard costing saves on bookkeeping costs. Standard costing isolates price and efficiency variances as soon as they occur. Companies use standards and variances to control costs. Using standards and variances allows a company to pinpoint why actual results differ from the budget.

10. What are the two-variable manufacturing overhead variances? What does each measure? Who within the organization would be responsible for each of these variances? The two-variable manufacturing overhead variances are the variable overhead rate variance and the variable overhead efficiency variance. The variable overhead rate variance is the difference between the actual variable overhead costs incurred during the year and the amount of variable overhead expected, given the actual hours worked. It tells managers whether more or less was spent on variable overhead than expected given the actual hours used. The production supervisor and the purchasing manager are in the best position to evaluate this variance. The variable overhead efficiency variance is the difference between the actual hours and the standard hours allowed for the actual production volume, calculated at the standard variable overhead rate. The variance tells managers how much of the total variable overhead variance is due to using more or fewer hours than expected for the actual volume of output. The production supervisor is in the best position to explain this variance. 11. Suppose a company that makes and sells spaghetti sauce in plastic jars makes a change to its bottle that allows it to use significantly less plastic in each bottle. Describe at least four ways this change could help the company and its sustainability efforts. • • • •

Cost savings from the reduction in plastic used in production Cost savings from the reduction in indirect labor (manufacturing overhead) to process this waste The reduction in waste ending up in a landfill reducing the impact on the environment Marketing the sustainable efforts to attract new customers

12. Think of a company that manufactures a product. What type of standards do you think they might have regarding their sustainability efforts? Do you think sustainability standards would be beneficial for the company? Why or why not? Student answers will vary.

11-47

Managerial Accounting 6e Solutions Manual

Application & Analysis A11-67 Student answers will vary.

(30–60 min.) A11-68 1.

Pella will need standards that will enable them to compute the following: • Direct materials price and quantity variances for individual direct materials, including – glass; – wood; – different types of hardware, such as door handles, and window cranks; – and so on. This will require price and quantity standards for each individual type of direct materials. • Direct labor rate and efficiency variances Pella will need different price and quantity standards for each different type of direct laborer—for example, skilled versus unskilled labor. • Variable manufacturing overhead rate and efficiency variances Pella will have to separate overhead costs into variable and fixed components. Ideally, Pella should have separate standards for individual variable overhead items such as utilities, indirect materials, and indirect labor. • Fixed manufacturing overhead budget and volume variances • Nonfinancial key factors Pella should develop nonfinancial standards for key factors such as quality (number of defects) and on-time delivery.

2a. Three alternative approaches to setting standards include the following: • Engineering analysis/time-and-motion studies This approach reveals the minimum amount of direct materials, direct labor, and manufacturing overhead resources required for production. The engineers will probably suggest reorganization of plant layout or changes in the production process to increase efficiency. Pella’s own engineers or outside consultants could perform this analysis. • Continuous improvement standards Pella would begin with its historical data-based standards. The company would then reduce these standards by a certain percentage every quarter or year, yielding ever-tighter standards (for example, a 10% reduction in costs each year). • Benchmarking Benchmarking standards are based on “best practice.” Best practice can be defined as either internal (within the company) or external (based on other companies). Internal benchmarks are standards from the best practice within the company. If the Carroll, Iowa, plant is not the most efficient in the company, then benchmarks could be adopted from the most efficient of the company’s other plants. External benchmarks require standards based on the “best practice” of other companies. Pella might be able to obtain benchmark data from industry trade publications or from consultants. Or Pella might enter into a partnering relationship with another company such as Andersen Windows or Peachtree Windows, where the partner companies exchange benchmark information. 2b. Evaluation • Engineering analysis/time-and-motion studies This approach usually allows for unavoidable waste and spoilage, but it generally results in tight, or difficult-toachieve, standards. Employees who believe that standards are not attainable may be demoralized. If Pella uses

11-48

Chapter 11

Standard Costs and Variances

outside consultant engineers, this is a costly approach. However, the analysis usually identifies opportunities for increasing production efficiency, which should make the company more profitable. •

Continuous improvement standards The ever-tightening standards will give employees incentives to increase efficiency. This approach is inexpensive because it starts with the existing historical data-based standards and then simply requires that these costs be reduced by a specified percentage each quarter (or year). A problem with this approach is that after some point, further reductions may not be possible. Management must be careful not to make demands that employees believe are unattainable.

•

Benchmarking Using “best practice” as a standard gives employees incentives to increase efficiency. Employees should see these standards as attainable, because other plants have attained these standards. Internal benchmark information is easier and less expensive to obtain. External benchmark data are inexpensive if obtained from industry trade publications or from partnering relationships but can be expensive to obtain from consultants.

2c. MEMO DATE: _______________ TO: Controller, Pella Corporation FROM: _______________, Management Consultants SUBJECT: Standard Costs ____________________________________________________ First, we recommend that Pella move from its historical-data-based standards to adopt new standards based on 1) engineering analysis/time-and-motion studies, 2) continuous improvement standards, or 3) benchmarking. Any of these three approaches will provide incentives to reduce costs and increase operating efficiency. Without more information on the costs of each approach, we cannot definitively recommend a single method. However, we suggest that Pella examine trade publications for relevant benchmark data and explore the possibilities of partnering with other manufacturers to obtain external benchmark data. If benchmark data are too costly or impossible to obtain, then we recommend adopting continuous improvement standards. Benchmarking and continuous improvement standards will require more efficient operations. Time-and-motion studies are one way to identify opportunities to increase efficiency. Consequently, we recommend that Pella perform time-and-motion studies as resources permit, to help attain the continuous improvement or benchmark standards. Student answers will be less complete and will differ widely.

11-49

Managerial Accounting 6e Solutions Manual

A11-69 Ethics 1.

The ethical issues in this situation are as follows: Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical standards.” By adjusting the standards that were originally agreed on by the committee, Green Gnome Company employees would not be following the “zero-defects” strategy that was set throughout the organization. Integrity: “Refrain from engaging in any conduct that would prejudice carrying out duties ethically.” By loosening the standards, Greg Hanes could be accused of doing so to protect his position and relationship with the plant manager, which would prejudice carrying out duties ethically. Credibility: “Communicate information fairly and objectively.” By loosening standards to satisfy the plant manager and protect his job, Greg Hanes is not communicating information objectively. Integrity: “Mitigate actual conflicts of interest.” Greg has a conflict of interest because he is concerned about saving his own job. He should not let his personal interests supersede his responsibilities as an accountant. Greg Hanes’ responsibilities as a management accountant are to be honest, fair, objective, and responsible. He is responsible for remaining objective when reviewing and accepting the material, labor, and overhead standards.

No, Greg Hanes should not adjust the standards to a more achievable level. If Greg were to loosen the standards, he would not be performing his duties objectively.

Greg could consult the senior management before adjusting the standards if he does not want to violate the IMA Statement of Ethical Professional Practice.

A11-70 Real Life Mini-Case 1.

Before the company makes any changes to its standards, it must consider the impact of the manufacturing process changes on its variances. Indicate the impact of the changed process on each variance as favorable, unfavorable, or unchanged/unknown.

Reorganization Robots Software 2.

Direct material price variance N/A F F

Direct material quantity variance N/A F F

Direct labor rate variance N/A F N/A

Direct labor efficiency variance N/A F N/A

Variable MOH rate variance U N/A U

Variable MOH efficiency variance F N/A U

Fixed overhead budget variance F N/A N/A

Fixed overhead volume variance F N/A N/A

For each of the improvement projects listed in the case, describe which standards would need to be adjusted for future variance analysis. Reorganization: Variable manufacturing overhead variances and fixed overhead variances would have to be adjusted for future analysis. Robots: Direct materials variances and direct labor variances would have to be adjusted for future analysis Software: Direct material and variable manufacturing overhead variances would have to be adjusted for future analysis. Student answers will vary. There is no single set of “correct” answers for this one; it is meant to spark discussion.

11-50

Chapter 12 Capital Investment Decisions and the Time Value of Money Quick Check Answers QC12-1. b QC12-2. a QC12-3. d

QC12-4. c QC12-5. d QC12-6. b

QC12-7. d QC12-8. c QC12-9. b

QC12-10. a QC12-11. d QC12-12. c

Short Exercises (10 min.) S12-1 1.

(c)

Identify potential capital investments

(f)

Project investments’ cash flow

(d)

Screen / analyze investments using one or more of the methods discussed

(e)

Budget capital investments

(a)

Make investments

(g)

Perform post-audits

(b)

Use feedback to reassess investments already made

(5 min.) S12-2 Payback period

Initial investment Expected annual net cash inflow

= =

$1,000,000 $312,500 3.20 years

If the investment had a $175,000 residual value, the payback period would not be affected. The cash inflow from any residual value would occur at the end of the asset’s useful operating life and is not taken into account when calculating the payback period. The payback period if the project had a residual value of $175,000 is 3.20 years. The payback period is less than 3.5 years, so it passes Playmore’s initial screening.

12-1

Managerial Accounting 6e Solutions Manual

(5 min.) S12-3

Full years

Amount to complete recovery in next year Projected net cash inflow in next year

($102,000

$340,000)

Payback

2.30 years

If the investment had a $175,000 residual value, the payback period would not be affected. The cash inflow from any residual value would occur at the end of the asset’s useful operating life and is not taken into account when calculating the payback period. The payback period if the project had a residual value of $175,000 is 2.30 years. The payback period is less than 3.5 years, so it passes Playmore’s initial screening.

(5–10 min.) S12-4 Accounting rate of return

Average annual operating income from asset Initial investment

Average annual net cash inflow from asset

− Initial investment

$312,500 − $200,000* $1,000,000

= = * Depreciation expense: [$1,000,000 − $0] ÷ 5 = $200,000

12-2

$112,500 $1,000,000 11.25%

Annual depreciation expense on asset

Chapter 12

Capital Investment Decisions and the Time Value of Money

(continued) S12-4 If the project had a $175,000 residual value, the ARR would change. Specifically, the residual value would cause the yearly depreciation expense to decrease, which will cause the average annual operating income from the investment to increase. Accounting rate of return

Average annual operating income from investment Initial investment

Average annual net cash inflow from asset

Annual depreciation expense on asset

− Initial investment

$312,500 − $165,000* $1,000,000

$147,500 $1,000,000

= =

14.75%

* Depreciation expense: [$1,000,000 − $175,000] ÷ 5 = $165,000 The ARR, in either case, exceeds Playmore’s minimum required ARR. Therefore, the project passes the company’s screening rule in both cases.

(5–10 min.) S12-5 Accounting rate of return

Average annual operating income from investment Initial investment

Average annual net cash inflow from asset

−

Annual depreciation expense on asset

Initial investment $305,600a − $200,000* $1,000,000

$105,600 $1,000,000

= = a

10.56%

Average net cash inflow = $1,528,000 total net cash inflow ÷ 5 years = $305,600

* Depreciation expense: $1,000,000 ÷ 5 = $200,000

12-3

Managerial Accounting 6e Solutions Manual

(continued) S12-5 If the project had a $175,000 residual value, the ARR would change. Specifically, the residual value would cause the yearly depreciation expense to decrease, which will cause the average annual operating income from the investment to increase. Accounting rate of return

Average annual operating income from investment Initial investment

Average annual Annual depreciation net cash expense on asset − inflow from asset Initial investment

$305,600 − $165,000* $1,000,000

= =

$140,600 $1,000,000 14.06%

12-4

Chapter 12

Capital Investment Decisions and the Time Value of Money

(10–15 min.) S12-6

Using an 8% interest rate, the present values are: Scenario #1 Present value

Scenario #2 Present value Scenario #3 Present value

= = =

$ 8,750 × (Annuity PV factor, i = 6%, n = 7) $ 8,750 × 5.582 $48,843 (rounded)

$48,750 (since it would be received now)

= = =

$99,350 × (PV factor, i = 6%, n = 7) $99,350 × 0.665 $ 66,068 (rounded)

Scenario #3 appears to be the best option. Based on a 6% interest rate, its present value is the highest. Using a 12% interest rate, the present values are: Scenario #1 Present value

Scenario #2 Present value Scenario #3 Present value

= = =

$ 8,750 × (Annuity PV factor, i = 12%, n = 7) $ 8,750 × 4.564 $39,935 (rounded)

$48,750

= = =

$99,350 × (PV factor, i = 12%, n = 7) $99,350 × 0.452 $ 44,906 (rounded)

Scenario #2 appears to be the best option. Based on a 12% interest rate, its present value is the highest.

12-5

Managerial Accounting 6e Solutions Manual

(5–10 min.) S12-7 a.

The future value of the single lump sum investment is found as follows: Future Value

Principal amount × (FV factor, i = ?, n = ?) $7,550 × (FV factor, i = 12%, n = 3) $7,550 × 1.405 $10,608 (rounded)

The future value of the annuity is found as follows: Future Value

= = = =

Amount of each installment × (Annuity FV factor, i = ?, n = ?) $2,517 × (Annuity FV factor, i = 12%, n = 3) $2,517 × 3.374 $8,492 (rounded)

The future value of the annuity is lower than the future value of the lump sum investment. The lump-sum investment earned interest over the full three years. However, the annuity earned interest only as the installments were received over the course of three years. The sooner the cash is invested, the more interest is earned. The investor lets time do the work.

12-6

Chapter 12

Capital Investment Decisions and the Time Value of Money

(10–15 min.) S12-8 a.

Payment Options Option #1 $940,000 now

$2,029,460 ($940,000 × 2.159)

Option #2 $148,000 annually for 10 years

Option #3 $1,850,000 10 years from now

$2,144,076 ($148,000 × 14.487)

$1,850,000 (already stated at its future value)

Based on the future values, our preference among payout options is: Option 2 Option 1 Option 3

Future Value of Lottery Payout (Principal amount × FV factor i = 8%, n = 10)

– most preferable – next preferable – least preferable

We can make a valid comparison between the payout options at any point in time, as long as we convert each payment option to its value at the same point in time using the same interest rate. The preference among the options is the same regardless of whether we compare the options at their present values or at their future values. Valid comparisons can be made among options at any point in time, as long as we convert all cash flows to the same point in time using the same interest rate.

12-7

Managerial Accounting 6e Solutions Manual

(10–15 min.) S12-9 a.

The present value of the $1 received each year is calculated as: (Principal × PV of $1 factor, i = 10%, n = various): One year from now: ($1 × 0.909)……... Two years from now: ($1 × 0.826)……... Three years from now: ($1 × 0.751)……... Four years from now: ($1 × 0.683)……... Five years from now: ($1 × 0.621)……... Total present value………………..

$0.909 0.826 0.751 0.683 0.621 $3.790

An annuity is a stream of equal cash flows that occurs at equal time intervals. This stream of cash flows fits the definition of an annuity because each cash flow is $1 and each cash flow occurs at the end of the year.

Using the Present Value of Annuity of $1 table, we find the present value of this annuity to be: Present Value of Annuity

= $3.791

Amount of each cash installment × (Annuity PV factor for i = 10%, n = 5) $1 × 3.791

Except for a slight rounding error, the sum of the present values in part (a) ($3.790) equals the present value calculated with the annuity table ($3.791). d.

This exercise shows how Annuity PV factors (in the Present Value of Annuity of $1 table) are the sums of the PV factors found in the Present Value of $1 tables. The annuity tables are derived from the lump-sum tables and save us from going through the series of steps performed in part (a) above.

(5–10 min.) S12-10 Annuity PV Factor at 8% Present value of annuity of equal annual net cash inflows for 9 years at 8% Less: Investment Net present value of studios

Net Cash Inflow

6.247 × $90,000

Total Present Value

$562,230 (625,000) $(62,770)

Because the NPV is negative, the studio investment does not provide Woodsy Music’s minimum required rate of return. Therefore, the investment is not favorable.

12-8

Chapter 12

Capital Investment Decisions and the Time Value of Money

(5–10 min.) S12-11 We solve for the IRR by first finding the Annuity PV factor associated with the investment: $625,000 $90,000

Annuity PV factor (n = 9, i = ?)

6.94

Annuity PV factor (n = 9, i = ?)

Looking at the present value of an annuity table (Appendix 12A, Table B), we find that the project’s Annuity PV factor of 6.94 falls between 5% and 6% at a period of 9 years. Therefore, the IRR is between 5% and 6%.

(5–10 min.) S12-12

Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Net Cash Inflow $14,000 21,000 27,000

PV Factor i =14% 0.877 0.769 0.675

Present Value $ 12,278 16,149 18,225 $ 46,652 (45,500) $ 1,152

The NPV is positive, and therefore the kiosks are a favorable investment.

12-9

Managerial Accounting 6e Solutions Manual

(10–15 min.) S12-13 The IRR is the interest rate at which the NPV= 0. Because the NPV at 14% is positive, the IRR must be higher than 14%. We’ll start the trial and error process using 16%. PV Factor Year Net Cash Inflow i =16% Present Value 1 $14,000 0.862 $ 12,068 2 21,000 0.743 15,603 3 27,000 0.641 17,307 Present value of net cash inflows $ 44,978 Less: Initial investment (45,500) NPV $ (522) The NPV is negative at 16%. Therefore, the IRR must be between 14% and 16%.

(10–15 min.) S12-14 a. b. c. d. e. f. g. h. i.

Payback period ignores salvage value after the payback period. IRR uses discounted cash flows to determine the asset’s unique rate of return. Payback period highlights risky investments. In capital rationing decisions, the profitability index must be computed to compare investments requiring different initial investments when the NPV method is used. NPV and IRR incorporate the time value of money. Payback period focuses on time, not profitability. ARR uses accrual accounting income. ARR measures profitability but ignores the time value of money. IRR finds the discount rate, that brings the investment’s NPV to zero.

(10 min.) S12-15 Purchase Item a. b. c. d. e. f. g. h. i. j.

12-10

The upgrade of the customer service fleet to new fuel-efficient vehicles has a cost of $400,000. The cost of raw materials for the year is estimated at $570,000. All of the computers at the help desk are being upgraded at a cost of $202,000. The total cost of the management succession program for the coming year is projected to be $330,000. The cost to retrofit one of a company’s closed retail outlets into a customer service center is projected to be $250,000. The cost of worker’s compensation insurance for the coming year is projected to be $430,000. To support the launch of the new product line, staff training costs are $175,000. The cost to purchase a new retail commerce system for the company’s website is $1,785,000. The replacement of the engine on one of a company’s aircraft for $240,000 (this will not increase the useful life of the plane). The delivered, installed cost of a new production line is $720,000.

Capital Investment? Yes No Yes No Yes No No Yes No Yes

Chapter 12

Capital Investment Decisions and the Time Value of Money

(5–10 min.) S12-16 a.

Luciana accepts a kickback payment from a contractor to make sure that the contactor's bid is accepted. Ben is a staff accountant. He has recently been moved into a position where he will be working on capital budgeting proposals. Ben does not know how to make an NPV calculation, but he does not take the steps to acquire the skills. He figures he can just use ARR and payback for investment analysis instead. Dania does not include an estimate of maintenance costs associated with a new computer system. She knows that her department needs the computer system. If the maintenance costs were included in the estimate, the computer system purchase might not be approved. Gordon is anxious to impress his date, Laura. Laura works in Purchasing, while Gordon works in Accounting. When they start talking about people they work with, Gordon shares salary information about each person. Emmanuel’s company is in negotiations to purchase a complex computer system from one of its suppliers. Emmanuel, a management accountant, does not disclose that his mother is a major stockholder of the supplier.

Integrity—Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

(10 min.) S12-17 1.

In the Excel worksheet pictured above, what values or formulas would be entered in the specified cells in the following table: Scenario #1 Cell

Scenario #2

Value or formula

Cell

Value or formula

(1,200,000)

720,000

612,000

475,000

404,000

310,000

248,000

295,000

206,000

200,000

110,000

=IRR(B2:B5)

=IRR(E2:E5)

B10

=IRR(B2:B7)

C10

=IRR(E2:E7)

12-11

Managerial Accounting 6e Solutions Manual

(continued) S12-17 2.

Assume that Lovejoy calculates the IRR under both scenarios. Those results are listed below. Based on this IRR analysis, should Lovejoy undertake this conference facility upgrade? Explain. Scenario #1

Scenario #2

IRR after 3 years

14.4%

3.1%

IRR after 5 years

26.3%

13.7%

Lovejoy should not undertake this conference facility upgrade. Lovejoy’s management would like capital investments to earn a hurdle rate of at least 15%. This is only possible under one of the assumptions tested (Scenario #1 if the project lasts for five years). Based on this information, the project appears to be risky. Student answers will vary.

(10 min.) S12-18 1.

What does the Internal Rate of Return (IRR) measure? Internal Rate of Return (IRR) measures the rate of return (based on discounted cash flows) that a company can expect to earn by investing in a capital asset. The IRR is the interest rate that makes the NPV of the investment equal to zero.

What is the weakness in Anderson’s analysis? Anderson’s analysis is based on the project definitely lasting five years and only relies on IRR as the measure.

Look at Hudak’s Excel analysis. Why would it be important to evaluate the IRR both at the end of three years and at end of five years for this project? Robot technology is rapidly evolving. This equipment and project may not be viable for five years.

Does Hudak’s analysis support Anderson’s conclusion that the project should definitely be accepted? Why or why not? Hudak’s analysis does not support Anderson’s conclusion that the project should definitely be accepted. Anderson’s conclusion is that the project will definitely be viable for all five years and that may not occur. This project only meets or exceeds the capital investment hurdle rate of 16% in both Years 3 and 5 in the best-case scenario. In the most likely case scenario, the investment hurdle rate is only met after five years. Because the investment hurdle rate is not met until Year 5 in the most likely scenario, there is considerable risk in undertaking this project. For someone to definitely accept this project, we would want to see an IRR of 16% or greater under every scenario in both Years 3 and 5.

Describe the steps in Excel that would have been taken to calculate the IRR in Cell B12. How would the calculation in Cell B13 differ from the calculation in Cell B12? On the Ribbon, click on Formulas tab, and then click on Financial. A drop-down list of financial functions will appear. Click on IRR. In the Values box, select cells B5-B8 then click OK. For the calculation in cell B13, in the values box, select cells B5-B10.

12-12

Chapter 12

Capital Investment Decisions and the Time Value of Money

Exercises (Group A) (5–10 min.) E12-19A Payback period

Initial investment Expected annual net cash inflow

$900,000 $300,000

3 years

Decision: The payback occurs well before the plant must be replaced, so the payback method does support purchasing the plant.

(10–15 min.) E12-20A Req. 1 Wait time per day: Amount spent on wait time per day: Number of days food bank open per year: Cost of hours employees wait per year:

60 minutes × 7 warehouse pickers = 420 minutes 420 minutes / 60 minutes = 7 hours 7 hours/day × $12.00/hr. = $84.00 per day 52 weeks/yr. × 5 days week = 260 days 260 days – 10 holidays = 250 days per year 250 days × $84.00/day = $21,000

Net cash inflow (cost savings) per year of eliminating employee wait time is $21,000. Req. 2 Payback period

Initial investment Expected annual net cash inflow

$24,000 $21,000 (see Req. 1)

1.14 years

Req. 3 Wage rate if increased 25%: Amount spent on wait time per day: Cost of hours employees wait per year:

$12.00 × 1.25 = $15 per hour 7 hours/day × $15.00/hr. = $105 per day 250 days × $105.00/day = $26,250

If employee wage rate increased 25%, the net cash inflow (cost savings) per year of eliminating employee wait time is $26,250. Req. 4 Payback period

Initial investment Expected annual net cash inflow

$24,000 $26,250 (see Req. 3)

0.91 years

Req. 5 The payback period decreases (0.91 years) as compared to the original payback period (1.14 years) when the wage rate increases because there are more costs each year and the annual cost savings is more than the initial investment in the project.

12-13

Managerial Accounting 6e Solutions Manual

(5–10 min.) E12-21A Payback = 5 years + (195,000 / 250,000) Payback = 5.78 years

(10–15 min.) E12-22A Accounting rate of return

Average annual operating income from investment Initial investment

Average annual net cash inflow from asset Initial investment

$260,500a − $155,000* $1,550,000

$105,500 $1,550,000

= = a

6.81%

Average net cash inflow = $2,605,000 total net cash inflow ÷ 10 years = $260,500

* Depreciation expense: $1,550,000 ÷ 10 = $155,000

(10–15 min.) E12-23A

Accounting rate of return

Accounting rate of return on Heatherwood

Accounting rate of return on Riverland

Decision: Riverland offers the higher rate of return.

12-14

Average annual operating income from asset Initial investment $153,000 $900,000 17.00%

$249,750 $1,350,000 18.50%

Chapter 12

Capital Investment Decisions and the Time Value of Money

(15–20 min.) E12-24A Req. 1 Your “out-of-pocket” cost is $67,500 either way: ($2,700 × 25 years) vs. ($4,500 × 15 years). Req. 2 Future value

Future value

= = =

Annuity × (Annuity FV factor, i = 10%, n = 25) $2,700 × (98.347) $265,537 (rounded)

= = =

Annuity × (Annuity FV factor, i = 10%, n = 15) $4,500 × (31.772) $142,974

Req. 3 The strategy involving earlier savings grows substantially larger over time. This is because the savings are invested sooner, so time does the work. Req. 4 Future value

Future value

= = =

$265,537 × (FV factor, i = 10%, n = 10) $265,537 × (2.594) $688,803 (rounded)

= = =

$142,974 × (FV factor, i = 10%, n = 10) $142,974 × (2.594) $370,875 (rounded)

(15–20 min.) E12-25A Req. 1 Payback = 12 years ($600,000/50,000) Req. 2 PV of cash inflows (savings) =7.469 × $50,000 =

$373,450

Less: Initial investment

($600,000)

NPV of project

($226,550)

Req. 3 No because the payback period is more than five years. The energy manager could argue that the payback method is only focusing on time, not on profitability, and the payback period is not considering the cash inflows that occur after that period. Req. 4 Student answers will vary.

12-15

Managerial Accounting 6e Solutions Manual

(5–10 min.) E12-26A Req. 1 With the 8% interest rate, she needs: Present value

= = =

Annuity × (Annuity PV factor, n = 4, i = 8%) $30,000 × (3.312) $99,360

Req. 2 With an 6% interest rate, she needs:

Present value

= = =

Annuity × (Annuity PV factor, n = 4, i = 6%) $30,000 × (3.465) $103,950

If her savings are earning a lower interest rate (6%), she’ll need to save more to be able to withdraw $30,000 per year.

(10–15 min.) E12-27A Option #1: Present value

= = =

$14,500,000 × (PV factor, i = 6%, n = 6) $14,500,000 × 0.705 $10,222,500

= = =

$2,200,000 × (Annuity PV factor, i = 6%, n = 6) $2,200,000 × 4.917 $10,817,400

= = =

$12,500,000 × (PV factor, i = 6%, n = 4) $12,500,000 × 0.792 $9,900,000

Option #2: Present value

Option #3: Present value

Payout Option #2 has the highest present value using the 6% discount rate. Therefore, it appears to be the most favorable option.

12-16

Chapter 12

Capital Investment Decisions and the Time Value of Money

(10–15 min.) E12-28A Question 1: Future value

= = =

$4,000 × (FV factor, i = 10%, n = 6) $4,000 × 1.772 $7,088

= = =

$ 6,000 × (Annuity PV factor, i = 12%, n = 20) $ 6,000 × 7.469 $44,814

Question 2: Present value

Question 3: Present value

Question 4: Future value

= = =

$160,000 × (PV factor, i = 6%, n = 7) $160,000 × 0.665 $106,400

= = =

$2,000 × (Annuity FV factor, i = 12%, n = 10) $2,000 × 17.549 $35,098

= = =

$ annuity × (Annuity FV factor, i = 6%, n = 4) $ annuity × 4.375 $ annuity

Question 5: Future value $51,000 $11,657

(15–20 min.) E12-29A Vargas Products Net Present Value Analysis Annuity PV Factors at I = 16%; 12% Net Cash Inflow Total Present Value Project A: Present value of annuity of equal annual net cash inflows for 8 years at 16% Less: Initial investment

4.344* × $56,000 per year =

Net present value of Project A

$ 243,264 (280,000) $ (36,736)

Project B: Present value of annuity of equal annual net cash inflows for 9 years at 12% Less: Initial investment

5.328** × $74,000 per year =

Net present value of Project B

$ 394,272 (380,000) $ 14,272

12-17

Managerial Accounting 6e Solutions Manual

(continued) E12-29A In order to earn the desired return (16% for Project A and 12% for Project B), the maximum price the company would pay for each investment is the present value of the net cash inflows at that interest rate. Thus, the maximum acceptable price for each project is: Project A — Maximum acceptable price = $243,264 Project B — Maximum acceptable price = $394,272 *Annuity PV factor (n = 8, i = 16%) **Annuity PV factor (n = 9, i = 12%)

(15 min.) E12-30A When the investment yields equal net cash inflows, the IRR is found by first finding the Annuity PV factor that will solve the following equation and then finding the interest rate associated with that PV factor: Initial investment Annuity PV factor = Amount of each annual net cash inflow (i = ?, n = ?) Project A: $280,000 $ 56,000 5.00

Annuity PV factor (i = ?, n = 8)

Using the Present Value of Annuity of $1 table, we find that 5.00 is between 10% (5.335) and 12% (4.968). The IRR for Project A is between 10% and 12%.

Project B: $380,000 $ 74,000 5.14

Annuity PV factor (i = ?, n = 9)

Using the Present Value of Annuity of $1 table, we find that 5.14 is between 12% (5.328) and 14% (4.946). The IRR for Project B is between 12% and 14%. Project B is better because the IRR is higher.

12-18

Chapter 12

Capital Investment Decisions and the Time Value of Money

(15–20 min.) E12-31A 1.

The equipment’s net present value (NPV) is calculated as follows. Because each annual cash inflow is unique, we cannot use the annuity table. We must discount each annual cash inflow using the PV Factors found in the Present Value of $1 table: PV of $1 Factor Present Value of Net Year Net Cash Inflow (i = 14%) Cash Inflow Year 1 (n = 1) $262,000 0.877 $229,774 Year 2 (n = 2) $255,000 0.769 196,095 Year 3 (n = 3) $224,000 0.675 151,200 Year 4 (n = 4) $210,000 0.592 124,320 Year 5 (n = 5) $204,000 0.519 105,876 Year 6 (n = 6) $173,000 0.456 78,888 Present value of net cash inflows $886,153 Less: Initial investment ($905,000) Net present value ($ 18,847)

The company should not invest in the equipment because its NPV is negative.

The company must determine whether the equipment investment becomes favorable (positive NPV) if the equipment is refurbished, used for one more year, and then sold. The following analysis needs to be added to the NPV computations above: Cash (Outflow) / PV of $1 Factor Year Inflow (i = 14%) Present Value Refurbishment at the end of Year 6 (n = 6) ($105,000) 0.456 ($47,880) Cash inflows in year 7 (n = 7) $ 72,000 0.400 28,800 Residual value (n=7) $ 55,000 0.400 22,000 Additional NPV provided from refurbishment $ 2,920 NPV from part 1 ($18,847) New NPV

($15,927)

The refurbishment provides a positive NPV. The refurbishment NPV, $2,920, is not large enough to overcome the original negative NPV of the equipment, ($18,847). Therefore, the refurbishment should not alter the company’s decision to turn down the equipment investment.

12-19

Managerial Accounting 6e Solutions Manual

(15–20 min.) E12-32A NPV at 8% Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Net Cash Inflow $484,000 388,000 286,000

PV Factor i = 8% 0.926 0.857 0.794

Net Cash Inflow $484,000 388,000 286,000

PV Factor i = 10% 0.909 0.826 0.751

Present Value $448,184 $332,516 $227,084 $1,007,784 (960,000) $ 47,784

NPV at 10% Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Present Value $439,956 $320,488 $214,786 $975,230 (960,000) $ 15,230

NPV at 12% Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Net Cash Inflow $484,000 388,000 286,000

The IRR is somewhere between 10% and 12%. Per Excel, the IRR is 11.00%.

12-20

PV Factor i = 12% 0.893 0.797 0.712

Present Value $432,212 $309,236 $203,632 $945,080 (960,000) ($ 14,920)

Chapter 12

Capital Investment Decisions and the Time Value of Money

(10–15 min.) E12-33A Because each investment presents a positive NPV, Stanton Manufacturing should use the profitability index to compare the profitability of each investment. Equipment A Equipment B Equipment C Present value of net cash inflows $1,710,000 $1,950,000 $2,180,000 Divide by: Initial investment ÷ 1,425,000 ÷ 1,875,000 ÷ 1,744,000 Profitability index 1.20 1.04 1.25 The company should invest in Equipment C because it is the most profitable project.

(10–15 min.) E12-34A Req. 1 Avg. net cash inflow per day

Number of ski days per year

Avg. annual net cash inflow

$12,250

160

$1,960,000

Avg. annual net cash inflow

–

Annual depreciation expense

Avg. annual operating income from asset

$1,960,000

–

$875,000

$1,085,000

Initial investment

Expected annual net cash inflow

Payback period

$8,000,000

$1,960,000

4.08 years

Req. 2

Req. 3

Req. 4 Avg. annual operating income from asset

Initial investment

Accounting rate of return

$1,085,000

$8,000,000

13.56%

12-21

Managerial Accounting 6e Solutions Manual

(10–15 min.) E12-35A Req. 1 NPV Calculation Including Residual Value Present value of annuity, n = 8 Plus: Present value of residual value, end of Year 8 Total present value Less: Initial investment Net present value

PV Factor (i = 12%) 4.968 0.404

× ×

Net Cash Inflow $1,960,000 $1,000,000

Present Value 9,737,280 404,000

= =

10,141,280 (8,000,000) $2,141,280

Net present value of expansion $2,141,280. The expansion is an attractive project because its NPV is positive. Req. 2 NPV Calculation Including Residual Value Present value of annuity, n = 8 Less: Initial investment Net present value

PV Factor (i = 12%) 4.968

Net Cash Inflow $1,960,000

Present Value 9,737,280 (8,000,000) $1,737,280

Net present value of expansion $1,737,280. Without a residual value, the expansion is still attractive because of the project’s positive NPV.

(20 min.) E12-36A Req. 1 Initial investment*

Expected annual net cash inflow*

Payback period

$40,000

$59,300

0.67 years (rounded)

*$35,000 + $5,000 ** $18/hr. × 10 hours/day = $180/day × 360 days = $64,800 annual savings $64,800 annual savings – $4,000 annual service cost ($40,000 initial investment × 10%) – $1,500 annual electricity = $59,300 net annual cash inflow Req. 2 The company would need to consider what the impact of replacing people with machines would have with customers. Student answers will vary. Req. 3 Neither NPV nor IRR is likely to be necessary because the payback period is less than one year. Student answers will vary.

12-22

Chapter 12

Capital Investment Decisions and the Time Value of Money

(20 min.) E12-37A Req. 1

First preferred Second preferred Third preferred Fourth preferred

(a) Net Present Value C A B D

(b) Profitability Index A C B D

(d) Payback Period C A D B

(e) Accounting Rate of Return D A B C

Payback period—This method will show the company how quickly it recoups its initial investment. This method will be good for screening out those potential investments that are too risky because the payback period is too long. However, the payback period will not be the sole criterion for accepting capital investments because it does not give the company any insight about the investment’s profitability. In addition, it does not incorporate the time value of money. Accounting rate of return (ARR)—This method will give the company an indication of how profitable the investment will be. However, because it does not consider the time value of money, it is not the best indicator of profitability. This method is the only method that uses accrual accounting figures. Therefore it will help the company assess the impact of investments on the financial statements. The other methods use net cash flows. Student answers will vary.

12-23

Managerial Accounting 6e Solutions Manual

(20 min.) E12-38A 1.

For each of the two scenarios that the hotel is analyzing, calculate the a. Internal Rate of Return (IRR) after three years b. Internal Rate of Return (IRR) after five years

Based on your IRR calculations in Requirement 1, would you recommend that the hotel undertake this conference facility upgrade? Why or why not? Peacelove should not undertake this conference facility upgrade. Peacelove’s management would like capital investments to earn a hurdle rate of at least 14%. This is only possible under one of the assumptions tested (Scenario #1 if the project lasts for five years). Based on this information, the project appears to be risky.

12-24

Chapter 12

Capital Investment Decisions and the Time Value of Money

(20 min.) E12-39A 1. For each of the three scenarios, calculate the a. Internal Rate of Return (IRR) after three years b. Internal Rate of Return (IRR) after five years

Look at your analysis in Requirement 1. Why would it be important to evaluate the IRR both at the end of three years and at the end of five years for this project? Robot technology is rapidly evolving. This equipment and project may not be viable for five years.

3. Based on your IRR calculations for Requirement 1 and your comments for Requirement 2, which plan would you recommend, and why? I would recommend that the company not undertake the project because it only meets the capital investment hurdle rate in the most likely scenario after five years and this project is based on a rapidly evolving technology. (Student answers may vary.)

12-25

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (5–10 min.) E12-40B Payback period

Initial investment Expected annual net cash inflow

$2,400,000 $300,000

= =

8 years

The payback occurs before the plant must be replaced, so the payback method supports purchasing the plant.

(5–10 min.) E12-41B Req. 1 Wait time per day: Amount spent on wait time per day: Number of days food bank open per year: Cost of hours employees wait per year:

60 minutes × 7 warehouse pickers = 420 minutes / 60 minutes = 7 hours 7 hours/day × $14.00/hr. = $98.00 per day 52 weeks/yr. × 5 days week = 260 days – 10 holidays = 250 days per year 250 days × $98.00/day = $24,500

Net cash inflow (cost savings) per year of eliminating employee wait time is $24,500. Req. 2 Payback period

Initial investment Expected annual net cash inflow

$25,000 $24,500 (see Req. 1)

1.02 years

Req. 3 Wage rate if increased 20%: Amount spent on wait time per day: Cost of hours employees wait per year:

$14.00 × 1.20 = $16.80 per hour 7 hours/day × $16.80/hr. = $117.60 per day 250 days × $117.60/day = $29,400

If employee wage rate increased 20%, the net cash inflow (cost savings) per year of eliminating employee wait time is $29,400. Req. 4 Payback period

Initial investment Expected annual net cash inflow

$25,000 $29,400 (see Req. 3)

0.85 years

Req. 5 The payback period decreases (0.85 years) as compared to the original payback period (1.02 years) when the wage rate increases because there are more costs each year and the annual cost savings is more than the initial investment in the project. 12-26

Chapter 12

Capital Investment Decisions and the Time Value of Money

(5–10 min.) E12-42B

Full years

Amount to complete recovery in next year ( $120,000

Projected net cash inflow in next year

$240,000 )

Payback

5.50 years

(10–15 min.) E12-43B

Accounting rate of return

ARR

Average annual operating income from asset Initial investment $108,000 $1,460,000 7.40%

12-27

Managerial Accounting 6e Solutions Manual

(10–15 min.) E12-44B

Accounting rate of return

Accounting rate of return on Kunshier

= =

Accounting rate of return on Preston

= =

Average annual operating income from asset Initial investment

$198,000 $1,200,000 16.5%

$236,500 $1,100,000 21.5%

Decision: The Preston Limited offers the higher accounting rate of return.

(15–20 min.) E12-45B Req. 1 Your “out-of-pocket” cost is $90,000 either way: ($3,600 × 25 years) vs. ($7,500 × 12 years). Req. 2 Future value

Future value

= = =

Annuity × (Annuity FV factor, i = 12%, n = 25) $3,600 × (133.334) $480,002 (rounded)

= = =

Annuity × (Annuity FV factor, i = 12%, n = 12) $7,500 × (24.133) $180,998 (rounded)

Req. 3 The strategy involving earlier savings grows substantially larger over time. This is because the savings are invested sooner, so time does the work. Req. 4 Future value

Future value

12-28

= = =

$480,002 × (FV factor, i = 12%, n = 9) $480,002 × (2.773) $1,331,046

= = =

$180,998 × (FV factor, i = 12%, n = 9) $180,998 × (2.773) $501,907

Chapter 12

Capital Investment Decisions and the Time Value of Money

(15–20 min.) E12-46B Req. 1 Payback = 6.88 years ($550,000/80,000) Req. 2 PV of savings 7.606 × $80,000 = Less: Initial investment NPV of project

$608,480 ($550,000) $ 58,480

Req. 3 No because the payback period is more than five years. The energy manager could argue that payback method is only focusing on time, not on profitability, and the payback period is not considering the cash inflows that occur after that period. Req. 4 Student answers will vary.

(5–10 min.) E12-47B Req. 1 With the 6% interest rate, she needs: Present value

= = =

Annuity × (Annuity PV factor, n = 6, i = 6%) $35,000 × (4.917) $172,095

Req. 2 With a 4% interest rate, she needs: Present value

= = =

Annuity × (Annuity PV factor, n = 6, i = 4%) $35,000 × (5.242) $183,470

If her savings are earning a lower interest rate (4%), she’ll need to save more now to be able to withdraw $35,000 per year.

(10–15 min.) E12-48B Option #1: Present value

Option #2: Present value

Option #3: Present value

= = =

$12,000,000 × (PV factor, i = 10%, n = 6) $12,000,000 × 0.564 $6,768,000

= = =

$2,200,000 × (Annuity PV factor, i = 10%, n = 5) $2,200,000 × 3.791 $8,340,200

= = =

$10,500,000 × (PV factor, i = 10%, n = 4) $10,500,000 × 0.683 $7,171,500

Payout Option #2 has the highest present value using the 10% discount rate. Therefore, it appears to be the most favorable option. .

12-29

Managerial Accounting 6e Solutions Manual

(10–15 min.) E12-49B Scenario 1: Future value

= = =

$3,000 × (FV factor, i = 10%, n = 6) $3,000 × 1.772 $5,316

= = =

$ 6,000 × (Annuity PV factor, i = 12%, n = 20) $ 6,000 × 7.469 $44,814

= = =

$135,000 × (PV factor, i = 8%, n = 7) $135,000 × 0.583 $ 78,705

= = =

$3,500 × (Annuity FV factor, i = 12%, n = 10) $3,500 × 17.549 $61,422

= = =

$ annuity × (Annuity FV factor, i = 8%, n = 4) $ annuity × 4.506 $ annuity

Scenario 2: Present value

Scenario 3: Present value

Scenario 4: Future value

Scenario 5: Future value $53,000 $11,762

12-30

Chapter 12

Capital Investment Decisions and the Time Value of Money

(15–20 min.) E12-50B McKnight Products Net Present Value Analysis Annuity PV Factors at I = 16%; 12% Project A: Present value of annuity of equal annual net cash inflows for 7 years at 16% Less: Initial investment Net present value of Project A

Project B: Present value of annuity of equal annual net cash inflows for 9 years at 12% Less: Initial investment Net present value of Project B

Net Cash Inflow

Total Present Value

4.039* × $65,000 per year =

$ 262,535 (265,000) $ (2,465)

5.328** × $72,000 per year =

$ 383,616 (385,000) $ (1,384)

*Annuity PV factor (n = 7, i = 16%) **Annuity PV factor (n = 9, i = 12%)

Project A — Maximum acceptable price = $262,535 Project B — Maximum acceptable price = $383,616

12-31

Managerial Accounting 6e Solutions Manual

(15 min.) E12-51B When the investment yields equal net cash inflows, the IRR is found by first finding the Annuity PV factor that will solve the following equation and then finding the interest rate associated with that PV factor: Initial investment Annuity PV factor = Amount of each annual net cash inflow (i = ?, n = ?) Project A: $265,000 $ 65,000 4.08

Annuity PV factor (i = ?, n = 7)

Using the Present Value of Annuity of $1 table, we find that 4.08 is between 14% (4.288) and 16% (4.039). The IRR for Project A is between 14% and 16%. Project B: $385,000 $ 72,000 5.35

Annuity PV factor (i = ?, n = 9)

Using the Present Value of Annuity of $1 table, we find that 5.35 is between 10% (5.759) and 12% (5.328). The IRR for Project B is between 10% and 12%. Decision: Project A is better because its IRR is higher.

12-32

Chapter 12

Capital Investment Decisions and the Time Value of Money

(15–20 min.) E12-52B Req. 1 The equipment’s net present value (NPV) is calculated as follows. Because each annual cash inflow is unique, we cannot use the annuity table. We must discount each annual cash inflow using the PV Factors found in the Present Value of $1 table: PV of $1 Factor Present Value of Net Year Net Cash Inflow (i =16%) Cash inflow Year 1 (n = 1) $264,000 0.862 $227,568 Year 2 (n = 2) $252,000 0.743 $187,236 Year 3 (n = 3) $222,000 0.641 $142,302 Year 4 (n = 4) $210,000 0.552 $115,920 Year 5 (n = 5) $203,000 0.476 $96,628 Year 6 (n = 6) $173,000 0.410 $70,930 Present value of net cash inflows $840,584 Less: Initial investment ($910,000) Net present value ($69,416)

The company should not invest in the equipment because its NPV is negative. Req. 2 The company must determine whether the equipment investment becomes favorable (positive NPV) if the equipment is refurbished, used for one more year, and then sold. The following analysis needs to be added to the NPV computations above: Cash (Outflow) / PV of $1 Factor Year Inflow (i = 16%) Present Value Refurbishment at the end of year 6 (n = 6) ($102,000) 0.410 ($41,820) Cash inflows in year 7 (n = 7) $ 74,000 0.354 26,196 Residual value (n=7) $ 50,000 0.354 17,700 Additional NPV provided from refurbishment $ 2,076 NPV from part 1 ($69,416) New NPV

($67,340)

The refurbishment provides a positive NPV. The refurbishment NPV is not large enough to overcome the original NPV of the equipment ($69,416). Therefore, the refurbishment should not alter the company’s original decision to turn down the equipment investment.

12-33

Managerial Accounting 6e Solutions Manual

(15–20 min.) E12-53B NPV at 10% Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Net Cash Inflow $492,000 394,000 286,000

PV Factor i = 10% 0.909 0.826 0.751

Net Cash Inflow $492,000 394,000 286,000

PV Factor i = 12% 0.893 0.797 0.712

Present Value $447,228 $325,444 $214,786 $987,458 (955,000) $ 32,458

NPV at 12% Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Present Value $439,356 $314,018 $203,632 $957,006 (955,000) $ 2,006

NPV at 14% Year 1 2 3 Present value of net cash inflows Less: Initial investment NPV

Net Cash Inflow $492,000 394,000 286,000

PV Factor i = 14% 0.877 0.769 0.675

Present Value $431,484 $302,986 $193,050 $927,520 (955,000) ($ 27,480)

The IRR is somewhere between 12% and 14%, but closer to 12%. Per Excel, the IRR is 12.13%.

(10–15 min.) E12-54B Because each investment presents a positive NPV, the company should use the profitability index to compare the profitability of each investment: Equipment A Equipment B Equipment C Present value of net cash inflows $1,700,000 $1,970,000 $2,220,000 Divide by: Initial investment ÷ 1,360,000 ÷ 1,588,710 ÷ 2,000,000 Profitability index 1.25 1.24 1.11 The company should invest in Equipment A because it is the most profitable project.

12-34

Chapter 12

Capital Investment Decisions and the Time Value of Money

(10–15 min.) E12-55B Req. 1 Avg. net cash inflow per day

Number of ski days per year

Avg. annual net cash inflow

$12,272

164

$2,012,608

Avg. annual net cash inflow

–

Annual depreciation expense

Avg. annual operating income from asset

$2,012,608

–

$880,000

$1,132,608

Initial investment

Expected annual net cash inflow

Payback period

$9,500,000

$2,012,608

4.72 years

Req. 2

Req. 3

Req. 4 Avg. annual operating income from asset

Initial investment

Accounting rate of return

$1,132,608

$9,500,000

11.92%

12-35

Managerial Accounting 6e Solutions Manual

(10–15 min.) E12-56B Req. 1 PV Factor at 12% Present value of annuity of equal annual net cash inflows for 10 years at 12% Present value of residual value* Total present value Less: Initial investment Net present value of expansion a b

Net Cash Inflow

5.650 × $2,012,608a 0.322 b × $700,000

Total Present Value

$11,371,235 225,400 $11,596,635 (9,500,000) $ 2,096,635

From E12-51B The residual value is a single lump sum (not an annuity) that will occur at the end of the investment’s useful life. The Present Value of $1 table is used to find the correct PV factor for i = 12%, n = 10.

The expansion is an attractive project because its NPV is positive. Req. 2 Annuity PV Factor at i = 12%, n = 10 Present value of annuity of equal annual net cash inflows for 10 years at 12% Less: Initial investment Net present value of expansion a

Net Cash Inflow

5.650 × $2,012,608a

From E12-51B

Without a residual value, the expansion is still attractive because of the project’s positive NPV.

12-36

Total Present Value

$11,371,235 (9,500,000) $ 1,871,235

Chapter 12

Capital Investment Decisions and the Time Value of Money

(20 min.) E12-57B Req. 1 Initial investment*

Expected annual net cash inflow**

Payback period

$40,500

$56,140

.72 years (rounded)

*$35,000 + $5,500 ** $17.50/hr. × 10 hours/day = $175/day × 360 days = $63,000 annual savings $63,000 annual savings – $4,860 annual service cost ($40,500 initial investment × 12%) – $2,000 annual electricity = $56,140 net annual cash inflow Req. 2 The company would need to consider what the impact of replacing people with machines would have with customers. Student answers will vary. Req. 3 Neither NPV nor IRR is likely to be necessary because the payback period is less than one year. Student answers will vary.

(20 min.) E12-58B Req. 1

First preferred Second preferred Third preferred Fourth preferred

(a) Net Present Value C A D B

(b) Profitability Index A C B D

(d) Payback Period C A D B

(e) Accounting Rate of Return D A B C

Req. 2 Net present value (NPV)—This method indicates profitability by comparing the present value of the investment’s net cash inflows with the cost of the investment (already stated at its present value). This method is superior because it incorporates the time value of money. Profitability index—This method helps to compare the NPV across alternative investments of varying sizes. Internal rate of return (IRR)—This method also indicates profitability and incorporates the time value of money. This method will show us the actual rate of return being earned on the investment by equating the present value of the net cash inflows to the investment’s cost. In other words, it is the interest rate, which brings the investment’s NPV to zero. Payback period—This method will show the company how quickly it recoups its initial investment. This method will be good for screening out those potential investments that are too risky because the payback period is too long. However, the payback period will not be the sole criterion for accepting capital investments because it does not give the company any insight about the investment’s profitability. In addition, it does not incorporate the time value of money. Accounting rate of return (ARR)—This method will give the company an indication of how profitable the investment will be. However, because it does not consider the time value of money, it is not the best indicator of profitability. This method is the only method that uses accrual accounting figures. Therefore it will help the company assess the impact of investments on the financial statements. The other methods use net cash flows. Student answers will vary. .

12-37

Managerial Accounting 6e Solutions Manual

(20 min.) E12-59B 1. For each of the two scenarios that the hotel is analyzing, calculate the a. Internal rate of return (IRR) after three years b. Internal rate of return (IRR) after five years

Based on your IRR calculations in Requirement 1, would you recommend that the hotel undertake this conference facility upgrade? Why or why not? Radiance should not undertake this conference facility upgrade. Radiance’s management would like capital investments to earn a hurdle rate of at least 14%. This is only possible under one of the assumptions tested (Scenario #1 if the project lasts for five years). Based on this information, the project appears to be risky.

12-38

Chapter 12

Capital Investment Decisions and the Time Value of Money

(20 min.) E12-60B 1. For each of the three scenarios, calculate the a. Internal Rate of Return (IRR) after three years b. Internal Rate of Return (IRR) after five years

Look at your analysis in Requirement 1. Why would it be important to evaluate the IRR both at the end of three years and at the end of five years for this project? Robot technology is rapidly evolving. The equipment and project may not be viable for five years.

Based on your IRR calculations for Requirement 1 and your comments for Requirement 2, which plan would you recommend, and why? I would recommend that the company not undertake the project because it only meets the capital investment hurdle rate in the most likely scenario after five years and this project is based on a rapidly evolving technology. (Student answers may vary.)

12-39

Managerial Accounting 6e Solutions Manual

Problems (Group A) (30–45 min.) P12-61A Scenario 1: Future value

= = =

$ 35,000 × (FV factor, i = 10%, n = 15) $ 35,000 × 4.177 $146,195

= = =

$3,500,000 × (PV factor, i = 14%, n = 30) $3,500,000 × 0.020 $ 70,000

Scenario 2: Present value

Scenario 3: Present value $1,500,000 $200,830

= = =

Annuity × (Annuity PV factor, i = 12%, n = 20) Annuity × 7.469 Annuity

Scenario 4: Future value

= = =

$ 4,000 × (Annuity FV factor, i = 10%, n = 7) $ 4,000 × 9.487 $37,948

= = =

$13,000 × (Annuity PV factor, i = 6%, n = 9) $13,000 × 6.802 $88,426

Scenario 5: Present value

Scenario 6: Present value Year 1 Year 2 Year 3

12-40

= = = =

Cash flow × (PV factor, i = 12%, n = 1, 2, 3) $304,000 × 0.893 = $206,000 × 0.797 = $108,000 × 0.712 = Total present value Less: Initial investment Net present value (NPV)

$ 271,472 164,182 76,896 $ 512,550 (510,000) $ 2,550

Chapter 12

Capital Investment Decisions and the Time Value of Money

(continued) P12-61A Scenario 7: The IRR is the interest rate at which the investment’s NPV = 0. Because the NPV was positive at 12% (in Scenario 6), we’ll try 14% next. Present value Year 1 Year 2 Year 3

= = = =

Cash flow × (PV factor, i = 14%, n = 1, 2, 3) $304,000 × 0.877 = $206,000 × 0.769 = $108,000 × 0.675 = Total present value Less: Initial investment Net present value (NPV)

$ 266,608 158,414 72,900 $ 497,922 (510,000) ($ 12,078)

Therefore, the IRR is between 12% and 14% but closer to 12%

(15–20 min.) P12-62A Retirement planning involves two separate annuities: 1. The annual cash savings (from age 30 to age 40) and 2. The annual withdrawals (from age 40 to age 70). To find the amount of annual savings needed, we perform a two-step process: First, we discount the retirement withdrawals back to their present value (at age 40). Second, we set that amount equal to the future value of the savings annuity. 30 years

10 years

Annual retirement withdrawals

Annual savings installments

AT AGE 40: PV of future retirement withdrawals = FV of the annual savings installments

12-41

Managerial Accounting 6e Solutions Manual

(continued) P12-62A Req. 1 Present value

= = =

Annual cash withdrawals × (Annuity PV factor, i = 10%, n = 30) $ 205,000 × (9.427) $1,932,535

By age 40, you need to have accumulated a sum of $1,932,535. Req. 2 Over the course of your retirement, you will be withdrawing $6,150,000 ($205,000 × 30 years). However, by age 40, you only need to have invested the present value. These numbers are different because you need to have far less saved than what you will withdraw because you only withdraw a portion of the investment every year and the balance remains invested where it continues to earn 10% interest. Req. 3 To find the amount of annual savings needed, we set the $1,932,535 equal to the annuity’s future value: Future value $1,932,535 $121,261

= = =

Amount of annual cash savings × (Annuity FV factor, i =10%, n = 10) Amount of annual cash savings × (15.937) Amount of annual cash savings

You must pay $121,261 into the investment each year for the first 10 years. Req. 4 The total out-of-pocket savings amounts to $1,212,610 ($121,261 × 10 years). This is far less than the investment’s worth at the end of 10 years and remarkably lower than the amount of money you will eventually withdraw from the investment.

12-42

Chapter 12

Capital Investment Decisions and the Time Value of Money

(20–30 min.) P12-63A Req. 1 Payback period

Initial investment Expected annual net cash inflow $2,050,000 $515,000

= 3.98 years

Accounting rate of return

Average annual operating income from asset Initial investment Average annual net cash inflow from asset

− Initial investment

Annual depreciation expense on asset

$515,000 − $256,250a $2,050,000 $258,750 $2,050,000

= 12.6% a

Annual depreciation

$2,050,000 8

Annuity PV Factor at i = 14%, n= 8 Net present value: Present value of annuity of equal annual net cash inflows for 8 years at 14% Less: Initial investment Net present value

$256,250

Net Cash Inflow

4.639  $515,000 per year =

Total Present Value

$ 2,389,085 (2,050,000) $ 339,085

The positive NPV shows that the investment’s rate of return is actually higher than 14%.

12-43

Managerial Accounting 6e Solutions Manual

(continued) P12-63A (Req. 1 continued) The internal rate of return is calculated as follows: Initial investment =

Annuity PV factor (i = ?, n = ?)

$2,050,000 $515,000

Annuity PV factor (i = ?, n = 8)

3.98

Annuity PV factor (i = ?, n = 8)

Amount of each equal net cash inflow

Using the Present Value of Annuity of $1 table (for n = 8), we find that 3.98 is between 18% and 20%. The IRR (internal rate of return) is between 18% and 20%. Req. 2 Recommendation: Invest in the new facility.

(30–45 min.) P12-64A Req. 1 Payback period

Plan A

Initial investment Expected annual net cash inflow $8,440,000 $1,400,000

= Plan B

6.0 years $8,340,000 $1,200,000

= =

12-44

7.0 years

Chapter 12

Capital Investment Decisions and the Time Value of Money

(continued) P12-64A Accounting rate of return

Average annual operating income from asset Initial investment Average annual net cash inflow from asset − Annual depreciation expense on asset Initial investment

Plan A

$1,400,000 − $844,000a $8,440,000 $556,000 $8,440,000

= = Plan B

6.6% =

$1,200,000 − $726,500b $8,340,000

$473,500 $8,340,000

= 5.7% __________ a Annual depreciation = $8,440,000 / 10 = $844,000 b Annual depreciation = ($8,340,000 − $1,075,000) / 10 = $726,500 PV Factor at i = 8%, n = 10 Plan A: Present value of annuity of equal annual net cash inflows for 10 years at 8%

Net Cash Inflow

6.710 c × $1,400,000 per year

Less: Initial investment Net present value of Plan A

$ 9,394,000 (8,440,000) $ 954,000

Plan B: Present value of annuity of equal annual net cash inflows for 10 years at 8% Present value of residual value (lump sum, not annuity) Less: Initial investment Net present value of Plan B c

Total Present Value

6.710c × $1,200,000 per year

$ 8,052,000

0.463 d × $1,075,000

497,725 (8,340,000) $ 209,725

Present Value of Annuity of $1 (n = 10, i = 8%) Present Value of $1 (n = 10, i = 8%)

Net present value is based on cash flows, can be used to assess profitability, and takes into account the time value of money. It has none of the weaknesses of the other two models. .

12-45

Managerial Accounting 6e Solutions Manual

(continued) P12-64A Payback method is easy to understand, is based on cash flows, and highlights risks. However, payback ignores profitability and the time value of money. Accounting rate of return can be used to assess profitability, but it ignores the time value of money. Req. 2 Recommendation: Invest in Plan A. It has the higher net present value. It also has a shorter payback period and a higher accounting rate of return. Req. 3 The IRR for Project A is computed as follows: Initial investment =

Annuity PV factor (i = ?, n = ?)

$8,440,000 $1,400,000

Annuity PV factor (i = ?, n = 10)

6.029

Annuity PV factor (i = ?, n = 10)

Amount of each annual net cash inflow

The IRR (internal rate of return) of Plan A is between 10% and 12%. This rate exceeds the company’s hurdle rate of 8%.

12-46

Chapter 12

Capital Investment Decisions and the Time Value of Money

Problems (Group B) (30–45 min.) P12-65B Scenario 1: Future value

Scenario 2: Present value

Scenario 3: Present value $2,000,000 $293,643 Scenario 4: Future value

Scenario 5: Present value

Scenario 6: Present value Year 1 Year 2 Year 3

= = = =

= = =

$ 30,000 × (FV factor, i = 14%, n = 15) $ 30,000 × 7.138 $ 214,140

= = =

$3,000,000 × (PV factor, i = 10%, n = 40) $3,000,000 × 0.022 $ 66,000

= = =

Annuity × (Annuity PV factor, i = 12%, n = 15) Annuity × 6.811 Annuity (rounded)

= = =

$ 3,000 × (Annuity FV factor, i = 14%, n = 8) $ 3,000 × 13.233 $39,699

= = =

$12,000 × (Annuity PV factor, i = 6%, n = 9) $12,000 × 6.802 $81,624

Cash flow × (PV factor, i = 12%, n = 1, 2, 3) $308,000 × 0.893 = $205,000 × 0.797 = $102,000 × 0.712 = Total present value Less: Initial investment Net present value (NPV)

$ 275,044 163,385 72,624 $ 511,053 (500,000) $ 11,053

Scenario #7: The IRR is the interest rate at which the investment’s NPV = 0. Because the NPV was positive at 12% (in Question 6), we’ll try 14% next. Present value = Cash flow × (PV factor, i = 14%, n = 1, 2, 3) Year 1 = $308,000 × 0.877 = $ 270,116 Year 2 = $205,000 × 0.769 = 157,645 Year 3 = $102,000 × 0.675 = 68,850 Total present value $ 496,611 Less: Initial investment (500,000) Net present value (NPV) $ (3,389) The IRR for the project is between 12% and 14%.

12-47

Managerial Accounting 6e Solutions Manual

(15–20 min.) P12-66B Retirement planning involves two separate annuities: 1. The annual cash savings (from age 20 to age 40) and 2. The annual withdrawals (from age 40 to age 80). To find the amount of annual savings needed, we perform a two-step process: First, we discount the retirement withdrawals back to their present value (at age 40). Second, we set that amount equal to the future value of the savings annuity.

40 years 20 years Annual retirement withdrawals

Annual savings installments

AT AGE 40: PV of future retirement withdrawals = FV of the annual savings installments

Req. 1 Present value

= Annual cash withdrawals × (Annuity PV factor, i =12%, n = 40) = $ 225,000 × (8.244) = $1,854,900 By age 40, you need to have accumulated a sum of $1,854,900. Req. 2 Over the course of your retirement, you will be withdrawing $9,000,000 ($225,000 × 40 years). However, by age 40, you only need to have invested the present value. These numbers are different because you need to have far less accumulated than what you will withdraw because you only withdraw a portion of the investment every year and the balance remains invested where it continues to earn 12% interest. Req. 3 To find the amount of annual savings needed, we set the $1,854,900 equal to the annuity’s future value: Amount of annual cash savings × (Annuity FV factor, Future value = i =12%, n = 20) $1,854,900 = Amount of annual cash savings × (72.052) $25,744 = Amount of annual cash savings You must pay $25,744 into the investment each year for the first 20 years. Req. 4 The total out-of-pocket savings amounts to $514,880 ($25,744 × 20 years). This is far less than the investment’s worth at the end of 20 years and remarkably lower than the amount of money you will eventually withdraw from the investment.

12-48

Chapter 12

Capital Investment Decisions and the Time Value of Money

(20–30 min.) P12-67B Req. 1 Payback period

Initial investment Expected annual net cash inflow $1,950,000 $505,000

= 3.9 years (rounded)

Accounting rate of return

Average annual operating income from asset Initial investment Average annual net cash inflow from asset

− Initial investment

Annual depreciation expense on asset

$505,000 − $243,750a $1,950,000 $261,250 $1,950,000

= 13.4% (rounded) __________ a

Annual depreciation

$1,950,000 8

Annuity PV Factor at i = 14%, n= 8 Net present value: Present value of annuity of equal annual net cash inflows for 8 years at 14% Less: Initial investment Net present value

$243,750

Net Cash Inflow

4.639  $505,000 per year =

Total Present Value

$ 2,342,695 (1,950,000) $ 392,695

The positive NPV shows that the investment’s rate of return is actually higher than 14%. The internal rate of return is calculated as follows: Initial investment =

Annuity PV factor (i = ?, n = ?)

$1,950,000 $505,000

Annuity PV factor (i = ?, n = 8)

3.861

Annuity PV factor (i = ?, n =8)

Amount of each equal net cash inflow

The IRR (internal rate of return) is between 18% and 20%. .

12-49

Managerial Accounting 6e Solutions Manual

(continued) P12-67B Req. 2 Recommendation: Invest in the new facility.

(30–45 min.) P12-68B Req. 1 Payback period

Plan A

Initial investment Expected annual net cash inflow $8,940,000 $1,600,000

= Plan B

5.6 years $8,540,000 $1,400,000

= =

Accounting rate of return

6.1 years

Average annual operating income from asset Initial investment

Average annual net cash inflow from asset − Annual depreciation expense on asset Initial investment Plan A

= = Plan B

$1,600,000 − $894,000 a $8,940,000

$706,000 $8,940,000 7.9 % $1,400,000 − $746,500 $8,540,000

$653,500 $8,540,000

= 7.7% __________ a Annual depreciation = $8,940,000 / 10 = $894,000 b Annual depreciation = ($8,540,000 − $1,075,000) / 10 = $746,500

12-50

Chapter 12

Capital Investment Decisions and the Time Value of Money

(continued) P12-68B PV Factor at i = 8%, n = 10 Plan A: Present value of annuity of equal annual net cash inflows for 10 years at 8% Less: Initial investment Net present value of Plan A

Plan B: Present value of annuity of equal annual net cash inflows for 10 years at 8% Present value of residual value (lump sum, not annuity) Less: Initial investment Net present value of Plan B c d

Net Cash Inflow

Total Present Value

6.710c × $1,600,000 per year

$10,736,000 (8,940,000) $ 1,796,000

6.710c × $1,400,000 per year

$ 9,394,000

0.463 d × $1,075,000

497,725 (8,540,000) $ 1,351,725

Present Value of Annuity of $1 (n = 10, i = 8%) Present Value of $1 (n = 10, i = 8%)

Net present value is based on cash flows, can be used to assess profitability, and takes into account the time value of money. It has none of the weaknesses of the other two models. Payback method is easy to understand, is based on cash flows, and highlights risks. However, payback ignores profitability and the time value of money. Accounting rate of return can be used to assess profitability, but it ignores the time value of money. Req. 2 Recommendation: Invest in Plan A. It has the higher net present value. It also has a shorter payback period. Req. 3 The IRR for Project A is computed as follows: Initial investment =

Annuity PV factor (i = ?, n = ?)

$8,940,000 $1,600,000

Annuity PV factor (i = ?, n = 10)

5.588

Annuity PV factor (i = ?, n = 10)

Amount of each annual net cash inflow

Using the Present Value of Annuity of $1 table (for n = 10), we find that 5.588 is between 12% and 14%. The IRR (internal rate of return) of Plan A is between 12% and 14%. This rate exceeds the company’s hurdle rate of 8%.

12-51

Managerial Accounting 6e Solutions Manual

Serial Case C12-69 Req. 1 Payback period = Initial investment / Expected annual net cash inflow Expected annual net cash inflows = Annual hotel room revenue (1) – Annual variable hotel room costs (2) – Annual fixed operating costs a.

New hotel room price × Number of rooms rented per year using Caesars rate = $ 149 × 587 × 0.912 × 365 = $ 29,114,683

b. Variable cost per hotel room night × Number of rooms rented per year using Caesars rate = $ 27 × 587 × 0.912 × 365 = $ 5,275,815 Expected annual net cash inflows = $ 29,114,683 – $ 5,275,815 – $ 2,390,000 = $ 21,448,868 Payback period = $ 75,000,000 / $ 21,448,868 = 3.5 years Req. 2 NPV calculations: PV Factor

Cash inflow from hotel rooms, 15 years, 10% Maintenance cost in 7 years Maintenance costs in 12 years Less: Initial investment Net present value of Plan A

Net Cash Inflow

7.606 × $21,448,868 per year 0.513 × ($17,000,000) 0.319 × ($25,000,000)

Total Present Value

$163,140,090 (8,721,000) (7,975,000) (75,000,000) $ 71,444,090

Req. 3 The qualitative factors that Caesars’ management likely consider when making the decision to renovate the hotel include consumer preferences, technology changes, competition, importance of other investments, and government regulations.

12-52

Chapter 12

Capital Investment Decisions and the Time Value of Money

Discussion & Analysis A12-70 1.

Describe the capital budgeting process in your own words. Companies use the capital budgeting process to help them determine which capital investment opportunities should or should not be taken.

Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter. Capital investments are the acquisitions of assets that a company plans to use for the long term. Three examples of capital investments are purchases of land, buildings, and vehicles.

“As the required rate of return increases, the net present value of a project also increases.” Explain why you agree or disagree with this statement. An increase in the required rate of return will result in a decrease in the net present value because the investment is being required to pay a higher return. For instance, if the required rate of return increases from 12% to 14% for five years, the NPV factor will decrease from 3.605 to 3.433. Therefore I disagree with the statement.

Summarize the net present value method for evaluating a capital investment opportunity. Describe the circumstances that create a positive net present value. Describe the circumstances that may cause the net present value of a project to be negative. Describe the advantages and disadvantages of the net present value method. Net present value is the difference between the present value of an investment’s net cash flows and the investment’s cost. A positive NPV will be the result when an investment’s cost is less than the present value of the expected cash flows it will generate. If the net present value is negative, it means that the investment’s cost is higher than the present value of the cash flows it is estimated to produce. The advantages of the NPV include incorporating the time value of money and evaluating whether the investment will earn the company’s minimum required rate of return. Disadvantages of the NPV method are that sometimes the highest NPV also requires a larger investment than its alternatives and the profitability index must be used when there is capital rationing.

Net cash inflows and net cash outflows are used in the net present value method and in the internal rate of return method. Explain why accounting net income is not used instead of cash flows. A company must determine a capital asset’s ability to generate net cash flows (cash inflows – cash outflows) over the asset’s useful life. Accounting net income is determined by the accrual method, not the cash method, and therefore includes non-cash items such as depreciation.

Suppose you are a manager and you have three potential capital investment projects from which to choose. Funds are limited, so you can only choose one of the three projects. Describe at least three methods you can use to select the one project in which to invest. Three methods that I could use to determine which project to select are the following: • Internal rate of return—the rate of return a company can expect to earn on the three potential investments. • Net present value—the difference between the present value of the three investments’ net cash inflows and the investments’ cost. • Payback—the length of time it takes to recover the cost of the investment.

12-53

Managerial Accounting 6e Solutions Manual 7.

The net present value method assumes that future cash inflows are immediately reinvested at the required rate of return, while the internal rate of return method assumes that future cash inflows are immediately invested at the internal rate of return rate. Which assumption is better? Explain your answer. Neither assumption is better. NPV indicates whether an investment’s cost will be less than the present value of its cash flows based on the required rate of return. The IRR shows the interest rate where the investment cost and the present value of its cash flows are equal. They are two different methods of evaluating investments.

The decision rule for NPV analysis states that the project with the highest NPV should be selected. Describe at least two situations when the project with the highest NPV may not necessarily be the best project to select. The NPV does not take into consideration the relative size of the original investment when considering alternative investments. Another situation that might skew the decision is the timing of the cash flows. Cash flows loaded near the beginning of a project or investment gives a higher NPV.

List and describe the advantages and disadvantages of the internal rate of return method. Advantages of the internal rate of return are that it provides the exact rate of return of an investment; it incorporates the time value of money and can be used for capital rationing decisions. One disadvantage is that it is cumbersome to perform the computations for the IRR using the tables.

10. List and describe the advantages and disadvantages of the payback method. The advantages of the payback method are that it is quick and easy to calculate and works well for relatively shortterm investments. The major disadvantage is that it focuses only on time, not profitability. It ignores any cash flows that occur after the payback period. 11. Oftentimes, investments in sustainability projects do not meet traditional investment selection criteria. Suppose you are a manager and have prepared a proposal to install solar panels to provide lighting for the office. The payback period for the project is longer than the company’s required payback period and the project’s net present value is slightly negative. What arguments could you offer to the capital budgeting committee for accepting the solar energy project in spite of it not meeting the capital selection criteria? Student responses will vary. 12. Think of a company with which you are familiar. What are some examples of possible sustainable investments that company may be able to undertake? How might the company management justify these possible investments? Student responses will vary.

12-54

Chapter 12

Capital Investment Decisions and the Time Value of Money

Application & Analysis A12-71 1.

Research the cost of each model (includes taxes and title costs). Also, obtain an estimate of the miles per gallon fuel efficiency of each model. For the purpose of this sample solution, the two models compared are the Accord EX-V6 and the Accord Hybrid. Student selections of car make and models will vary. Model Cost Mpg

EX-V6 $26,700 21 city/30 highway

Hybrid $30,000 30 city/37 highway

Estimate the number of miles you drive each year. Also estimate the cost of a gallon of fuel. I drive about 10,000 miles per year (mostly city), and the cost of a gallon of gas is currently around $3.00.

Given your previous estimates from 1 and 2, estimate the total cost of driving the hybrid model for one year. Also estimate the total cost of driving the nonhybrid model for one year. Calculate the savings offered by the hybrid model over the nonhybrid model. EX-V6 – 10,000 miles / 21 mpg = 476 gallons 476 gallons × $3.00 = $1,428 Hybrid – 10,000 miles / 30 city = 333 gallons 333 gallons × $3.00 = $999

Calculate the NPV of the hybrid model, using the annual fuel savings as the annual cash inflow for the 10 years you would own the car. Annual fuel savings – $1,428 – $999 = $429 Present value – $429 × 6.145 = $2,636.21 Difference in purchase prices – $30,000 – $26,700 = $3,300 Because the present value of the cash savings ($2,636.21) is less than the additional cost of the hybrid ($3,300), the NPV of purchasing the hybrid is a negative $663.79.

Compare the NPV of the hybrid model with the cost of the gasoline-engine model. Which model has the lowest cost (the lowest NPV)? From a purely financial standpoint, does the hybrid model make sense? The NPV of the hybrid is $27,363.79 ($30,000 – $2,636.21) compared to the cost of the EX-V6 of $26,700. Therefore it would be better to purchase the EX-V6 for a NPV of $26,700.

Now look at the payback period of the hybrid model. Use the difference between the cost of the hybrid model and the gasoline-engine model as the investment. Use the annual fuel savings as the expected annual net cash inflow. Ignoring the time value of money, how long does it take for the additional cost of the hybrid model to pay for itself through fuel savings? Cost of hybrid $30,000 – cost of EX-V6 $26,700 = $3,300 Payback = $3,300 / $429

= 7.7 years

12-55

Managerial Accounting 6e Solutions Manual 7.

What qualitative factors might affect your decision about which model to purchase? The EX-V6 has been around long enough to have a track record for researching its strengths and weaknesses. There is more risk involved when purchasing the hybrid model because it’s too new to the market to have a track record.

A12-72 1.

b. 2.

The ethical issues in this situation are as follows: Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” In her initial report, Samantha Pace made two mistakes. If Peter Nichols ignores the mistakes, it is a breach of this principle. Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” Ignoring errors in reports, which affect real business decisions, could discredit the profession. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” It is reasonable to expect that the undisclosed errors, if disclosed, would affect the approval of the project. Thus, by not fixing these errors and rejecting the proposal, Peter Nichols is violating this ethical principle. Peter Nichols’ responsibilities as a management accountant are to be honest, fair, objective, and responsible. He should seek to correct the mistakes in the project proposal and reject the proposal.

Instead of simply accepting or rejecting the proposal, Peter could consult upper management to discuss the benefits of the project. Upper management may then decide that the project is still a good idea even though it does not meet the NPV and ARR requirements. This course of action will prevent any unethical decision-making.

A12-73 Real Life Mini-Case Note: These answers are only one set of suggested answers; there are no “right” answers. This case is meant to encourage discussion only and the solution should not be viewed as the model for all answers. 1.

Americans like things that are made in America. There is also a possibility that the products will be of better quality than if they were made in China.

These companies will face higher wage rates; therefore, their margins may be squeezed a bit tighter, depending on other changes in variable costs.

The stakeholders that are impacted are the former (Chinese) employees who would have been manufacturing the same product, the new American employees, the stockholders, and the people who enjoy the products from these companies. The Chinese employees may lose their jobs, Americans will gain jobs, the stockholders will be affected only by the change in stock price, and the users of the products may have to pay a higher price.

Potentially, if the company is not producing at its greatest margin, it could become the victim of a takeover attempt. The stockholders could argue that management is deficient in the stewardship function. It also hurts the employees who work for lower wages so that they could keep their jobs.

12-56

Chapter 13 Statement of Cash Flows Quick Check Answers QC13-1. c QC13-2. c QC13-3. b

QC13-4. c QC13-5. d QC13-6. a

QC13-7. a QC13-8. d QC13-9. a

QC13-10. b QC13-11. b QC13-12. a

Short Exercises (5–10 min.) S13-1 a. b. c. d. e.

Decrease in inventory Increase in accounts receivable Repayment of long-term loan Loss on sale of building Payment of dividends to stockholders

O+ OF O+ F

h. i. j. k. l.

Increase in accounts payable

O+

Net income

O+

Depreciation expense Retained earnings Increase in prepaid insurance expense Gain on sale of land Sale of common stock Sale of equipment no longer being used Decrease in accrued taxes payable

O+ NA OOF I O-

(5–10 min.) S13-2 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense Gain on sale of land Increase in accounts receivable, inventory, and prepaid expenses Decrease in current liabilities Total reconciling adjustments Net cash provided (used) by operating activities

$80,000 $ 7,000 (6,000) (10,000) (3,000) (12,000) $ 68,000

13-1

Managerial Accounting 6e Solutions Manual

(5–10 min.) S13-3 a. b. c. d. e. f. g. h.

Issuance of common stock for cash Purchase of new forklift with cash Purchase of equipment by issuing note payable Depreciation of building Decrease in raw materials inventory Payment of cash dividend Increase in prepaid rent expense Purchase of treasury stock

F+ INIF O+ O+ FOF-

i. j. k. l. m. n. o. p.

Cash sale of land (no gain or loss) Sale of long-term investment (no gain or loss) Increase in salaries payable Amortization of patent Purchase building with cash Decrease in accrued taxes payable Gain on sale of equipment Repayment of long-term debt

I+ I+ O+ O+ IOOF-

(10–15 min.) S13-4

Activity a.

b. c.

d. e.

f. g.

h. i.

13-2

Operating (O) Investing (I) Financing (F) I O

Amount of Cash Flow $161,000 $(17,000)

O O O O O F F F F F I O O O O F F O O O O

$117,000 $20,000 $23,000 $(8,000) $1,000 $(60,000) $37,000 $(65,000) $(11,000) $25,000 $39,000 $12,000 $55,000 $(1,000) $(10,000) $260,000 $(25,000) $6,000 $(15,000) $14,000 $53,000

Increase (+) Decrease (-) + – + + + – + – + – – + + + + – – + – + – + +

Chapter 13

Statement of Cash Flows

(continued) S13-4 Note: The below is included as guidance on how to solve for the amounts in the table

Building Cost

$188,000

Accumulated Depreciation

(44,000)

Gain on Sale

17,000*

Net Cash Flows from Investing

$161,000

*The gain on sale would also need to be subtracted from net income in the operating portion of the cash flow statement b.

Net Income

$117,000

Depreciation Expense Net Cash provided (used) by Operating activities

20,000 $137,000

Net Income

$23,000

Increase in Accounts Receivable

(8,000)

Increase in Accounts Payable

1,000

Net Cash provided (used) by Operating activities

$16,000

Bonds Retired

$(60,000)

Bonds Issued

37,000

Net Cash provided (used) by Financing activities

$(23,000)

Bonds Retired

$(65,000)

Cash Dividends

(11,000)

New Notes Payable Net Cash provided (used) by Financing activities

25,000 $ (51,000)

Plant Asset Cost

$66,000

Accumulated Depreciation

(15,000)

Loss on Sale

(12,000)*

Net Cash provided (used) by Investing activities

$39,000

*The loss on sale would also need to be added back to net income in the operating portion of the cash flow statement .

13-3

Managerial Accounting 6e Solutions Manual

(continued) S13-4

13-4

Net Income

$55,000

Increase in Current Assets

(1,000)

Decrease in Current Liabilities

(10,000)

Net Cash provided (used) by Operating activities

$44,000

Common Stock Issued

$260,000

Cash Dividends Paid

(25,000)

Net Cash provided (used) by Financing activities

$235,000

Net Income

$53,000

Decrease in Current Assets

6,000

Decrease in Current Liabilities

(15,000)

Depreciation Expense

14,000

Net Cash provided (used) by Operating activities

$58,000

Chapter 13

Statement of Cash Flows

(5–10 min.) S13-5 a.

Ending balance

Assets sold

–

Beginning balance

Purchases of plant assets

$1,250,000

–

$1,130,000

$120,000

Proceeds from the sale of investments = $22,000, as follows:

Beg. bal.

Purchases

−

Ending balance

Proceeds from sale of investments

$68,000

−

$46,000

$22,000

(5–10 min.) S13-6 a. Ending balance (NP)

−

Beginning balance (NP)

New borrowing (payment of) notes payable

$69,000

−

$85,000

$(16,000)

The payment of long-term notes payable is $16,000. b. Ending balance (CS)

−

Beginning balance (CS)

Issuance (retirement) of common stock

$723,000

−

$773,000

$(50,000)

The retirement of common stock is $50,000. c. Beginning balance (RE)

Net income

–

Ending balance (RE)

Dividend paid

$742,900

$928,200

–

$1,540,300

$130,800

The payment of dividends is $130,800.

13-5

Managerial Accounting 6e Solutions Manual

(5–10 min.) S13-7

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Issuance of stock Principal payments on long-term note payable Depreciation expense Increase in accounts receivable Cash received from customers Purchase of plant assets with cash Decrease in payroll taxes payable Cash paid to suppliers Dividends paid Increase in salaries payable Cash paid for taxes Purchase of treasury stock

Operating (O) Investing (I) Financing (F) F F O O O I O O F O O F

Direct (D) Indirect (I) Both (B) B B I I D B I D B I D B

Increase (+) Decrease (-) + + + + -

(10–15 min.) S13-8 Req. 1 Cash flows from operating activities: Net income Add: Depreciation expense Net decrease in current assets Deduct: Net decrease in current liabilities Net cash provided (used) by operating activities Req. 2 Cash flows from investing activities: Cash proceeds from sale of long-term investment Cash used to purchase building Net cash provided (used) by investing activities

92,900 11,000 21,000 (5,600) $119,300

100,000 (275,000) ($ 175,000)

Req. 3 Cash flow from financing activities: Cash proceeds from issuance of long-term note payable

$51,800

Cash paid for dividends

(50,800)

Net cash provided (used) by financing activities

$ 1,000

Req. 4 Net cash provided (used) by operating activities (Req. 1)

119,300

Net cash provided (used) by investing activities (Req. 2)

(175,000)

Net cash provided (used) by financing activities (Req. 3)

1,000

Net increase (decrease) in cash for the year

13-6

($ 54,700)

Chapter 13

Statement of Cash Flows

(continued) S13-8 Req. 5 Beginning cash balance

154,000

Net increase (decrease) in cash for the year (Req. 4)

(54,700)

Ending cash balance

$ 99,300

(5–10 min.) S13-9 Account Title Accounts receivable

Behavior during year Increased

Inventory

Decreased

Other current assets

Increased

Accounts payable

Decreased

Other current liabilities

Increased

(10–15 min.) S13-10 Req. 1 Cash flows from operating activities: Received from customers Paid for interest Paid for utilities Paid for taxes Paid to employees Paid to suppliers Paid for insurance Paid for advertising

$ 51,000 (4,700) (20,000) (5,600) (16,000) (39,000) (9,800) (7,300)

Net cash provided (used) by operating activities Req. 2 Cash flows from investing activities: Paid cash for equipment Received cash from sale of land Received cash from sale of plant assets Net cash provided (used) by investing activities

$ (51,400)

$(17,000) 20,000 6,700 $ 9,700

Req. 3 Cash flow from financing activities: Paid dividends Received cash from issuing long-term note payable Net cash provided (used) by financing activities

$(7,400) 26,000 $18,600

13-7

Managerial Accounting 6e Solutions Manual

(continued) S13-10 Req. 4 Net cash provided (used) by operating activities (Req. 1)

$(51,400)

Net cash provided (used) by investing activities (Req. 2)

9,700

Net cash provided (used) by financing activities (Req. 3) Net increase (decrease) in cash for the year

18,600 $(23,100)

Req. 5 Beginning cash balance

342,000

Net increase (decrease) in cash for the year (Req. 4)

(23,100)

Ending cash balance

$318,900

(5–10 min.) S13-11 a.

13-8

Chrissy uses the indirect method to prepare the statement of cash flows, even though her company has adopted International Financial Reporting Standards. She is unfamilar with the steps required to produce a statement using the direct method. Layne is an accountant at Black Squirrel Radio Group, Inc. She has helped to prepare the financial statements. She knows that the internal controls over cash are weak, but she does not speak up because she feels that it is not her job. The statement of cash flows has never been Erik's strength; he struggled with it in school. This year, Erik cannot get the statement of cash flows to balance so he decides to hide the amount that the statement is off by adding that difference to one of the items in the operating section. Mark does not disclose to upper management that his sister is a partner in the accounting firm that the company is hiring for the audit. Quinn is an accountant at Murphy & Swanson, Inc. Quinn confides to a close friend that he is concerned about the future of Murphy & Swanson. Quinn explains that operating cash flows are negative; this information is on the not-yet-released financial statements.

Competence—Perform professional duties in accordance with relevant laws, regulations, and technical standards.

Credibility—Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. Competence—Perform professional duties in accordance with relevant laws, regulations, and technical standards.

Integrity—Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Chapter 13

Statement of Cash Flows

(10 min.) S13-12 1.

What information is needed to prepare the operating section of the statement of cash flows using the indirect method? In order to prepare the statement of cash flows (indirect method), we need noncash expenses and revenues, changes in current asset accounts, and changes in current liability accounts.

What feature in Excel did the controller use to create the information in Box A? The controller used a slicer feature in Excel to create the information in Box A.

Describe the steps the controller used to create the information in Box A. Start with a data set that has descriptive column headings. Select any cell in the data set. On the ribbon, click the Insert tab, then click the pivot table icon. A dialog box will open that suggests the cell range for the data set. Click OK. A new worksheet will open with a task pane containing the PivotTable Fields on the right. Drag “Line item” to the rows box. Drag “Change” to the “Values” box. To add a slicer, click on the Analyze tab on the Ribbon, and then click on Insert Slicer. The Slicer dialog box will open. Check the box next to Classification, then click OK.

In Excel, how would you use Box A to gather information for the operating section of the statement of cash flows (indirect method)? The slicer can be used to isolate one classification of accounts. For example, if the user wants to know the current assets found on the cash flow statement, click on the current asset icon in the slicer and only current assets and its total will display. Clicking on the different options will toggle between the options.

(10 min.) S13-13 1.

In Box A, a sample of the general ledger data is displayed. What information from this general ledger data is needed to prepare the company’s operating cash flows section on the statement of cash flows using the indirect method? In order to prepare the statement of cash flows (indirect method), managers need to group the accounts into their assigned line items and then find the change in balance since the previous balance sheet date.

What Excel feature was used to create the information displayed in Columns A and B in Box B? What Excel feature was used to create the information displayed in Columns C, D, and E in Box B? Describe the steps that were taken to create the information displayed in Box B. A pivot table was used to create the information displayed in Columns A and B in Box B. A slicer feature was used to create the information displayed in Columns C, D, and E in Box B. The steps that were taken to create the information in Box B: Select any cell in the data set. On the ribbon, click the Insert tab, then click the pivot table icon. A dialog box will open that suggests the cell range for the data set. Click OK. A new worksheet will open with a task pane containing the PivotTable Fields on the right. Drag “Line item” to the rows box. Drag “Change” to the “Values” box. To add a slicer, click on the Analyze tab on the Ribbon, and then click on Insert Slicer. The Slicer dialog box will open. Check the box next to Classification, then click OK.

What information is being displayed in Box C? How would this information be used in preparing the company’s operating cash flows section on the statement of cash flows using the indirect method? Box C displays the change in the company’s current assets. The indirect method of preparing the operating section of the statement of cash flows requires that the changes in current assets (and current liabilities) be added and subtracted (as appropriate) as adjustments to reconcile net income to cash flows provided by operations. .

13-9

Managerial Accounting 6e Solutions Manual

Exercises (Group A) (5–10 min.) E13-14A Coastal Travel Services, Inc. Statement of Cash Flows—Indirect Method (Operating Activities) For Year Ended December 31, 2021 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Loss on sale of land Depreciation expense Decrease in accounts receivable Increase in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in wages payable Increase in interest payable Increase in income tax payable Total reconciling adjustments Net cash provided (used) by operating activities

13-10

$32,000 $ 3,800 5,000 5,000 (41,000) 8,000 (6,000) 8,000 1,000 3,000 (13,200) $18,800

Chapter 13

Statement of Cash Flows

(15–20 min.) E13-15A Coastal Travel Services, Inc. Statement of Cash Flows—Indirect Method For Year Ended December 31, 2021 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Loss on sale of land Depreciation expense

$32,000 $3,800 5,000

Decrease in accounts receivable Increase in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in wages payable Increase in interest payable Increase in income taxes payable Total reconciling adjustments Net cash provided (used) by operating activities

5,000 (41,000) 8,000 (6,000) 8,000 1,000 3,000 (13,200) 18,800

Cash flows from investing activities: Proceeds from sale of land Purchase of equipment Net cash provided (used) by investing activities

9,200 (22,000)

Cash flows from financing activities: Long-term notes issued Dividends paid Issuance of stock for cash Net cash provided (used) by financing activities

9,000 (8,000) 20,000

(12,800)

21,000

Net increase (decrease) in cash Cash, beginning of year Cash, end of year

27,000 17,000 $44,000

13-11

Managerial Accounting 6e Solutions Manual

(10–15 min.) E13-16A Req. 1 Beginning retained earnings

Net income

−

Dividend declarations

Ending retained earnings

$138,000

$60,000

−

$180,000

$138,000 + $60,000 − $180,000 $18,000

Req. 2 The $55,000 would appear in the financing section of the statement of cash flows as cash provided by common stock issuance. Req. 3 The $27,000 would appear in the financing section of the statement of cash flows as cash used by treasury stock purchase. Req. 4 a) Cash proceeds from the sale of plant assets total $9,000. b) The investing section of the statement of cash flows would report $9,000 as a source of cash. The investing section would also report acquisition of plant asset for $(41,000). c) The operating section of the statement of cash flows would show no amount using the direct method.

(5–10 min.) E13-17A Ericson Corporation Statement of Cash Flows—Indirect Method For Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense Increase in current assets other than cash Decrease in current liabilities Total reconciling adjustments Net cash provided (used) by operating activities

13-12

$41,000 $ 20,000 (6,000) (9,000) 5,000 $46,000

Chapter 13

Statement of Cash Flows

(15–20 min.) E13-18A Ericson Corporation Statement of Cash Flows—Indirect Method For Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense

$41,000 $ 20,000

Increase in current assets other than cash Decrease in current liabilities Total reconciling adjustments Net cash provided (used) by operating activities

(6,000) (9,000) 5,000 46,000

Cash flows from investing activities: Proceeds from sale of land Purchase of equipment Net cash provided (used) by investing activities

19,000 (26,000)

Cash flows from financing activities: Payment of dividends Payment of note payable Proceeds from issuance of common stock Purchase of treasury stock Net cash provided (used) by financing activities

(6,000) (13,000) 73,000 (13,000)

(7,000)

41,000

Net increase (decrease) in cash

$80,000

13-13

Managerial Accounting 6e Solutions Manual

(15–20 min.) E13-19A Innovations Corporation Statement of Cash Flows—Indirect Method For the Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense Decrease in accounts receivable Decrease in inventory Increase in prepaid insurance Decrease in accounts payable Decrease in other short term-liabilities Increase in salaries payable Increase in interest payable Increase in income taxes payable Total reconciling adjustments Net cash provided (used) by operations

$91,000 $16,000 8,000 10,000 (200) (11,000) (2,000) 9,000 700 4,000 34,500 125,500

Cash flows from investing activities: Proceeds from sale of land Purchase of new computer system Net cash provided (used) by investing activities

18,000 (17,000)

Cash flows from financing activities: Payment of dividends Retired bond payable Net cash provided (used) by financing activities

(30,000) (17,000)

1,000

Net increase (decrease) in cash Cash, beginning balance Cash, ending balance

(47,000) 79,500 90,000 $169,500

(5–10 min.) E13-20A

Middleton Spas Statement of Cash Flows—Direct Method (partial) For the Year Ended December 31 Cash flows from operating activities: Collections from customers………………… Payments to suppliers……………………….. Payments to employees……………………… Payment of income tax………………………. Net cash provided (used) by operating activities

13-14

$ 153,000 (65,000) (64,000) (9,500) $ 14,500

Chapter 13

Statement of Cash Flows

(10–15 min.) E13-21A Middleton Spas Statement of Cash Flows—Direct Method For the Year Ended December 31 Cash flows from operating activities: Collections from customers…………………….. Payments to suppliers…………………………… Payments to employees…………………………. Payment of income tax…………………………... Net cash provided (used) by operating activities

$ 153,000 (65,000) (64,000) (9,500) $ 14,500

Cash flows from investing activities: Proceeds from sale of land……………………… Purchase of equipment………………………….. Net cash provided (used) by investing activities

$ 40,500 (9,500) 31,000

Cash flows from financing activities: Payment of long-term note payable………………………… Proceeds from issuance of common stock….. Payment of dividends……………………………. Purchase of treasury stock……………………... Net cash provided (used) by financing activities Net increase (decrease) in cash…………………………………. Cash, beginning of the year……………………….. Cash, end of the year……………………………

(4,000) 12,500 (11,000) (12,500) (15,000) $ 30,500 15,000 $ 45,500

(10–15 min.) E13-22A Shadi Interiors Statement of Cash Flows—Direct Method For the Year Ended December 31 Cash flows from operating activities: Collections from customers………………… Payments for expenses…… Net cash provided (used) by operating activities

$ 400,000 (350,000)

Cash flows from investing activities: Purchase of equipment……………………… Net cash provided (used) by investing activities…….

$(70,000)

$ 50,000

(70,000)

Cash flows from financing activities: Issued long-term note payable to borrow money……. Payment of dividends………………………... Net cash provided (used) by financing activities Net increase (decrease) in cash…………………………... Cash, beginning of the year……………………….. Cash, end of the year……………………………

$ 44,000 (25,000) 19,000 $ (1,000) 55,000 $ 54,000

13-15

Managerial Accounting 6e Solutions Manual

(10–15 min.) E13-23A Cash Flow Affected

Cash +/-

Investing

–

Operating

–

Operating

–

A Toyota Prius hybrid automobile was purchased for use by the CEO of PLC. PLC paid cash.

Investing

–

PLC issued long-term bonds during the year to help to finance growth.

Financing

PLC became a minority partner in a solar-panel electricity generation project by investing $1 million in cash in the project.

Investing

A fleet of plug-in electric cars was purchased for the sales staff. PLC paid cash.

Investing

–

A wind turbine was built to power part of PLC’s operations. PLC paid cash.

Investing

–

10. PLC installed a “living roof” on its manufacturing facility. This roof is made mostly from sedum, a drought-resistant perennial grass-like groundcover. The plants help to reduce storm-water runoff and double the expected life of the roof over a conventional roof. The plants also absorb carbon dioxide to help reduce greenhouse gases. The living roof was paid for with cash.

Investing

–

Transactions 1.

13-16

New production equipment that is 60% more energy efficienct than the old equipment was purchased for cash. When the plastic wood is cut into the lengths needed to build picnic tables, the end pieces cut off are scrap. PLC sold this cutting scrap to another recycler. Engineers at PLC performed research into a new process that injects tiny air bubbles into the plastic to reduce the usage of raw materials (plastics) and to reduce the weight of the finished products. Throughout the year, PLC participated in several trade shows that featured green products for use by parks and recreation facilities. For each trade show, PLC incurred cash expenses for transportation, registration, meals and lodging, and booth setup.

Chapter 13

Statement of Cash Flows

(20 min.) E13-24A 1.

Using the file provided in MyLab Accounting, create a pivot table that summarizes the information by “Line item” (Rows box) and “Change” (Values box). Fill in the following change totals from the pivot table: a. Accrued expenses k. Inventory b. Accts Payable l. Investments c. Accts Receivable m. LT bonds payable d. Accum. Depreciation n. LT notes payable e. Cash o. Preferred stock f. Common stock p. Prepaid expenses g. Current portion LT debt q. Property, Plant, Equip h. Goodwill r. Retained earnings i. Income tax payable s. Wages payable j. Interest payable

13-17

Managerial Accounting 6e Solutions Manual

(continued) E13-24A 2.

Add a slicer based on “Classification” to the pivot table you created for Requirement 1. Use the slicer to get the following change totals: a. Current Assets

b. Current Liabilities

c. Long-Term Assets

d. Long-Term Liabilities

e. Stockholders’ Equity

13-18

Chapter 13

Statement of Cash Flows

(20 min.) E13-25A 1.

Using the file provided in MyLab Accounting, create a pivot table that summarizes the information by “Line item” (Rows box) and “Change” (Values box). Fill in the following change totals from the pivot table. a. Accrued expenses k. Inventory b. Accts Payable l. Investments c. Accts Receivable m. LT bonds payable d. Accum. Depreciation n. LT notes payable e. Cash o. Preferred stock f. Common stock p. Prepaid expenses g. Current portion LT debt q. Property, Plant, Equip h. Goodwill r. Retained earnings i. Income tax payable s. Wages payable j. Interest payable

13-19

Managerial Accounting 6e Solutions Manual

(continued) E13-25A 2.

Add a slicer based on “Classification” to the pivot table you created for Requirement 1. Use the slicer to get the totals of the change in Current Assets and the change in Current Liabilities. a. Current Assets

b. Current Liabilities

Calculate “Net cash provided by (used by) operating activities” for the past fiscal year.

13-20

Chapter 13

Statement of Cash Flows

Exercises (Group B) (15–20 min.) E13-26B Seaway Travel Services, Inc. Statement of Cash Flows—Indirect Method For Year Ended December 31, 2021 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Loss on sale of land Depreciation expense

$40,000 $ 3,000 5,000

6,000 (40,000) 3,000 (7,000) 11,000 2,000 2,000 (15,000) $25,000

13-21

Managerial Accounting 6e Solutions Manual

(10–15 min.) E13-27B Seaway Travel Services, Inc. Statement of Cash Flows—Indirect Method For Year Ended December 31, 2021 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Loss on sale of land Depreciation expense Decrease in accounts receivable Increase in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in wages payable Increase in interest payable Increase in income taxes payable Total reconciling adjustments Net cash provided (used) by operating activities

$40,000 $ 3,000 5,000 6,000 (40,000) 3,000 (7,000) 11,000 2,000 2,000 (15,000) 25,000

Cash flows from investing activities: Proceeds from sale of land Purchase of equipment Net cash flows provided (used) by investing activities

13,000 (20,000)

Cash flows from financing activities: Long-term notes issued Dividends paid Issuance of stock for cash Net cash provided (used) by financing activities

10,000 (5,000) 10,000

Net increase (decrease) in cash Cash, beginning of year Cash, end of year

13-22

(7,000)

15,000 33,000 12,000 $45,000

Chapter 13

Statement of Cash Flows

(10–15 min.) E13-28B Req. 1 Beginning retained earnings

Net income

−

Dividend declarations

Ending retained earnings

$137,000

$61,000

−

$175,000

$137,000 + $61,000 − $175,000 $23,000

Cash dividends paid during the year total $23,000. Req. 2 The $62,000 would appear in the financing section of the statement of cash flows as cash provided by common stock issuance. Req. 3 The $18,000 would appear in the financing section of the statement of cash flows as cash used by treasury stock purchase. Req. 4 a. Cash proceeds from the sale of plant assets total $6,000. b.

The investing section of the statement of cash flows would report $6,000 as a source of cash. The investing section would also report the purchase of PPE for cash of $(37,000).

The operating section of the statement of cash flows would show no amount using the direct method.

13-23

Managerial Accounting 6e Solutions Manual

(5–10 min.) E13-29B Thompson Corporation Statement of Cash Flows—Indirect Method (Operating Activities) For Year Ended December 31 Cash flows from operating activities: Net Income Adjustments to reconcile net income to cash basis: Depreciation expense Increase in current assets other than cash Decrease in current liabilities Total reconciling adjustments Net cash provided (used) by operating activities

$30,000 $ 22,000 (7,000) (6,000) 9,000 $39,000

(15–20 min.) E13-30B Thompson Corporation Statement of Cash Flows—Indirect Method For Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense Increase in current assets other than cash Decrease in current liabilities Total reconciling adjustments Net cash provided (used) by operating activities

$30,000 $ 22,000 (7,000) (6,000) 9,000 39,000

Cash flows from investing activities: Proceeds from sale of land Purchase of equipment Net cash provided (used) by investing activities

23,000 (28,000)

Cash flows from financing activities: Payment of dividends Payment of note payable Proceeds from issuance of common stock Purchase of treasury stock Net cash provided (used) by financing activities

(8,000) (11,000) 79,000 (16,000)

Net increase (decrease) in cash during the year

13-24

(5,000)

44,000 $78,000

Chapter 13

Statement of Cash Flows

(15–20 min.) E13-31B Dragon Corporation Statement of Cash Flows—Indirect Method For the Year Ended December 31 Cash flows from operating activities: Net Income Adjustments to reconcile net income to cash basis: Depreciation expense Decrease in accounts receivable Decrease in inventory Increase in prepaid insurance Decrease in accounts payable Decrease in other short-term liabilities Increase in salaries payable Increase in interest payable Increase in taxes payable Total reconciling adjustments Net cash provided (used) by operating activities

$89,000 $14,000 8,000 10,000 (700) (12,000) (1,000) 6,000 400 2,000 26,700 115,700

Cash flows from investing activities: Proceeds from sale of land Purchase of new computer system Net cash provided (used) by investing activities

23,000 (9,000)

Cash flows from financing activities: Dividends paid Retired bonds payable Net cash provided (used) by financing activities

(33,000) (12,000)

14,000

(45,000)

Net increase (decrease) in cash Cash, beginning of the year

84,700 91,000

Cash, end of the year

$175,700

13-25

Managerial Accounting 6e Solutions Manual

(5–10 min.) E13-32B Comfort Spas Statement of Cash Flows—Direct Method (partial) For the Year Ended December 31 Cash flows from operating activities: Collections from customers………………… Payments to suppliers……………………….. Payments to employees……………………… Payment of income tax………………………. Net cash provided (used) by operating activities...

$ 151,000 (62,000) (63,000) (9,000) $17,000

(10–15 min.) E13-33B Comfort Spas Statement of Cash Flows—Direct Method For the Year Ended December 31 Cash flows from operating activities: Collections from customers…………………….. Payments to suppliers…………………………… Payments to employees…………………………. Payment of income tax…………………………... Net cash provided (used) by operating activities…..……. Cash flows from investing activities: Purchase of equipment………………………….. Proceeds from sale of land……………………… Net cash provided (used) by investing activities……. Cash flows from financing activities: Proceeds from issuance of common stock….. Payment of note payable………………………… Payment of dividends……………………………. Purchase of treasury stock……………………... Net cash provided (used) by financing activities Net increase (decrease) in cash…………………………………. Cash, beginning of the year……………………….. Cash, end of the year……………………………

13-26

$ 151,000 (62,000) (63,000) (9,000) $ 17,000

$ (7,500) 41,000 33,500

14,500 (4,500) (14,000) (11,500) (15,500) $ 35,000 14,500 $ 49,500

Chapter 13

Statement of Cash Flows

(10–15 min.) E13-34B Shabnam Interiors Statement of Cash Flows—Direct Method For the Year Ended December 31 Cash flows from operating activities: Collections from customers………………… Payments for expenses…… Net cash provided (used) by operating activities….

$ 405,000 (360,000)

Cash flows from investing activities: Purchase of equipment……………………… Net cash provided (used) by investing activities…….

$(85,000)

Cash flows from financing activities: Issued note payable to borrow money……. Payment of dividends………………………... Net cash provided (used) by financing activities…. Net increase (decrease) in cash…………………………... Cash, beginning of the year……………………….. Cash, end of the year……………………………

$ 45,000

(85,000)

$ 58,000 (24,000) 34,000 $ (6,000) 55,000 $ 49,000

(5–10 min.) E13-35B Transactions 1. PLC became a minority partner in a wind-turbine project by investing $2 million in cash in the project. 2. A new delivery truck that uses biofuel was purchased for cash. 3. PLC built a new building for its manufacturing facility. The new building is LEED certified and was paid for with cash. 4. PLC sold plastic scrap generated by its manufacturing process. 5. Engineers and scientists at PLC performed research into whether another kind of post-consumer plastic not currently used in its plastics extrusion process could be used. 6. Throughout the year, PLC participated in several trade shows that featured green products for use by parks and recreation facilities. For each trade show, PLC incurred cash expenses for transportation, registration, meals and lodging, and booth setup. 7. Solar panels were installed on PLC’s administrative offices to supply part of the electricity needed for its operations. PLC paid cash. 8. Six Toyota Prius Hybrid automobiles were purchased for the use of the sales staff. PLC paid cash. 9. PLC issued comon stock during the year to help finance growth. 10. New production equipment that is 75% more energy efficient than the old equipment was purchased for cash.

Cash Flow Affected

Cash +/-

Investing

–

Investing

–

Investing

–

Operating

–

Operating

–

Investing

–

Investing

–

Financing

Investing

–

13-27

Managerial Accounting 6e Solutions Manual

(20 min.) E13-36B 1.

13-28

Chapter 13

Statement of Cash Flows

(continued) E13-36B 2.

Add a slicer based on “Classification” to the pivot table you created for Requirement 1. Use the slicer to get the following change totals: a. Current Assets

b. Current Liabilities

c. Long-Term Assets

d. Long-Term Liabilities

e. Stockholders’ Equity

13-29

Managerial Accounting 6e Solutions Manual

(20 min.) E13-37B 1. Using the file provided in MyLab Accounting, create a pivot table that summarizes the information by “Line item” (Rows box) and “Change” (Values box). Fill in the following change totals from the pivot table. a. Accrued expenses k. Inventory b. Accts Payable l. Investments c. Accts Receivable m. LT bonds payable d. Accum. Depreciation n. LT notes payable e. Cash o. Preferred stock f. Common stock p. Prepaid expenses g. Current portion LT debt q. Property, Plant, Equip h. Goodwill r. Retained earnings i. Income tax payable s. Wages payable j. Interest payable

13-30

Chapter 13

Statement of Cash Flows

(continued) E13-37B

2. Add a slicer based on “Classification” to the pivot table you created for Requirement 1. Use the slicer to get the totals of the change in Current Assets and the change in Current Liabilities. a. Current Assets

b. Current Liabilities

3. Calculate “Net cash provided by (used by) operating activities” for the past fiscal year.

13-31

Managerial Accounting 6e Solutions Manual

Problems (Group A) (20–30 min.) P13-38A Harding Industries, Inc. Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2021 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense Gain on sale of plant asset Decrease in Accounts Receivable Increase in Inventory Increase in Prepaid Insurance Increase in Accounts Payable Decrease in Wages Payable Increase in Interest payable Increase in Taxes payable Increase in Other Accrued Expenses Payable Total reconciling adjustments Net cash flow provided (used) by operating activities Cash flows from investing activities: Proceeds from sale of plant equipment Purchase of new equipment Purchase of new investments Net cash provided (used) by investing activities Cash flows from financing activities: Dividends paid Repayment of long-term debt Proceeds from bond issuance Net cash provided (used) by financing activities Net increase (decrease) in cash Cash, beginning of the year Cash, ending of the year

13-32

$165,690 $ 52,000 (4,000) 54,000 (113,000) (3,000) 27,000 (1,000) 800 49,010 3,300 65,110 230,800

4,300 (40,300) (12,000) (48,000)

(36,800) (6,500) 48,500 5,200 188,000 286,000 $474,000

Chapter 13

Statement of Cash Flows

(30–40 min.) P13-39A Req. 1 Rabb Corporation Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2021 Cash flows from operating activities: Net income……………………………………………… Adjustments to reconcile net income to cash basis: Depreciation expense………………………………………… Gain on sale of equipment………………… Increase in accounts receivable………………… Decrease in inventories…………………………… Increase in prepaid insurance…………………… Decrease in accounts payable…………………... Decrease in wages payable……………………… Increase in interest payable……………………… Increase in taxes payable………………………… Decrease in other accrued expenses payable…………. Total reconciling adjustments Net cash provided (used) by operating activities….

$185,300 $ 5,900 (4,600) (3,200) 6,500 (700) (2,600) (4,400) 2,100 5,400 (4,000) 400 $185,700

Cash flows from investing activities: Proceeds from sale of equipment……………… Purchase of equipment…………………………… Purchase of stock investment…………………... Net cash provided (used) by investing activities……… Cash flows from financing activities: Cash payments for dividends ……………………. Repayment of long-term debt ………………………. Issuance of common stock ……………………. Net cash provided (used) by financing activities……… Net increase (decrease) in cash………………………………………. Cash, beginning of the year…………………… Cash, end of the year……………………

15,100 (27,500) (117,000) (129,400)

(22,300) (34,000) 31,000 (25,300) 31,000 20,500 $51,500

Req. 2 Evaluation: Rabb Corporation’s cash flows look strong. It had $185,700 provided by operating activities. The investing activities used some cash. These activities included purchasing a stock investment and equipment. The financing activities used cash to pay dividends and to pay down long-term debt. The corporation also issued some additional common stock.

13-33

Managerial Accounting 6e Solutions Manual

(30–40 min.) P13-40A Req. 1 Williams Digital Services, Inc. Statement of Cash Flows—Direct Method For the Year Ended December 31

Operating activities: Cash receipts from customers Cash receipts from interest Cash dividends received Cash payments to suppliers for inventory Cash payments to employees for salaries Cash payments for interest Cash payments for taxes Net cash provided (used) by operating activities

$824,500 5,200 6,600 (570,000) (74,400) (2,400) (38,000)

Investing activities: Cash used to purchase PP&E Proceeds from sale of plant asset Proceeds from sale of long-term investment Net cash provided (used) by investing activities

$(52,400) 24,700 12,300

Financing activities: Cash used to repay long-term debt Cash used to pay dividends Cash received from issuing long-term note payable Cash received from issuing common stock Net cash provided (used) by financing activities

$(44,500) (28,200) 24,900 21,500

$151,500

(15,400)

(26,300)

Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$109,800 25,500 $135,300

Noncash investing and financing transactions: Payment of short-term note payable by issuing common stock Purchase of equipment by issuing common stock to seller Total noncash investing and financing transactions

$71,700 17,900 $89,600

Req. 2 Evaluation of cash flows: The year was a good year from a cash-flow standpoint. Operations provided a substantial amount of cash, and the company was able to issue new stock, which means the stockholders have faith in the company. The business invested heavily in plant assets and reduced their debt, which generally bodes well for the future.

13-34

Chapter 13

Statement of Cash Flows

(45–60 min.) P13-41A Req. 1 Marshall Sign Company, Inc. Statement of Cash Flows—Indirect Method For the Year Ended March 31, 2021 Cash flows from operating activities: Net income…………………………………………... Adjustments to reconcile net income to cash basis: Depreciation expense……………………………………... Loss on sale of land……………………………. Decrease in accounts receivable……………. Increase in inventories………………………… Decrease in prepaid expenses……………… Increase in accounts payable………………… Decrease in income tax payable……………... Decrease in accrued liabilities……………….. Increase in interest payable…………………... Decrease in salary payable…………………… Net cash provided (used) by operating activities………….

$ 77,100 $13,800 9,900 1,600 (5,000) 1,400 1,200 (1,700) (1,400) 1,000 (2,800)

Cash flows from investing activities: Proceeds on sale of land……………………………………….. Purchase of long-term investment…………… Net cash provided (used) by investing activities………….

Cash flows from financing activities: Payment of long-term note payable………… Payment of cash dividends…………………… Issuance of common stock…………………… Net cash provided (used) by financing activities………. Net increase (decrease) in cash…………………………………… Cash, beginning of the year………………………… Cash, end of the year……………………

18,000 95,100

52,100 (3,200) 48,900

(59,500) (45,400) 2,600 (102,300) 41,700 14,200 $55,900

Schedule of Disclosures Noncash investing and financing activities: Purchase of equipment by issuing long-term note payable Retirement of short-term note payable by issuing common stock Total noncash investing and financing activities

$15,100 4,800 $19,900

13-35

Managerial Accounting 6e Solutions Manual

(continued) P13-41A Req. 2 Marshall Sign Company, Inc. Cash Flows from Operating Activities—Direct Method For the Year Ended March 31, 2021 Cash flows from operating activities: Cash receipts from customers………………. Cash receipts from interest.………………….. Cash payments to suppliers…………………. Cash payments to employees ...…………….. Cash payments for income taxes………........ Cash payments for interest.………………… Net cash provided (used) by operating activities………...

13-36

$ 296,100 1,900 (145,700) (41,800) (12,200) (3,200) $ 95,100

Chapter 13

Statement of Cash Flows

Problems (Group B) (20–30 min.) P13-42B Hall Industries, Inc. Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2021 Cash flows from operating activities: Net income Adjustments to reconcile net income to cash basis: Depreciation expense Gain on sale of plant asset Decrease in Accounts Receivable Increase in Inventory Increase in Prepaid Insurance Increase in Accounts Payable Decrease in Wages Payable Increase in Interest payable Increase in Taxes Payable Increase in Other Accrued Expenses Payable Net cash provided (used) by operating activities

$171,080 $ 46,700 (3,500) 51,000 (121,000) (1,500) 14,000 (1,700) 1,300 53,820 3,100

Cash flows from investing activities: Proceeds from sale of plant equipment Purchase of new equipment Purchase of new investments Net cash provided (used) by investing activities

42,220 213,300

4,200 (20,400) (13,000) (29,200)

Cash flows from financing activities: Dividends paid Repayment of long-term bonds Proceeds from bond issuance Net cash provided (used) by financing activities Net increase (decrease) in cash Cash, beginning of the year Cash, end of the year

(33,100) (4,500) 39,500 1,900 186,000 291,000 $477,000

13-37

Managerial Accounting 6e Solutions Manual

(30–40 min.) P13-43B Req. 1 Gibson Corporation Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2021 Cash flows from operating activities: Net income……………………………………………… Adjustments to reconcile net income to cash basis: Depreciation expense………………………………………… Gain on sale of equipment ………………… Increase in accounts receivable………………… Decrease in inventories…………………………… Increase in prepaid insurance…………………… Decrease in accounts payable…………………... Decrease in wages payable……………………… Increase in interest payable……………………… Increase in taxes payable………………………… Decrease in other accrued expenses payable………….. Total reconciling adjustments Net cash provided (used) by operating activities…. Cash flows from investing activities: Proceeds from sale of equipment……………… Purchase of equipment…………………………… Purchase of stock investment…………………... Net cash provided (used) by investing activities……… Cash flows from financing activities: Cash payments for dividends……………………. Repayment of long-term debt………………………………. Issuance of common stock………………………. Net cash provided (used) by financing activities……… Net increase (decrease) in cash………………………………………. Cash, beginning of the year…………………… Cash, end of the year……………………

$182,400 $ 4,700 (3,900) (2,400) 6,500 (500) (3,300) (4,900) 2,800 5,500 (3,900) 600 $183,000

15,200 (29,800) (110,000) (124,600)

(25,400) (36,000) 31,000 (30,400) 28,000 20,500 $ 48,500

Req. 2 How is this company doing? Evaluation: Gibson Corporation’s cash flows look strong. The company had $183,000 provided by operating activities. The investing activities used some cash. These activities included purchasing a stock investment and equipment. The financing activities used cash to pay dividends and to pay down long-term debt. The corporation also issued some additional common stock.

13-38

Chapter 13

Statement of Cash Flows

(30–40 min.) P13-44B Req. 1 Huggins Digital Services, Inc. Statement of Cash Flows—Direct Method For the Year Ended December 31

$823,000 5,700 6,800 (572,500) (74,200) (12,900) (38,400) $137,500

Investing activities: Cash used to purchase PP&E Proceeds from sale of plant assets Proceeds from sale of long-term investment Net cash provided (used) by investing activities

$(52,500) 24,400 12,400

$(43,500) (28,100) 24,900 22,000

$(15,700)

$(24,700)

Net increase in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year

$97,100 25,100 $122,200

$71,800 17,200 $89,000

Req. 2 Evaluation of cash flows: The year was good in terms of cash flow. Operations provided cash, and the company was able to issue new stock, which means the stockholders have faith in the company. The business invested heavily in plant assets and reduced their debt, which generally bodes well for the future.

13-39

Managerial Accounting 6e Solutions Manual

(45–60 min.) P13-45B Req. 1 Graphic Company, Inc. Statement of Cash Flows—Indirect Method For the Year Ended March 31, 2021 Cash flows from operating activities: Net income…………………………………………... Adjustments to reconcile net income to cash basis: Depreciation expense……………………………………... Loss on sale of land……………………………. Decrease in accounts receivable……………. Increase in inventories………………………… Decrease in prepaid expenses……………… Increase in accounts payable………………… Decrease in income tax payable……………... Decrease in salary payable……………….. Increase in interest payable…………………... Decrease in accrued liabilities……………… Net cash provided (used) by operating activities…………. Cash flows from investing activities: Proceeds on sale of land……………………………………….. Purchase of long-term investment…………… Net cash provided (used) by investing activities………….

$ 76,800 $ 13,100 9,200 1,700 (5,100) 1,200 1,400 (1,300) (3,000) 1,200 (1,100)

17,300 94,100

52,300 (2,900) 49,400

(59,600) (45,600) 2,200 (103,000) 40,500 14,900 $ 55,400

13-40

$14,200 5,300 $19,500

Chapter 13

Statement of Cash Flows

(continued) P13-45B Req. 2 Graphic Company, Inc. Cash Flows from Operating Activities—Direct Method For the Year Ended March 31, 2021 Cash flows from operating activities: Cash receipts from customers Cash receipts from interest Cash payments to suppliers Cash payments to employees Cash payments for income tax Cash payments for interest Net cash provided (used) by operating activities

$ 295,200 1,800 (145,600) (42,700) (11,600) (3,000) $ 94,100

13-41

Managerial Accounting 6e Solutions Manual

Serial Case C13-46 1.

Cash flows from financing activities such as proceeds from issuance of long‐term debt are the main source of cash inflow to Caesars Entertainment Corporation.

Because renovation expenditures are capitalized under long‐term assets section of the balance sheet, they are reported as negative items under cash flows from investing activities.

The interest on the cost of the renovation after completion is reported as interest expense in the income statement. Therefore, it is part of the net income (loss) under cash flows from operating activities.

Discussion & Analysis A13-47 1.

How do managers use the statement of cash flows? The statement of cash flows helps managers understand if the company is generating sufficient cash from its dayto-day operations to enable investments in new equipment, stores, or businesses. It also helps managers predict if the company can meet its obligations in the future.

Describe at least four needs for cash within a business. Employees expect payment of their salaries and wages. Suppliers expect payment for their products and services. Creditors expect to be repaid loans and interest payments. Investors expect dividends. Governmental taxing authorities expect payment of income and property taxes.

Define an “operating activity.” List two examples of an operating activity on the statement of cash flows that would increase cash. List two examples of an operating activity that would decrease cash. Operating activities are the day-to-day profit-making activities of the company, such as making or buying inventory, selling inventory, selling services, paying employees, advertising, and so forth. This also includes any other activity that affects net income (not just operating income), current assets, or current liabilities. Decreases in accounts receivable and inventory would increase cash from operating activities. Decreases in accounts payable and accrued liabilities would decrease cash from operating activities.

Define an “investing activity.” List two examples of an investing activity on the statement of cash flows that would increase cash. List two examples of an investing activity that would decrease cash. Investing activities are activities that involve buying or selling long-term assets, such as buying or selling property, plant, or equipment; buying or selling stock in other companies (if the stock is meant to be held for the long term); or loaning money to other companies with the goal of earning interest income from the loan. Selling land and investments would increase cash from investing activities. Purchasing equipment or intangible assets would decrease cash from investing activities.

13-42

Chapter 13

Statement of Cash Flows

Define a “financing activity.” List two examples of a financing activity on the statement of cash flows that would increase cash. List two examples of a financing activity that would decrease cash. Financing activities are activities that either generate capital for the company or pay it back, such as issuing stock or long-term debt, paying dividends, and repaying principal amounts on loans; this includes all activities that affect long-term liabilities and owners’ equity. The issuance of notes or stock would increase cash from financing activities. The payment of dividends and the repayment of long-term notes would decrease the cash from financing activities.

Define a “noncash investing or financing” activity. Describe an activity that would need to be disclosed as a noncash investing or financing activity. A noncash investing and financing activity does not involve cash, but it does involve both financing and investing activities. It must be disclosed in a supplementary schedule to the statement of cash flows. An example of a noncash investing and financing activity would be the purchase of equipment (investing activity) by issuing common stock (financing activity) to the seller.

Describe the difference between the direct and the indirect methods of preparing the operating section of the statement of cash flows. The direct method presents cash flows from operating activities by listing separately the receipts and payments of cash for specific operating activities. The indirect method presents the cash flows from operating activities by beginning with the company’s net income (prepared on the accrual basis) and then reconciles it back to the cash basis through a series of adjustments.

Describe the process for reconciling net income to the cash basis. What items are added to net income? What items are subtracted from net income? The process for reconciling net income to the cash basis begins with the company’s accrual based net income. To that amount, depreciation and other noncash expenses and losses are added, and noncash gains or other revenues are subtracted. Then current assets (aside from cash) are analyzed, the increases are subtracted, and the decreases are added. Then the current liabilities are analyzed, increases are added, and decreases are subtracted.

When preparing a statement of cash flows using the indirect method, what information is needed? What documents or statements would be used? The current year income statement and comparative balance sheets, in addition to supplementary information, are needed to prepare the statement of cash flows using the indirect method for operating activities.

10. Summarize the process for preparing the operating section of the statement of cash flows when using the direct method. The direct method lists the receipt and payment of cash for specific operating activities. For example, the operating activities would list such line items as the following: Cash receipts from customers Cash payments (to suppliers) for inventory Cash payments (to employees) for salaries and wages Cash payments for insurance In essence, the direct method lists many of the same items shown on the income statement, but it calculates them on a cash basis rather than accrual basis. .

13-43

Managerial Accounting 6e Solutions Manual

11. Provide an example of an operating cash inflow that could result from sustainability activities. Also provide an example of an operating cash outflow that would support sustainability. An example of an operating cash inflow that could result from sustainability activities is the cash received from recycling cardboard packaging. An example of an operating cash outflow related to sustainability efforts would be the purchase of carbon offsets for the company’s delivery trucks. Student answers will vary significantly. 12. Think of a company with which you are familiar. Describe an investing activity related to a company’s sustainability efforts that would be classified as a use of cash on a company’s statement of cash flows. Describe a financing activity related to a company’s sustainability efforts that would be classified as a use of cash on a company’s statement of cash flows. An investing activity that is related to a company’s sustainability efforts would be the purchase of more environmentally friendly equipment. A financing activity related to sustainability efforts would be the payment of long-term debt issued to finance the investment in sustainability-related plant assets.

13-44

Chapter 13

Statement of Cash Flows

Application & Analysis A13-48 Note: These answers are SAMPLE answers only—student answers can and will vary widely. This case is intended for discussion and critical thinking.

Basic Discussion Questions For each of the companies you selected, answer the following: 1.

Which method is used to calculate the cash provided or used by operations? Nike—indirect method Reebok—indirect method

What items increased cash provided by operations? Nike—decreases in inventories and prepaid expenses Reebok—increases in accounts payable and other current liabilities

What items decreased cash provided by operations? Nike—increases in accounts receivable and decreases in current liabilities Reebok—increases in receivables and other current assets

Overall, was cash increased or decreased by operating activities? Nike—cash increased by operations Reebok—cash increased by operating activities

Did investing activities in total increase cash or decrease cash during the year? What were the major uses or sources of cash related to investing? Nike—investing activities used cash due mainly to the purchases of short-term investments and additions to property, plant, and equipment. Reebok—investing activities used cash due mainly to the purchase of trademarks and other intangible assets, purchases of property, plant and equipment, and purchases of investments.

Did financing activities in total increase cash or decrease cash during the year? What were the major uses or sources of cash related to financing? Nike—financing activities used cash mainly due to reductions in long-term debt, repurchase of common stock, and payment of dividends. Reebok—financing activities used cash mainly due to payment of dividends, repurchase of shares, and repayments of short-term borrowings.

What items (if any) are disclosed as significant noncash financing or investing activities? Now that you have looked at each company’s cash flow statements individually, compare the two companies. What can you tell about each company from its statement of cash flows? Can you tell if one company is stronger than the other from their statements of cash flows? What clues do you have? Neither company disclosed any noncash financing or investing activities. The two companies are very similar. Both companies experienced cash provided by operations, cash used by investing activities, and cash used by financing .

13-45

Managerial Accounting 6e Solutions Manual activities. Both companies had cash at year end. Both look strong having most of their cash provided from operating activities and purchasing more investments than selling them.

A13-49 Ethics Mini-Case 1.

b. 2.

The ethical issues in this situation are: Competence: “Maintain an appropriate level of professional expertise by continually developing knowledge and skills.” By using Wikipedia to research the direct method instead of a credible source, Christopher Wargo is not maintaining an appropriate level of professional expertise. Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” Estimating numbers instead of using the actual values could discredit the profession. Also, Wargo’s use of Wikipedia as a research source could discredit the profession. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” It is reasonable to expect that estimating the amounts on the statement of cash flows could influence a user’s understanding of the financial statements. Christopher Wargo’s responsibilities as a management accountant are to be honest, fair, objective, and responsible.

Wargo should seek to report actual, correct values on the statement of cash flows, and learn about the direct method from a more credible source. He should follow the four IMA Ethical Standards.

A13-50 Real Life Mini-Case Req. 1 a. Is Sears generating cash from its operations? No, Sears is not generating a positive net cash flow from operations. b. Describe what investing activities Sears has been involved in over the past three years. Are investing activities an overall source or use of funds for Sears? Sears has been selling property and investments, especially in 2016, and purchasing a much smaller amount of property plant and equipment. Investing activities have been a source of funds for Sears over the past three years. c. What financing activities has Sears been undertaking in the past three years? Has it been paying dividends to its common stockholders? (Note: Sears Canada is a holding that does not represent Sears common stockholders.) Sears’ primary financing activity over the past three years has involved paying off debt and issuance of debt. Sears has not been paying dividends to its common stockholders. d. How will the closure of the Kmart and Sears stores impact the 2016 statement of cash flows? Because the stores that are closing have not been profitable, more cash should be generated from operations and possibly more cash from the sale of the property, plant, and equipment of the closed locations.

13-46

Chapter 13

Statement of Cash Flows

Req. 2 a. Is Wal-Mart generating cash from its operations? Yes, Wal-Mart is generating a positive net cash flow from operations. b. Describe what investing activities Wal-Mart has been involved in over the past three years. Are investing activities an overall source or use of funds for Wal-Mart? Wal-Mart’s primary investing activities have been purchasing property, plant, and equipment. Investing activities are an overall use of funds for Wal-Mart. c. What financing activities has Wal-Mart been undertaking in the past three years? Has it been paying dividends to its common stockholders? Wal-Mart has been repaying long-term debts, paying dividends, purchasing common stock, and some other financing activities in the past three years. Yes, Wal-Mart has been paying dividends to its common stockholders. d. How will the closure of the Wal-Mart stores impact the 2016 statement of cash flows? Assuming the stores that are closing have not been profitable, there should be more cash generated from operations and possibly more cash from the sale of the property, plant, and equipment of the closed locations.

Req. 3 Judging from the statements of cash flows, which company, Sears or Wal-Mart, is healthier? Wal-Mart appears to be healthier. Req. 4 Why do you think Sears and Wal-Mart would have fiscal year-ends around January 31 rather than using a calendar year-end of December 31? Retail operations are extremely busy during the holiday season so it often does not make sense to have to close the year-end books in the middle of the busiest season of the year. In addition, it allows a more accurate picture of the business by closing the books at the company’s natural low point of activity. Student answers will vary.

13-47

Managerial Accounting 6e Solutions Manual

Decision Case (15–25 min.) A13-51 Meredith Enterprises looks like the better investment at the present time for the following reasons: 1.

Net cash from operating activities is higher for Meredith Enterprises than for the other two companies. Dalton Corporation has a negative net cash flow from operations. Thornton, Inc., does have a positive net cash flow from operating activities, but not as much as the net operating cash flow at Meredith Enterprises.

Dalton Corporation appears to be selling off equipment and issuing more debt to sustain itself because its cash flow from operating activities is negative.

Thornton, Inc., appears to be in a growth mode. It used cash from operations to purchase plant or equipment. It also issued additional debt and stock to help to finance the expansion. It paid out no dividends in the past year and appears to be retaining cash for expansion.

Meredith Enterprises used cash from operating activities to purchase plant and equipment and to purchase an investment in stock. It also paid out dividends and repaid some long-term debt.

13-48

Chapter 14 Financial Statement Analysis Quick Check Answers

QC14-1. c QC14-2. b QC14-3. d

QC14-4. c QC14-5. b QC14-6. d

QC14-7. d QC14-8. c QC14-9. a

QC14-10. b QC14-11. a QC14-12. d

Short Exercises (5–10 min.) S14-1 Increase (Decrease)

Revenues Cost of sales Gross profit

(Amounts in millions) 2020 2019 2018 $13,390 $12,875 $12,500 6,550 5,750 5,000 $ 6,840 $ 7,125 $ 7,500

2020 Amount $515

Percent 4.00%

$(285)

(4.00)%

2019 Amount Percent $375 3.00% $(375)

(5.00)%

(5–10 min.) S14-2 a.

Trend percentages: 2020 102% 106%

Revenues………… Net income………. b.

2019 94% 99%

2018 89% 95%

2017 100% 100%

Revenue increased faster than net income.

(10–15 min.) S14-3 Vertical analysis of assets: Amount $ 49,980 $ 43,470 $ 116,550 $ 210,000

Cash Inventory Property, plant, and equipment, net Total assets

Percent 23.8% 20.7% 55.5% 100.00%

14-1

Managerial Accounting 6e Solutions Manual

(10 min.) S14-4 Martinez Amount Percent $ 10,900 100.0% $ 6,660 61.1% $ 3,564 32.7% $ 676 6.2%

Net sales Cost of goods sold Other expense Net income

Amount $ 19,536 $ 14,203 $ 4,356 $ 977

Rojo Percent 100.0% 72.7% 22.3% 5.0%

Rojo earns more net income. Martinez has a net income at a higher percentage of net sales.

(5–10 min.) S14-5 Req. 1 In both the second half and full year of 2019 compared to 2018, although revenue is higher, loss from operations is greater as well. For the full year of data, revenue increased 26.8% [($827,886 – $652,802)/$652,802] but operating expenses increased 41.6% [($453,230 – $320,073)/$320,073]. Cost of revenue also increased 39.9% [($525,119 – $375,472)/$375,472)]. The rate of increase is higher for expenses than revenues. Req. 2 Expenses increased at a greater rate than revenues. Both cost of revenue and operating expenses increased faster than revenues. Req. 3 In both the second half and full year of 2019 compared to 2018, the gross profit decreased, and the loss from operations increased. Because there is a loss from operations, the rate of increase for expenses is higher than the rate of increase for revenues. Req. 4 For the full year of data, the cost of revenue—content acquisition costs, sales and marketing expense, product development expenses, and general and administrative expenses—all increased in 2019. Advertising revenue increased and subscription revenue decreased in 2019. Req. 5 The statement in dollars is more beneficial because you are able to calculate the rate at which both expenses and revenues are changing.

(5–10 min.) S14-6 a.

Total current assets Total current liabilities = b.

Cartwright’s current ratio deteriorated slightly.

14-2

2020

2019

$6,688,000 $4,400,000

$6,048,000 $3,600,000

1.52

1.68

Chapter 14

Financial Statement Analysis

(10–15 min.) S14-7

Inventory turnover

Cost of goods sold Average inventory

$21,766,030 $4,433,000

4.91 times

b. Days’ sales in receivables: One day’s sales

Days’ sales in receivables

34,988,900 365

Average net receivables One day’s sales

$95,860

$239,650* $95,860

2.50 days

__________ *($100,800 + $378,500) / 2 = $239,650

(5 min.) S14-8

Total liabilities Total assets

$8,700,000 $18,125,000

Debt ratio

The debt ratio is fairly low. The company’s ability to pay its liabilities appears strong.

0.48

(10 min.) S14-9 a.

Gross profit percentage

Operating income percentage

Rate of return on net sales

Rate of return on total assets

Gross profit Sales revenue Operating income Sales revenue Net income Net sales

$13,222,870 34,988,900 $8,134,620 34,988,900

Net Interest income + expense Average total assets

Rate of return on common stockholders' equity

Net Preferred income − dividends Average common stockholders' equity

37.8%

23.2%

$5,991,070 $34,988,900

= e.

17.1%

$5,991,070 + $217,800 17,896,500 34.7%

$5,991,070 − $0 $9,638,500

= 62.2%

These rates of return are strong.

14-3

Managerial Accounting 6e Solutions Manual

(5–10 min.) S14-10 1.

EPS

Price/earnings ratio

Net income − Preferred dividends Number of shares of common stock outstanding

Market price per share of common stock EPS

$5,991,070 − $0 720,000

$8.32

$62.50 $8.32

= 7.51 times

(10 min.) S14-11 1.

14-4

Ben has not participated in any continuing education activities since he graduated five years ago because life has just been too busy. He is unprepared for the company to implement the new revenue recognition standards. Tim, the corporate controller, prepares a report for the board of directors that summarizes the year. Tim, wanting to look good, only includes the favorable ratios and favorable events in this report. Colton talks about the financial woes of the company he works for when he is out with a group of friends. He shares that the company will not be able to meet the ratios specified in the loan covenants. Jordan prepares the financial statements, but the internal control system weaknesses are not disclosed. Sarah, an accountant working in the Accounts Payable Department, writes a company check to herself for $1,500 to temporarily borrow money to pay her apartment rent; she plans on paying back the money after her next paycheck.

Competence—Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. Confidentiality—Keep information confidential except when disclosure is authorized or legally required.

Credibility—Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. Integrity—Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

Chapter 14

Financial Statement Analysis

(10 min.) S14-12 1.

What is the Excel feature that is pictured in Column J? The sparklines feature is pictured in Column J.

Describe the steps that would have been taken in Excel to display the line contained in Cell J2. Select Cell J2. On the Ribbon, click Insert, then click the Sparkline icon for the line chart style. Select cells B2 through I2. Click OK.

Which distribution channel(s) is trending upward in sales revenue over the time period pictured? Both the company website and Amazon.com channels are trending upward in sales revenue over the time period pictured.

Which distribution channel(s) is trending upward in gross profit over the time period pictured? Both the company website and Amazon.com channels are trending upward in gross profit over the time period pictured.

Describe a feature in Excel that might be used to create a larger visual depiction of the trends in sales revenue by distribution channel. When managers don’t need to conserve space on the worksheet, or want to compare trends between distribution channels simultaneously, inserting a full graph on the worksheet is a better option than using sparklines.

(10 min.) S14-13

What is the Excel feature that is pictured in Column J? The sparklines feature is pictured in Column J.

Describe the steps that would have been taken in Excel to display the line contained in Cell J2. Select Cell J2. On the Ribbon, click Insert, then click the sparklines icon for the line chart style. Select cells B2 through I2. Click OK.

How is the gross profit percentage calculated? What formula would have been entered in Cell B14 to calculate the gross profit percentage? Gross profit percentage is a measure of profitability that is calculated by dividing the gross profit by the sales revenue. The formula for Cell B14 is =B8/B2. The initial answer shows as a decimal; click percentage as the format in the toolbar.

Describe the eight-year trend in the following categories for each of the distribution channels: a. Subscription boxes—Sales Revenue has trended downward, Gross Profit has trended upward, and Gross Profit Percentage has trended upward. b. Book fairs—Sales Revenue and Gross Profit have trended upward; Gross Profit Percentage has trended downward. c. Company website—Sales Revenue, Gross Profit and Gross Profit Percentage have trended upward. d. Wholesalers—Sales Revenue and Gross Profit have trended upward; Gross Profit Percentage has trended downward.

What conclusions can you draw from analyzing the trends in the data? From a sales standpoint the company’s biggest profit percentage are in subscription boxes and the company website. The company should emphasize those distribution channels to maximize its gross profit.

14-5

Managerial Accounting 6e Solutions Manual

Exercises (Group A) (5–15 min.) E14-14A 2020

2019

2018

Total current assets

$275,640

$254,000

$214,500

Total current liabilities

195,000

182,000

152,000

$80,640

$72,000

$62,500

Working capital

Increase $8,640/72,000 12.0%

Increase $9,500/62,500 15.2%

The decreasing trend of working capital is unfavorable.

(10–15 min.) E14-15A The Ruby Group Horizontal Analysis of Comparative Income Statement For the Years Ended December 31, 2020 and 2019 INCREASE (DECREASE) 2020

2019

AMOUNT

PERCENT

$458,800

$400,000

$58,800

14.70%

Less: Cost of goods sold

209,820

195,000

14,820

7.60%

Gross profit

248,980

205,000

43,980

21.45%

Less: Operating expenses

95,670

90,000

5,670

6.30%

Operating income

153,310

115,000

38,310

33.31%

Less: Interest expense

4,250

3,125

1,125

36.00%

Income before income taxes

149,060

111,875

37,185

33.24%

Income tax expense

16,420

11,875

4,545

38.27%

$132,640

$100,000

$32,640

32.64%

Net sales revenues

Net income

Net income increased by a much higher percentage than total revenues during 2020 because revenues increased at a higher rate than did major expenses, such as cost of goods sold and operating expenses.

14-6

Chapter 14

Financial Statement Analysis

(5–10 min.) E14-16A Trend percentages: Net revenue Net income

2020 132% 145%

2019 108% 135%

2018 104% 95%

2017 94% 85%

2016 100.00% 100.00%

Net income increased by 45% during the period, compared to 32% for net revenue.

(10–15 min.) E14-17A Riley Designs, Inc. Balance Sheet As of December 31 For the year (in thousands)

Percentage (rounded)

Assets Total current assets Property, plant, and equipment, net Other noncurrent assets

$43,605 204,915 36,480

15.30% 71.90% 12.80%

Total assets

$285,000

100.0%

Liabilities Total current liabilities Long-term liabilities Total liabilities

$52,440 108,870 $161,310

18.40% 38.20% 56.60%

Stockholders’ equity Total stockholders' equity

$123,690

43.40%

Total liabilities and equity

$285,000

100.0%

14-7

Managerial Accounting 6e Solutions Manual

(10–15 min.) E14-18A Jubilee Corporation Income Statement For the Years Ended December 31, current year and prior year Current Year

Prior Year

Net sales revenue…………………………….

100.00%

Less: Cost of goods sold……………………

34.93%

37.30%

Gross profit………….…………………………..

65.07%

62.70%

Less: Operating expenses…………………

29.01%

31.47%

Operating income……………………………

36.06%

31.24%

Less: Interest expense……………………..

1.52%

1.40%

Income before income taxes……………

34.54%

29.84%

Less: Income tax expense…………………

6.88%

5.59%

27.66%

24.24%

Net income……………………………………….

An investor would be pleased with the current year in comparison with the prior year. Net sales and net income are both up significantly from the prior year. Cost of goods sold and operating expenses—the two largest expenses— consumed smaller percentages of total revenues in the current year, and net income represents a higher percentage of revenues. Overall, profits are rising.

(10–15 min.) E14-19A a.

Current ratio

$171,990 $117,000

= 1.47

Acid-test (quick) ratio

$16,000 + 14,730 + 50,000 $117,000

= 0.69

Inventory turnover

$323,400 73,500

= 4.40 times

Days’ sales in average receivables

$63,070 $1,190

= 53 days

14-8

Chapter 14

Financial Statement Analysis

(15–20 min.) E14-20A a.

Current ratio: 2020:

$475,950 (59,500 + 28,500 + 137,150 + 250,800) $285,000

1.67

2019:

$461,760 (49,500 + 0 + 127,300 + 284,960) $208,000

2.22

Acid-test ratio: 2020:

$59,500 + $28,500 + $137,150 $285,000

0.79

2019:

$49,500 + $0 + $127,300 $208,000

0.85

Debt ratio: 2020:

$333,000* $555,000

= 0.60

__________ *$285,000 + $48,000 = $333,000 d.

2019:

$238,140** $486,000

0.49

4.03 times

__________ **$208,000 + $30,140 = $238,140

Times-interest-earned ratio: $164,350 2017: $47,500

= 3.46 times

2016:

$169,260 $42,000

Summary: The company’s ability to pay its current liabilities, total liabilities, and interest expense deteriorated during 2020 as shown by the worsening of all four ratios.

14-9

Managerial Accounting 6e Solutions Manual

(10–15 min.) E14-21A a.

Gross profit percentage: $106,400 2020: $211,400 Operating income percentage: $53,400 2020: $211,400 Rate of return on net sales: $25,368 2020: $211,400

Rate of return on total assets: $25,368 + $5,385 2020: $201,000* __________ *($207,000 + $195,000) / 2 = $201,000

= 50.33%

2019:

$86,910 $182,910

= 47.52%

= 25.26%

2019:

$40,910 $182,910

= 22.37%

= 12.00%

2019:

$18,291 $182,910

= 10.00%

2019:

$18,291 + $6,459 $187,500**

= 13.20%

= 15.30%

__________ **($195,000 + $180,000) / 2 = $187,500

Rate of return on common stockholders’ equity: $25,368 – $2,980 $18,291 – $2,980 2020: = 2019: 23.2% $96,500*** $76,555**** __________ __________ ***($101,000 + $92,000) / 2 = $96,500 ****($92,000 + $61,110) / 2 = $76,555 f.

Earnings per share of common stock: $25,368 – $2,980 2020: 27,985

= $0.80

2019:

$18,291 – $2,980 27,985

The company’s operating performance improved during 2020. All of the ratios improved during 2020.

14-10

= 20.00%

= $0.55

Chapter 14

Financial Statement Analysis

(10–15 min.) E14-22A Current Year (2020) a.

Price/earnings ratio: $20.00 ($80,400 − $14,000) / 83,000

25.0

$8.00 ($47,200 − $14,000) / 83,000

20.0

1.30%

$21,580 / 83,000 $8.00

3.25%

$7.10

$639,150 − $220,000 83,000

$5.05

Dividend yield: $21,580 / 83,000 $20.00

Last Year (2019)

Book value per share of common stock: $809,300 − $220,000 83,000

There is conflicting information regarding the attractiveness of the stock in 2020. Dividend yield decreased, which is unfavorable. However, the PE ratio and book value per share increased, which are favorable signals.

(20–30 min.) E14-23A a. Inventory turnover:

$5,120 $1,600

= 3.2

The company sells its inventory 3.2 times per year. To determine if this seems reasonable, a comparison to industry standards would be necessary to reach a better conclusion. b. Days’ sales in receivables:

$2,730 $15,330 / 365

= 65.0 days

It takes the company 65 days to collect its average receivables. This time period is long and may indicate the company is having trouble collecting from customers. A possible solution might be creating a tougher credit policy to ensure timely collections from customers. c. Acid-test ratio:

$3,720 + $0 + $3,000 $12,000

= 0.56

The company can pay off just over half of its current liabilities with its most liquid assets. Due to long receivables collection time, the receivables may not be as liquid as cash and equivalents. This may be a cause of concern for management.

14-11

Managerial Accounting 6e Solutions Manual

(continued) E14-23A d.

$7,200 $300

Times-interest-earned

= 24.0

The company‘s income from operations can cover its interest expense 24 times. There should not be a problem servicing its debt per this ratio. e.

$10,210 $15,330

Gross profit percentage

= 66.6%

Of each sales dollar, 66.6% is gross profit for the company. This is a high gross profit percentage but should be compared to the industry average to better determine if it is reasonable. f.

$7,200 $15,330

Operating income percentage

= 47.0%

Of each sales dollar, 47% is income for the company. This is a high operating income percentage but should be compared to the industry average to better determine if it is reasonable.

Return on stockholders’ equity

$2,350 – $0 ($11,000 + $7,800) / 2

= 25%

The company’s return on stockholders’ equity is 25%, which is a strong return. h.

$2,350,000* - $0 2,500,000

Earnings per share of common stock:

= $0.94

*The 000s are added to net income to keep the numerator consistent with the number of shares of stock, which is not given in thousands in the data. The company generates earnings of $0.94 per share of common stock. i.

$32.90 $0.94

Price/earnings ratio:

= 35.0

Per this ratio, the market price of one share of stock is 35 times the earnings per one share of stock. A comparison to industry standards is needed to determine if this stock is overpriced or underpriced compared to the industry.

(5 min.) E14-24A a. b. c. d. e. f. g. h. i. j. k. l.

Planet Profit Planet People People Planet People People Planet Profit Planet People

14-12

Chapter 14

Financial Statement Analysis

(20 min.) E14-25A Requirements 1.

Insert sparklines in Column J for the Sales Revenue and Gross Profit rows.

Which distribution channel(s) is trending upward in sales revenue over the eight-year time period? Both the company website and Amazon.com channels are trending upward in sales revenue over the eightyear time period.

Which distribution channel(s) is trending upward in gross profit over the eight-year time period? Both the company website and Amazon.com channels are trending upward in sales revenue over the eightyear time period.

Create a line chart to show the trend over the eight-year period for each of the following categories: a. Sales Revenue

14-13

Managerial Accounting 6e Solutions Manual

(continued) E14-25A b. Gross Profit

14-14

What conclusions can you draw from the sparklines and/or line charts? Home party sales revenue is dropping, as is its gross profit. The company should emphasize its company website and Amazon.com distribution channels to maximize its gross profit, while deemphasizing home party sales. Student answers may vary.

Chapter 14

Financial Statement Analysis

(20 min.) E14-26A Requirements 1. 2.

Insert formulas in the Gross Profit % rows for Years 1 through 8 for each of the four distribution channels (subscription boxes, book fairs, company website, and wholesalers). Insert sparklines in Column J for the Sales Revenue, Gross Profit, and Gross Profit % rows.

Which distribution channel(s) is trending upward in sales revenue over the eight-year time period? Both the book fairs and wholesalers channels are trending upward in sales revenue over the eight-year time period.

Which distribution channel(s) is trending upward in gross profit over the eight-year time period? All channels are basically trending upward in gross profit over the eight-year time period.

What conclusions can you draw from the sparkline trends for each of the four distribution channels? Gross profit in dollars is increasing for each distribution chain. However, gross profit percentage is increasing in subscription boxes and the company website while gross profit percentage is falling in book fairs and wholesalers. The company website sales are trending down. One should investigate why that is when the profitability is increasing. Student answers may vary.

14-15

Managerial Accounting 6e Solutions Manual

Exercises (Group B) (5–15 min.) E14-27B 2020

2019

2018

Total current assets

$358,290

$323,500

$291,500

Total current liabilities

189,000

175,000

154,000

$169,290

$148,500

$137,500

Working capital

Year 2020 2019

Dollar amount of change $20,790 $11,000

Divide by base year amount $148,500 $137,500

= Percentage of change in working capital 14.0% 8.0%

The increasing trend of working capital is favorable.

(10–15 min.) E14-28B The Slate Group Horizontal Analysis of Comparative Income Statement For the Years Ended December 31, 2020 and 2019 INCREASE (DECREASE) 2020

2019

AMOUNT

PERCENT

$460,000

$400,000

$60,000

15.00%

Less: Cost of goods sold

216,200

200,000

16,200

8.10%

Gross profit

243,800

200,000

43,800

21.90%

Less: Operating expenses

$105,800

$100,000

$5,800

5.80%

Operating income

138,000

100,000

38,000

38.00%

Less: Interest expense

9,000

6,000

3,000

50.00%

Income before income taxes

129,000

94,000

35,000

37.23%

Income tax expense

18,600

14,000

4,600

32.86%

$110,400

$80,000

$30,400

38.00%

Net sales revenues

Net income

Net income increased by a much higher percentage than total revenues during 2020 because revenues increased at a higher rate than did cost of goods sold and operating expenses.

(5–10 min.) E14-29B Trend percentages:

Net revenue Net income

2020 127% 155%

2019 115% 140%

2018 107% 95%

Net income grew by 55% during the period, compared to 27% for total revenue.

14-16

2017 94% 90%

2016 100% 100%

Chapter 14

Financial Statement Analysis

(10–15 min.) E14-30B Carolina Designs, Inc. Vertical Analysis of Balance Sheet As of December 31 AMOUNT

PERCENT

Total current assets………………………..

$41,720

14.90%

Property, plant, and equipment, net

$202,720

72.40%

Other noncurrent assets…………………………………..

$35,560

12.70%

Total assets……………………………………

$280,000

100%

Total current liabilities…………………….

$52,920

18.90%

Long-term debt……………………………….

$106,400

38.00%

Total liabilities…………………………………

$159,320

56.90%

$120,680

43.10%

$280,000

100%

ASSETS

LIABILITIES

STOCKHOLDERS’ EQUITY Total stockholders’ equity……………….. Total liabilities and stockholders’ equity

(10–15 min.) E14-31B Wolf Corporation Comparative Common-Size Income Statement For the Years Ended December 31, 2020 and 2019 2020

2019

Net sales revenue……………………………..

100.00%

Less: Cost of goods sold………………..

45.73%

48.75%

Gross profit………………………………….

54.27%

51.25%

Less: Operating expenses…………….

20.85%

22.50%

Operating income………………………..

33.42%

28.75%

Less: Interest expense………….………

.93%

.78%

Income before income taxes…………

32.49%

27.97%

Less: Income tax expense……………..

3.58%

2.97%

28.91%

25.00%

Net income………………………………………..

An investor would be pleased with 2020 in comparison with 2019. Net sales and net income are both up significantly from 2019. Cost of goods sold and operating expenses—the two largest expenses—consumed smaller percentages of total revenues in 2020 and net income represents a higher percentage of revenues. Overall, profits are rising. .

14-17

Managerial Accounting 6e Solutions Manual

(10–15 min.) E14-32B

Current ratio

$178,750 $125,000

= 1.43

Acid-test (quick) ratio

($16,500 + $10,750 + $49,000) $125,000

= 0.61

Inventory turnover

$319,000 $79,750

= 4.00 times

Days’ sales in average receivables

$63,180 $427,050 / 365

= 54 days

(15–20 min.) E14-33B a.

Current ratio: 2020:

$450,360 (61,500 + 26,000 + 126,560 + 236,300) $278,000

1.62

2019:

$436,560 (47,000 + 0 + 118,240 + 271,320) $204,000

2.14

Acid-test ratio: 2020:

$61,500 + $26,000 + $126,560 $278,000

0.77

2019:

$47,000 + $0 + $118,240 $204,000

0.81

Debt ratio: 2020:

$298,920* $564,000

= 0.53

__________ *$278,000 + $20,920 = $298,920 d.

Times-interest-earned ratio: $166,110 2020: $49,000

2019:

$250,920** $492,000

0.51

4.04 times

__________ **$204,000 + $46,920 = $250,920

= 3.39 times

2019:

$159,580 $39,500

Summary: The company’s ability to pay its current liabilities, total liabilities, and interest expense deteriorated during 2020, as shown by the worsening of all four ratios.

14-18

Chapter 14

Financial Statement Analysis

(10–15 min.) E14-34B a.

Gross profit percentage: $84,120 2020: $178,120 Operating income percentage: $41,120 2020: $178,120 Rate of return on net sales: $22,265 2020: $178,120

Rate of return on total assets: $22,265 + $7,360 2020: $197,500* __________ *($203,000 + $192,000) / 2 = $197,500

= 47.23%

2019:

$79,725 $167,725

= 47.53%

= 23.09%

2019:

$44,725 $167,725

= 26.67%

= 12.50%

2019:

$13,418 $167,725

= 8.00%

= 15.00%

2019:

$13,418 + $8,100 $185,500**

= 11.60%

__________ **($192,000 + $179,000) / 2 = $185,500

Rate of return on common stockholders’ equity: $22,265 − $2,660 $13,418 − $2,660 2020: = 20.00% 2019: $98,025*** $81,500**** __________ __________ ***($110,050 + $86,000) / 2 = $98,025 ****($86,000 + $77,000) / 2 = $81,500 f.

Earnings per share of common stock: $22,265 − $2,660 2020: 26,140

= $0.75

2019:

$13,418 − $2,660 26,140

= 13.20%

= $0.41

The company’s operating performance improved during 2020. All the ratios except gross profit percentage and operating income percentage improved in 2020.

14-19

Managerial Accounting 6e Solutions Manual

(10–15 min.) E14-35B

Current year (2020) a.

Price/earnings ratio: $18.80 ($68,250 − $14,500) / 86,000

30.1

$12.50 ($57,500 − $14,500) / 86,000

25.0

1.40%

$22,575 / 86,000 $12.50

2.10%

$7.30

$642,100 − $225,000 86,000

$4.85

Dividend yield: $22,575 / 86,000 $18.80

Last year (2019)

Book value per share of common stock: $852,800 − $225,000 86,000

14-20

Chapter 14

Financial Statement Analysis

(20–30 min.) E14-36B

Inventory turnover:

$1,980 $900

= 2.2

The company sells its inventory 2.2 times per year. To determine if this is reasonable, a comparison to industry standards would be necessary to reach a better conclusion. b.

Days’ sales in receivables:

$1,980 $13,140 / 365

= 55

It takes the company 55 days to collect its average receivables. This time period is long and may indicate the company is having trouble collecting from customers. A possible solution might be creating a tougher credit policy to ensure timely collections from customers. c.

Acid-test ratio:

$5,700 + $0 + $2,100 $15,000

0.52

Times-interest-earned

$10,500 $500

The company’s income from operations can cover its interest expense 21 times. There should not be a problem servicing its debt per this ratio. e.

$11,160 $13,140

Gross profit percentage

= 84.9%

Of each sales dollar, 84.9% is gross profit for the company. This is a high gross profit percentage but should be compared to the industry average to better determine if it is reasonable. f.

Operating income percentage

$10,500 $13,140

79.9%

Of each sales dollar, 79.9% is income for the company. This is a high operating income percentage but should be compared to the industry average to better determine if it is reasonable.

Return on stockholders’ equity

$3,000 – $0 $12,500

0.24

The company’s return on stockholders’ equity is 24%, which is a strong return.

14-21

Managerial Accounting 6e Solutions Manual

(continued) E14-36B h.

Earnings per share of common stock:

$3,000,000* – $0 3,125,000

$0.96

Price/earnings ratio:

$31.20 $0.96

= 32.5

Per this ratio, the market price of one share of stock is 32.5 times the earnings per one share of stock. A comparison to industry standards is needed to determine if this stock is overpriced or underpriced compared to the industry.

(5 min.) E14-37B a. b. c. d. e. f. g. h. i. j. k. l.

People Planet Planet People Profit Planet People Planet People Planet Planet Profit

14-22

Chapter 14

Financial Statement Analysis

(20 min.) E14-38B Requirements 1.

Insert sparklines in Column J for the Sales Revenue and Gross Profit rows.

Which distribution channel(s) is trending upward in sales revenue over the eight-year time period? The Amazon.com distribution channel is trending upward in sales revenue over the eight-year time period.

Which distribution channel(s) is trending upward in gross profit over the eight-year time period? The company website distribution channel is trending upward in gross profit over the eight-year time period.

Create a line chart to show the trend over the eight-year period for each of the following categories: a. Sales Revenue

14-23

Managerial Accounting 6e Solutions Manual

(continued) E14-38B b. Gross Profit

14-24

What conclusions can you draw from the sparklines and/or line charts? Sales revenue is dropping in both home party sales and the company website; however, the company website gross profit is increasing. The company should emphasize its company website and Amazon.com distribution channels to maximize its gross profit, while deemphasizing home party sales. Student answers may vary.

Chapter 14

Financial Statement Analysis

(20 min.) E14-39B Requirements 1. 2.

Which distribution channel(s) is trending upward in sales revenue over the eight-year time period? The subscription boxes, book fairs, and wholesalers channels are all trending upward in sales revenue over the eight-year time period.

Which distribution channel(s) is trending upward in gross profit over the eight-year time period? All of the distribution channels are trending upward in gross profit over the eight-year time period.

What conclusions can you draw from the sparkline trends for each of the four distribution channels? Gross profit in dollars is increasing for each distribution channel. However, gross profit percentage is increasing in subscription boxes and the company website, while gross profit percentage is falling in book fairs and wholesalers. The subscription boxes channel is trending upward in sales revenue, gross profit, and gross profit percentage. The company should emphasize this distribution channel. Student answers may vary.

14-25

Managerial Accounting 6e Solutions Manual

Problems (Group A) (20–30 min.) P14-40A Req. 1 Vallen Optical Corporation Trend Percentages 2020

2019

2018

2017

Net sales revenue

111%

105%

97%

100%

Net income

125%

85%

75%

100%

Common stockholders’ equity

176.8%

103.2%

168.8%

100%

Req. 2 Dollar amounts in thousands 2018 Net income Avg. CSE

14-26

$420 $4,200

2019 10.00%

$476 $4,250

2020 11.20%

$700 $4,375

16.00%

Chapter 14

Financial Statement Analysis

(20–30 min.) P14-41A Req. 1 Block Department Stores, Inc. Common-Size Income Statement Compared to Industry Average For the Year Ended December 31 BLOCK

INDUSTRY AVERAGE

Net sales…………………………………………….

100.00%

Less: Cost of goods sold……………..

67.30%

65.70%

Gross profit…………………………………

32.70%

34.30%

Less: Operating expenses……………

21.00%

19.50%

Operating income……………………….

11.70%

14.80%

Less: Interest expense…………………

0.15%

0.50%

Income before income taxes……….

11.55%

14.30%

Less: Income tax expense……………

0.65%

0.30%

Net income………………………………………..

10.90%

14.0%

Block Department Stores, Inc. Common-Size Balance Sheet Compared to Industry Average As of December 31 BLOCK

INDUSTRY AVERAGE

Current assets……………………………….

67.90%

70.90%

Fixed assets, net…………………………….

25.60%

23.70%

Intangible assets, net……………………….

1.30%

0.70%

Other assets………………………………….

5.20%

4.70%

Total assets…………………………………..

100.00%

Current liabilities…………………………….

46.40%

48.30%

Long-term liabilities…………………………

22.80%

16.70%

Stockholders’ equity………………………...

30.80%

35.00%

Total liabilities and stockholders’ equity..

100.00%

Req. 2 Block’s common-size income statement shows that its ratios of gross profit to sales, operating income to sales, and net income to sales are worse than the industry averages. Overall, Block’s profit performance is worse than the average for the industry. Req. 3 Block’s common-size balance sheet shows that its ratio of current assets to total assets and its ratio of stockholders’ equity to total assets are worse than the industry average. Overall, Block’s financial position is worse than the average for the industry.

14-27

Managerial Accounting 6e Solutions Manual

(30–40 min.) P14-42A Req. 1 (ratios before the transactions) (Dollar Amounts and Stock Quantities in Millions) Current Ratio

Debt Ratio

$288

Earnings per Share

$382.8

$24.5 + $83 + $180.5 $49.5 + $106 + $44.5

= 1.44

$200 + $182.8 $660

= 0.58

$63.18 54

= $1.17

$200

Req. 2 (ratios after the transactions) (Dollar Amounts and Stock Quantities in Millions) Current Ratio

Debt Ratio

EPS

$288 + $75 $200 + $75

= 1.32

$382.8 + $75 $660 + $75

= 0.62

$288 + $264 $200

= 2.76

$382.8 + $264 $660 + $264

= 0.70

$288 + $210 $200

= 2.49

$382.8 $660 + $210

= 0.44

$288 $200

14-28

$382.8 =

1.44

$660

= 0.58

$1.17

$63.18 54 + 6.75 $1.17

$1.04*

Chapter 14

Financial Statement Analysis

(40–50 min.) P14-43A Req. 1 a. Current ratio:

2020 $362,000 $200,000

b. Times-interestearned ratio:

$77,910 $10,600

c. Inventory turnover:

e. Return on common stockholders' equity: f.

Earnings per share of common stock:

= 1.81

$77,910 $445,910

$48,450 – 6,650* ($133,000 + 87,000) / 2

= 6.3

$224,000 ($163,000 + $157,000) / 2

= 1.4

= .17

= 0.38

$48,450,000** − 6,650,000* = $3.80 11,000,000

= 1.75

$73,080 $11,600

= 7.35

$236,000 = 1.6 ($132,000 + $163,000) / 2

d. Operating income percentage

2019 $385,000 $220,000

$73,080 $425,080

$41,850 – 6,650* ($87,000 + $133,000) / 2

$41,850,000** – 6,650,000* 11,000,000

=.17

= 0.32

= $3.20

g. Price/earnings $43.51 $31.36 = 11.45 = 9.8 ratio: $3.80 $3.20 __________ *$95,000,000 × 0.07 = $6,650,000 **The 000s are added to net income to keep the numerator consistent with the number of shares of stock, which is not given in thousands in the data. Req. 2 Decisions: a.

Tennyson’s ability to pay its debts and to sell inventory improved during 2020.

The investment attractiveness of Tennyson’s common stock appears to have increased.

14-29

Managerial Accounting 6e Solutions Manual

(45–60 min.) P14-44A Best Digital

Zone Network

a. Acid-test ratio:

$27,000 + $38,520 + $37,500 $102,000

b. Inventory turnover:

$203,000 ($73,000 + $72,000) / 2

= 2.8

$242,000 ($73,000 + $103,000) / 2

2.75

c. Days’ sales in receivables:

($45,060 + $37,500) / 2 $467,200 / 365

= 32.25

($53,780 + $44,500) / 2 $569,400 / 365

31.5

d. Debt ratio:

$102,000 $300,000

= 0.34

$143,000 $325,000

0.44

$467,200 – $203,000 $467,200

= 0.57

$569,400 – $242,000 $569,400

0.57

$72,800 13,000

= $5.60

$95,400 18,000

$5.30

e. Gross profit percentage

Earnings per share of common stock:

g. Price/earnings ratio:

$98.00 $5.60

= 1.01

= 17.5

$18,000 + $15,400 + $44,500 $95,000

$100.70 $5.30

= 0.82

Decision: Best Digital Electronics’ common stock seems to fit the investment strategy better. Its price/earnings ratio is lower than that of Zone Network Electronics, and Best Digital Electronics appears to be in better shape than Zone Network Electronics. On most the ratios, Best Digital Electronics looks better than Zone Network Electronics.

14-30

Chapter 14

Financial Statement Analysis

Problems (Group B) (20–30 min.) P14-45B Req. 1 Connor Vision Corporation Trend Percentages 2020

2019

2018

2016

Net sales revenue

114%

106%

94%

100%

Net income

123%

83%

78%

100%

Common stockholders’ equity

175%

106.25%

143.75%

100%

Req. 2 Dollar amounts in thousands 2020 Net income Avg. CSE

$738 $4,500

2019 16.40%

$498 $4,000

2018 12.45%

$468 $3,900

12.00%

14-31

Managerial Accounting 6e Solutions Manual

(20–30 min.) P14-46B Req. 1 Ambrose Department Stores, Inc. Common-Size Income Statement Compared to Industry Average For the Year Ended December 31

Net sales………………………………………

Ambrose

INDUSTRY AVERAGE

100.00%

Less: Cost of goods sold……………..

67.30%

65.90%

Gross profit…………………………………

32.70%

34.10%

Less: Operating expenses……………

20.90%

19.40%

Operating income……………………….

11.80%

14.70%

Less: Interest expense…………………

0.10%

0.40%

Income before income taxes……….

11.70%

14.30%

Less: Income tax expense……………

0.90%

0.40%

10.80%

13.90%

Net income……………………………………

Ambrose Department Stores, Inc. Common-Size Balance Sheet Compared to Industry Average December 31 Ambrose

INDUSTRY AVERAGE

Current assets……………………………….

67.50%

70.80%

Fixed assets, net…………………………….

25.60%

23.80%

Intangible assets, net……………………….

1.90%

0.80%

Other assets………………………………….

5.00%

4.60%

Total assets…………………………………..

100.00%

Current liabilities…………………………….

46.80%

48.10%

Long-term liabilities…………………………

22.00%

16.50%

Stockholders’ equity………………………...

31.20%

35.40%

Total liabilities and stockholders’ equity..

100.00%

Req. 2 Ambrose’s common-size income statement shows that its ratios of gross profit to sales, operating income to sales, and net income to sales are worse than the industry averages. Overall, the company’s profit performance is worse than the average for the industry. Req. 3 Ambrose’s common-size balance sheet shows that its ratio of current assets to total assets and its ratio of stockholders’ equity to total assets are worse than the industry averages. Overall, Ambrose’s financial position is worse than the average for the industry.

14-32

Chapter 14

Financial Statement Analysis

(30–40 min.) P14-47B Req. 1 (ratios before the transactions) (Dollar Amounts and Stock Quantities in Millions) Current Ratio

Debt Ratio

$278,000

Earnings per Share

$408,000

$25,000 + $83,500 + $169,500 $51,500 + $105,000 + $43,500

$200,000 + $208,000 $680,000

= 1.39

= 0.60

$74,520 46,000

= $1.62

$200,000 Req. 2 (ratios after the transactions) (Dollar Amounts and Stock Quantities in Millions) Current Ratio

Debt Ratio

EPS

$278,000 + $60,000 $200,000 + $60,000

= 1.30

$408,000 + $60,000 $680,000 + $60,000

= 0.63

$278,000 + $170,000 $200,000

= 2.24

$408,000 + $170,000 $680,0000 + $170,000

= 0.68

$278,000 + $136,000 $200,000

= 2.07

d. 1.39 Nothing changed from Req. 1

$408,000 $680,000 + $136,000

0.60

= 0.50

1.62

$74,520 46,000 + 5,750

$1.44

1.62

14-33

Managerial Accounting 6e Solutions Manual

(40–50 min.) P14-48B Req. 1 2020

2019

a. Current ratio:

$364,000 $208,000

= 1.75

$391,000 $230,000

1.70

b. Times-interestearned ratio:

$75,990 $10,200

= 7.45

$80,010 $12,600

6.35

$226,000 ($127,000 + $155,500) / 2

1.60

0.18

c. Inventory turnover:

$234,000 = 1.80 ($133,000 + $127,000) / 2

d. Operating income percentage

$75,990 $449,990

= 0.17

$80,010 $441,010

e. Return on common stockholders’ equity:

$59,100 – 6,300* = 0.40 ($134,000 + $130,000) / 2

$47,100 – 6,300* ($130,000 + $110,000) / 2

0.34

$59,100,000** – 6,300,000* = $4.40 12,000,000

$47,100,000** – 6,300,000* 12,000,000

$3.40

Earnings per share of common stock:

g. Price/earnings $50.60 $33.49 = 11.50 = 9.85 ratio: $4.40 $3.40 __________ *$90,000,000 × 0.07 = $6,300,000 **The 000s are added to net income to keep the numerator consistent with the number of shares of stock, which is not given in thousands in the data. Req. 2 Decisions: a. Hollingsworth’s ability to pay its debts and to sell inventory improved during 2020. b. The investment attractiveness of Hollingsworth’s common stock appears to have increased.

14-34

Chapter 14

Financial Statement Analysis

(45–60 min.) P14-49B Digital Plus Electronics

Speed Network Electronics

a. Acid-test ratio:

$30,500 + $52,220 + $35,000 $109,000

b. Inventory turnover:

$209,000 ($86,000 + $66,000) / 2

= 2.75

($34,300 + $35,000) / 2 $401,500 / 365

= 31.5

c. Days’ sales in receivables:

d. Debt ratio

$109,000 $436,000

e. Gross profit percentage:

Earnings per share of common stock:

g. Price/earnings ratio:

= 1.08

$22,000 + $21,200 + $40,000 = 0.8 $104,000

$231,000 ($77,000 + $98,000) / 2

2.64

30.75

($53,480 + $40,000) / 2 $554,800 / 365

= 0.25

$139,000 $434,375

=0.32

$401,500 - $209,000 $401,500

= 0.48

$554,800 - $231,000 $554,800

0.58

$49,000 10,000

= $4.90

$63,000 14,000

$4.50

$81.90 $4.50

18.2

$73.50 $4.90

= 15

Decision: Digital Plus’ common stock seems to fit the investment strategy better. Its price/earnings ratio is lower than that of Speed Networks Electronics, and Digital Plus appears to be in better shape than Speed Network Electronics. On most the ratios, Digital Plus looks better than Speed Network Electronics.

14-35

Managerial Accounting 6e Solutions Manual

Serial Case C14-50 Req. 1 2017: Net Working Capital = Current Assets – Current Liabilities = $ 3,457 – $ 1,884 = $ 1,573 million. 2018: Net Working Capital = Current Assets – Current Liabilities = $ 2,265 – $ 2,000 = $ 265 million. Net working capital measures the ability of the company to pay current liabilities with current assets. Generally, the larger the working capital, the better the ability to pay debts. Caesars’ net working capital decreased from 2017 to 2018. Req. 2 2017: Current Ratio = Current Assets / Current Liabilities = $ 3,457 / $ 1,884 = 1.83 2018: Current Ratio = Current Assets / Current Liabilities = $ 2,265 / $ 2,000 = 1.13 Req. 3 2018: Accounts Receivable Turnover = Net Sales / Average Net Accounts Receivable = $ 8,391 / $ 484 * = 17.34 * (463 + 505) / 2 Day’s sales outstanding = 365 / Accounts Receivable Turnover = 365 / 17.34 = 21.05 This number shows how many days’ sales remain in accounts receivable or how many days it takes to collect the average level of receivables. Req. 4 2018: Times-Interest-Earning Ratio = Income from Operations / Interest Expense = $ (739) / $ 1,346 = –0.55 This ratio measures the number of times operating income can cover interest expense. Because the ratio is negative, the company’s operating loss cannot cover interest expense. There is no operating income to cover interest expense.

14-36

Chapter 14

Financial Statement Analysis

Discussion & Analysis A14-51 1.

Describe horizontal analysis. Describe vertical analysis. What is each technique used for? How are the two methods similar? How are they different? Horizontal analysis is the study of percentage changes in line items in comparative financial statements, where vertical analysis reveals the relationship of each statement line item to a specified base, which is the 100% figure. Horizontal analysis provides a year-to-year comparison of a company’s performance in different periods. Vertical analysis provides a means of evaluating the relative size of each line item in the financial statements. It allows for comparison of companies of different sizes. Both methods help judge performance by comparing a company’s financial statement data from year-to-year, with a competitor, and with industry averages.

How is the current ratio calculated? What is it used to measure? How is it interpreted? The current ratio measures the ability to pay current liabilities with current assets by dividing current assets by current liabilities. It shows the number of dollars in current assets for every dollar of current liabilities.

Assume a company has a current ratio of 2.0. List two examples of transactions that could cause the current ratio to increase. Also list two examples of transactions that could cause the current ratio to decrease. The current ratio will increase when the company earns revenue and when current liabilities are paid. The current ratio will decrease when inventory is purchased on account and when dividends are paid.

What does the accounts receivable turnover measure? What does a relatively high accounts receivable turnover indicate about a company? The accounts receivable turnover measures a company’s ability to collect cash from credit customers. To compute accounts receivable turnover, divide net credit sales by average net accounts receivable. The higher the ratio, the faster the cash collections. However, a turnover that’s too high may indicate that credit is too tight, which could cause the loss of sales to good customers.

Describe the set of circumstances that could result in net income increasing while ROI decreases. An increase in total average assets that’s greater than the increase in net income will cause ROI, or Rate of Return on Total Assets, to decrease.

Suppose a company has a relatively high inventory turnover. What does the high inventory turnover indicate about the company’s short-term liquidity? Inventory turnover is the ratio of cost of goods sold to average inventory. It indicates how rapidly inventory is sold. Inventory turnover measures the number of times a company sells its average level of inventory during a year. A high rate of turnover indicates ease in selling inventory and improves a company’s liquidity.

Describe at least four financial conditions that may signal financial trouble. • • • •

Has net income decreased significantly for several years in a row? Has income turned into a loss? Most companies cannot survive years of consecutive losses. How does the company’s debt ratio compare to that of major competitors? If the debt ratio is too high, the company may be unable to pay its debts. Are days’ sales in receivables growing faster than those of competitors? A cash shortage may be looming. Is inventory turnover too slow? If so, the company may be unable to sell goods or it may be overstating inventory. .

14-37

Managerial Accounting 6e Solutions Manual 8.

Describe at least two reasons that a company’s ratios might not be comparable over time. Two reasons that a company’s ratios might not be comparable over time are (1) an isolated growth period for one year or (2) changing economic conditions.

Compare and contrast the current ratio and the quick ratio. The current ratio is current assets divided by current liabilities. It measures the ability to pay current liabilities with current assets. The acid-test ratio, or quick ratio, tells us whether the entity could pay all of its current liabilities if they came due immediately. That is, could the company pass this acid test? To compute the acid-test ratio, the sum of cash, short-term investments, and net current receivables (accounts and notes receivable, net of allowances) is divided by current liabilities. Inventory and prepaid expenses are not included in the acid test because they are the least liquid current assets.

10. Describe why book value per share of common stock may not be useful for investment analysis. Book value per share of common stock may not be useful for investment analysis because it bears no relationship to market value and provides little information beyond stockholders’ equity reported on the balance sheet. 11. Find a recent annual report for a publicly held company in which you are interested. Summarize what sustainability information is provided in that annual report. Based on the sustainability information provided in the annual report, what measurements do you think the company might use to track its sustainability efforts? (You can use your imagination here; the actual sustainability measures are unlikely to be in the annual report.) Student answers will vary. 12. There are three components in the triple bottom line: people, planet, and profit. Which component do you think is most important? Why? Student answers will vary.

14-38

Chapter 14

Financial Statement Analysis

Application & Analysis A14-52 Basic Discussion Questions For each of the three companies you selected, answer the following (for the purpose of this illustration, Nike, Reebok, and ASICS have been chosen, but students will choose DIFFERENT companies). 1.

Calculate two ratios that measure the ability to pay current liabilities. Nike

Reebok

ASICS

Current ratio

9,734.0/3,277.0 = 2.97

4,934/3,645 = 1.35

1,304.3/510.3 = 2.56

Acid test ratio

5,186.6/3,277.0 = 1.58

2,009/3,645 = 0.55

802.9/510.3 = 1.57

Calculate at least two ratios that measure the ability to sell inventory and collect receivables. Nike

Reebok

ASICS

Inventory turnover

10,571.7/2,397.7 = 4.41

5,543/1812 = 3.06

1,417.4/402 = 3.53

Accounts receivable turnover

19,176.1/2,839.6 = 6.75

10,799/1,541.5 = 7.01

2,468.8/550.6 = 4.48

Calculate at least two ratios that measure the ability to pay long-term debt. Nike

Reebok

ASICS

Debt ratio

4,556.5/13,249.6 = 0.34

6,133/9,533 = 0.64

782.2/1,784.9 = 0.44

Times interest earned

(1,956.5 + 40.3)/40.3 = 49.6

(904 + 178)/178 = 6.1

(201.4 + 6.3)/6.3 = 33

Nike

Reebok

ASICS

Rate of return on net sales

1,486.7/19,176.1 = 7.75%

644/10,799 = 6%

133.5/2,468.8 = 5.4%

Earnings per share

$3.07

$3.25

$0.67

Calculate at least two ratios that measure profitability.

Calculate at least two ratios that help to analyze the stock as an investment. Nike

Reebok

ASICS

19.4

16.8

12.5

Dividend yield

1.7%

1.4%

1.2%

Now that you have crunched the numbers, interpret the ratios. What can you tell about each company and its financial position? Is one company clearly better than the others in terms of its financial position or are all three companies similar to each other? Of the three companies, ASICS lags behind Nike and Reebok in half of the ratios. The choice then becomes between Nike and Reebok. Nike is the better choice for short-term debt paying ability. Nike also has a higher inventory turnover than Reebok. The ability to pay long-term debt is also better for Nike than Reebok. The profitability ratios are mixed for the two with Nike being higher in return on sales, while Reebok has higher EPS. The dividend yield is relatively close, and the PE ratio is a bit higher for Nike. Overall, Nike appears to be the best choice of the three companies.

14-39

Managerial Accounting 6e Solutions Manual

Ethics Mini-Case A14-53 1.

The ethical issues in this situation are as follows: Competence: “Provide decision support information and recommendations that are accurate, clear, concise, and timely.” If Tom does not disclose all of the ratios clearly, even those that are weak, the decision support information would be inaccurate. If Tom changes the ratios, then the ratios are not accurate. Integrity: “Abstain from engaging in or supporting any activity that might discredit the profession.” Camouflaging the weaker ratios in their report would affect real business decisions and could discredit the profession. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” It is reasonable to expect that the weaker ratios, if clearly disclosed, would affect the investors’ decisions. Thus, by camouflaging the weaker ratios, Tom is violating this ethical principle.

Tom’s responsibilities as a management accountant are to be honest, fair, objective, and responsible. He should seek to present all ratios clearly and accurately.

14-40

Chapter 14

Financial Statement Analysis

Real Life Mini-Case A14-54 Req. 1

Req. 2 CVS Health Corporation a. Ability to pay current liabilities: CVS’s current ratio has fallen since 2016, which is not a good sign. Its quick ratio has remained about the same. Its working capital has decreased. These numbers indicate that CVS can pay its current liabilities, but the downward trend could be troubling. b.

Ability to sell inventory and collect receivables: To better assess CVS’s inventory and days’ sales you would need to compare to industry averages. However, the trend for CVS is not positive. It is taking longer to collect its receivables and to sell its inventory.

Ability to pay long-term debt: CVS’s debt ratio has increased and shows that more than half of the company’s assets are financed with debt. In addition, its times-interest-earned ratios are decreasing rapidly, which may lead to the company having trouble paying off its debt.

Profitability: CVS had a loss in 2018, even though its revenues increased each of the three years. Its return on assets has also fallen over the three-year period. Its operating income percentage has also fallen. One would need to dig deeper to evaluate the cause of the decrease in profitability.

14-41

Managerial Accounting 6e Solutions Manual Req. 3 Walgreens Boots Alliance, Inc. a.

Ability to pay current liabilities: Walgreens’ current ratio has fallen since 2016, which is not a good sign. Its quick ratio has also decreased. Its working capital is now negative. The downward trends and the negative working capital are troubling and indicate that the company could have trouble paying its liabilities.

Ability to sell inventory and collect receivables: To better assess Walgreens’ inventory and days’ sales, you would need to compare to industry averages. However, the trend for Walgreens is not positive. It is taking longer to collect its receivables and to sell its inventory.

Ability to pay long-term debt: Walgreens’s debt ratio has stayed the same and shows that more than half of the company’s assets are financed with debt. Its times-interest-earned ratio is increasing, which is positive.

Profitability: Walgreens’ revenues increased in each of the three years. Its return on assets has grown over the three-year period. Its profitability has increased since 2016.

Req. 4 Conclusions It is not clear which company is in a stronger financial position. CVS has more ability to pay its current liabilities than Walgreens, but its ability has been trending downward. Walgreens is a more profitable company than CVS, but the negative working capital is troubling. Further analysis would need to be performed to make a judgment about which company is stronger—neither company looks to be the clearly stronger company. Student answers may vary.

14-42

Chapter 14

Financial Statement Analysis

Team Project A14-55 Student answers will vary.

14-43

Chapter 15 Sustainability Quick Check Answers QC15-1. c QC15-2. d QC15-3. b

QC15-4. a QC15-5. c QC15-6. c

QC15-7. d QC15-8. c QC15-9. b

QC15-10. a QC15-11. d QC15-12. a

Short Exercises (5 min.) S15-1 a. b. c. d. e. f.

Increasing market share Reducing costs Generating new revenue streams Reducing compliance and litigation risks Attracting capital Improving external image

(5 min.) S15-2 GOAL 1. q GOAL 2. o GOAL 3. e GOAL 4. p GOAL 5. k GOAL 6. m GOAL 7. g GOAL 8. i GOAL 9. n GOAL 10. h GOAL 11. b GOAL 12. d GOAL 13. a GOAL 14. j GOAL 15. l GOAL 16. f GOAL 17. c

15-1

Managerial Accounting 6e Solutions Manual

(5 min.) S15-3 Aspect